Editors Note: The following article is brought to you by UPS Capital in partnership with the Supply Chain Network.
When you ship a package or shipment, do you purchase insurance to protect against loss or damage? Or, do you rely on liability offered through the carrier?
There is good reason for posing these questions.
First, if you pay for carrier liability, you are NOT getting insurance. Yes, you read that correctly. Carrier liability is NOT insurance.
Second, it’s important to understand the differences between carrier liability and insurance.
So, what is carrier liability?
Carrier liability is typically a nominal amount that may be recovered against carriers in the event of goods being damaged or lost while in transit. Applicable law and/or industry standard, which vary by mode and region, will usually determine a default maximum liability of the carrier, for example between $0.50 and $5 per pound on domestic ground shipments. However, greater liability limits may also be purchased for an additional charge.
It is important to note that such increased liability is still a form of carrier liability and is not insurance.
Carrier and declared value liability generally allow recovery only if the carrier is in fact legally liable. Legal liability is subject to a variety of carrier defenses depending upon the mode of transportation and region. Many people are surprised to learn how broad these defenses are. Some carrier defenses even apply to acts of negligence; they can essentially render a claim not compensable.
Generally, for the shipper to recover on a claim, the shipper — not the carrier — must prove, at the shipper’s expense:
- That the goods were in good condition when given to the carrier;
- That the goods were already damaged when delivered (or not delivered at all);
- The amount of the damage; and
- That any defenses asserted by the carrier do not apply.
Even if the shipper successfully proves the above, the carrier’s liability is still limited to the declared value amount or the replacement cost at destination. This can be a far cry from the sale price of the goods.
Furthermore, in the U.S., attorneys’ fees incurred in bringing a cargo claim typically can’t be recovered from the carrier, even if the shipper ultimately succeeds in the claim. Also, some cases for international shipments need to be litigated overseas.
What are the risks with carrier liability?
Companies are putting themselves at risk if they assume that carriers’ contractual terms and liability laws help “insure” their shipments. Again, carrier liability is not insurance. The laws and their interpretation can be different, depending on the mode of transport, and can be complex.
Though the laws are “standardized,” they are not intended to secure full-value protection for shippers. Instead, they are generally designed to limit liability and create a predictable risk forecast for carriers, to ultimately facilitate lower freight rates. As a result, even if you “win” as an uninsured shipper, you may very well lose in terms of what you receive in compensation for your loss. Here’s what you typically get under default liability terms:
- LTL – There are two levels of liability:
- Full Freight Rate – Generally pays $25/pound
- Freight All Kinds (FAK) Rate – variable rates as little as $0.50/pound, and usually not more than $10/pound
- Ocean Freight – Generally a flat $500 per customary freight unit
- Airfreight – Varies domestically vs. internationally
- Domestic – Typically $0.50/pound
- International – 19 Special Drawing Rights (about $26) per kilogram.
If not carrier liability, then what is a better alternative?
With an all-risk cargo insurance policy, shippers can expect to be reimbursed for their goods in the event of loss and damage — without having to jump through hoops or prove the carrier is at fault. They can also expect coverage up to the invoice value of the goods — and potentially the selling price for presold goods — plus reimbursement for transportation charges.
Another benefit may be a longer time to report damages. Most carriers allow only a few days to report concealed damage, while actual insurance policies may provide up to 30 days. Further, with cargo insurance the shipper has coverage not only for cargo loss or damage, but also for additional incurred expenses. Examples include fumigation charges, recovery expenses in the event of ocean carrier insolvency, general average contributions in the event of maritime casualty, expediting expenses and others.
Most importantly, as is the essence of insurance — having a cargo insurance policy will give a shipper peace of mind. An insurance company owes its insured a fiduciary duty. A carrier has no such obligation to its customers.
For example, a truck carrying a pallet of smartphones is hijacked. Each phone is worth $300, and each of the eight boxes weighs 50 pounds. That’s 400 pounds of smartphones worth $480,000. Typical carrier liability for smartphones is generally around $10 per pound, so the shipper would be reimbursed $4,000 (400 lbs. x $10/lb.). The shipper is out $476,000.
The importance of cargo insurance
Well, if the above example didn’t convince you. Let’s try one more line of reasoning.
Most people have insurance — for their home, their health and their autos. But most don’t think about insurance for supply chain loss. That can be disastrous and in some cases put a company out of business.
So, why go through the hassles with carrier liability when cargo insurance is actual insurance and will really protect your business against the financial impact of lost or damaged goods?
About the author: Dave Zamsky has been with UPS for more than three decades, building products and services to meet customers’ supply chain needs and helping to drive profitable growth for the organization.
About UPS Capital: Nobody understands transportation and logistics like UPS. And while you’ve probably never thought of a UPS company for financing and insurance services, the global supply chain expertise of UPS Capital uniquely positions us to help protect companies from risk and leverage cash in their supply chains. Insurance companies and banks can’t say that. UPS Capital and its affiliates have offices throughout the United States, as well as operations in Asia, Europe and Latin America.
Insurance is underwritten by an authorized insurance company and issued through licensed insurance producers affiliated with UPS Capital Insurance Agency, Inc. and other affiliated insurance agencies. UPS Capital Insurance Agency, Inc. and its licensed affiliates are wholly owned subsidiaries of UPS Capital Corporation. Insurance coverage is not available in all jurisdictions.