What Insurance is Required When Using a 3PL Warehouse and What They Mean For Your Business

Insurance needed when using a 3PLYour goods are you business. Their safe transport from your production facilities to their subsequent warehouses and their safe storage is one of the most important considerations that you have to make as a business owner.

If your goods are lost or damaged while in the hands of a third party warehouse provider, you could be looking at losses in revenue of tens of thousands of dollars or more without the ability to recoup those losses.

That’s why asking the right questions and choosing the right 3PL warehouse provider is such a critical decision. Our clients often ask us questions about what kinds of insurance is required when using a 3PL warehouse provider and what kind of insurance should they include in their contracts?

This post is all about answering those important questions and giving you a deeper understanding of the warehouse industry so that you can make informed decisions.

What kind of insurance is required and what are you covered for?

There are several types of insurance that any warehouse and transportation provider can possess. Each one has a different level of coverage and will cover your goods for different scenarios.

We are going to cover three of the most common types of insurance that you need to be aware of when contracting a 3PL provider for warehousing and transportation services as well as what each one means for your business.

1. Warehouse Legal Liability Insurance

Warehouse legal liability insurance means that the warehouse provider is responsible for the safe storage of your goods and must provide “reasonable care” to your goods while in their care.

This means that if the warehouse provider does not provide “reasonable care” and their negligence results in loss or damage of your goods, the warehouse provider’s insurance company will cover your losses and pay your for the goods.

Under this kind of insurance policy, you are still responsible for your goods for any other kind of damage or loss of goods i.e fires, floods, windstorms, hurricanes, etc.

It’s important to note that with warehouse legal liability insurance, the insurance provider that is covering the policy will only pay your damages if negligence is the cause of the loss or damage.

If the warehouse provider is offering you a level of care that goes beyond the legal definition of “reasonable care” the insurance provider will most likely not cover damages in the event of lost or damaged goods.

So, if your warehouse provider is offering added storage benefits or a higher degree of care than what their insurance policy defines as “reasonable”, you need to make sure that your contract specifies who will cover damages in the event the insurance provider declines to cover the costs.

2. Business Interruptions Insurance

Business interruptions insurance covers the warehouse in the event of a natural disaster or other business interruption and pays the warehouse their profits during the time that they were unable to conduct business.

This is a step beyond property insurance as it covers the profits associated with loss of business and not just the costs of repairing the property.

This kind of insurance will only cover the warehouse provider, not the customers that are storing their goods there.

If the warehouse that you’re storing your goods in is located in an area prone to natural disasters, you could add a provision to your contract that would require the warehouse provider to give you a portion of your losses out of their payment from the insurance provider who underwrites their business interruption insurance. However, this would be a very hard bargain and is unlikely that most (or any) 3PL providers would agree to it.

However, there is also contingent business interruption insurance which means that in the event one of your warehouses cannot operate and you lose profits during the time that they were inoperable, you would be able to file a claim with your insurance provider to cover the losses during that time.

This would be something that you would need to purchase outside of any warehouse provider you decide to do business with, but could be incredibly beneficial to you as you expand your business and increasingly rely on third party logistics providers throughout the country.

3. Transportation Insurance

Much like the warehouse legal liability insurance above, transportation insurance has varied clauses, legal definitions and limitations to when and how much you’ll get reimbursed if your goods are lost or damaged.

Basic transportation insurance specifies that the carrier is responsible for the safe transport of your goods and their insurance provider will pay your for loss or damage as long as the carrier was negligent during transport.

Again, you’re still responsible for loss or damage due to natural disasters or other circumstances outside of the control of the carrier. When you’re reviewing the contract for responsibility during transport make sure you understand the definition of negligence that the carrier is using.

Another consideration for transportation insurance is whether or not the payment will be made to you based on loss of profits, wholesale price of your goods or price per pound of your products. Depending on how payments are specified, you could be looking at a varied amount of payments.

These examples are some of the most common kinds of insurance required when using a 3PL warehouse. Based on your specific business needs or products being stored & transported, these may be insufficient for your needs. It’s always best to consult a professional or a lawyer when drafting or signing contracts that could impact your business’s bottom line.

If you have any questions about insurance or any other aspect of 3PL warehousing or transportation, feel free to contact us.

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