Welcome to The Month End CPG community chat, The Month End will provide emerging CPG brands real life knowledge into the accounting, finance and operational worlds. Our guests will be key stakeholders from those same brands as well as other key contributors in the industry.
Welcome to Episode 37 of The Month End podcast looking forward to chatting to the with the guys from secure CPG. Today we'll talk and Russ Taylor. How are you guys doing today? Well and Ross doing all right. How are you? Great. Doing great doing great. Can't complain, I get to talk to two handsome fellows here. All right, so we're gonna try to make the conversation the next 20 to 30 minutes about insurance as fruitful as possible for the listeners. So before we get started about to talk specifics about insurance give us the your each your background as well as what you guys do pursue secure CPG and then let us know what security CPG does.
Yeah, absolutely. So I so I worked in insurance for a little over a decade, kind of long story short, burned out on it didn't like it didn't like the experience and like the products didn't like, didn't like really everything around the industry. I thought it was wildly integrated. So I actually left that industry. I decided to go back to focus on my master's launch a company I exited from that company. At which point in time, I actually got pulled back into kind of the insurance sphere, really, based on the thesis of why secure CPG exists. I will let Russ kind of make an introduction and then I'll kind of dive into security, Bg what we're doing and kind of what we're improving.
Awesome.
Thanks Will. So yeah, so last six or seven years, I've worked in like a much more traditional insurance style brokerage operation where working with like vertically integrated manufacturers, and I was heavy on the product liability side, I was doing everything from, you know, r&d, companies that build drones, algae based air filters, and then started building out this, this niche in the food and beverage space handling product liability recall. And that's gonna tie in nicely to, you know, sort of the story that secure.
Yep. So just to kind of piggyback on what Russ said, so Secure CPG is a newly launched platform that we're building with the ultimate thesis that insurance for modern brand operations is woefully inadequate. And what I mean by that is when you look at things like spoilage, contamination, recall, goods in transit, the way that traditional insurance contracts are written. As it relates to the use of third party ca manufacturing facilities or 3PL fulfillment warehouses, most contracts tend to not insure product effectively. So when we asked the founder when he when we came together to decide to launch Secure CPG, the goal was to innovate in contract language, so that brands that were buying insurance knew that it would actually cover the most frequent issues that they face. So from beverage, it's, it's I mean, you still run across contamination, but the biggest thing would be kind of a seamer issue, or can corrosion, no matter where it is in the manufacturing lifecycle. And then for food, it's a really big thing around spoilage and contamination, and really how that product is stored. I mean, you get as granular as frozen versus sell shelf stable. And really identifying those nuanced issues within the space. And working with some of the biggest insurance carriers in the country to actually change their contracts, price them more effectively, and include language that more effectively covers product.
Sounds good as a high level background, so let's kind of get into kind of step one. And here, not the traditional insurance types of really focusing on this CPG product, food and drink specific items that you mentioned. So if we talk about like, risk, right, what are the key risk here of a let's just say you have a brand new founder who just wants to go ahead and make a cool new...I don't know, THC infused drink, right? Just throwing that out there?
What are the things that they should think of from a risk perspective related to product and different things as well as the other insurances that are key to this industry?
Yeah, so first and foremost, any any operator, the first thing that they're going to purchase is a general liability policy. What that essentially is doing is it's protecting you for your product going either in or on somebody's body. And what that means is if your product causes harm to another person to a third party, that your business is protected. We've talked to a number of businesses that actually look at their relationship with their co-manufacturer and say, well, they're the ones that's making that that's making the product. So it's their liability. when in truth, it's your brand, it's your packaging, it's your company that the lawsuit is initially going to target. That is the first thing that anybody really focuses on. And it's required. Any sort of retailer relationship is going to require a COI or certificate of insurance, stating that you have this coverage. When you get into more nuanced ingredients. It's actually great that you brought up THC. When you get into more nuanced ingredients. That's where you have to be very specific about which insurance provider you're using, because some will offer wildly restricted contracts that exclude that particular product. And if your contract shows that that product is excluded, then essentially you're wasting your money on an insurance policy. That's not going to kick in should something happen.
