How tariffs may impact insurance for Canadian liquor sellers

Threatened U.S. tariffs of 25% on all Canadian goods are on hold, for now, and newly announced tariffs on Canadian metals won’t impact until March. Should they come into force, and if Canada issues counter-tariffs, it will raise prices for many goods Canadians routinely buy — including liquor.

Spirits produced in southern U.S. states are among goods named for responsive tariffs by Ottawa in early February. And Canadian liquor sellers, particularly those in regions where provincial governments manage sales, promptly announced they’d pull U.S. brands off their shelves.

Some removals were walked back when Washington postponed its Feb. 2 tariff date. But trade uncertainty has the potential to create warehousing worries for liquor sellers, and may create tangential insurance issues.

“Those items are [not] ordered a week ago. Stock has been ordered months and months in advance,” says Gary Hirst, president and CEO of Ches Special Risk. “So, whilst liquor bottles are being taken off the shelves…there is still going to be perhaps two or three months worth of deliveries that would have to be stored somewhere or other, if the politicians are deciding not to sell.”

 

Storage considerations

That means retailers, and some restaurants and hospitality providers, may be looking for additional warehouse space for bottles that would normally transfer quickly from storage facilities onto retail shelves. And some products may require speciality storage facilities.

“If you have got something that is vintage, then there’s temperature considerations as well, because some of that fine wine will stale pretty quickly if it’s not kept at the right temperature,” he says. “In some instances, putting really valuable things into long-term storage or medium-term storage [means added] costs of security as well.”

Plus, transporting all that merchandise means liquor retailers will incur additional labour charges.

“There is not only an increase in liquor costs, but an increase in storage costs and an increase in transportation, which unfortunately won’t be insurable because it’s not connected with an indemnifiable claim, unless [a retailer or hospitality firm] in Canada buys political risk insurance against the Americans,” says Hirst.

That last point is unlikely, he adds, because Canadians have long operated in free-trade frameworks that implied buying coverages against U.S. political risk was unnecessary.

 

Tariff scenarios

If tariffs and counter-tariffs materialize, Hirst notes the value of American goods being stored in Canadian warehouses will increase, presumably by the percentage amount of any tariff.

“Now your replacement cost of stock that’s awaiting transit will be going up,” he says. “But there is the other ramification of general replacement cost of property. [Now] it is stored in a warehouse. But if that warehouse burned down, what is the cost consideration for rebuilding that property and how much of the materials would be coming from the U.S.A.?

“I would suggest, looking back at the insurance side of things, insurers and brokers would need to start to look at basis evaluation, taking into account the increased cost of importing items from the U.S.”

Although insurance policy coverage specifics may not change, pricing is tied to invoice values, Hirst notes. “The size of those invoices will increase, and there will more likely be additional premiums that would have to be paid,” he says.

“Generally speaking, it’s not a new policy, but it will be an additional value that should be added to an existing policy, which has an additional premium consideration.”

 

The long haul

Should the trade dispute become protracted, retailers and hospitality companies may begin sourcing alcoholic beverages from Europe, Asia and Mexico using water transport routes into Halifax, Montreal or Vancouver — that bypass the U.S.

That strategy may raise costs and lead to some delays, Hirst says, “because ships have to be booked months, if not years, in advance for those voyages.

“One assumes the advice [brokers give to clients] is for what is called a ‘stock throughput policy’ [which] usually attaches at the factory gates,” he adds.

“Let’s say it is Mexican [tequila] coming in. A stock throughput policy would incept at the gate of the brewery in Mexico, whilst it’s transported to the port, unloaded at the port, then the transit on the ship, offloading in Canada, [temporary] warehousing somewhere, and then transportation to warehouses or straight to the stores to sell. That is pretty standard insurance.”

 

Feature image by iStock/sergeyryzhov