When a commercial insurance policy goes into force, the price is typically fixed for the term of the policy. If claims are made during the term of the policy, expect to pay higher rates for coverage in the future. This is sometimes called “stacking” when it applies to commercial insurance policies, and it is a significant problem for wineries. The rising cost of replacement for winery equipment is often the source of these increased rates, and it can cost wineries a lot of money to secure the coverage they need.

The cost of winery insurance is rising, says one company that has been insuring wineries for 20 years. “I’ve never seen anything like this,” said a representative of the company. “The cost of replacing an entire vineyard has gone up 20 percent this year alone. It’s the result of a worldwide shortage of good vineyard land and the need to grow grapes in areas that weren’t previously used for winery production, such as Michigan.”

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Larry Chacin, CEO, PAK & PAK Programs Winery Insurance Program

In the wake of recent wildfires, it’s no surprise that winery owners have refocused on risk mitigation and comprehensive insurance coverage. Many of these owners have spent years perfecting their craft and have seen firsthand the devastation caused by wildfires. They want to do everything they can to protect the property they have invested their lives in.

While vineyard owners who contacted their insurance partners expected to hear about gaps in their existing coverage and new risks to their properties, many were surprised by the opposite. Rising costs, combined with replacement efforts, put many vintners in a state of shock. Rising commodity prices, labor shortages and logistical problems associated with the pandemic are driving up the cost of lumber and other building materials – and insurance should cover those costs if the worst happens.

Perfect Storm

A leading indicator for the construction industry, the PEG Design and Construction Cost Index (DCCI) from IHS Markit, showed that design and construction costs rose for the fifth consecutive month, with the core cost index rising from 68.2 in February to 79.5 in March. In addition, the six-month forecast for these costs rose from 76.6 in February to 81.3 in March, indicating that respondents expect prices to continue to rise in the coming months. Price increases were noted in particular for materials and equipment, subcontractor labour, ocean freight, steel, transformers and copper.

Since the start of the COVID-19 pandemic, the price of wood has risen 232% and this increase is likely to continue, according to a recent article in FORTUNE magazine. The author notes that the proposal is on the back burner and there is no relief to be had as renovation and construction projects continue. The article explains the problem as a perfect storm that included foreclosures that halted production, homebuilders, low interest rates that boosted the housing market, limited manufacturing capacity and labor shortages.

While rising prices are not good news for replacement value in any insurance policy, it can be particularly difficult for vineyard owners who often have multiple sites and have used high-quality materials and finishes in construction. Just think of the ornate brickwork, handcrafted finishes, detailed moldings, floor-to-ceiling glass walls and other architectural details used in the construction of many of these wineries. If it was already expensive enough to construct a building with such architectural details, it would be even more expensive at worst to rebuild it.

Unfortunately, my company learned this the hard way. When a vineyard owner first contacted us, his property was valued at $6 million. Our experienced team immediately saw that the cost was exceptionally low and, after consultation, informed the insured that reconstruction would cost more than double. The insured requested a limit of $10 million. During the fires of last summer, this vineyard unfortunately suffered considerable damage, which was disastrous for all concerned. To make matters worse, the replacement cost was $16 million, leaving policyholders with several million dollars in out-of-pocket reconstruction costs.

A step in the right direction

In response to rising restoration costs, leading wine insurers are hiring construction consultants to visit wineries and obtain professional estimates of property restoration costs.

At the same time, vineyard owners should ensure that their insurance agents exercise due diligence to ensure that their property is properly appraised. Homeowners should also do their part by sharing information about structures that have been overlooked, new appliances, patio elements, etc. In many cases, insurers no longer offer blanket limits on property values. It is therefore up to vineyard owners to ensure that they and their insurance partner analyze every detail of the property when assessing value and limits. There are also many advantages to working with an insurance partner who specializes in the industry.

An accurate estimate of replacement costs will lead to the development of a comprehensive insurance policy that the vineyard owner can rely on to protect his or her business during these turbulent times. While insurance premiums may seem like a shock at first, the company ultimately benefits if the vineyard owner has to file a lawsuit or if a total loss occurs.

Remember, insurance is there to support homeowners during difficult times and to help rebuild and revitalize the business and the community around it. Without an accurate and current property valuation, an insurer cannot provide the comprehensive coverage that wineries deserve.

Larry Chassin is President and CEO of PAK Programs, which offers insurance programs to wineries, cellars, breweries, wine and spirits retailers, ciders, meads, distilleries, wine and spirits importers and distributors. He can be reached at [email protected].

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