Gotcha. So we talked about GL product or, you know, situation, why don't we talk about while we're talking about kind of product insurance here. We were just chatting before this about kind of a nightmare that you want your clients or when somebody that your colleagues experienced you kind of high level that aspect for the audience?
Yeah, yeah. 100%. I'm actually this is kind of one of my soapboxes this particular month, something that I'm really preaching to every brand that we talked to, we talked probably about 10 or 15 a week is when you have a relationship with a co-manufacturer, obviously, the most important thing that you could set up would be a contract with that co-manufacturer, a lot of smaller brands that are just starting out don't do that, because they don't want the the obligation for minimum order requirements. So what we generally advise clients and brands to do right off the bat is to request a certificate of insurance being naming their brand as a co-insured on their co-manufactures insurance. So now what that does, and I'll kind of tell the story quickly. So we have a friend that's in the space, it's a beverage company, there was a seamer issue where what happened was a leak occurred after the product had been completed. At the co-manufacturing facility. The leak happened after it was sitting at the third party warehouse. So the co-manufacturer kind of had an out in that they sent the can away the to a third party facility they tested the can determined it was a seamer issue. But the coal manufacturer's pushing back saying it's actually a can corrosion issue. So basically, everybody's putting their hands up in the air and saying it's not my fault. Had this brand requested a COI from that co-manufacturer, they would have been able to just go directly to their insurance–which they have insurance for this exact issue–to recoup their money. Instead, what's happening because they're not on a COI, and they didn't have a contract is there battling and trying to be trying to play nice with this co-manufacturer, when the co-manufacturers denying all liability. So really, their only option at this point is to ultimately sue that co-manufacturer, when had they just requested the COI and kind of taken these basic, completely acceptable steps in a business relationship. There would not be an issue, they would recoup their money, they would keep moving forward, they would do another production run and they wouldn't tarnish the relationship with the co-manufacturer.
would the co-manufacturer easily give that COI if requested?
Yeah, that's just that standard business.
Gotcha.
It's just it's just knowing task for it.
Yeah, just like how retailers ask all their brands for you know, certificates of insurance. It's a it's a two way street. Right? You can ask your co-man or 3PL for a COI. And I think Will brings up a good point, right? We talked about this a lot with our clients. Insurance is really designed to be a defensive product, right? It's something bad happened, I need to be made whole. I had too make people get this idea that, "Oh, I have this insurance policy, I can go after something." So in this particular case, right. It's a issue with the co-manufacturer, but the insurance policies are designed to go attack someone else's design and make you whole in the case of you know, wrongdoing. So we're trying to help them find some coverage that apply. That applies even though it wasn't their fault that the product went bad.
Gotcha. Makes sense. So we in talking with a on the product side of the business specifically within a co-man relationship. That's key to do. Two other kinds of situations: number one is just purchasing raw materials from a vendor. Like, what are the things to think about there? And then number two is, what if you're in-house manufacturing? What are the different things you should think of? So number one, like when you're purchasing a product, from a vendor, is there a specific insurance or things that you know, to get that product to your warehouses etc?
Yeah, I'll take the first part, then rush, you can take the second. So one of the biggest things that we preach and really focus on is understanding at which point your business owns that product. Sometimes it's when it hits the co-manufacturer, sometimes it's when it leaves the the ingredient source, whichever that is, there are pieces of insurance that can make sense if it's a high enough value order. And what I'm specifically referring to would be kind of a very one off cargo insurance policy, stock throughput, what those are very niche products that ensure very specific moments, like your inventory coming overseas, from China, or on a truck coming up from Mexico, or really, anytime you're sourcing something from outside of the United States. That's where you really need to dive into the contracts figure out when you take ownership of it, and what sort of freight insurance that your shipper is actually providing. It's really, I mean, it's a good idea to have a third party that really understands this look at it. But I mean, a perfect example on this is, we talked to a brand that was spending $18,000 on one of these cargo policies. And the only thing that covered was $7,500 worth of sprinkles that they ordered from China annually. So then very kind of candid conversation that we had with this brand was, well what happens if you lose that sprinkle order, though, they said they're just gonna write a check in order to again, so there really is no need for that insurance. That's a case where somebody overbought insurance when it when they didn't need it. But there's a lot of times like if you're a beverage company, and you're sourcing all of your bottles or cans in one large order during the year, that's where it might make sense.
