The Ultimate Guide to Insurance for the Manufacturing Industry

Australia boasts a vibrant manufacturing sector with over 100,000 businesses operating across the country. As an owner of one of these enterprises, you're likely aware of the myriad risks that come with running a manufacturing business. From equipment failures and liability issues to product defects and employee injuries, the potential for financial loss is significant.

Without adequate insurance coverage, these risks can have a costly impact on your business. Here are some of the most common risks faced by the manufacturing industry and the insurance policies that can help mitigate these threats.

Product liability

Under Australian Consumer Law manufacturers have a legal responsibility to supply products without safety defects. If a consumer suffers an injury or damage to themselves or their property due to your product, they may seek compensation. One of the most critical areas of insurance for manufacturing businesses is product liability. Product liability insurance is designed to cover these claims, including the costs associated with product recalls. This type of insurance is crucial for protecting your business from financial losses stemming from defective products.

Error and omissions extensions

Manufacturers' Errors and Omissions (E&O) extensions are vital to safeguarding businesses in this industry. Typical professional indemnity policies will not cover claims arising from the supply of goods. As well, public liability insurance usually only covers personal injury or property damage. E&O extensions are applied in addition to these policies and provide broader cover including claims arising from negligence, contractual liability, statutory breaches and equitable breaches.

For example, a food manufacturer who makes muffins and sells them to a wholesaler who then distributes them to cafes, sends a batch of muffins out with faulty packaging. As a result, the wholesaler cannot distribute the product for an entire week. This leads to significant loss of income for the distributor, as well as losing a large account for being unable to fulfil contractual requirements. The wholesaler consequently files a claim against the manufacturer. It's essential to understand the specific nature of the business to determine the right level of coverage required for E&O extensions.

Property and machinery damage

Property insurance will protect against losses due to natural disasters. Should your premises be damaged or destroyed, this insurance can help you rebuild and resume operations. Similarly, machinery insurance is necessary to cover the replacement of damaged or destroyed equipment. For businesses involved in food processing, where significant quantities of stock and ingredients are kept in cold storage, machinery breakdown cover can also be particularly beneficial. Repairing and replacing specialised machinery can be a lengthy process, as spare parts may need to be imported and new equipment is often custom-made, taking months, sometimes years, to fabricate. Ensuring you are covered for such circumstances is essential.

Business interruption and supply chain disruption

The disruption caused by Covid-19 to supply chains served as a wake-up call for companies around the globe. In comparison to pre-pandemic times, numerous companies are now significantly more equipped to handle business interruptions or supply chain disruptions. However, almost any hazard can cause disruption, whether there's a tree fallen on your warehouse or an energy crisis happening on the other side of the world. Business interruption insurance is designed to support your manufacturing business in the aftermath of catastrophic events. This insurance helps to cover ongoing operational costs while you recover and can provide financial relief if supply chain disruptions prevent you from obtaining necessary materials. [Read: Don't Dismiss Business Interruption Insurance]

Workplace injuries

Accidents and injuries are a risk for any business, but those working in the manufacturing industry are even more likely to experience an injury in the workplace. Manufacturing environments often involve the use of heavy machinery, hazardous materials, repetitive motions, and physically demanding tasks, all of which increase the risk of accidents and injuries. Implementing stringent workplace health and safety procedures, along with comprehensive employee training, can mitigate these risks. However, should an accident occur, workers' compensation insurance will cover the costs associated with employee injuries, whether physical or mental. Australian law requires employers to have workers compensation to cover their employees. [Read: Workplace Safety: It's Not Just About Compliance ]

Cybersecurity threats

The industry's reliance on operational technology and industrial control systems has unintentionally created new opportunities for cybercriminals. These systems are typically old and were previously operated offline, shielding manufacturers from malicious cyberthreats. However, as they are increasingly integrated with internal networks and systems, they are becoming more susceptible to attacks. For example, cybercriminals gain access to the smart thermostat through a software vulnerability and plant ransomware, which then silently spreads across the manufacturer's network, encrypting critical data and paralysing the entire manufacturing system. Not only is production at a standstill but the cybercriminals are demanding a ransom or they'll release sensitive business information. It's important to note that standard business interruption insurance and property insurance do not usually cover cyber related incidents. Cyber insurance is designed to cover the costs associated with these incidents, as well as aid with protecting sensitive information and returning to business operations quickly.

Reviewing and updating your insurance coverage

Given the dynamic nature of the manufacturing industry, it is crucial to regularly review and update your insurance coverage. Your business needs can change over time, and staying up-to-date with the appropriate insurance policies ensures you remain protected against evolving risks.

How Coverforce can help

Our insurance brokers can help you tailor your coverage to meet the specific needs and circumstances of your business. Coverforce insurance brokers have the expertise to assess your risks and recommend the most suitable insurance products to safeguard your manufacturing operations. Visit this page for more information on our manufacturing insurance solutions or contact your local Coverforce Office.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Coverforce directly.

REFERENCES

https://kpmg.com/au/en/home/insights/2023/10/industry-4-0-cyber-threats-on-the-rise-australian-manufacturers.html
https://www.productsafety.gov.au/product-safety-laws/legislation/product-liability

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