Contract production is becoming more of a common practice than a specialised offering in beverage manufacturing industries such as wineries, breweries, and distilleries. Having already experience some claims in this area, I wanted to take the time to shed some light on the conversation to let you know that this commonly misunderstood industry practice is causing some serious issues for companies. But ultimately, we have a solution for you to consider.

What is Contract Production?

Contract production is when one company hires another company to manufacture its products on its behalf. Rather than spending the capital up front to manufacture a product, companies are reaching out to established facilities to use their production facilities, methods, and resources to help get into the marketplace. This approach is a great idea for start-ups and those companies who want to crawl before they walk; however, brokers are seeing some massive claims in this space, some covered and some not.

This article means to bring to your attention the conversation that needs to be had around contract production.

Our test case will be called John Smith Winery. John Smith has recently purchased a property in the Niagara area that has some existing vines producing wine grapes. John decides he wants to start producing and selling wine from his lands to help create some income for his family. The costs to purchase production equipment for winemaking can get very expensive, so John, knowing a local winery offers contract production, sets up a meeting to pitch his plan. The “contract winery” and John come to agreement that will give John Smith Winery the wine produced by the contract winery.

The above test case is very common and is occurring everyday in the wine, beer, and distillery industries. Taking this test case into consideration, I want to bring some important concerns to your attention.

  • The regular insurance marketplace does not understand what is happening in the winery, brewery, and distillery industries when it comes to contract production and offers limited to no coverage for these revenue streams.

When entering into an agreement to perform contract production, one of the most common overlooked areas and leading causes of unpaid or denied insurance claims is the lack of a signed contract between the client and the facility.

Signature Risk is an exclusive partner of Beverage Protect, and we have asked Joe Hannigan, vice president of Signature Risk, who has experience in this area for some key information for you to consider: 

If you are considering using a third party or contract production company to produce your wine, craft beer, or spirits, it is imperative that an operating contract be put in place to protect all involved. If the third party produces a bad product, most insurance policies will not cover the loss, which is why a contract is so important.

To use our example of John Smith Winery that outsourced the wine making, bottling, and labelling without a contract in place: If the contracted production facility makes an error in any part of the process, yet delivered the wine to John Smith Winery, it may not have coverage for its mistake, along with John Smith Winery not have coverage for the bad or incorrect product delivered. Who pays for this mistake? 

Many domestic insurers are unaware of this activity and, as such, they are not providing the proper advice to insurance brokers with winery and craft brewery clients. It is critical that winery and craft brewery owners and operators work with insurance brokers like Beverage Protect who have specialised expertise in this area and who can help protect these unique businesses with what is required in order to protect the future of their businesses.

Beverage Protect has also reached out to our exclusive partner Bill Godkin of CE Safety to help address some recent changes in this area that can affect the contract production agreements happening today.

  • Limited to no regulatory oversight of these wine, beer, and distilling operations which can lead to problems for contract production operations for both parties, especially with regard to the lack of regulations concerning standard operations procedures and health and safety.

One of the largest exposures concerning contract production is the lack of information you may have on the operations or practices of a facility providing you with its services. 

If you choose to hire a company to produce your products for you and its facilities are not properly maintained; if they have no health and safety protocols in place; and if there are an overall lack of standard operating procedures, your business as the contractual client may have some exposures you need to know about.

 When it comes to using contract facilities, workers, or contracting out work to another company, most businesses are unaware of their potential liability and responsibility under Ontario’s Occupational Health and Safety (OHS) Act. Put simply, a customer bears no responsibilities of operations under the OHS Act. In our example, if the contract winery is using some of John Smith Winery’s workers or recommended standard operating procedures, then the contract winery is deemed to have responsibilities as an ‘employer’.

Why risk your business’ reputation and potentially its viability by not ensuring that the winery, distillery, or brewery who is making your product has simply complied with provincial law? Work with companies like Beverage Protect, who consult firms like CE Safety who can do all of this easily, quickly, and affordably.

In conclusion, we are having this important conversation about contract production because while we don’t want individuals and companies to stop working together, we want them to understand the risks that are involved and that there are solutions available that can prevent both parties involved in this process from enduring a loss. 

It is the goal of Beverage Protect to ensure that all of our clients, and prospective ones, are aware of what is happening in the beverage industry and how hidden potential risks can severely impact the future of their businesses. Beverage Protect provides an exclusive insurance product along with a risk partnership with its clients. We are continually working to align ourselves with preferred service providers like CE Safety and others so we can provide expertise and value to our clients.

For a no-obligation review of your current coverage and a competitive quote from our exclusive beverage program, contact our office today.

We hope you will consider the information provided above, and we are available to answer any questions or concerns you may have.

Joshua Kearley

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