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Managing Dairy Plant Expansion Risk

Food & Agribusiness, Property & Casualty

Milk production growth is rapidly outpacing US processing capacity. So, how are processors responding? According to results from a recent Wisconsin Cheese Makers Association survey, processors are investing in brick and mortar expansions, new equipment purchases, and process flow improvements. Per the survey, we can expect that in 2018, new plant capacity and improvements to Wisconsin processing plants will result in processors being able to handle an additional 962 million pounds of milk. All you need to do is go for a drive around the state to see that the scenery supports the survey results. At dairy processors across the country, it’s almost as common to see a fleet of bulldozers, excavators and cranes as it is tanker trucks for delivering milk. Some plants have about as many hard-hats on site as they do hair nets. And construction neon is becoming the “colour de jour”.

While expansions are exciting, they come with some tricky challenges. The keys to reducing risk during an expansion are ANTICIPATE, CONTROL & TRANSFER the risks.

According to M3’s Jim Brunker, There are several critical areas of risk management to consider when expanding a plant.  While the list below is not all-inclusive, it provides some food for thought.

1)  ANTICIPATE and identify potential risks that could arise during construction

Consider limiting bidding participation to specialized general contractors, design professionals and engineers who have successfully completed dairy plant projects within your state. While USDA standards for 3-A accepted practices for permanently installed sanitary products and pipelines will apply to all, other state, TIF and local ordinances from wastewater regulations to earthquake proof construction requirements can vary a great deal.

A good starting point for your building committee is to review the USDA General Specifications for Dairy Plants approved for USDA Inspection and Grading Service. Additionally, if Quality Assurance (QA) teams are included in the planning process, they will be an asset to your building committee throughout the design/build process.

Include your legal counsel and insurance professional in the review of proposed construction contracts prior to signing.  Among other things, lawyers can help identify intellectual property and patent issues in proposed equipment designs, and brokers can identify insurance related pitfalls in the proposed construction contract.

2)  CONTROL the risks associated with plant expansions

Food & Premises Safety – The entire facility and grounds should be mapped with internal and external traffic flow patterns. Many dairy plants utilize the 10 principles as outlined in the “Sanitary facility design checklist” located on the Innovation Center for U.S. Dairy’s website. https://www.usdairy.com/trends-and-initiatives/community-focus/food-safety

Additionally, make contractors aware of your food safety policy and create plant postings and standard operating procedures for contractors. A pre-construction meeting with contractors and the QA team can help to put processes in place to minimize the risk. And, employees should be trained to spot the signs of potential food safety compliance risks during the construction process.  As an additional value added service, insurance companies and brokers will schedule several inspections during the course of construction at no cost.

Builder’s Risk –  The dairy operation should control the builder’s risk insurance in the construction contract through the dairy’s insurance broker, not the general contractor’s insurance. The builder’s risk insurance policy is the primary risk transfer mechanism that will respond to most, but not all claims. It basically serves as a bond to the construction contract.  The dairy processor’s financial risks and insurable interests greatly exceed the cost of brick and mortar construction. The contractor’s insurable interest on the project is limited to the project itself. It does not make sense for the dairy operation (the project owner) to give up this control.

Here is a scenario to consider. Seven months into a nine month project a fire or tornado occurs and work has to completely start over. The financial loss of anticipated income will not be covered by the construction contract nor the builder’s risk insurance. It can be covered, however, if the dairy plant leadership controls the insurance placement and includes extended loss of business income (including payroll) above the hard costs of the construction contract. Typically this additional insurance cost is very nominal and is often overlooked.

3)  TRANSFER the risks

Prior to construction, the insurance broker should advise on the insurance minimum requirements your contractor should carry for general liability, products and completed operations, workers’ compensation and pollution liability. Your construction contract should also require the general contractor and all subcontractors to adhere to all state, federal and local laws and hold you harmless from those financial risks imposed upon you for their work on your premise.

In the event of a loss, your broker will assist in enforcing the construction contract by either transferring the claim to your builder’s risk insurance, or to the responsible party. When all parties step up to their contractual responsibilities, claims during the course of construction go smoothly.

Here are loss examples that may not be covered by builder’s risk insurance:

Flaws in Equipment Design/Installation – Boiler and Machinery coverage should be included in your construction contract. Equipment design flaws that aren’t fortuitous can often be transferred to the engineering firm’s Professional Liability Insurance, also known as Malpractice or Errors and Omissions Insurance.

Construction Defect – Statutes of limitations vary greatly from state to state.  The dairy processor can require that the construction firm maintain the limits of insurance in the event of a design flaw or construction defect for a minimum of two years after substantial completion of your project.

Liability Claims – Builder’s risk insurance is simply a form of property insurance called an inland marine policy. Pollution liability, workers’ compensation, auto, and general liability claims remain separate issues and are not covered by the builders risk insurance. The same can be said for OSHA fines and penalties for onsite work injuries.

Remember, when a knowledgeable insurance broker has a seat at the table and partners with the processor on new construction, everyone wins. No one would expect an insurance broker to be a master cheesemaker … likewise, cheesemakers aren’t expected to be insurance experts.

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This blog post is a summary of article by Jen Pino-Gallagher, originally published by The Cheese Reporter on March 2, 2018. M3’s Food & Agribusiness professionals are regular contributors to the Cheese Reporter. Read the most recent M3 articles on cheesereporter.com.

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