Gotcha. And before we get into the manufacturer, question Ross hold tight. Since we're talking about kind of external party relationships, let's just get down to two other ones. Right. Number one, a 3PL warehouse is housing, your inventory that may be ready to be sold or whatever, i.e., Amazon and a lot of other 3PLs that are out there. But then secondly, then after that, like retail. So maybe we go to those first couple go back to the whole manufacturer risks aspect.
Yes. So again, I think a lot of brands have a misconception about what's happening, what's happening and who's ensuring their product when it's added 3PL. And I don't want to say the 3PL is or line. But I think a lot of times they're having conversations and the salespeople talking to the brands don't fully understand insurance, you know, they're not agents, they're not brokers. And so they go, yeah, yeah, when your product comes in, we have insurance for it. And a lot of times, what they're probably misunderstanding is that, you know, the 3PL itself has insurance. But what we find is 90, 98 times out of 100, when your product sitting on a 3PL shelf, it's not being insured by them, or if it is, it's 25 cents on the dollar. So it's really important that you make sure your property policy, your cargo policy, however, your agent has set it up for you to have it covered as it moves through your supply chain until it hits retail shelves. And that's been a really eye opening thing for some clients that we work with where they go, we have $250,000 $1,000,000, $2 million, so on so forth. inventory sitting on shelves right now. And you're telling you, we're telling them in some cases, it's completely uninsured. So that that's been a really delicate conversation that we have to have with clients to make sure that we understand where ownership lies, and the values of their inventory that's in the marketplace. Taking the next step when it goes to retail is registering goods, you no longer own your product while sitting on retail shelves. So you're no longer required to carry property insurance for it. But there's still these massive risks out there. And to go back to the beginning of our conversation. This is where General Liability and product liability comes into play. Your brand is out in the marketplace if someone consumes it and incurs an injury, gets sick, whatever it might be from utilizing your product, that's where product liability would step into place so someone needs your you know your brand granola drinks your tea, and they get sick from it and they say hey, your your product is what did this. That's where your product liability policy steps into place and says, "Hey, don't worry, we're going to protect you in this event", and then we can go, probably more touch on later. But recall is a big piece that once it's on retail shelves, if you realize, "hey, there was a, you know, error with this batch, we need to get it out of the marketplace". That's where recall comes in.
Gotchya, we're great.
We're actually dealing Brad, we're dealing with a, with a recall issue right now, where the formulation was off. And again, the ingredients source, the co-manufacturer, everyone's pointing fingers at the other at the other party saying, well, they this these packages were mislabeled, therefore the formulation was wrong. And the reason that we were able to get a recall claim is because essentially, the way to think about it is we didn't like the brand can't say that there's something wrong with the product that could have hurt somebody. But they can't assure that there's that the mismatch of the formulation couldn't create a problem. So it's this very gray area of saying, "Well I know it's probably not going to hurt somebody. But I can't guarantee that it won't", if that makes sense.
Makes Perfect, perfect sense of the insurance and kind of legal space. On to kind of in the in house manufacturers here like what or is there additional risk for them to be aware of? In their with their supply chain?
