CPG Insurance, What Could Go Wrong?

Jordan Buckner: [00:00:00] Business insurance is one of those things that most founders think about once and never think about again. That is until a major problem happens and they're desperately trying to figure out if insurance will cover it. As your brand grows, you should be reviewing your insurance needs annually. At least to make sure you're covered and all the ways that you need in case something goes wrong to talk about all the things that can go wrong so that you're prepared.

I've invited on Russ Taylor, who's the head of business development for Secure CPG to share a couple of stories. Russ, welcome. 

Russ Taylor: Enjoying. Thanks so much for having me.

Jordan Buckner: So what I love about you guys is your focus on insurance and business insurance for brands in the CPG space, because there's definitely some specifics and nuances that.

They need to be aware of, I think a lot of brands kind of, and founders know about some of the basic business insurance things, general liability and coverage, workers compensation and things like that. But what are some of the CPG specific areas that you [00:01:00] think are really important for founders to be aware of for insurance?

Russ Taylor: That's a great question, Jordan. So you're right. General liability is a requirement. Most people are familiar with that. Same with workers compensation. CPG specific insurance is so crucial because traditional insurance contracts are designed for vertically integrated manufacturing. In the modern brand space, a lot of things are outsourced or they're utilizing vendor partners to take care of part of the operations.

The coverages that we focus on specifically for CPG brands would be things like spoilage, contamination, product recall, and inventory. So, things that are crucial to the lifeblood and operations of a modern day brand. And if one of those things goes wrong or is missing it can really cripple a startle brand or even a midsize brand.

Jordan Buckner: Yeah, love those. And, you know, running my own CPG brand, we started off small and honestly didn't even know about some of those insurance coverages that we probably should have had when we were growing. So what I would love to do today is to walk through a couple of those and some of those [00:02:00] challenges to really share how our listeners can be aware and, Benefit by knowing what to do.

So one question that comes in on just the very basic side is around general liability coverage, how much I should have, and things like umbrella coverage, especially when they start working with some of the larger retailers who might ask for, you know, really large umbrella policy to cover anything that could go wrong.

How do you typically advise brands in terms of like about how much coverage they should have and when they should push back? 

Russ Taylor: Oh, yeah. That is something that comes up in almost every conversation that we, we come across in working with a new brand. The typical general liability policy is going to be 1 million per occurrence and 2 million in aggregate.

So that means 1, 000, 000 for any one event or claim that they have and then 2, 000, 000 for the year. So they could have two 1, 000, 000 claims or a bunch of small claims aggregating 2, 000, 000. Now, of course, we don't recommend that, but that is the amount that they could theoretically utilize from the policy.

General liability protects your operations [00:03:00] and product liability is the other side of that same coin that protects your business when someone consumes and just uses the product that you manufacture and sell. Now in terms of getting into a retail contract type scenario, a lot of times brands feel like they're at the whim of what the contract in front of them says because they want to get on the wholesome shelf or the Walmart shelf or whatever retail they're trying to get into.

And we always advise that. You should read through those, look over them with your attorney, but also have us, or whomever your insurance agent is, take a peek at them, because we read them every day, and we know, hey, these are pretty standard and boilerplate agreements that they're sending out, and it might be designed for a brand that's doing in excess of a hundred million in revenue, and that's why they're saying you need to carry ten million dollars in liability insurance.

A company that's doing a couple million in revenue, or even less than that. You might be able to say, Hey, look, this doesn't meet the viabilities for my business, right? I'm going to go insurance poor if I have to get a 10 million umbrella on top of my existing general liability policy. And we've seen that when done [00:04:00] correctly, they will say, we understand.

And they might be willing to reliance on some of those insurance requirements. Not always, but it can't hurt to ask us our opinion. 

Jordan Buckner: Yeah. So I know those prices can go up really fast once your liability , goes high. 

Russ Taylor: Then I wanted to touch on the limit that you want to carry really depends on the size of your business.

Carrying a million dollar umbrella on top is often a really good practice to start and you can scale it fairly efficiently as your brand grows. There's no cut and dry answer on how much liability you should carry. As you're approaching multiple millions of revenue, we want to make sure that you have at least a million dollars in the umbrella and then sort of scale in accordance with the amount of revenue that you do.

You don't want to be a hundred million dollar brand. Caught with only two or $3 million of liability. You know, as a claim comes up, a judge would find you liable for paying in excess of your line available limits. 

Jordan Buckner: Wow. Yep. Very important. And so for CPG brands, does the general liability coverage help with claims for both business issues and product liability?

Russ Taylor: [00:05:00] Yes, so I always say think of product liability and general liability as 2 sides of the same coin. You really can't have 1 without the, well, you can have general liability but product liability is built onto the general liability policy. However, they are 2 different coverage. General liability covers your operations.

