Canadian Underwriter

Commercial broker explains how third-party logistics contracts can make underwriting more difficult

September 25, 2013   by Greg Meckbach, Associate Editor

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NICC 2013 – Some of the contracts that large retailers are asking their third-party logistics providers to sign make it difficult for insurance carriers to underwrite the risks those logistics firms are taking on, a marine risk expert for a major commercial brokerage suggests.

Third-party logistics (3PL) firms, which are increasingly used by companies to manage their supply chains, are neither “common carriers,” nor do they fall under the legal definition of “warehouseman,” noted Matthew Yeshin, managing director of marine practice at Marsh Canada Ltd.

“As a result, standard limitations that traditionally apply to the transportation industry don’t apply to them,” Yeshin said of 3PLs.

Yeshin made his remarks Tuesday during a panel discussion at the National Insurance Conference of Canada (NICC) in Gatineau, Que. He suggested the contracts some large retailers have with their 3PLs are designed to address supply chain risks.

But, he added, some of those 3PLs have not read their agreements carefully or if they did, they only signed them because they assumed a competitor would get the contract if they refused to sign.

“As more 3PLs entered the market, more 3PLs said, ‘You know what? We’re going to be a better partner than that other 3PL … and we’re going to do more for you and we’re going to take on more risk for you,'” Yeshin said. “3PLs started to sign these agreements with these companies to do whatever they wanted to do.”

Some of those agreements require the logistics firm to assume responsibility for consequential loss, which could include business interruption, loss of market or loss of profits in the event that a shipment does not reach its destination on time.

“It’s actually in the contract, saying ‘We are going to make you responsible for BI, loss of market and loss of profits, but we’re not going to tell you how much and we’re not going to limit it,'” Yeshin said.

This is in contrast to the traditional bills of lading used in transit agreements for land, air and ocean carriers, he noted. Some of these bills of lading, he suggested, can have the effect of making the carriers responsible for only a small fraction of the total value of the goods. The terms of those traditional bills of lading also limit carriers’ liability where losses are due to “acts of God” — such as unexpected floods or hurricanes — or losses due to the fault of public authorities, terrorism, strikes or riots.

“When some of these logistics people in companies responsible for supply chain started to look at these bills of lading for the first time, they realized the financial liability of a carrier is incredibly limited.”

But now some 3PLs are agreeing to assume risk for the “full value of cargo whether declared or not,” and that’s what’s making those 3PLs difficult to underwrite.

“We want you to be responsible for the full value of the cargo that you’re carrying, but we’re not going to tell you what the cargo’s worth or what the maximum value of your liability is,” is essentially what some retailers are saying to 3PLs, Yeshin said.

He suggested 3PLs are approaching their brokers asking for insurance quotes without knowing their potential liability.

The other speakers on Yeshin’s panel at NICC were Linda Conrad, director of strategic business risk management at Zurich Financial Services, and Kelly Marchese, principal of supply chain and manufacturing at Deloitte.

Two out of three companies surveyed by Deloitte reported they have a supply chain risk management program, Marchese said.

“Supply chains are so much more complex than they have ever been, so therefore, it’s that much more challenging to manage those supply chains,” she said. “Anything from natural disasters to human rights violations have an impact on supply chains. Counterfeiting and quality failures  — the list goes on and on.”

One of Marchese’s slides included clippings from newspaper headlines from the last several years, referring to events such as eruption of Mount Eyjafjallajökull in Iceland in April 2010 (which interrupted air travel for days) and floods the following year in Thailand.

“Every time you look at the headlines you look at something that has happened in the world that has resulted in a supply chain disruption,” Marchese said.

Conrad also referred to the 2011 floods in Thailand. One of her slides compared the economic and insured losses of those floods, as well as losses from the March, 2011 Tohoku earthquake off the coast of Japan. In both disasters, many supply chain losses were uninsured, Conrad noted.

The earthquake in Japan had estimated economic losses of up to US$300 billion and a total projected insured loss estimate of up to US$40 billion, according to Conrad. Total economic losses from the flooding in Thailand were almost US$50 billion while insured losses could surpass US$20 billion.

“There’s a pretty big gap in there, isn’t there?” Conrad said of the difference between economic and insured losses. “Someone is bearing that loss. There’s some person that has to pay for that and it may be because they didn’t understand what their true exposure was and therefore did not properly insure against it.”

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