There’s No Use Crying Over Spilled Milk - But What About Spilled Wine? (Part Two)
In my previous blog I discussed how the recent Southern Napa Valley earthquake might have left some winery owners (and insurers for that matter) with a financial hangover. We looked at some of the underwriting and policy issues around business interruption and valuation. In this follow up, I look at policy endorsements and extensions, plus loss prevention.
Coverage for spoilage is usually excluded under a standard property form, unless it is the result of direct physical damage of the type insured against on the insured’s premises. Loss of power at the winery for even a short time - especially during the hot summer months - can affect wine stocks, and high temperatures can produce a change in color, flavor, texture, finish, etc. This could reduce the wine’s value and the loss could be covered by the policy. If the insured purchased boiler and machinery coverage, spoilage from the failure of mechanical or electrical temperature controls may be covered as well.
Service interruption endorsements extend the policy’s coverage for spoilage as a result of interruption of power off premises (though the insured should have back-up electrical generation for AC/refrigeration equipment and contingency planning to help mitigate damage). Boiler and machinery, if purchased, would also extend the coverage of service interruption off the winery premises.
Wines aging in barrels are supposed to be kept as still as possible. A control of damage property clause allows the insured to use judgment as to whether damaged property can be salvaged and resold. It could come into play if older red wines that are shaken are deemed to be damaged property.
While the peril of earthquake is excluded from standard all risk forms, loss from fire following earthquake would typically be covered. Since wineries often have combustible construction and can be housed in older buildings, a gas line break or an electrical short could lead to fire and perhaps a loss. Owners should have properly installed and updated electrical installations, as well as seismic shut-off valves on gas lines.
Still on the subject of loss prevention and safety, implementing safe storage methods at all stages of processing is crucial, whether it relates to stainless steel tanks, oak barrels in racks or in bottles on shelves or racks. After the Napa event, the Los Angeles Times wrote that one local vintner "found every single barrel there had been tossed down into a huge pile."
Estimates of the insured damage from this earthquake of 6.0 magnitude, a moderate event, have ranged between $250 million and $80 million. The overall economic damages will likely be significantly higher as the take up rate for earthquake insurance is surprisingly low given the hazard in the area: Early estimates from the Washington Post were that total damages were expected "to surpass $1 billion."
Hopefully, the Napa Valley quake will stimulate demand for insurance in the region. Importantly, it could lead to improvements in seismic risk management, especially in storage practices and contingency planning. With proper loss prevention measures in place and adequate policy coverage, there ought to be much less reason to cry over spilled wine.