So for most CPG brands, that's a fairly insignificant portion of what they do because they're not in a warehouse. They're not on a construction site. They're typically working in an office space or an office setting. Product liability is the one that most CPG brands need to be aware of and make sure that their coverage is in the correct amount.

And there's no damning exclusions on the policy that might exclude ingredient that is in their product or exclude something else that would potentially prohibit that fraud, excuse me, prohibit insurance policies in responding to a claim.

Jordan Buckner: That makes a ton of sense. So I want to get into some of the stories that you've seen or experience that the CPG brands are dealing with.

I know one thing is that , some companies manage their [00:06:00] own production, but a lot of our listeners work with a contract manufacturer and you were sharing a little bit about an issue about issue of beverage company and some of, the cans having damage and determining who was liable.

Can you share what happened and what's going on with that? 

Russ Taylor: Yeah. We got referred to a company who came to us after they already had this issue arise and they had about a hundred. 1, 000 plus inventory that was unsellable, excuse me, because the cans were at first glance what appeared to be corroding.

And so they were really frustrated and they had an independent company doing analysis and what the independent analysis turned up is that it was really a seamer issue that was caused during the manufacturing process, not actual can corrosion. So, because of the faulty seam some of the beverage was spilling outside on the outside of the can and that was causing the can to deteriorate.

So unfortunately, their policy didn't have inventory or property coverage built into it. So they weren't able to make the claim on their own insurance [00:07:00] policy. And we tried to help them find some ancillary coverages that would be built into that. But not being their current age, we would limit our scope.

However, we said, well, you know, this is really a manufacturing issue. Your co man or your co packer should be able to help out on this. That's what their insurance policy would be built for. They went and talked to their co man and their co man said, well, we think it's can corrosion. And because of the lack of a contract in place and they were not named additional insured to their co man's policy, there really is no recourse for them to use the insurance that is at their co manufacturer to be made whole in the case of this loss.

So, they're looking at paying 100, 000 out of pocket to, you know, remove and destroy that product that they lost. And it really is unfortunate. So, our soapbox for this month and probably for this year, honestly, is gone. Advising brands to, you know, review their contracts if they're unable to meet minimum run requirements at least make sure that they made additional short on their coming or co vampers and shares 

[00:08:00] policies.

Jordan Buckner: Yeah, and this happens all the time. And I talked to brands and experienced this myself where a lot of. Contract manufacturers are unsure how many runs they're going to do with a brand and they find it in their favor not to have a contract because usually they're the ones that will hold any liability from that contract.

And then so they pretty much say like, Hey, if you want to work for us, like we'll bring it in, but , we'll talk about a contract down the line. A lot of times that never happens, and there's all these little points that add up to a lot of money that are important to discuss, because there are a lot of things that go wrong, are delayed, and it's important to be clear on who's responsible , for what, especially if there's You know, 100, 000 plus on the line that can completely disrupt your business, right?

Russ Taylor: Absolutely. And for all the brands out there listening, we've talked to a number of brands that are starting up or they're in the emerging phase. And I think there's some trepidation around approaching , your co man or co packer and saying, Hey, I want to be named additionally insured, or I want to at least sort of view the contract.

And they feel that they don't have [00:09:00] purchase power maybe because, you know, they don't meet a minimum requirement. But It's a totally normal business transaction for you to ask to be named additionally insured on a co man's policy. It happens in every other industry, really without question. We're trying to normalize that within the CPG space.

Jordan Buckner: Yeah, I love that. And I think that a lot of times, And you know, not like a lot of founders feel forced into certain relationships because they haven't found other options. If you feel like that's the case, reach out to me. I can connect you with others to help find better partners because there's some really great partners out there.

And there's a lot of partners who just aren't interested in investing , the time and energy into really making sure that you're taking care of as a brand. I know another area that happens is I see a lot of founders who set themselves up and then managing like the brand and manufacturing a lot of times, like they don't even touch the inventory that goes out and there's a lot of D2C brands that do that as well.

What are some of the issues that those brands can experience in terms of like understanding who actually is responsible for that inventory? 

Russ Taylor: Yeah, that's something [00:10:00] we do a lot of contract review. And again, we're not attorneys, but just understanding where ownership starts and stops and where liability gaps potentially exist.

Some commands have a really strong insurance clause in their policy and it makes it really easy to work with them. And others have things that sort of leave the values or who is going to be responsible in the event of a loss kind of up in the air, and that really doesn't favor you as the brand in our opinion.

But a lot of times what we're looking at is you know, you paid for it, you own it, you know, pretty much throughout your entire supply chain until it hits retail shelves. And we view that you should really be insuring any value that you can't lose yourself. We've seen some contracts that say, Hey, we'll, we're willing to cover up to this much insurance to make you right in the event of a loss or a claim.

