By Mark A.W. Smith

Introduction
The bottled water industry is huge and growing. From the delivery of five-gallon jugs to the handy 16 ouncers, more and more often Americans choose to get their water from a bottle. The industry has grown to a multi-billion dollar market, exceeding $10 billion in sales in 2005.

Since you’re already in the water industry, the allure of adding profits to your company’s bottom line by adding water bottling is a short leap. You have the water, you have the RO units and GAC filters, you have skilled workers: all you need is a bottling line and some labels! A number of companies, many featured in this magazine, make high-quality bottling lines that can be set up almost anywhere, require only moderate expertise and supervision and will churn out labeled, capped bottles of water that will retail at a higher price per gallon than regular unleaded at the pump. Who can blame you for wanting to become the next bottled water baron?

Risky business
Lawyers can blame you, that’s who. Like anything else, there is risk in the bottled water biz, but it’s risk you can manage. Adding a water bottling line of any size or configuration will substantially change your risk and should send you running to your broker for a complete policy review. If you need to change or upgrade your insurance, ask your broker to contact your carrier; many coverages can be added or changed mid-term (you don’t have to wait until your policy renewal period).

How will your risk increase? First, this is expensive equipment. A large bottling line with capper and labeling system costs over $45,000. Many first party policies (the insurance you buy to protect your own property) are scheduled policies. That means the insurance only applies to equipment and tools you disclosed during the application process. You will only have automatic coverage for new equipment you buy for a few weeks, so if you add a bottling line make sure it will be covered in the event of fire or other loss. Call your broker before the equipment is installed and make sure that it will be covered on your policy.

Workers’ comp and SIC
Another problem is your workers’ compensation insurance. These machines are well designed and most of the manufacturers continually upgrade their systems to make them safe and easy to use. Even so, bottling lines that include capping and labeling components present a risk of injury to your workers. ‘Pinch’ injuries from machines are one of the most common industrial accidents and can result in lost fingers—or worse.

Bottling water is considered manufacturing under the Standard Industrial Classification (SIC) code system used to classify businesses. If your company is already classed as a manufacturer adding bottling won’t affect your rating. If, on the other hand, your current business is as a retailer or installer, adding a bottling line will change your classification and your rates will probably rise. You might be tempted to skip this to avoid the added expense, but don’t do it. If you don’t add the machines to your business policy the worst thing that can happen is that the company will deny that portion of the claim and they might not even do that depending on the type of policy and the nature of the loss. On the other hand, in most states, a business is required to report a material change in its activities to its insurance carrier at once. Your workers’ compensation insurer probably won’t deny the claim of an injured worker even if you failed to disclose your new business activities. Instead, they will seek to cancel the policy. They may also annotate your loss run (the basis on which insurers rate your policy) that you failed to make required disclosures. If this happens you may face a catastrophic rise in compensation rates. It is especially important that you tell your broker/agent about the new venture. Most insurers will be tolerant of your failure to disclose the new activity for your current policy year, but if your broker sends in your renewal application without disclosing your new venture, the insurance company will suspect fraud. Fraud in an application is grounds to rescind the policy and getting another insurance company to write you a policy once that happens may be impossible. At that point your only option will be your state’s program, at exorbitant rates.

Liability
Once you have made sure that your property and workers are protected you also need to be certain your liability insurance is in order. Chances are your liability insurance will also need a tune up. If you are a dealer or installer, you probably carry commercial auto and general liability insurance. Between the two policies very little that can go wrong in your business will be uncovered. However, as the manufacturer of a product, rather than as the vendor of someone else’s product, you are taking on new risks; risks that may not be covered under your existing insurance.

The good news is that the biggest new risk you have assumed, the products liability risk, is covered. People drink water. Things people eat and drink can make them sick. If the thing they drank that made them sick is your water, or they just think that your water is what made them sick, they will sue you. Fortunately for you, bodily injury caused by a defect in your work or your product is covered under the Commercial General Liability (CGL) policy. So the question is, do you have enough CGL coverage? Let’s assume that your main business is selling and installing water softeners and RO systems for residential users. You have salesmen and a few teams of installers. Your commercial auto policy covers you for car accidents that your crews or sales reps might get into and your CGL policy will cover any mishaps at the customer’s home while installing the equipment. It will even cover you for plumbing leaks and the like that might arise after the fact. If something goes wrong with the equipment you install and the customer gets ill as a result, the system manufacturer will bear the brunt of that suit.

How much is enough?
If you have a $300,000 to $400,000 auto policy and a $500,000 to $1,000,000 CGL policy you are probably in great shape. But how much coverage do you need when you are the manufacturer? Just as you will look to the manufacturer if you are sued over a defective product, so your vendors are going to look to you. Insurance limits that are more than enough to protect you and your business may not be enough to protect you and your customer. While you must examine whether or not you have enough coverage to protect you and your vendors, you also need be sure that your insurance meets all of your legal obligations to your vendors. When you are sued your insurance carrier owes you not only coverage for any judgment, but also a defense of the lawsuit. Many policies limit that duty only to the insured. Thus, your customer may end up suing you to recover the often considerable expense of conducting his defense. If you decide to bottle water, make certain that your increased exposure is covered. Ask your broker to review your coverage and make sure that the policy either provides blanket coverage to vendors of your product, or that they can be automatically added by you. The former is a far wiser solution, because adding each vendor as an additional insured to the policy, even if there is no separate charge, means that you have to remember to do it.

You will probably need more coverage as well; the good news on that front is that there are reasonably inexpensive alternatives to doubling your primary coverage. A commercial umbrella policy provides excess coverage over and above both your commercial auto insurance and your liability insurance. Umbrella policies are usually far less expensive than increasing the limits of both your primary policies. By having your broker place the umbrella coverage for you, you maintain the simplicity of reporting losses to one broker, who can then handle reporting for you to the various insurers.

Conclusion
Deciding to bottle and sell water that costs you 60 cents a gallon for $7 (or more) a gallon is a good gamble; doing it with inadequate insurance is a very bad bet.

About the author
Mark A.W. Smith is the principal of Mark A.W. Smith & Company, providers of alternative dispute resolution services, including mediation and arbitration of claims in the construction, environmental and insurance coverage arenas, specializing in trades and trade contractors and their issues. Smith spent over 25 years as an executive for several of the major carriers. He can be reached at msmith@smithclaims.com or by calling (520) 887-1200.

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