Insurance: Protect Your Assets

As a Cottage Food business owner, you face the typical business hazards, such as fire, theft, car accident or an employee injury (if you have one). Additionally, since you are producing and selling food products, you are at risk of causing a foodborne illness, such as noro virus or salmonella, or having your customers encounter foreign objects in your products. With a fire, theft or car accident, you have costs to repair/replace your home, your car or your lost product inventory, or pay doctor bills for your car accident or your employee’s accident.

However, there is also the potential for lawsuits, especially you are connected with a foodborne illness, employee injury or even foreign object (although this will be highly unlikely because you will probably be packing your products by hand rather than using machinery). Unless your cottage food business is structured as a corporation or a limited liability company, your personal assets are at stake in such lawsuits. This includes the equity in your home and your farm, your 401K account, your personal savings, and other financial and personal assets.

Do not assume that your existing homeowners’ or renters’ policy covers any claims related to your cottage food business. If you are a farmer, do not expect your farm policy to cover your cottage food business; such policies usually cover only selling wholesale. Do not assume that your auto insurance automatically covers the replacement costs for the car you totaled when you were driving to the farmer market to sell your cottage foods. Review your policies carefully; you will probably find language indicating your home business is not covered. You should contact your current insurance agent and ask if you can get endorsement to cover your car when using it for business purposes, and similarly for theft and fire losses. If such extended coverage is not available, ask your agent if she/he writes business policies.

If your agent doesn’t offer business policies, ask her/him for a referral. Also, check with your contacts who are involved in the food business for recommendations. Look for an agent who has experience working with food businesses and discuss your insurance needs thoroughly. General commercial liability insurance should cover claims from employee injuries to a customer getting sick from eating your product. You may be interested in also getting “inland marine” coverage for your property other than buildings (if you have expensive equipment or a significant amount of high value product inventory.

Having a liability insurance policy may be necessary, especially if you are asked to indemnify a customer or an organization that you market your products through. Indemnification, or “hold harmless” agreements, require you to pay their legal fees and expenses if they are sued by a third party. For example, a farmers market may require you, as a vendor, to indemnify the market if the market is sued because of an injury/illness sustained at your stall. In such cases, you should contact your insurance agent and ask that the farmers market should be named as an “additional insured” on your liability insurance policy. You will probably be charged a small fee ($50-$100 a year) for this additional coverage.

The following limits typically apply to each standard liability policy:

$2,000,000 General Liability Aggregate

$2,000,000 Products & Completed Operations Aggregate

$1,000,000 Each Occurrence (applies to General Liability)

$1,000,000 Each Occurrence for Products & Complete Operations Aggregate

$300,000 Each Occurrence Damage to Rented Premises

$5,000 Medical Expenses Any One Person

$1,000,000 Personal & Advertising Injury

$0 Deductible for Liability policy

$5,000/$10,000 Inland Marine/Business Personal Property

$100 Deductible for Inland Marine policy

Well-known insurance companies that provide general liability policies for businesses (usually referred to as commercial policies) include Nationwide, Allied, Hartford and Progressive. Note that these companies are listed solely to provide examples; they are not endorsed by the University of California. A relatively new company, Food Liability Insurance Program (FLIP), charges a $299 annual premium for the two types of coverage described above, if your sales are under $50,000. The annual premium is $399 if your sales are over $50,0000. FLIP does not use underwriters; everything is done online at www.fliprogram.com, mainly by the person seeking insurance. FLIP claims that its Do-It-Yourself business model, along with its pooled risk concept, keeps its premiums about 50% less than those of traditional insurance companies.