Principles of Insurance
You have obtained a position with Fama’s French Bakery in their newly established Insurance &Risk Management Department. Fama’s French Bakery provides the food service industry with baked goods, (i.e., they sell only to restaurants, not to retail outlets). The Bakery will be undergoing a massive expansion thanks to a new contract to provide a major fast-food chain with all of their baked good needs for a six (6) state area. Fama’s Bakery got the contract because the previous provider was unable, for various reasons, to fulfill the obligations of the contract in a timely fashion. Less than thirty (30) companies in the United States have operations and capabilities similar to Fama’s French Bakery.
Fama’s French Bakery owns two (2) production facilities and a number of warehouses for both production inputs (flour, sugar, butter, yeast) and outputs (breads, buns and muffins). The Ohio production facility produces the buns, while the Indiana production facility produces the breads. Fama’s French started selling muffins in response to customers’ requests for the product. Rather than create the production lines necessary for the muffin product, Fama’s French subcontracts the work to Scholes Muffins, Inc. The goods are baked in natural-gas fired ovens, packaged for shipping, and held no more than twelve (12) hours before being transported directly to the customer’s facilities. The transportation of the finished product (including the Scholes Muffins), as well as the inputs from warehouses to the production facilities, is performed by a fleet of vehicles owned and operated by a wholly-owned trucking subsidiary of the Bakery, Sharpe-Lintner Trucking, Inc.
Fama’s French attributes its success to two factors: unique, high quality products, and the close, personal involvement of the owners of the company. Fama’s French started as a weekend hobby of its founder, Gene Fama. Gene soon discovered that people found his breads to have special, very appealing qualities that were not in other similar products. According to Gene, this is because he blends in the flour of a special type of grain grown only in a small region of the Saskatchewan province of Canada. As more and more people requested Gene’s baked goods, he enlisted the help of his good friend, Rich Thaler. Fama and Thaler soon realized this could be a profitable enterprise that would allow them to make much more money than they were presently earning. They formed a partnership and rented commercial bakery space. The business continued to grow; more partners were brought in for both the capital that they provided and the knowledge of the bakery business they possessed. The partnership now has over twenty (20) partners. Partners fill all of the key executive and administrative roles, (i.e., owners perform management.)
The new contract with the fast-food chain creates some problems for Fama’s French. Production facilities will have to be expanded to meet the new demand. Both the existing facilities have sufficient area to expand, but the State of Ohio is offering additional tax benefits if Fama’s French builds a new facility in a ‘Brownfield Rejuvenation District’ located next to the Cuyahoga River in Cleveland, Ohio. The ‘District’ is an area where industrial production facilities were formerly located. Some usable structures exist in the district, but many of the former facilities have been torn down, leaving open space for construction. In addition, the new contract contains a ‘liquidated damages’ provision. This provision contains a schedule of monetary penalties Fama’s French will have to pay should the company fail to meet the production output required by the contract. If for any reason, Fama’s French fails to provide the quantity and quality of baked goods specified in the contract, the bakery will have to pay a specific dollar amount to the fast-food chain. Finally, the new contract has made several of the partners reconsider their relationship with the business. What started as a small operation has become a very large and complex business. Some of the partners no longer wish to expend the personal time and resources required by the business. It is expected that these partners will ask that their ownership interest in the business be “bought out” by the other partners.
By nearly all accounts, Fama’s French Bakery and Sharpe-Lintner trucking are good places to work. The ‘hands on approach”’ of the partners seems to have everyone well focused on operating efficiently and safely. There are very few reported accidents or injuries among the workforce. Since the operations are highly automated, there are only 60 employees on the Bakery side of the business and 50 employees in the trucking company. Since there are so few reported accidents and injuries, the partners have never been able to see any type of consistency or pattern in the incidents. One weakness of management, perhaps due to the low number of incidents, is that there is uncertainty as to exactly what types of insurance coverages are currently in place for all portions of the business. Management is certain that all mandatory coverage obligations are being met, but the identity of the insurers, coverages and policy limits are not readily known.
Instructions:
Prepare a report to provide Fama’s French Bakery with the following:
1. An analysis/ identification of the risks to which the business is exposed;
2. Choices available to manage those risks;
3. The pros and cons of the choices;
4. Your recommended choice;
5. A reasoned explanation for your choice.
The report is to be typewritten, double spaced, in 10 to 12 point font.