Yeah, I mean, marginally, right. It's, it's better in the sense that QA is now in house to probably so you're, you've got eyes on every you know, SKU every piece of product going out the door, which is which is really helpful. It's going to, it's going to change the way that you insure your product. But the good news is, traditional insurance contracts that are available in the marketplace right now are designed for vertically integrated manufacturing companies. Right, the bigger challenge that we had Secure CPG or tackling is when "Hey, I have an outsourced co-man. I have an outsourced co Packer I have an outsourced distribution network. But with that said, right, you now take on the onus of the brand name and the manufacturing, so there is no pointing the finger at someone else and subjugating in the event of a manufacturing error. So I don't want to say that it's riskier. I don't think it is I think it's just you know, "hey, we have different operations, let's make sure that we are insured correctly and adequately for you know, our skill set". And we see this a lot right now. Brands are going to do a hybrid in house manufacturing for a lot of r&d or small runs and in their outsourcing you know, their tried and true products that are their moneymakers.
So there's a there's a big issue sign, there's a big issue to around kind of equipment, whether it's owned or leased insurance requirements on that, as well as building. So there's a couple of brands that we work with that actually specifically, they hired engineers to build custom machines that create the product. So you have to account for lost business revenue if that machine goes down. So because they're it's, it would take them six months, six, 12 months to build another machine to manufacture their products. So it can get it he we like to get really granular on it. Because there are some more unique risks in the self manufacturing space, especially once you start getting into like, very original, like product design that requires very specific machinery.
Good point, Will
Makes sense? So if something happens, and then all the sudden you you know, with a co man and we're talking about this, he sheds, he said she said point fingers, how does an insurance provider validate the actual quantity or value of the inventory? And I'm just thinking of this from the accuracy of inventory on the balance sheet of a company like me, I'm assuming they're just taking those records, but who knows what it is, but I'm assuming that's very, very important part of this aspect if this happens?
Yeah, Russ tyou wanna do that?
Yeah. So it's actually it starts in the initial conversation with us as the agent, right? We're talking to the brain saying are, you know, do we want to insure this for the value of COGS or retail, and of course, the higher the value that you're insuring the more premiums associated with that. It it depends on the way your policy is written as well on so when again, when we have the conversation with our clients, we structure the policy on the back end to say, Okay, we're gonna insure this for the cost of goods or rent insured for the cost that you would sell it at retail, and that's how the policy will respond in turn to a loss. So there it's it's really an early on concept that you you can make a decision around and say, "Okay, I want to recoup the cost of my manufacturing", or "I want to recoup the cost at retail", if the product is damaged, when is that a third party.
There's also a, what's referred to as a business income loss component. That's usually part of that conversation. And that's saying kind of what's the revenue that's driven? What are the additional expenses. And if if you have a hit, if you are doing a limited number of runs throughout the year, and you're doing large runs throughout the year, there's essentially there's potentially a large amount of business income associated with that. So that's, that's where we identify kind of how much insurance is actually needed on that product and whether or not you're going to do it based on COGS, or based on kind of retail sales value.
Gotcha. Oh, that makes sense. So I want to move on slightly here to another kind of topic. So how does fundraising change insurance requirements?
Be it known, the more investors you have, the more likely you are to be required to purchase directors and officers insurance. Really, the easiest way to think about that is it protects the personal assets of your board members, for accusations of money mismanagement, or poor business decisions. It's really a so if you take on venture capital, or if you take on any sort of kind of institutionalized capital, that one of the biggest requirements in the side letter that we see is going to be directors and officers insurance. Sometimes that said, the thing about directors and officers is it's priced very much by how speculative the investment or business venture is. So if you're essentially raising $15 million for this incubator, parent company platform, that doesn't really have this pedigree of a product that's been on shelves before and you're going to innovate new product constantly. That's a very expensive directors and officers insurance policy, because accusations can get thrown around for money mismanagement. If you're raising for a granola company, it's going to be a much cheaper policy, because that's been done before, and they have the ability to price that out. Does that make sense?
Absolutely.
Absolutely. And then how does? Is there any other specific requirements, like if you're dealing with, you know, debt, venture debt, banks, etc? On the other side? The money raising standpoint?
