Retailers, manufacturers, and businesses of all sizes leverage third-party logistics operators to effectively outsource their warehousing, fulfillment, and distribution to reduce costs of staffing and improve business results. The facility selection and contract negotiation process can be challenging, and it is vital to ensure the right provider is selected to become a true extension of your business. When negotiating contracts, one key area that often gets misinterpreted is the legal liability limitations of the warehouse operator, and we have suggestions to simplify the process, and move through contractual legal limbo quickly.
What are the limits of liability insurance?
The limit of liability is the maximum amount that a contracted 3PL pays for a specified loss, in the event of a claim. The industry standard for liability for product loss/damage is $0.25-$0.50 per pound on loss due to gross negligence, or willful misconduct on the part of the 3PL provider.
Common misconception: Limits of liability should cover the value of the products
A common point of confusion in 3PL contract negotiations is the limits of liability coverage for warehouses doesn’t cover for the value of the product, instead it aims to cover a portion of cargo value in the event of a claim. This signals risk for the firm looking to outsource their warehousing and fulfillment services and could either elongate the sales process or lead the firm to stay status quo. We’ve provided a hypothetical scenario breakdown of what typically happens in the 3PL contract negotiation process with our perspective and expertise based on reviewal on thousands of contract negotiations.
Customer perspective“The $0.25-$0.50 cents per pound on loss due to gross negligence doesn’t even come close to covering the value of the product. This is an inherent risk for our business, and we can’t accept these terms. “ | Warehouse perspective“As a warehouse, we charge for space, not based on the value of the inventory. Our limits of liability cover gross negligence as it pertains to the handling of the goods. Your business should have insurance that protects against acts of God, or any other type of loss.” | WHQ perspective“We recommend discussing your liability with your insurance provider or prior to debating limits of liability with your 3PL contracts. This will help align your internal team on the subject of risk and often realize that your company’s current insurance policy accounts for other causes of potential loss. |
Why can’t the warehouse carry liability to cover the full cost of our goods?
Insurance companies are limited in their ability to provide a warehouse with liability coverage for the value of all of the goods within the warehouse (this could be in the billions of dollars in some cases). In fact, a 3PL operator’s projected revenue on a customer project will nearly always fall far below the total cargo value being stored within their four walls. Warehouses have an insurance policy in place for acts of gross negligence and the coverage within the 3PL contract is often aimed to help cover the customer’s deductible on their all-risk insurance policy, not cover the total cost of goods stored with the warehouse provider. Given that the facility is not claiming ownership of the cargo, their ability to ensure claim coverage is limited to instances of damage or loss related to misconduct is key.
As a cargo owner, you should already have insurance for your inventory before selecting a 3PL warehouse, but understanding the cultural fit of your 3PL provider is equally important. Speak with your risk manager to understand what all is covered within your current policy. If a 3PL accepts added liability without a corresponding change to their insurance, they could incur issues that could impact your business in the future.
If you have any questions regarding 3PL warehousing liability, please feel free to reach out the WarehouseQuote team.