For dietary supplement companies that have off-site storage of their property—be it labels, finished goods, raw materials or other property—who insures those goods against the perils of fire, theft, vandalism, etc. (commonly called fire insurance)? When I ask this question, I can’t count the number of times the owner of the supplement company answers with the statement “well, it’s in their warehouse so they must be insuring it, right?”

This is a dangerous and incorrect assumption. In the vast majority of situations, property stored at a location other than your own is not insured by those whose care and custody it is in. Not knowing this is bad enough. Not knowing it until after your inventory is destroyed in a fire is worse.

Most fulfillment house contracts I have seen deal with the issue in one of several ways. The contract might say:
• Nothing about who is responsible for the loss or damage to your goods (which means that they don’t intend to insure your property);
• You are solely responsible for loss or damage to your property, a duty which somehow is quickly forgotten or overlooked;
• The fulfillment house can arrange insurance and charge you extra for it;
• Their liability is limited to some kind of formula often based on weight, which in reality will pay you 10 or 20 cents on the dollar if the property is destroyed, if that.

Aside from the first two items, none of the remaining two conditions are good for you. Why would you let somebody else take charge of insuring your property? What if the coverage is inadequate? What if their policy is cancelled or not renewed accidentally and there is a subsequent fire that destroys your goods? Why would you give them a blank check to purchase insurance for you, when you should be controlling the breadth of coverage and cost as carefully as you do when you procure insurance for your building or vehicles? And of course, a limitation on the liability by weight is simply unacceptable if you want to be made whole after a catastrophic loss of your property.

My rule is this: Insure your own property, wherever it may be, because it is very likely that nobody else is insuring it for you.
By the way, these comments apply not only to fulfillment houses storing finished dietary supplements. The same train of thought applies to:
• Raw materials you have purchased and sent to a contract manufacturer for use in manufacturing your products;
• Goods while in transit from your manufacturer to a fulfillment house or to your own location (called “inland transit insurance”);
• Goods while in transit from your plant or your manufacturer’s plant to a retailer you use (also inland transit coverage);
• Raw materials or finished goods from overseas, after they leave the dock in the U.S. and are on their way to your facility or another facility such as a contract manufacturer (again, inland transit insurance).

Many people recognize the risks and choose to let the shipper insure the goods. This is OK, but almost certainly is costing you more money than if you arranged the insurance yourself. In many cases, it is like the “insurance” you buy when you rent a car. There really is no insurance (which, you’ll notice, is why they never call it insurance at the car rental desk). The entire premium goes into a kitty to pay losses, and they pocket what’s left. And they pocket a lot of money.

Policy Options
So what solutions exist for these exposures to financial loss? First, check your fulfillment and warehouse contracts to see who is responsible for loss or damage to your property, and act accordingly. If there is no contract in existence then have a discussion with your trading partner about who will be responsible if something happens to your property while it’s in their custody. Get it in writing, and then take action to insure it as necessary.

Traditionally, insurance coverage for these situations is placed on a replacement cost basis, which means in the event of loss you will recover the amount it costs you to replace the goods. But it will not cover your lost profits on those goods, and in the dietary supplement industry that spread between retail selling price and replacement cost can be substantial. That’s where a different kind of policy might be the right answer for you, especially if you are a wholesaler or retailer of finished goods.

The stock throughput policy originated years ago at Lloyd’s of London and is designed for manufacturers. However, even if you are not a manufacturer per se, this policy can be adapted to your operations with many major coverage advantages.

A stock throughput policy is a marine policy that is designed primarily to insure finished goods inventory, including component parts such as raw materials. It insures these items from the source of production through the chain of commerce until your risk of loss in those goods ceases. It will include several components, such as ocean cargo (if needed), inland transit and property at fulfillment houses and at your manufacturer’s location, all in one policy. Thus it integrates transportation, inventory storage, material handling and packaging. Some unique features of this kind of policy are:
• Recovery for finished goods is on a selling price basis rather than a more traditional replacement cost. Since you recover on a selling price basis, your profit in the destroyed goods is paid to you. This completely eliminates the need to complete a business interruption worksheet, a task found by most people to be draconian at best.
• A “no claims” rebate can be negotiated, so if you have no claims you get some of the premium back at the end of the policy year.

Rating is a very simple process. Although you will have to provide some exposure data, ultimately, the premium is adjusted on sales revenue, just like a dietary supplement product liability policy. It grows automatically with your business. For a rapidly growing company, this is a real advantage.

In conclusion, a dietary supplement company with raw materials or finished goods on the move from place to place before they are sold has a duty to itself to make sure those items are insured for perils covered by a standard fire insurance policy or a related policy (such as inland transit policy). Failing to do so may cause a very unpleasant surprise after an uninsured loss results in not only the loss of the goods but also the profits they represented. Check your fulfillment house contract today.