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.

She noted a large backup gas generator can easily cost a quarter of a million dollars, however, and represented one way in which costs could jump even if companies do not want to pay the spiking premiums caused by the sudden change in the market.

Depending on where a winery expects its demand to be, trucking inventory out of the area would also be an option, Bishop said.

“They are contemplating moving inventory out of the Napa Valley and moving it to non-wildfire prone areas so that their inventory can be insured more cost effectively despite increased transportation costs,” she said.

She added, “It could be anywhere between Sacramento or Gilroy if they expect continued California distribution. Or if they expect to have East Coast distribution potentially moving warehousing to Colorado or other states.”

The recent Kincade Fire and 2017 Tubbs Fire saw wineries threatened and damaged by flames and stock ravaged by smoke, illustrating the threats posed to the wine industry by a worsening annual fire season.

Paradise Ridge Winery in Santa Rosa burned down in 2017, and some of its grapes were exposed to smoke taint this year. The boutique Soda Rock Winery in Alexander Valley is planning to rebuild after several structures were lost to the Kincade Fire this year.

The recurring fires have impacted many insurance providers in California. Lloyd’s backing away from wineries is an example of how a key feature of the insurance industry is changing because of the fires, according to Paul Laufer, executive vice president at Gorst & Compass Insurance.

Typically, so-called “admitted” insurance providers file their rates with state regulators — and in turn are backed by a guarantee fund — but can only raise rates a certain amount each year, tamping down coverage and price volatility, Laufer said. For things they do not want to or cannot ensure, nonadmitted carriers, like Lloyd’s, typically step in, he added.

Because of the annual wildfire risk however, even admitted providers are not renewing or are closely inspecting businesses and even homes they insure in areas prone to fire, Laufer said. “You have a lot of admitted business not being renewed.”

Laufer said wildfires pose a unique risk to insured businesses in that they represent a total loss, which can also be catastrophic for an insurance provider, unlike partial losses posed by earthquakes.

“The admitted marketplace for homeowners and for commercial property is going to start to be impacted as well, based on what could be this new norm of wildfire,” he said.

Staff Writer Chase DiFeliciantonio covers technology, banking, law, accounting, and the cannabis industry. Reach him at chase.d@busjrnl.com or 707-521-4257.