A manufacturer plays a critical role in the supply chain, so if your business faces any issues, the whole logistical system gets affected by it. This is why it’s essential manufacturers do everything they can to reduce risks.
As a manufacturer, you try to produce the best quality goods to meet your customer’s expectations. If this process gets affected by instances such as machinery breakdown, fire or contamination of a product, it can negatively impact your business. To protect your manufacturing business from such risks, it’s worth considering the different types of manufacturing insurance.
Every manufacturing business produces different goods and operates in a different way. Nintero two businesses are the same. Therefore, a manufacturer’s insurance, too, cannot be one-size-fits-all. It pays to understand and analyse the risks within your business and then seek professional advice regarding the right insurance cover to meet your needs.
What insurance should a manufacturer have?
Some of the most common types of manufacturer insurance policies are:
This cover can protect your business if any of your insured property (physical assets) is damaged due to a perilous event. Some of the common types of peril an insurer will automatically cover are:
- Wind and Water
- Malicious damage
Flood cover can be added if required and is generally not offered automatically by most insurers.
Some of the most common assets covered by insurers are:
- Goods under production
- Goods in transit
Usually, you can cover your business’s buildings and contents for their full replacement value. However, with goods under production and stock, you can insure them for their highest value that could be lost at their final stage of production.
Usually, a broader policy such as Commercial Property Insurance covers against the damage done to your insured property. However, it will most likely not cover the loss of income or revenue due to that damage. Therefore, business interruption insurance ensures your business’s costs, such as utilities and wages are paid in case of a property damage or loss event.
As a rule of thumb, a business interruption policy covers the loss of revenue/sales, incurred expenses, and increased working costs due to the property damage. Along with the amount of cover, it is important to consider the indemnity period for which you want the cover in place. Depending on the size of your manufacturing business and the complication of your machinery, it can take 1-2 years for you to recover your business. Therefore, ensure that you are covered for a sufficient period of time.
Despite how long it may take to rebuild a building, sometimes the actual construction can take months before it even commences.
This cover is sometimes also called Business Continuity Insurance or Business Revenue Protection Insurance.
As the name suggests, this cover protects a manufacturer’s business property that is lost due to burglary or theft. An insurer will typically define theft as the occurrence of or attempted threat of stealing a securely stored item by violent and forcible entry on-site.
Some policies can extend burglary/theft to items left in the open air or where there hasn’t been any sign of forcible or violent entry, however, this often needs to be negotiated into the policy.
The types of property/items covered by this policy are:
- Machinery and equipment.
- Marketing and advertising tools such as display screens.
- Data storage equipment such as computers and servers.
- Contents such as fixtures, lightings, furniture and furnishings.
The types of property/items NOT covered by this policy are, unless specifically requested:
- Money left on site (usually insured under the Money section of a Business Insurance policy).
- Personal items such as jewellery or laptops.
- Any motor vehicle that is not stock or business property (registered vehicle).
- Glass (windows).
Some items above can be included but are often restricted to a very small sublimated amount.
As a manufacturer, you may need to import certain goods or export your goods. Marine insurance is a general term used to describe cargo or goods in transit. It covers all modes of transport — air, sea and land. If a manufacturer’s goods are damaged, lost or stolen by these three modes transport, the insurer will provide coverage for the appropriate replacement value, sometimes also including insurance and freight costs. If the goods are lost prior to being sold, they are usually insured for the wholesale replacement cost. If presold, they may be able to be insured for the retail cost.
It is possible that your aviation, freight or courier company may offer a contingent limited liability insurance. However, it may not cover the full value of your goods and can leave you under-insured. Most commercial carriers will contract out of negligence or restrict their coverage to negligence-based, which does not cover all scenarios and can leave the owner of the goods uninsured.
This type of policy can be two-fold — one, it covers the cost to repair or replace machinery that is broken down (machinery insurance), and two, it may cover loss of income, similar to a business interruption policy. It can be said that a business interruption policy is an extension of the machinery breakdown insurance, and so it is important to consider taking both together. Breakdown does not cover general wear and tear or lack of maintenance. Critical machinery that cannot be repaired or sourced effectively should definitely consider a more specialised breakdown policy that is suitable for items that carry a higher risk.
This policy covers equipment and machinery and does not extend to a manufacturer’s stock or on-site contents.
You probably have certain vehicles that work on site. If just one of them goes out of action, it can disrupt your whole process. Motor fleet insurance protects your range of vehicles and can include all vehicles under one policy.
There are three different types of motor fleet insurance — comprehensive, third party only, and third party fire and theft. You can get certain extensions, too, such as higher liability cover, driver flexibility, modifications and replacement hire vehicle coverage.
