Is spoilage coverage right for your business?
Post written by Ruth A. Knopf JD, CPCU, CIC, ARM, AU
The first image that comes to mind when discussing loss from spoilage is food, but food is just one type of property subject to spoilage. However, spoilage coverage encompasses much more. A combination of risk management techniques, including risk control and risk transfer, can help protect your business from financial ruin resulting from a spoilage loss.
Spoilage coverage protects against loss due to the deterioration or death of perishable stock on an insured premise. Perishable stock is defined as personal property that is maintained under controlled conditions for its preservation and that is susceptible to loss or damage if the controlled conditions change.
What is perishable stock?
Perishable stock includes food, produce, flowers, live plants, pharmaceuticals and biomedical material. Spoilage can result from a power outage, equipment malfunction or contamination. And the loss is not limited to loss of product, income or reputations; it can also include liability exposure for medical payments or bodily injury and coverage to pay for additional advertising after a food or contamination loss.
To reduce your exposure to loss, make losses more predictable and decrease the frequency and/or severity of losses, consider risk control techniques including limiting in-stock inventory to reduce loss in the event of a spoilage situation.
When risk cannot be avoided, it can usually be minimized. Complying with food service standards, including cleanliness, temperature and humidity, avoiding cross contamination, managing stock and adhering to scheduled inspections and maintenance calls go a long way toward preventing loss.
But even if you do everything in your power to prevent loss, things happen. The following strategies can help make loss more predictable and reduce the severity of a loss.
- Install a generator that automatically kicks on in case of a power outage.
- Install notification alerts to activate if there is an equipment breakdown.
- Identify where you can rent equipment until damaged equipment is repaired or replaced.
- Disperse stock so that a catastrophic event at one location will not impact all of your inventory.
- When feasible, store stock across a number of locations.
- Store perishables across more than one piece of equipment.
- Create a backup plan.
- Investigate options for short-term use if stock can be moved in an emergency.
- Research options for mobile cold storage or identify other appropriate equipment to bring to the insured location.
- However, this high-level approach is not practical for all businesses. This strategy allocates business resources into a number of industries so that a significant revenue loss from one line of business is supported by ongoing operations from other lines.
Risk transfer — transferring the risk from the insured to the insurance carrier — can restore the position you were in before the loss if you have identified exposures and put coverage in place. In most cases, language in the policy requires regular maintenance, so review forms to confirm compliance with coverage terms. Coverage includes:
- Food contamination
- Time element/business income
- Equipment breakdown
- Utility services
- Perishable farm personal property
Is spoilage coverage for you?
Business that should consider spoilage coverage include, but are not limited to:
- Restaurants and all manner of food service risks
- Ice cream stores and mobile operations
- Fruit and vegetable retailers
- Cheese stores
- Grocery stores, convenience stores, butchers, etc.
- Florists and greenhouses
- Pharmaceutical operations
- Food processing plants
- Cigar stores
- Tropical fish stores
- Blood banks and similar operations
- Cold storage warehouses
When managing risk to business and property, it is critical that you understand the available options before you need them. Review assets and revenue generators to gain an understanding of what you need to protect from a loss standpoint.
Put a plan in place to gain the peace of mind of knowing that appropriate risk management will eliminate or reduce loss to your bottom line in case of spoilage.