Why Lloyd's of London likely won't be last insurer to challenge California wineries over rising fire risk
The North Bay wine industry is feeling the heat from recent wildfires, but not how you might think.
Insurance experts say that as part of a wider company review the international insurance house Lloyd’s of London stopped underwriting what are known as stock-throughput policies for larger, premier wineries in the region because of the seemingly annual risk to wine production and storage caused by wildfires.
During the second quarter of this year, Lloyd’s moved away from what it saw as the unprofitable business of insuring wine grapes on the vine, wine in production and the finished product up until a winery releases custody and control, according to Debra Costa, senior vice president and vintner practice leader at Heffernan Insurance Brokers.
Costa said that while some wineries buy their insurance as a package covering all aspects of their business, once inventory values reach the $25 million or $30 million mark it makes sense to insure wine production through a “carve out” known as a stock-throughput policy.
She said the move by Lloyd’s is part of a global reassessment of certain business lines by the company that is hitting large, high-end wineries with extremely valuable inventory in the North Bay hard.
Lloyd’s of London determined that underwriting stock-throughput policies on wine and other perishable goods is no longer profitable, Costa said.
“Because they have such high values, anywhere between $50 million to as high as $200 million at any one location, those premier brands are seeing a 100% to 200% increase (in insurance costs), depending on their location,” according to Elizabeth Bishop, executive vice president of Heffernan Insurance Brokers’ North Bay and Portland operations. Because the highest priced wines in the U.S. originate from Napa and Sonoma counties, they are being hit the hardest by the change, she said.
Costa added that smaller, boutique wineries which often purchase insurance packages from a provider that cover everything from inventory to property liability would be less affected.
That doesn’t mean rates won’t go up for them as well, however, Bishop said.
She estimated that boutique wineries could also see rates jump by 10% to 20% because of the increased risk of wildfires to their operations and inventory.
“We had one winery call us and tell us the increased insurance cost would be cutting their (earnings before interest, taxes, depreciation, and amortization) in half,” Bishop said.
Faced with a seemingly impossible financial decision, wineries may have to use other strategies to contain the risk wildfires pose to their product that do not necessarily involve buying insurance according to Bishop.
“Insurance is a tool of transfer of risk versus retention of risk,” she said. “Instead of transferring risk to insurance companies they’re being forced to retain risk. There are some wineries that are retaining more limits on their exposure via higher deductibles,” she added.
But some wineries may have to go further.
Some wineries will have to consider repurposing dollars they would have spent on insurance on risk mitigation tools against wildfires or the preventive turning off power which took place this season. Bishop said wildfire season coincides with the grape crushing season and keeping that process going during a fire and smoke event is essential.
Wineries are considering “purchasing backup generators that will allow them to keep their crush process going,” Bishop said.