Cracking open coverage for canned cocktails

Not long ago, a client of Midland Insurance Brokers suffered a problem known in the drinks game as “pinholing”. 

After canning its own ready-to-drink (RTD), pre-mixed beverages, the distillery discovered a problem: microscopic holes had formed in many of its cans. During the time the drinks were stored, and as some were sent out to retail, most of the stock was lost through leakage.

It’s the type of case that might be covered under a property claim as accidental damage, says Midland Insurance Brokers director, Damien Lane. However, it also illustrates the unexpected nature of risk in the RTD space.

“There’s another risk with beer, known as secondary fermentation,” says Lane. “That’s when it ferments again, in the bottle or can, and either goes off or the alcohol content increases. That requires recall, but it’s unique to beer and doesn’t happen with spirits.”

There are several other risks in the drinks space that require specific attention, Lane adds.

“Fire is a risk, particularly for spirit manufacturers as the distilling process itself can cause fires,” he says. “It can be a very flammable product.

“And if there’s a maturing product, which describes much of the sector, it can be contaminated during the maturation process.”

Then, of course, there are the usual business interruption risks. 

Midland Insurance Brokers brings a customised “breweries business pack” to its drinks clients, with specialist spoilage, leakage and contamination covers, a better basis of settlement for products that need to mature, excise cover if required, as well as discounts on premiums.

As brewers and distillers diversify into the RTD space, such customised cover will likely become more important.

Marketing risk: Don’t believe the hype

A report from the Australian and New Zealand Journal of Public Health painted a concerning picture of the RTD segment of the beverages sector in Australia and New Zealand.

It revealed approximately half (52 per cent) of RTDs displayed at least one nutrition-related claim, with the most common referring to naturalness (32 per cent), sugar (31 per cent), and energy content (32 per cent).

Such nutrition claims, particularly in a space in which consumption is dominated by young people, can come with a high degree of risk. 

The research study report said, “Nutrition-related claims have the potential to mislead consumers about the healthiness of alcohol products, and more stringent regulation of nutrition-related claims is needed.”

Since the COVID-19 period, many brewers have branched into RTDs to diversify from beer lines that may be more heavily affected by supply-chain issues.

They’re also targeting a market of younger drinkers who, according to a US study, overwhelmingly feel RTDs are more convenient and better tasting than other drinks.

And so, the issue of nutrition claims for sugary, sweet, pre-mixed alcopops, in such a fast-growing market, becomes an important one.

Warren Reid, founder and director of Gold Coast brokerage Broad Risk, offers insight around these and other key risk areas for the RTD market, and vehicles that could offer solutions.

Product liability

“Potentially misleading health claims in advertising and labelling could lead to claims under product liability,” says Reid.

“If they are advertising certain health benefits that are not actually health benefits, and if the product could lead to people becoming ill, there could be a potential claim scenario whereby the third party, being the customer who has purchased and consumed the goods, makes a claim against the manufacturer for misleading advertising and labelling. That’s a product liability scenario.”

Public liability

With increased alcohol consumption linked to misleading health perceptions, public liability risks may rise.

“Increased consumption may lead to higher incidences of alcohol-related injuries, public disorder and damage to property, particularly in social venues,” says Reid.

“Companies involved in distributing or selling these products could see greater public liability exposure, especially in cases of third-party harm.”

Directors and officers (D&O) liability 

“This covers claims made against the business for the mismanagement of the company,” Reid says. 

“If they’re putting products into the market that claim to have health benefits, but the directors know they are not healthy, that’s mismanagement. It exposes directors and officers to potential liability if claims are found to be misleading.”

Regulatory and compliance risk

Regulatory and compliance risk would not fall under a traditional insurance policy, says Reid, but could lead to fines or enforcement actions, which can sometimes be covered under specialised policies such as directors and officers.

“D&O has a couple of different sections, including company reimbursement and regulatory fines and penalties,” he says. “There can be cover if you are found to be liable and face fines and penalties.”

Cyber and media liability

Both cyber and media liability can be purchased on their own, says Reid. “Media liability is a specialised liability policy that is relevant for companies promoting pre-mixed alcohol products online, or through digital marketing.”

Media liability insurance might cover risks associated with misleading advertisements on social platforms, he continues.

“This type of policy could protect against claims of false advertising, defamation and misrepresentation stemming from promotional content, especially if consumers or regulators challenge the health claims.”

And while cyber insurance is not necessarily connected to misleading statements, it is important, says Reid, who is seeing a large number of claims in this space.

“Hackers are targeting small to medium businesses because they know their security is not as strict as the larger corporations,” he says.

Crisis management

Product recall insurance provides essential protection if an RTD product needs to be withdrawn from the market, due to potential harm to consumers or regulatory issues, Reid says. 

“It covers expenses related to recalling and replacing the product, helping to mitigate financial losses and reputational damage. These protections are particularly valuable in a fast-moving market where swift action is crucial."

Employment practices liability

With increased scrutiny on companies promoting potentially deceptive products, employee relations and workplace culture can also be affected, especially if public opinion impacts morale or retention, Reid says.

“It comes down to a moral hazard. A disgruntled employee or director might refuse to do a certain piece of work related to the product or might make their feelings known. A week later, they’ve been sacked. That could lead to a claim against the company for wrongful dismissal.”

While he’s not aware of such claims coming from misleading nutrition advice in the RTD space, Reid says that once there is a single claim, it will typically lead to many more.

“There’s always a knock-on effect,” he says. “If you have a product liability claim, it could lead to a public liability claim. Then, who decided to put the product into the market, or to promote it in a certain way? That’s a D&O claim or a management liability claim. Then somebody is fired, and there’s an employment practice claim, and the company is held liable by the local regulator, and there’s a regulatory claim.

“It can cause a domino effect, which is why relevant cover is vital.”