The Goldilocks Solution: Why Cargo Insurance is "Just right"

In an article posted by Material Handling & Logistics: “10 tips for reducing supply chain logistics costs”; Bernie Hart August 9, 2005. The number 6 tip was:

“Sometimes insurance doesn’t pay. Often when a company has a shipment of premium goods they tend to use the Carrier’s Insurance. Carriers Insurance is very expensive. If the company is self-insured, which most companies are, they should check their insurance policy to see if it covers shipment of goods. If it does, then they do not need to add the extra cost of Carrier’s Insurance. (1)”

I couldn’t agree more with Mr. Hart regarding the questionable value of using the freight carrier’s insurance. In spite of the article’s date this is still a common misconception. Transportation carriers are allowed to limit their liability through various statutes, agreements and global conventions. The only way to obtain the details of these limitations is to read the carriers Terms and Conditions of Carriage or their Tariff document. These voluminous documents are available on the carrier’s website, but they require careful scrutiny to ascertain a particular carrier’s liability with regard to your particular shipment. Since each carrier can write their own tariff each one must be reviewed.

So, you ask yourself: if my carrier has insurance why do I need to know what the liability limits are? As a shipper you are not privy to a contract of insurance between your carrier and their insurer. Without reviewing the policy how can you confirm whether the terms of coverage are adequate for your shipment: is the value covered or do policy limits place you in an under-insured position? Does the policy cover your goods from origin to destination? Are your goods specifically excluded from coverage? There are any number of contractual conditions in the policy that could leave you holding the bag.

Now if that is not enough to convince you that you are between a rock and a hard place, keep this in mind:

“For carriers, whose core business is transportation, the processing of claims is an integral part of their business, and all but the smallest of carriers are quite knowledgeable and very competent when it comes to defending against claims” (2).

How much luck do you think you will have coaxing a third party's insurance company to pay your claim?

So, you are back where you started and what do you have to show for your effort? Before you call for a congressional hearing on this grand conspiracy on the part of transportation carriers remember one thing. The liability of transportation providers is limited as a matter of longstanding public policy. These limitations provide certainty to both carrier and shipper and allow a carrier to assess risk and plan for potential exposure to loss and damage claims. The shipper is afforded the opportunity to assess its exposure to the same perils and mitigate the risks accordingly. This public policy arrangement makes for clear delineation among the parties involved in global commerce:

Shippers focus on making their goods and satisfying their customer’s needs Carriers provide transportation and logistics services which is what they do best Insurers provide their risk management expertise to protect the goods against loss or damage

Much like David Ricardo posited in the 19th century with his theory of Comparative Advantage, companies, like countries, should concentrate on what they do best. When they do all the parties realize the greatest value.

Ok, now that I talked you off the ledge, you want to consider being self-insured. Well, maybe but companies that claim to be self-insured are often un-insured. If your company is not assessing changing exposures on a regular basis, mining your own loss data and using the analysis to establish and validate the adequacy of your reserve you are un-insured. Being under reserved can result in ugly surprises and write-offs that reduce profitability. If loss reserves are excessive productive capital is stranded limiting internal investment and growth. An “All-Risk” Cargo insurance policy placed by a knowledgeable insurance broker is backed by deep data and experience. In addition, a known annual premium can be budgeted thus avoiding the reserves adequacy dilemma – as Goldilocks said “it’s just right”.

Sources:

http://mhlnews.com/transportation-amp-distribution/10-tips-reducing-supply-chain-logistics-costs“Freight Claims in Plain English” Brent W, Primus, JD; Logisticsmgmt.com; July 2012