Yeah, absolutely. And this actually comes from, we've we've had a number of conversations with some debt finance groups about this. Some of them have the due diligence to ensure that this is the case. Some of them don't, because they just don't pay attention to it. If you're, if you're raising like if you're if you're using debt financing to finance your inventory runs, what often is required is a COI naming that lender, as an additional insured on your inventory insurance. So a lot of brands that we encounter, finally figure out that none of their inventory is insured because they go to Dwight or as SU credit or Kickfurther or one of these other debt financing platforms. And they request the COI, the founder or the CFO realizes, "well wait a minute, I don't have that insurance". And that's where they all of a sudden realize that over the last five years, they've been operating and moving around inventory with no coverage. So that's really going to be the biggest component if you're doing debt financing, or working with a bank, to finance inventory runs is going to be knowing that that product is insured because they essentially own it as well, knowing that that product is insured and sending them a COI, that's why when the topic of COIs comes up, it's it's just normal course of business to request one.
Gotcha. All right, moving on to an entirely different topic. Cyber cyber risk, fraud spam, you know, this comes from an accountant here who's paying bills, processing payroll, etc. And all these emails that we get of "hey, send me a wire I updated my bank account. So give us a lay of the land of what's going on out there and the the cyberspace from a risk standpoint to small businesses and then like, you know, highlight how people should insure against that.
Yeah, Russ?.
Yeah. We, we see this all the time. And cyber is kind of the wild wild west and insurance right now. Think of it you've got, you know, nimble, agile people, that hackers and then huge archaic insurance companies on the other hand, so the number one claim that we see and we advise our clients against on the cyber front is probably what you see all the time Brad; invoice manipulation or fraud where they intercept, you know, an email for payment. And then they also the wire instructions or the check routing numbers or whatever it could be. And that's what your cyber policy is really for, you know, everyone is afraid, oh, you know, if I get hacked, and they locked me out of my systems, it covers that as well, which is great. We've seen that with larger companies where they can't access any of their systems and their servers get ransomed, and that's horrible. But for a lot of these smaller companies that are, you know, working off of a laptop, it's the $5,000 invoice that they're paying to one of their vendors, and they they send the money off, and then the vendor contacts them a week later, "hey, we never received that payment". And that's, you know, for a small brand, that can be a death sentence, if they're out five grand 7500 bucks. And the good news is cyber would recoup you and make you whole in that sense. So you get your money back, and you're able to, you know, then pay your vendor. But the most common one for sure. Is is invoice manipulation via email.
And the cyber insurance is not that expensive, right?
It's really not terribly expensive to get.
Yeah, yeah, I feel like just from our perspective, in terms of the vantage point that we get with all of our clients, clearly not just CPG specific, but any small businesses is the fraud that you're mentioning, and I think, you know, just being careful and aware, number one of just communications, emails, people sending random routing numbers and account numbers, and it appears like it's valid, but like, you don't need to put that information in on your bill payment side, get confirmation, call them just kind of to be aware of all that aspect. But I feel like the cyber insurance space in that policy isn't as normal not even normal, but isn't as you know, "hey, I'm gonna go get a GL policy or worker's comp policy", I feel like it's gonna get there. Where it's like, you should also just have a cyber policy because none of this other stuff covers it. And I and it's a it's a huge death sentence when you wire somebody, whatever it is 100 grand, 150, grand, 25 grand, and then it's just out there. And somewhere who knows where as well.
It's gone
So what's that?
It's gone once once you said it? Yeah.
Yeah, we? Yeah. So, you know, that's kind of tried and true to our heart as well, just from an accounting standpoint. So outside of that, is there any other kind of insurances that we didn't touch on that should be just kind of top of mind for for a small CPG? Brand? Owner?
Yes, 100%. Actually, the cyber kinda got me thinking about it, there's there's a big issue out there with smaller brands and Shopify and being sued for for a kind of a violation of being of not applying for the of not conforming to the ADA, compliance requirements of having a website where you're selling products online. So long story short, there's several wonderful attorneys out there practices of attorneys that type that find websites that don't fit within the requirements of the ADA guidelines.
