Logistics insurance need not be a gamble

Brian Sullivan, the TT Club’s Director of Business Development, brings insight into what is for some a mysterious world of risk and legalese

On the night of 1st November 2005, a major fire at a warehouse in Leicestershire in the UK, destroyed clothes destined for a store owned by fashion retailer, Primark.  The damage was estimated at tens of millions of pounds.

At least half of the entire stock at the warehouse was destroyed in the fire, though fortunately no one was injured.  Some 15 fire engines fought the blaze in the 300 sq. metre warehouse, which was operated by the logistics service provider, TNT NV.  Witnesses told of how the fire engulfed the whole area in a matter of minutes, mainly because of the presence of flammable material in the warehouse.
A fire service spokesman said: "It was full of clothes so it was obviously going to spread very quickly.  There is pretty much 100% damage to the building."
Fortunately, Primark and TNT were fully insured for the stock loss and for business disruption.

“It was the biggest catastrophe you can imagine,” commented a spokesman for Primark’s parent company, Associated British Foods.  Yet ABF’s share price actually increased after the fire – perhaps partly because at a stroke Primark had effectively disposed of the stock, which was insured for its retail value, but also because of the swiftness and efficiency of the response to the disaster.

Disasters such as this one are, thankfully infrequent occurrences in the logistics industry, but when they do happen, they can have a very serious effect on any transport company, and could even put them out of business if they don’t have sufficient insurance cover.

TT Club has been offering insurance to the transport and logistics sector for thirty years.  This particular part of commerce is rather complex and fast-changing, and so requires a flexible and understanding approach to its insurance needs.

Traditionally, insurers have been wary of the ‘trucks and sheds’ side of the industry.  It’s considered to be risky: trucks can cause a lot of damage, and liability can run into millions.  Trucks have to make deliveries in awkward places – narrow streets for example – and that can result in damage.  Warehouse fires can also be very expensive as fire services are unwilling to enter the buildings in case they collapse – as I expect was the case with the Primark fire.  And the fact that you have a lot of people at logistics centres moving things about, as well as third parties such as delivery trucks on-site, means that accidents do occur.

Insurance costs

For the average road haulage company, simply insuring its fleet trucks can account for over half of the company’s total insurance costs.  The next largest item on the bill will be employer’s liability insurance, which can account for 25% of the total, while liability for cargo in transit is around 10%.  Overall, a transport and logistics company can find that, as a percentage of its turnover, insurance costs can be as much as its pre-tax profit.

That being the case, I believe it pays transport companies to take a long hard look at their insurance needs, and to use a broker or insurer who understands the transport business.  Claims drive premiums, so anything that can be done to reduce risk and losses will save money.  Companies should make sure they are doing all they can to follow correct health and safety procedures; to ensure staff are properly trained in their jobs; and that appropriate operational systems are in place to ensure goods are moved as safely as possible.

If a pro-active attitude can be demonstrated and this is backed by robust processes for managing risk, then insurers will take a positive view when it comes to premium calculations.  The likely result of such a strategy is a modest claims record.  This is important as when changing insurance provider, all businesses are obliged to declare their claims records, so there is no point in massaging the facts.

Level of risk

It’s also important to decide the level of risk that is appropriate to an individual company’s operation.  This level of self-risk is called the ‘deductible’ or ‘excess’.  If there is a high level of confidence in the company’s operational capability, deductible amounts can probably be set quite high, thus reducing premiums.  If deductibles are set at a very low level, the insurer has more exposure to consider, because he may have to meet claims for as little as $100.  In the current adverse economic environment, deductible levels have been rising as logistics operators seek to reduce premiums and assume more risk themselves.  This can be an effective strategy where a company has good risk management and loss prevention processes in place.

Another consideration is duplication of insurance cover.  With separate insurance policies for equipment, employer’s liability and cargo, it can be the case that these overlap in certain areas – a good broker should be able to identify such overlaps and adjust the cover provided by each policy accordingly.  In other words, a company needs to devise an insurance programme that is suitable to its own circumstances and to do that a knowledgeable insurer is essential.