A lot of times we find that that might only be 30 cents on the dollar. So looking at the inventory insurance and raw materials and goods that you're purchasing, sending them to your co man, [00:11:00] sending them to your 3PL or your warehouse for storage. You're going to want to make sure that you understand where your ownership takes place and the value that's sitting there at any point in time so you can ensure it effectively on the property policy.

And it's a pretty easy process and it's. Fairly cost effective as well until you start hitting multiple millions of dollars in inventory. It's well worth making sure that you have, you know, at least 80, 90 percent of your inventory insured. To value because otherwise you could, you know, the roof could blow off your warehouse and they're saying, Hey, we don't cover your inventory while sitting there and you could be out a couple hundred grand.

And again, that hurts when you wake up to that message in your email and bombs. 

Jordan Buckner: You know, that brings up a really good point that I have talked to lots of founders about, which is the fact that as a brand, whether it is fair or not, you are responsible for your product in every aspect, from the time you purchase ingredients to the time a consumer Eat, serve uses your [00:12:00] product and it seems unfair because there's a lot of middle people in between but somehow we've gotten into a situation where everyone else along the supply chain disavows himself of most of that risk and then liability and puts it back on the brand. I think it's really unfortunate, but it's something to be aware of going into these relationships so that you can protect yourself because you can't rely on other people to do it for you.

Russ Taylor: Exactly. Yeah. Taking ownership of your product and a lot of founders are happy to do that. In most cases, I think they just need to be aware of that. No one's going to take care of this for them better than themselves. 

Jordan Buckner: So I work with a lot of refrigerated and frozen brands, and that's a really challenging category.

Those are really challenging categories for a lot of reasons, but a lot of that has to do with, right, like, make sure your product is actually kept at temperature, whether it's supposed to be refrigerated or frozen. For food safety issues, for product quality issues, there's a lot of things that can go wrong.

Can you share any stories around some of the problems that you've seen with [00:13:00] those types of brands? 

Russ Taylor: Yeah it might be the highest claim category just because of , the logistics and moving product that needs to remain at temperature or frozen or refrigerated throughout their supply chain. And I'm sure all the brands in Austin, Texas know what I'm talking about that work in that frozen, refrigerated category, but , we've dealt with several brands that have unfortunately encountered a thaw, refreeze scenario with one or more of their products or SKUs.

And it really becomes a very delicate dance for the brand if they are not insured correctly. Because most of the time, The 3PLs, the co mans, and everyone else involved in the logistics of mood making and moving the product from start to finish likes to absolve themselves and say, well, we did our job. It was the other person who messed up and I'm not trying to go on a wish on here for 3PLs and co mans because there's a ton of reputable players in the space, but one brand in particular we work with experienced three different instances where [00:14:00] their product Thawed and then refroze somewhere in their supply chain in from Coman to retail shelves.

And unfortunately in that, in a lot of those instances, they don't find out until it hits the retail shelves. And at that point is, you know, If you haven't been keeping trap of things very closely, it can become a recall scenario. In this case, we were able to help advise the brand, , let's follow the manufacturing process and the distribution process and try and figure out, you know, at what point was.

The ingredients and or the product you know, sort of lost integrity and then see if we can figure out how the insurance can apply to it. And that's where we come back sort of full circle to your first comment, Jordan, about what coverages are super specific and needed within the CPG space, because a lot of times you'll see an insurance company say, well, this doesn't fall under your property but it was spoiled.

So spoilage coverage will kick in. Or you know, hey, , this really, , the issue [00:15:00] was that it got contaminated with the wrong ingredient, and that's what caused it , to not being sellable. So, you know, , these cultures all kind of work together, and if you're missing one, it could be the one exclusion that prevents you from being made whole in the event of a loss.

Jordan Buckner: Yeah, and especially there's some categories that are A lot more risky and have different insurance requirements , than others. I know, right? Like a lot of times with beverages, if you have one can at the top of the pallet that opens or isn't sealed properly, and it ruins the entire pallet, right?

That's a lot of inventory that you have to cover. It's a relatively easy thing to happen that a lot of beverage brands face. 

Russ Taylor: Yeah. , we see different brands with different products varying levels of risk and susceptibility to loss. Beverage brands are super high, refrigerated and frozen are super high, meat, dairy, cheese, eggs, super high.

So, , not to scare off brand owners in that space, there's ways to protect yourself, but it, it really shows that, hey, having good risk management protocols in place outside [00:16:00] of the insurance policies can help avoid those titty tatty losses that can escalate into things that cost real dollars.

Jordan Buckner: Let's talk about recalls and recall insurance. When should you have it and how should it be designed , to cover you? 

Russ Taylor: That's a great question. Recall is something that , we preach day in and day out because of the ramifications, more so than getting the product off the shelves, but the adverse publicity and, you know, reputational harm it can cause to a brand.

