The Shipper, The Warehouseman, The Subcontracted Shipper and The Receiver

By Simon Fenn
In June 10, 2012
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Outsourcing has been practices for generations. It is essential that any company planning on outsourcing some or all of its operations or services selects its subcontractors carefully. In outsourced warehousing/ shipping and subcontracted manufacturing, correct selection of these services can keep you out of Outsourcing Hell!  This posting provides a very general overview of risk, risk management and insurance involved with outsourcing warehousing storage, packaging and shipping services.

For the purpose of this posting I am focusing on supply of a product rather than professional services.  I have defined the parties or the cast involved very simply for this “illustration”, as follows:

The Shipper – Shipper of Product sold to the Receiver.
The Warehouseman – subcontracted storage and possibly shipping on behalf of The Shipper.
The Subcontracted Shipper– local or foreign manufacturer/ Shipper of products outsourced through contract with the Shipper.
The Receiver – The Shipper’s customer

The Problem

 

As an example incorrect product is shipped due to the Warehouseman’s error whilst working on behalf of the Shipper.  The Receiver uses the product assuming it is in good condition and by so doing batch contamination/ spoilage/ property damage results.  The impact on the Shipper:

  • lost value of product;
  • potential loss of use claim from Receiver.
  • potential bodily injury or property damage liability claims if incorrect product causes bodily injury or property damage.  (Although most employees at customers’ premises would be covered primarily by Workers’ Compensation)
  • Loss of Goodwill.
  • Other risks dependant on industry type.

Observation

Similar exposure seems to exist with subcontracted supply.  E. G. batch supplied from Subcontracted Shipper under Shipper’s Label.  Shipment sent to Receiver and contaminates batch etc. We will remain focused on the Warehouse relationship for the balance of this illustration.

The Main Contracts

1. Supply contract between Shipper and Receiver.
2. Warehousing contract between shipper and independent warehouse operator.

The Relationships

In 1 above the Warehouseman is not a party to contract.
In 2 above the Receiver is not a party to the contract.

Notes:

Unless the Shipper: Receiver contract stipulates that Shipper may not subcontract without permission of Receiver, nothing prevents Shipper from subcontracting any part of its services to others.  It is important to check your contract prior to subcontracting/ outsourcing any services.

Section 9 (a) of The Canadian Standard Contract Terms and Conditions for Merchandise Storers or Warehouses( www.logisticsservicelocator.com/ resources/Standard_Terms_and_Conditions_Canadian.pdf) states that: “the responsibility of the Storer or Warehouse is the reasonable care and diligence required by the laws of the province where the goods are stored; provided that all goods are stored at the Depositor’s (Shipper’s) risk of loss, damage or delay in delivery unless Depositor establishes that such loss, damage or delay occurred because of the Storer’s or Warehouse’s failure to exercise the care required by the laws of the province where the goods are stored.”

9(c) states that:
“the warehouseman is not responsible for insuring the goods.”
“Without limiting the generality of the foregoing” – specifically (9(a,b,c)
“Section 9(d) (ii) The legal liability of the warehouseman shall be strictly limited to the lesser of the monetary amount of the damage incurred or 100 times the monthly storage rate on any one package or stored unit with the contents (or, in cases where the warehouseman’s charges are calculated for other than actual storage, maximum $50/unit) unless the Owner (Shipper) specifically request a higher limit in writing and declares the excess value, in which case the warehouseman may, at his option, accept liability and assess an additional charge to the monthly storage or other applicable rate” . 

Many warehouse storage companies do carry errors and omissions insurance.  The value of this protection to the Shipper is questionable as the errors and omissions insurer will depend heavily on The Canadian Standard Contract Terms and Conditions for Merchandise Storers for a defence.  The only potential opening for the Shipper from this layman’s perspective is clause 9(a) where presumably if the Warehouseman is negligent, the warehouseman’s legal liability insurance, general liability insurance or errors and omissions liability insurance may become involved.  I believe the statement “Without limiting the generality of the foregoing” preceding Section 9 (d) (ii) opens an opportunity for the Shipper to hold the Warehouseman liable if it did not exercise “reasonable care and diligence”; however, legal opinion should be sought.