Add-on services

Transport and logistics companies are increasingly offering a wide range of add-on services to customers, but they are often unaware how these can affect their insurance needs.  TT often sees companies offering services such as packing, labelling, sub assembly, customisation, and even domestic installation without fully understanding the implications for insurance.  For example, if a logistics company installs a washing machine on behalf of a customer, and the installation is faulty and results in flooding, causing the householder to claim against the supplier of the machine, then there will be a consequent claim on the logistics company, which needs to be covered under its insurance.  A good broker will help in this situation, keeping a watching brief on his client’s insurance needs and alerting them when they need to be changed or updated.

In fact, the more logistics companies become involved with assembling or installing their customers’ products, the greater is their exposure to the risks involved with product liability.  And indeed, manufacturers are tending more and more to offload liability onto their transport and logistics providers as a condition of their contract.

Smaller, lower cost transport companies are increasingly winning higher value contracts these days as manufacturers seek to reduce costs, but often the transport and logistics services provider doesn’t realise how much risk it is also assuming.  It’s possible for a logistics company to find themselves having to pay for a product recall, if something they have done, such as incorrect labelling, has caused a fault in the product.  It’s very important to ensure that logistics contracts are looked at by an insurance expert to make sure that sufficient cover is in place to support the liabilities under the contract.

Ultimately, a decision has to be taken as to how much a logistics company really wants a particular contract – is the liability it entails actually worth the reward?  For example, a contract for £10,000 can carry as much as a £1,000,000 liability.  So how is a price for the service fixed given the risks involved?  This has to be an essential factor in any bid a company submits; and companies don’t always realise that they need higher profit margins from some services such as consultancy, where there can be a high level of liability, to compensate them for the assumed risks.

‘Tailor-made’ demands

While 90% of the transport business works under standard terms and conditions issued by organisations such as RHA and BIFA, the one-size-fits-all type of contract is in some cases unsuitable for customers who want ‘tailor-made’ logistics packages. While it’s easy enough for transport operators to put such packages together in commercial terms, from the insurer’s point of view it’s not so easy.

In actual fact, there are hardly enough lawyers in the world to draw up these ‘bespoke’ contracts in the numbers now being demanded by shippers.  They can create an enormous amount of paperwork, which is very time consuming and so increases the costs of submitting a bid.  As a result, some tender invitations receive few bids because of the complexity from the insurance viewpoint of the draft contract.  So, logistics companies would be well-advised to consider this when deciding if a bid is worth tendering or not.

If this all sounds like a minefield, help is at hand.  The key is the services of a good broker who understands the transport and logistics business and the risks that are involved in the transactions and contracts that need to be undertaken.  The role of the broker is to assess a company’s risk profile.  Based on this he/she chooses an appropriate insurer; negotiates with the insurer on rating if required; makes sure various insurance policies or types of covers don't overlap; collects and distributes the premiums and process all paperwork.  The broker also, either offers a claims handling service or makes sure that the insurer is capable of offering this service.

Typically the main types of insurance protection that a logistics operator should consider are listed below.

Insurance cover usually includes:

• Liabilities for loss of or damage to cargo.
• Liabilities for errors and omissions.
• Third party liabilities.
• Fines for breach of customs, immigration, safety, security and anti-terrorism regulations.
• Investigation, defence and mitigation costs.
• Disposal costs.
• Misdirection, uncollected cargo and completion of carriage costs.
• Quarantine and disinfection costs.
• Liabilities for ‘supply chain’ operations, for example: assembly, order picking, processing and procuring, quality and stock control, and reverse logistics.
• Buildings and contents.
• Docks, wharves, berths, quays and jetties.
• Machinery and handling equipment.
• Rail and road infrastructure.
• Business interruption risks.
• Fire legal liability

Additional insurance may include:

• Infringement of personal rights.
• Per diem tank container costs.
• Liabilities for advice and information

Note: TT Club is a major insurance cover provider to logistics service operators.

For further information, visit: http://www.ttclub.com/

Published: 12/02/2010