As a manufacturer or supplier, you know firsthand how critical it is to protect your inventory. And if you work with a warehousing or fulfillment provider to store your goods, you are essentially entrusting someone else to deliver that protection. If you find the prospect of someone else overseeing your inventory to be a bit unnerving, you are not alone. You may also find the following questions running through your mind:
- “Does my warehouse provider have liability insurance?”
- “Exactly what is covered by liability insurance?”
- “If my inventory is lost or damaged, how would those losses be valued?”
- “What can I do as a supplier or manufacturer to minimize risk?”
These are all logical questions to ask. Ideally, you should ask them before you enter a relationship with your third party logistics (3PL) provider. But if you are already working with a warehousing company, do not despair. It is never too late to ask these questions and put your mind at rest.
What is legal liability insurance and does your warehouse provider have it?
“Warehouse Operators Legal Liability Insurance (is) insurance coverage against liability that might be incurred by businesses that store property of others for a fee. Previously referred to as warehousemen’s legal liability insurance.” – International Risk Management Institute, Inc. (IRMI)
Before diving into the coverage, loss valuation, and risk management, it is helpful to understand the basics of warehouse legal liability insurance. Also known as “warehousemen’s legal liability insurance” or “warehouse operators legal liability insurance,” this special type of insurance exists to safeguard against inventory loss or damage due to facility maintenance issues, or gross negligence on the part of employees.
If your inventory is adversely affected by one of these issues, your warehouse provider could be held liable for any product loss or damage. Legal liability insurance helps the warehouse provider pay for this type of loss or damage. If you are evaluating prospective warehousing firms, you should always ask to see a copy of the provider’s legal liability insurance certificate. Otherwise, you may find yourself without inventory and without compensation to replace it.
What is covered by warehouse legal liability insurance?
Warehouse owners and operators should deliver the same type of care for your goods that a “prudent person” would take. Generally speaking, this means operators should exercise care when storing your goods and should take reasonable steps to keep your inventory safe. While policies may vary from one warehouse to the next, here are some examples of claims that are typically covered by legal liability insurance:
- Product damage due to careless handling or storage
- Inventory damage due to negligent climate control
- Destruction due to insufficient facility maintenance
- Property damage due grossly to a fire caused by employees smoking in a non-smoking area
In a nutshell, coverage applies to inventory loss that is due to the warehouse operator’s gross negligence. After all, it is up to your warehouse provider to conduct employee background checks, offer the proper training, and ensure a well-maintained, climate-controlled environment. While losses due to hail, fire, windstorm, and other standard causes are generally not covered, policy holders are protected from loss due to negligence or careless handling.
How are inventory losses valued?
There is no universal formula used for loss valuation. Companies typically pay their clients according to the specific language used in the client’s contract. In most cases, warehouse providers issue payments that reflect the weight of the lost inventory. For example, consider a 3PL contract that indicates you will receive payment equal to $0.50 per pound of inventory. If the provider loses track of 500 pounds of your inventory, you would receive compensation of $250.
In addition to standard coverage, you may have the option of purchasing a higher liability limit. Also known as “landed cost,” this higher liability limit reflects the inclusion of manufacturing costs, transportation expenses, and warehousing costs. While this type of coverage is more expensive, it enables you to recover more of your losses if your inventory is destroyed, stolen, or lost.
Finally, it is important to realize that there is no such thing as a perfect warehouse provider. Even the nation’s most trusted providers will allow a small amount of inventory loss without incurring liability. Be sure to ask your provider if they have a threshold for inventory loss so you can plan accordingly.
What can suppliers and manufacturers do to minimize risk?
The path to well controlled inventory actually begins with the manufacturer or supplier. Just because your inventory will soon be out of sight does not mean that it should be out of mind. Before your inventory hits your 3PL provider’s warehouse door, you should have a plan in place to minimize risk. At a minimum, your plan should include these three steps:
- Step One: Invest in your own comprehensive insurance policy. Then make sure you always pay your premiums on time and keep them updated.
- Step Two: Choose your warehouse provider with care. And make sure the provider you choose has a robust insurance policy of their own.
- Step Three: Communicate regularly with your provider. You can also ask about the availability of extra insurance coverage for added protection.
Each of these three steps alone is essential to ensuring your inventory’s safety. But together, these measures combine to provide an unparalleled level of security for your goods.
What is the single best way to ensure the safety of your inventory?
Understanding the role of warehouse legal liability insurance is vital to your peace of mind as a manufacturer or supplier. But you still may have some lingering concerns about potential inventory loss and how insurance contracts work. You may also wish to learn more about the specific steps taken to protect your inventory.
The single best way to ensure the safety of your inventory is to contact one of our logistics experts to discuss the safety of your inventory. For over 30 years, industrial firms, grocers, health and beauty providers, and aerospace companies have turned to Symbia Logistics to keep their products safe and secure. Between your insurance policy and ours, you can rest assured that your inventory will receive the protection it deserves.
FAQ
How does the claim process work for inventory loss or damage?
The process involves notifying the warehouse provider immediately after discovering the loss or damage, providing detailed documentation of the inventory affected, and possibly submitting additional evidence like photos or purchase invoices. The warehouse’s insurance company will review the claim based on the contract terms and documentation provided.
What are common exclusions from warehouse legal liability coverage?
Exclusions often include losses from natural disasters, acts of God, war, and theft by employees. Specific scenarios or items may also be excluded based on the policy’s terms, necessitating a thorough review of the insurance certificate.
How do insurance premiums vary by goods type and warehouse features?
Premiums can vary significantly based on the value, risk level of the stored goods, and the warehouse’s location, security features, and historical loss record. High-value items or those requiring special storage conditions may result in higher premiums.
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