James F. Mahoney, Attorney
Commentaries
 
     

January 2015

3PLs Are Taking on Considerable Risks: Are You Promising Too Much as You Lure That New Shipper?

The best protection for the Intermediary is to do what has been traditionally done forever internationally – have the BCO insure its own cargo for the move

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The 3PL world is expanding seemingly exponentially as shippers or other BCOs outsource their logistics management work. Essentially this competition among Intermediaries, such as freight brokers, is shifting the risk of loss onto the Intermediary.

I may have said this previously, but some people will sign just about anything to get some freight to broker or manage. Intermediaries are now agreeing  to take on risks that are either uninsurable, not covered by the underlying transport carrier at all, or not covered by the underlying carrier’s insurance policy.

The exposure varies greatly. If the cargo moves are strictly domestic, there’s one type of exposure. If it had an international leg (air and water are slightly varied) on a through Bill, contracting with the shipper (BCO) to take a greater share or type of risk MAY OFTEN result in uncovered or minimally covered cargo claims, breach of agreement, and E&O mistakes for which the Intermediary will answer for.

Shippers and other BCOs are pushing out onerous contract terms to Intermediaries. You should take a moment before booking that freight to understand the exposures and take precautions. You may not even see the exposure then and it could hurt.

These contracts will generally trump any and all language on the BOL, any tariffs of motor carriers, and your load sheets. The Intermediary ends up with the loss because it can’t be passed on to the underlying carrier – rail or motor.

Carmack Amendment limitations to liability for damage or loss to cargo can be totally excluded in a contract. Contract damages can be much more than what the underlying carrier agrees with you to accept.

Some of the uncovered and minimally covered losses that an Intermediary may take on, and which cannot – or are not – easily transferred to the motor carrier are:

  • Liquidated Damages – specific penalty payments for late loads, missed appointments.

  • Full value claims whether declared or not (and the BCO has discretion to figure out the “full” value).

  • Specific liability of the 3PL, rather than the motor carrier, regardless of the underlying carrier’s actual liability – we’ve seen “identity” theft, i.e., phantom carriers intercepting a load, or phantom BCO reps misdirecting the destinations.

  • Liability for “consequential” loss, e.g., loss of profit, diminution of brand, injuries.

  • Full indemnity regardless of whether there’s actually a “fortuitous” loss (the basis of insurance).

  • Payments to BCOs for losses that are not sequenced with payment from the underlying carrier – or its insurers – create cash flow issues. Insurer payments notoriously lag for months and more claims are not being honored by insurers.

The best protection for the Intermediary is to do what has been traditionally done forever internationally – have the BCO insure its own cargo for the move.

Second best is when the Intermediary surcharges for placing this “first party” cargo cover. But, of course, that’s not often done on domestic freight. And, if the Intermediary does price it in, the Intermediary may just be pricing itself out of the freight by its competitors.

Cargo Insurance arranged by the 3PL

Pros

  • Addresses all risk requirements of BCO

  • Generally flexible enough on valuation of loads

  • Cost effective to BCO

  • Added value service to BCO

Cons

  • Does not address liquidated, contingent or other liabilities (which the 3PL may have contracted for)

  • Best to have values declared

  • Check with BCO to assure that BCO does need this coverage.

3PL Risk Management

Understand the Risk

  • Ensure that contractual obligations are clearly and completely passed through to the carrier – or where the liability cannot be passed through, that the underlying carrier has at least the expected standard liability cover.

  • Understand that some contractual responsibilities are not insurable.

Align Objectives

  • Understand what the cargo owner is trying to accomplish and have a discussion with someone in charge about eliminating some risks that are unlikely.

Manage the Risk

  • Greater obligations need increased risk management and loss control.

  • Confirm your carriers are legitimate – identity theft (phantom carrier intercepting load sheet and load) is common

  • Ensure that the MC’s insurance coverages are in place – don’t just check certificates, get policies – many cargo policies have extensive exclusions to coverage. Follow and monitor their CSA scores; ask for explanations of certain risky violations or high BASICs.

  • Implement vigilant loss control measures – either GPS on units or relatively frequent check on loads – and vet, vet, vet the carriers, culling the herd as necessary.