‘So, who made this stuff anyway?’ If you ask that question of the average craft beer drinker they probably think the answer is as plain as the hops in their IPA, but those in the industry know that it is not that simple. Today, a growing number of craft breweries concern themselves only with recipe development, marketing, sales and distribution of the beer. The actual production is “contracted” out to a brick-and-mortar brewer with additional, unused brewing capacity. This type of brewer is what The Brewers Association defines as a “contract brewer.”
There are a few key considerations to be made that can affect both the contract brewer as well as the production facility that will manufacture the product, and they are as follows:
Who owns what?
Understanding which party is responsible to insure the replacement value of stock, packaging and raw materials is important. Let’s say there is a fire at the production brewery and the damage is extensive; equipment has been destroyed, and the business is shut down for several months while the brewery is re-built. In addition to the equipment there is also finished product that is destroyed, including that of the contract brewer. How will the contract brewer recover from its financial loss? The production brewery more than likely has insurance coverage for it’s own equipment and inventory, but unless it has been specifically addressed the property belonging to the contract brewer will NOT be covered. The contract brewery should take out insurance to cover it’s own property (e.g. Kegs, Packaging, Finished product awaiting delivery, merchandise, raw materials, etc.
Interruption in Business
In the scenario above, the production brewery has been shutdown due to an insured loss (fire). It will be at least six months until that operation is back up and producing again. The contract brewery is also now shutdown with no facilities from which its product can be manufactured. The contract brewery may be able to mitigate it’s losses by finding a new host brewery; however, that may take several months to arrange during which time the lost revenue will surely be felt. Let’s not forget that the original production brewery is probably also seeking a new partner for production of its own beer. It may not be possible to obtain sufficient capacity within the immediate geographic area to accommodate the needs of both breweries. The resulting loss in revenue is insurable under a property policy that includes “contingent business interruption” coverage. This should be discussed with the insurance advisors of both the contract brewer and the host facility.
Avoiding Potential Legal Woes
We recommend that a formal agreement be established between the contract brewery and the production facility. Among other things, this contract should contain a “bilateral indemnification” clause – which is a fancy way of saying, “I won’t sue you, if you don’t sue me.” As a part of this clause both parties can agree to waive their rights of subrogation against the other. Without such a waiver it would be possible for the insurers of one party to attempt to recover any losses that have been paid against the other. For example: let’s say the insurer for the contract brewery pays for a loss of product following a fire at the host facility. By contract that insurance company is now in a position to sue the host brewery to recover what it has paid to its client. This scenario is likely not what either the contract brewery or the host brewery had in mind when they decided to join forces and can be easily avoided with the right contractual language. This agreement will need to be disclosed to the insurers of both operations.
Contract Brewing is here to stay, and growing in popularity. The unfortunate reality is that sometimes-bad things happen to good brewers; taking reasonable steps to protect the business is prudent. By and large property insurance is inexpensive and easy to obtain, so there is no excuse to go without. Speak to your insurance advisor and make sure that all bases have been covered.