I love–
most of these. Very, very above board, like they should definitely–
reputable.
And what they do, and actually, I mean, the craziest thing about this is, I think Shopify finally realized this, and they offer I believe, they offer a pay up option that makes your site ADA compliant. But you have to buy that. So basically, what they do is they come after you for $30,000, it hits your ego, you fight it, you call an attorney, you spend 5,000, 10,000, 15, they end up wiggling it down to where you just ultimately end up writing a check for $15,000. So it's it they have it so dialed in that no matter what, you're probably going to end up writing a check for 10 to $15,000. After you also pay attorneys fees on top of that. So one of the things that one of the policies that's really important for that, and it's not that expensive when you're a smaller brand. I mean, by smaller I mean if you're if you're a 15 million run rate and under brand you can get this relatively inexpensively is something called EPLI or Employment Practices Liability. So now Employment Practices Liability covers anything like harassment, wrongful termination. Let's say you didn't hire somebody and they felt that they were discriminated and they sue you. That's a big point that it covers. It also covers let's say you go to Expo West, and one of your team members is harassed by somebody at Expo West and and that and that employee of your sues you because you put them in that position to be harassed. As it relates to the ADA compliance, ADA compliance still qualifies as a discrimination component under the EPLI contract. So you can buy at this, we're not saying that everybody needs to buy all of these coverages at once, the important thing is to figure out what best aligns with your business. But just knowing all these things exist out there. But as far as as it relates to the ADA component, EPLI will kick in for that. So you don't have to hire an attorney, you don't have to battle this in court, you just go to your claim, they have attorneys that deal with it for you. And they kind of step in and resolve that issue for you. And I guarantee if you talk to 10 brands out there, eight of them have probably dealt with this lawsuit. It's that common.
Good, well, not good. But all this is great information, I think this is going to be really good a value to the audience here. And I've learned a lot just in the last 30 minutes. So before we leave, I want to basically have one CPG business do and one CPG business don't. So again, a small CPG brand, what is the number one thing they should be conscious about on the in terms of the topics we're talking about today?
I'm gonna go back to my soapbox, and I'm gonna say get a COI from your co-manufacturer. It solves a lot of problems, and it doesn't cost you anything.
Perfect. And then what is one CPG? Don't specific to the insurance space?
Russ, any thoughts?
Don't assume that you are covered, right? We come across all the time people get really busy. They're running a business. They're trying to scale and it's awesome. Don't just assume everything's okay. And where I'm going with that is we talk to so many brands, and they think that once their agent puts their policy in place that they don't need to talk to their agent anymore. Part of an agent's job is to be there when you call us and advise you on how to handle certain scenarios. So don't just put your head in the sand and assume everything's fine, right? Call your agent, if you have an issue. That's what we're here for. That's how we're supposed to have.
Yeah, great points. I'll say one more do do talk to an insurance agent that has CPG experience like Secure CPG here. I think that that goes a long way. So before we leave, where can we find you all out in the world wide web? Where can people reach out to you and what's the what's that? What's what's going on with the companies in general?
Yeah,
Yeah, no, absolutely. So our website is securecpg.com We have a lot of different ways that you can contact us through that platform. Some of the things that we're building are actually some digital onboarding paths where you tell us a little bit about your business and you automatically schedule a meeting with our team Russ is our head of business development he his email is Russ@securecpg.com As the founder and CEO I put my information out there too it's will@securecpg.com. We're always walking around the show floor so if you ever see us don't be afraid we don't bite. We love talking about brands love talking about product. I think that's that's the reason why we're in this space in the first place outside of making it better for brands to kind of insire their product so it's really securecpg.com is going to be the best way and then Russ@securecpg.com
Awesome awesome Will, Russ. Thank you guys so much again Will and Russ from Secure CPG. Episode 37 of The Month End podcast tons of value bombs here in the on the insurance topic. Thanks again guys. Take care.
