Protecting Shipments with Supply Chain Insurance

Mark Robinson


November 12, 2014

shippingCountless hours and meticulous, often automated processes are deployed to ensure a company’s goods are properly packed, labeled, containerized and prepared for shipping.  But despite all of this preparatory work, the goods can still be at risk because they are under-protected when they leave the company’s facilities.

While many transportation carriers have standard liability programs, it is often misunderstood that the provided standard carrier liability is insurance when actually it is not.  The term “limited liability,” often seen under the carriers’ “terms of use,” means exactly what it says. The transportation carriers’ liability for the goods they are transporting is limited based on the condition of the items being shipped and the class of the freight, regardless of the actual value of the shipment. This means when a claim is filed, the company is not likely reimbursed for the full retail value of the goods. Rather, the company receives either the cost of the goods or the cost to repair, whichever is the lesser amount.

In both instances, the company is not reimbursed the full sales value. This means the shipment owner may need to record the inventory as a loss, as it is less likely to be sold. For goods that are high-value and/or time- or temperature-sensitive, these standard liability programs are not viable options to protect against the significant financial risk of product loss.

Despite this fact, insurance for shipments is often not on the radar of executives as a tool to protect their supply chains, even with the minimal effort it takes to implement. This is interesting, given insurance companies share the same goal as supply chain professionals and risk managers: protecting against lost revenue for their companies. Knowing this, why would a company not do everything it can to protect its shipments and, ultimately, its revenue?

There are several possible reasons. It might be that supply chain professionals and risk managers believed they were fully protected without insurance. Maybe this approach is how they have been doing it for years, and they just did not think through all the financial ramifications. Perhaps they self-insure, or they are not sure the insurance premiums are worth it because transportation carriers have become so reliable.

We must remember, however, that insurance is really not about the transportation carrier. It is about the unknown and spontaneous risks that constantly bombard supply chains. This is where insurance can play a key role in protecting supply chains. For example, you don’t purchase car insurance because you are a bad driver; you purchase it because of the risks from other drivers on the road. The same is true of purchasing insurance to protect your goods while in transit. No matter the degree of carrier reliability, there can be delays in transit due to inclement weather, theft, crisis situations, cargo jettisoned overboard, ships sinking, trucks overturning and other unforeseen disasters.

Unique Solutions to Protect Supply Chains
Today, technology and data are converging to help synchronize the insurance and logistics industries. The combination of these two forces can help supply chain and risk management professionals gain the visibility needed to evaluate and mitigate the most vulnerable links in their supply chainWith troves of logistic data at their fingertips, insurance underwriters can predict with great accuracy the risk of shipping goods anywhere around the world using any mode of transportation and any trade lane during any season. Moreover, the data enables specialized insurance companies to offer solutions that are specific to unique supply chains.

For example, any company doing business internationally—either selling or sourcing materials overseas—faces risks that stem from the lack of control that comes with using multiple modes of transportation. A good cargo insurance policy can protect against risk enhancers like the “law of general average.” This maritime law allows the captain to jettison some cargo containers off the ship in order to save the majority. Without insurance, shippers who lost cargo will generally only receive reimbursement for the cost of the goods cast overboard, and not their retail value.

This leaves the shippers, whose goods were lost, with a considerable hole in their revenues, unless the company’s cargo policy reimburses the full retail value (which many do not). Even if your containers were one of the lucky ones, your company must participate in the restitution. All shippers proportionally share in the losses of those shippers whose containers were sacrificed. A good cargo insurance policy would also cover the reimbursement of what must be paid to the shippers whose containers were not so lucky.

Industries such as healthcare, agriscience and specialty foods often ship products that are time- and temperature-sensitive. In the recent UPS Pain in the Chain study, healthcare executives reported that product damage and spoilage is a key issue impacting their businesses. Sixty-one percent cited shipment insurance as a strategy to overcome the challenges of protecting products in an increasingly complex logistics environment.

These types of shipments may warrant round-the-clock, real-time proactive monitoring and intervention services to make sure highly perishable items both maintain proper temperature and arrive on schedule. The proprietary technologies offered by logistics companies allow services like this to exist and, more importantly, to be integrated with insurance coverage.

With a related insurance policy, if a package is considered at risk of not making its scheduled delivery, proactive mitigation tactics will automatically kick-in based on the customer’s predefined instructions to get packages back on track. These instructions may include procedures to maintain critical temperatures, such as re-icing, or expediting to same-day delivery. The insurance policy can cover these rescue activities at no additional cost to the customer, as well as provide reimbursement up to specified limits for shipments in the event of damage or loss.

These integrated services have already proven their worth. For instance, during the Boston Marathon bombing last year, no deliveries were made during the city’s shutdown. Luckily, a medical supplier with a time-sensitive, perishable product was already collaborating with its dedicated UPS team to enact recovery procedures and reroute shipments to ensure a successful delivery.

Other companies, like jewelers, face a different type of supply chain risk exposure due to the high value of their products. Such items may require more security and insurance policies that can match the associated higher retail values. The carrier liability programs offered by transportation carriers are not designed for high-value products.

There is one other way to mitigate risks in the supply chain, and that is to self-insure. This is a risk management decision that often requires a business to hold a large sum of money in reserves to reduce risk. For many companies, this capital is hard to come by and could be better used to grow the business through R&D and other investments. Self-insuring is on par with stuffing money under a mattress—it effectively gets the job done, but it is not an ideal solution.

The Right Fit for Your Supply Chain
When choosing an insurance partner, it is important to remember that most insurance providers do not have supply chain or logistics experience. Many are third-party providers without visibility into the technologies, security or recovery capabilities of a logistics provider.

To that end, before beginning any insurance policy, supply chain professionals should ask: Can intervention actions resolve the issue, and are these expenses covered under the policy? If intervention actions must be taken, is this my responsibility? Can I strike a balance between these options? Large, established logistics providers can often offer a logistics, insurance and claims process as a single source, in one comprehensive package.

The shipper must also read the fine print to understand the reimbursement policies and levels of coverage, whether using the carrier’s liability program or engaging a third-party insurance company. In a claims filing process, the best surprise is no surprise.

There are no risk-free supply chains, only risk-minimized ones. With all the different supply chain risk mitigation options, it is imperative that risk managers have a solid understanding of the complete scope of risks facing their supply chain. There is, unfortunately, no “one size fits all” solution—each supply chain is unique, with different needs. Nevertheless, supply chain insurance can be a formidable tool in a risk manager’s portfolio.
Mark Robinson is vice president at UPS Capital Corporation, working in the supply chain and trade finance areas.