Logistics Insurance. Waste of money or worth every penny?

Looking more in-depth at the role of Insurance in Logistics.

You need it, post finished, move on.

I know, I know you want the why

First off, it’s necessary but a pain.

Insurance seems to have become part of the fabric of life; there is insurance to cover everything and anything. The range is spectacular in the breadth of scope and the terms available.

But, regardless of how much we are willing to accept insurance as necessary, I would wager (is there betting insurance? Actually, it’s called hedging) that most people don’t know the details of what they have bought.

The challenge, as always, is to understand

  • What do you need to achieve?
  • What risk are you looking to cover?
  • What liability are you looking to delegate to someone else?

This should sound like the easy part, but one of the dangers that companies face is they don’t completely understand all the factors when shipping.

Insurance v INCO Terms

I have another post about INCO terms, yet most companies treat them as a way of reducing the need for insurance.

If we are selling EXW, then the risk is on the buyers. This is correct up to a point. It would help if you were still insured against defects should there be warranty issues later. What about reverse logistics? You have a duty of care for the product if it’s not fit for the task or has come to the end of its life, as most countries need the original manufacturers to maintain responsibility.

But even for EXW you are still at risk. What happens if the buyer uses a Letter of Credit (these are fun) to buy. Once an LC is in place, the bank has committed to paying (wait for it), based on the terms of the LC being completed.

Not sure how many of you have entirely read an LC. It is an ominous task to be in line with. Eventually, you will get the money, but your working capital is still at risk. So maybe income protection insurance could be an option (did you think this was just about logistics-specific insurance, to be honest, I am not sure that this exists).

An easier one then is CIF. You are selling based on CIF destination port, meaning that you have arranged the shipping and insurance (in the name), which is recouped back from the buyer.

So when you take the insurance.

  • Who is the beneficiary?
  • What are you covering?
  • What value?

Is extra insurance necessary, as you may be asking yourself, aren’t you protected by the Service Providers’ insurance (more on that later).

Depending on the terms of your sales/purchase contract, you may find that you have different answers to the above and that there may be complications and exceptions to who is the financial risk owner.

Insurance v 3rd Party Service Providers

Another route that companies take is to outsource.

The expectation is the service providers, through either

  • advanced operations,
  • has insurance to cover the risk of failure
    • either the intrinsic value of the goods
    • or the liquid damages (penalties) for failure to deliver per the sales/purchase contract.

Can mitigate the potential for risk (and therefore a need for insurance)

To be blunt and what may be something of a shock is that this is incorrect. The shipper/cargo owner is always liable.

You can mitigate or reduce the potential for this risk by ensuring you work with service providers that have the capability to deliver.

The companies that can provide you with quality are priceless to your organisation as they can influence the cost to insure and the need to use the insurance.

This has a much better impact on your working capital and, more importantly, your reputation as a company that delivers.

Ok, so you may now say, “We appreciate the point Sam, but what about the standard transport insurance that service providers have to have in place to operate?”.

I would then say, “that is a great point; thank you for raising it.”

Though I would ask if anyone has read through the details of one, such as Hague-Visby, which is part of the UK law (which may be more applicable than you think)

I have added a couple of articles, and I especially like the DSV text as it clearly shows the potential risk.

Key Points

  • The service providers are only liable if you demonstrate they made a mistake or negligence during transport.
    • Not always easy to do
  • Loss and damage are only applicable if they can be proven to have happened during transport.
    • Again not always easy to do
  • Delays aren’t covered, so you can’t claim your penalties
  • Their liability is capped to a certain amount regardless of the value of the cargo.
    • Your 1M USD cargo may only get hundreds or thousands back
    • It will be based on the weight rather than the commercial value

This is a difficult situation as most Service Providers are open about what they cover. Yet they may not be forthright with the information unless asked.

And most of the time, they will recommend that you take additional insurance, but from my experience, they may not be able to advise what to take or who to ask.

Insurance v Insurance

This is where it may get slightly complicated, and I apologise in advance. As most of you know, the insurance market, like financial services, has been allowed to take advantage of the buyer’s limited knowledge. Overly using complicated legalise wording in their offers may enable them to mitigate some of their liability to pay out if there was a claim.

For example, did you know that most insurance companies specify the maximum age of the cargo vessels that can be used for shipping? This is a fair point; however, how do you follow this? How do you dictate which ships are not covered to the carriers and shipping lines? How do you know which vessels your cargo is being loaded?

In the current world, the frequency of changes for vessel line-ups is becoming complex, e.g. schedule changes, missed planned ports etc.

Once your cargo is out in the water, your chance of visibility diminishes with each day.

Having insurance is more than just having insurance. It’s understanding that there is a suitable product for you. Acknowledging many options may not be what you require or support your specific needs.

Is it worth it?

Unfortunately, choosing the correct insurance also comes with risk, as the insurance market is not for the faint heart. However, it’s a business, and like any good business, they want to maintain its profit margins, which means they legally look for ways to reduce its burden.

How many of you have tried to claim for medical procedures under your health insurance that technically should be covered. Only to be rejected because the wrong document was sent (and more frustrating, how do we know which is the correct document!!)

It can be frustrating.

Although I may not have given this impression, I am a massive fan of insurance.

For me, this is a wonderful tool that can bring:

  • Peace of mind
  • Protection from the unknown
  • Save your business

Logistics Insurance. Waste of money or worth every penny?But like any tool, it must be used correctly and for the right activity.

The insurance market is complex, and the companies that operate like in most industries may not be offering the service that entirely fits your requirements. As I have mentioned in another post, not all partners are the right partner for you, and due diligence must be taken.

But it all starts with understanding what you need.

  • When does financial liability pass to the buyer as per the contract
  • Are you shipping non-standard items
  • Have you done this route before
  • Have your partners moved things like this before
  • Any work needed on the route
  • Current political and social risks
  • And many more

Insurance is a non-standard product that can be a waste of money if the right policy is not bought or, more importantly, could save a business when the right product is chosen.

Logistics Insurance. Waste of money or worth every penny?When used correctly, it can unlock the ability of the company to provide a better service to the customer.