By definition, a third-party logistics provider is an entity that arranges shipment on behalf of its clients, in addition to managing transportation and advising them on related issues. This describes a handful of firms that operate within the logistics landscape, including consolidators, brokers and freight forwarders. With the industry evolving rapidly in the recent past, these companies are now facing new liability risks in providing supply chain management services.
Also known as lead logistics providers, 4PL companies have become quite common in the last 5 years. This can be traced to the benefits they provide to their 3PL clients, such as an extensive network of warehouses and more resources. On the flip side, outsourcing with such a firm comes at the steep price of facing more risks.
While a solid contract can take care of some threats in this area, the majority of a firm’s liability risk will inevitably remain. For instance, a 3PL company could be held liable for a damaged item that changed hands several times while in transit, their own adherence to protocol notwithstanding. Even if this is covered under their policy, having solid loss control procedures in place can make a huge difference.
As more shippers chose to hand over their warehouse management duties to 3PL companies, it was only a matter of time before the latter was expected to assume more liability. Even with an ironclad contract, a negligence claim arising from this area can have disastrous consequences for such a firm. Legal fees aside, there’s often the cost of dealing with issues not covered under the law. To make matters worse, the probability of facing such a nightmare isn’t as low as one might assume — a third-party logistics firm can be found negligent both as a result of their actions and from a contractual standpoint as well.
Driven by the ever-escalating need to uphold safety, regulatory bodies now require everyone who deals with food products to invest in better tracking capabilities. In particular, warehouse operators now have to trace the origins of all products within their premises, and the destinations as well. This isn’t always easy, especially when dealing with complicated networks that extend beyond international borders. As such, it’s not uncommon for firms to find themselves being held liable due to unexplained gaps in coverage.
The advent of tighter regulations, coupled with the rising need for brands to protect their products, has forced logistics service providers to take on the responsibility of managing products by their expiry date. When this passes, it isn’t always clear whether this automatically declares the goods to be damaged. This is a grey area that often divides opinion, but what’s indisputable is the fact that 3PLs can be held for losses that may arise thereof.
Product recalls cost around $10M on average. While exercising caution can minimize the risk of facing such a huge penalty, this hasn’t stopped anyone from looking for scapegoats. In an attempt to mitigate risk on their part, manufacturers are always looking to spread the blame to their partners, including 3PLs. These companies have been left with no option but to buy product recall coverage, in spite of its steep cost.
Other risks that need to be taken care of include:
-Political risks: This is the case where a firm faces negative consequences due to the actions (or inaction) of a government. Coverage has to include the firm’s interests within the country, plus the damages that could result from politically-fueled violence.
-Trade disruption: This covers damages resulting from the delayed or suspended arrival of shipments due to a disruption in transit.
-Rejection: This covers the event where items are rejected by a governmental body.
While 3PL insurance still remains to be a crucial risk-management tool, it shouldn’t be viewed as a comprehensive solution for all threats. Because not all insurers understand the landscape, many policies simply can’t keep up with the changing landscape, more so when it comes to addressing emerging risks. 3PL companies would thus be better off creating a number of safeguards, some of which might include:
-Encouraging openness: A culture that encourages transparency makes it easier to correct errors and identify suitable solutions for anything that threatens to disrupt the flow of operations.
-Quantifying value at risk: Companies need to understand the extent to which they can be held liable at any particular point of failure.
-Lobbying: Firms within this niche should consider joining hands to press for the modernization of current laws and/or the creation of new ones altogether, keeping in mind the need to account for the interconnected nature of risk.
Above all is the need to review one’s coverage to make sure it covers emerging threats, which can be easily taken care of by partnering with an experienced insurance agent.