We really talk about even startup brands. One of the ways we like to schedule all policies is. Getting even a itty bitty tiny amount of recalls thrown on the policy, just so that they can have some help in the event of, you know, a product getting up that they don't intend to or getting the shelves in a fashion that they don't want to put their name on.

But for larger brands that are scaling, really as soon as you're over a couple hundred thousand dollars in revenue, you want to start looking at limits in excess of fifty or a hundred thousand dollars in recall. And our [00:17:00] data shows that getting product off the shelf is really only about a fourth to a fifth of the cost that a recall , can be, because we're talking about attorney's fees, we're talking about PR and reputational harm that you're trying to get out in front of along with the cost of getting it off the shelf, and then any business interruption or business income loss.

from your inability to operate while you're having to reman or potentially having to remanufacture an old product. And recall is, a true standalone recall policy is a really great and effective policy to have. It will pay for your legal fees. It will pay for the cost of remanufacturing goods. It will pay to hire a PR firm.

It'll pay for the income loss that you suffer while you might be dealing with this. So, It can be structured in such a way that most or all of your costs can be recovered. It went in a certain recall scenario and as secure. One of the things you really like [00:18:00] to really pride ourselves on is that we're trying to drive innovation in the insurance industry for CPG.

So we're currently working on a new policy that will help voluntary recalls. When you have something that maybe your product's not. You know, it's not making people sick or it's not harming people, but people are calling you out on social media saying, hey, this wasn't the way I wanted it to be. And a perfect example is we were talking to a dummy company, and bottom third of a number of their products, the dummies had melted and they were getting roasted on social media.

And they wanted to issue a voluntary recall, and we were helping them understand how their policy would respond to a voluntary versus a mandatory. 

Jordan Buckner: Do most recall insurances only cover mandatory versus voluntary? 

Russ Taylor: Not when they're built correctly. there are certain instances that policies are it needs to be issued by a governing body.

It's usually the language, so it doesn't necessarily need to be the government, but it could be a certified entity. But a correctly built. Recall policy will cover a voluntary or mandatory, 

Jordan Buckner: you know, I think a lot [00:19:00] of founders might think, Oh, this is really important when I'm only selling in retail or in a large distributor.

But I can tell you, there's a friend of mine who had a, it. Energy or protein bar company, and they had a great opportunity, talks about this publicly, but they were on Shark Tank and from that had a huge increase of orders and sales, so they had to quickly scale with their manufacturing, sent out thousands of products to customers, and only then realized that their water activity level was too high and a large percentage of their bars had mold growing on them.

And because of that, they had to, one, refund Everyone, , their money, they had actually taken out a loan to cover the inventory, so they didn't even have like the cash to cover that amount and ended up sending everyone a refund, canceling all the orders and tried to hold on, but unfortunately had to file for bankruptcy and close their company because and these were all like D to C orders.

This wasn't even in retail. [00:20:00] And so it's really important to you. You know, anytime that you essentially like hit crazy, like don't have the cash to cover the loss, think about something right to, to have this type of insurance. 

Russ Taylor: Yeah. And that's a great, great point, Jordan in the DTC world, a recall could be pulling it from your 3PL shelves before it gets into the customer's hands, but that's still a cost that you're going to incur.

To pay , your distributor with third party company to get rid of and destroy the product that nothing's free influx channels. 

Jordan Buckner: So I think, you know, we talked about a lot of horror stories that have happened to brands of all sizes today, but as you've mentioned throughout, there are ways that you can make sure that you're properly covered.

Properly covered is just a matter of knowing what that coverage should be. And I know you and the team at Secure really work with brands to make sure that they're covered and have the right level of insurance. And so, you know, if someone's looking and say, Hey, I really need to review my policy, what's the best way of getting in touch with you?

Russ Taylor: Awesome. Yeah. So my email is [00:21:00] russ@securecpg.com. Or you can go to the Secure CPG website and reach myself, Will Totten, our founder, or Taylor Stonoff, who is our head of policy procurement. The three of us all work together on a day to day basis. And our process is pretty straightforward and simple. We like to do a high level due diligence, review everything, and discuss what we see and How you view your business and what your goals are, because everyone's a little bit different.

Everyone has different goals. Everything has different things that keep them up at night. We want to make sure we're protecting you in a way that allows you to continue to grow and scale your business. 

Jordan Buckner: I love that, Russ. So, anyone listening in, if you If you are unsure that you are properly covered, reach out to Russ and the team because this is a mistake that you don't want to make and it costs you your business.

And so we want to see you out here surviving and thriving and not having this unknown risk to you. Russ, thanks so much for being on today. I'm going to include links to your info in the show notes as well. 

Russ Taylor: Thanks so much Jordan. I really appreciate it.