A good percentage of Shippers do not bother insuring shipments or property in storage at warehouse locations due to their low value.  They often have relatively little concern as to the hazards involved.  On considering the standard storage contract cited, these Shippers are in grave danger when 1) insurance is their responsibility and 2) section 9 (e) stipulates:

“Where loss, damage or destruction occurs to the Goods for which the Storer or warehouse is not liable, the Depositor (Shipper) shall be responsible for the cost of removing and disposing of such Goods and the cost of any environmental cleanup and site remediation resulting from the loss, damage or destruction to the Goods.”

This raises the question: how many Shippers that sell products that could cause a pollution situation, carry environmental impairment (pollution) liability insurance?

Possible Remedies

Whether Warehouseman’s insurance can be involved or not, most Shippers will carry at least products liability insurance as part of their general liability insurance.  Remember that the Warehouseman is not a party to the supply contract between Shipper: Receiver.  The Receiver may be unaware (or disinterested) in the existence of the warehouseman as their contract is with the shipper.  Subject to the specific circumstances of every accident or occurrence and the terms and conditions of each policy, products liability insurance carried by the Shipper very likely will respond to claims from Receivers and subsequent tiers of the Receivers customers.  Keep in mind however that liability claims do not always settle quickly as these insurers have to examine cause of loss and determine liability, they are actually in business after all to defend the Shipper.

The Receiver should therefore always first involve its own property insurer following an accident, in order to achieve expeditious repairs following an accident.  Their insurer can then launch a recovery action/ Statement of Claim against the Shipper (referred to as Subrogation), if it is of the opinion the shipper is liable.

If the Shipper carries property direct damage insurance it is not difficult to have product in storage with Warehouse covered for direct damage and also contingent business interruption insurance in the event of loss of turnover as a result of a peril (not otherwise excluded) that occurs at the warehouse location(s).  An older product known as Stock Throughput Insurance can also cover stock from “cradle to grave” basically while the Shipper has title to the stock; however, adding business interruption insurance to this could be complex.

One must raise the question why any Shipper would not purchase insurance protection at storage sites?  It is after all relatively inexpensive in the current 2012 marketplace and would appear to extend protection in the event of catastrophic loss.

Some Fundamental Risk Management Measures

The following minimum measures should be taken by the Shipper for its protection and we do recommend to seek the further advice of your insurance professional:
1) Obtain certificates of general liability from all outsourced parties with the Shipper as additional insured for liability arising from the operations of the outsourced party and with at least 30 days cancellation notice.  Request a minimum limit of liability your company feels comfortable with such as “at least $2,000,000 Commercial General Liability including $2,000,000 Products & Completed Operations Liability in the aggregate.” This is the most important policy to the Shipper in event one of its Receivers is adversely affected by its products.

2) Obtain certificates of errors and omissions insurance from all outsourced parties where an errors and omissions/professional liability exposure may exist.  Again select a minimum limit of liability such as “at least $1,000,000 each claim and in the aggregate”. 
3) Review contracts thoroughly, all your contracts, to ensure the assumption/ transfer of risk and liability is clearly understood before executing the agreement. Also review your Shipper / Receiver contract to ensure Receiver is not contractually transferring an inordinate amount of risk back onto the Shipper.  This will also assist Shipper in better understanding its insurance obligations/ assumption of risk with Receiver and identify any changes required to comply with contract.

4) Ensure as the Shipper that any product that is in your title or care under contract is insured against direct loss or damage and business interruption; also, in the case of storage risks, against contingent business interruption.  For example: In the event of a fire at storage site contingent business interruption (subject to insurers’ wording) would address a loss of turnover sustained by the Shipper due to inability to deliver product, to a maximum limit insured.

5) General and Products Liability Insurance (subject to the terms and conditions and exclusions of the various insurers’ policies and their own interpretation of coverage) can provide coverage for bodily injury or property damage resulting from the product, but will not usually extend to include a pollution situation (pollution or environmental impairment liability insurance should be purchased separately if an exposure exists).  Also, Property Damage is often defined by insurers’ wordings to include an extent of loss of use protection, provided there has been an accident and /or occurrence that triggers coverage under the policy (that is not otherwise excluded).

Many Shippers do not purchase coverage on exposures such as ocean cargo and product in storage either through their own resources or through outsourced/ subcontracted services.  It does seem incumbent on the Shipper to insure itself appropriately, especially when the Warehouse storage terms are so clear as to whom holds responsibility for insurance and considering third party liability exposure.

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