Some fleet policies are negotiated on an annual adjustment basis, which means all additions and deletions during the year are calculated close to the expiry of the policy.
In simple terms, Public Liability Insurance protects your business from being sued by the general public. It covers the cost of legal compensation that your business may be liable to pay for causing damage to third-party property, or injury or death of a third party due to negligence. It will also cover your legal costs. Damage caused could be someone (other than your employees — workers compensation can help with this aspect) slipping on your factory floor or your forklift damaging someone else’s property.
Public Liability may also cover employees causing damage or injury on site at a clients premises, perhaps during a delivery or installation.
Product Liability protects your business against property damage or personal injury caused due to the product you provided or sold to your customer. As a manufacturer, you ultimately provide a finished good to a customer. If that causes damage to property or personal injury, it can lead to a compensation claim. This insurance policy will help cover those costs.
Even if your products are not used properly by the customer or third party, a claim can arise. It is also possible that you may be liable for any products you have repaired or refurbished for sale or if it has your branding.
Most businesses don’t realise that even if not physically manufacturing an item, you may be still deemed the manufacturer when importing, altering or even relabeling a product. For more information on importing risks, please refer to the Australian Product Standards.
Product Recall Insurance/Contamination Insurance
While processes are followed to ensure product quality is high, sometimes things go wrong. If a certain batch of products you manufactured is contaminated or impaired, you may have to recall your products. This cover protects against the costs associated with the recall. Given that a product recall affects the reputation of your business, it is important to consider this insurance to at least help pay off the recall.
Some of the common occurrences that are insured against are government recall, contamination by accident, impaired components, malicious tampering of products, and product extortion.
It typically covers costs associated with recall, replacement, expert consultant and even business interruption.
Some Public Liability policies offer a Product Recall Expenses extension, however this often restricted to the incurred recall expenses only. A standalone Product Recall policy can be expensive, but can also save a business if something was to occur.
Does a manufacturer need professional indemnity insurance?
This is one of the most common insurances purchased by all business owners and not just manufacturers. Professional Indemnity Insurance protects the business against costs relating to legal damages arising as a result of the expertise (professional service) provided by an employee or executive of your company. If a lawsuit arises, the legal costs and compensation can be covered by this policy. Even though it may seem like a cover for service providers, Professional Indemnity Insurance can protect the manufacturing business against the actions of certain individuals.
Professional indemnity may be beneficial if a manufacturing business designs their product or provides advice for a fee. Some risks that aren’t often thought about include contractual breaches, misleading or deceptive conduct and also breaches of inteelectual property rights.
Management Liability Insurance/Director’s & Officer’s Liability
No matter how good the quality of what you manufacture is, it is possible that your employees, managers or directors can have a claim made against them by shareholders, other employees, the government or other stakeholders. In such cases, the accountable person and your business, both may suffer financial losses.
It is different from Professional Indemnity Insurance because even the company’s directors or managers are personally protected under this policy. The directors and officers of your business can have their legal liability covered for claims made against them arising from certain decisions they have made with respect to the running of the company and the management of employees.
Cyber insurance is gaining importance as the world relies on technology for all aspects of a business. This cover protects against financial losses caused by a cyber-attack which can include phishing, data breaches, malware and ransomware.
This insurance covers costs related to firsthand data breaches, recovering data, working with government agencies, cyber scams, loss of income and third party loss. All other manufacturing insurances do not cover cyber security related risks. For example, intellectual property theft, operational disruption, or compromise of product quality due to data breaches could cause significant financial losses for a manufacturer. Therefore, this cover should be considered as a default cover for manufacturers.
For a manufacturer, it is likely that their directors or senior management probably have to travel interstate and internationally to meet with vendors, suppliers, for research and other purposes. For such travels, you want to ensure that your staff are covered against risks related to travel.
Some of the common risks covered by insurers are personal injury or accident, cancellation or delay costs, medical expenses, loss or theft of personal and work items, emergency medical expenses, hijacking or kidnapping. Some insurers may also extend the cover to immediate family members and dependent children who are travelling with the staff member.
It is a standard practice within the manufacturing business to provide products on credit terms to your vendors. However, in case of insolvency of your debtor, your business could suffer heavily. Trade Credit Insurance protects your business’s balance sheet against such risks. It also ensures that your cash flow and, ultimately the net profit is unaffected. In case of your own business debt, the banks too will be at peace knowing that your business is insured against trade credit. Along with banks, it also provides security to your suppliers and shareholders.
If you would like to explore business insurance to cover your manufacturing risk, or just need help navigating a product disclosure statement, please get in touch today. We’re happy to answer any questions you may have regarding insurance protection for your manufacturing business.
This article originally appeared on Hunter Broking Group Media and has been published here with permission.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Hunter Broking Group.