Congratulations! You have decided to outsource to a Third-Party Logistics company (3PL). Great!
Now you can focus on your business while the 3PL manages the heavy lifting.
3PL’s can provide your business with a wide variety of service capabilities. Warehousing, kitting, B2C/B2B order fulfillment, EDI, distributions, transportation, inventory management, to name just a few. You may put some or all your inventory in a 3PL warehouse.
So how would insurance work in that case? Many 3PL’s have great insurance coverage but are your assets 100% insured against loss? Typically…No.
3PL’s commonly carry policies for property insurance, general liability, auto liability, workers’ compensation, employers’ liability, umbrella, professional liability, warehouse legal liability, cyber, crime, employment related practices, to name a few. Now that is a ton of coverage! That much coverage is not cheap.
But when it comes to your assets (the stuff you own and put in the 3PL warehouse), you should seek an insurance provider/broker to make sure you have all the proper insurance for your business and the goods you sell.
To understand different policy types (at least how our broker explained them to us), let us review some of the more common coverages a 3PL may carry. This information was provided to us by our broker, for our business.
You should always seek counsel from your insurance provider for your business, and your property. Those professionals will best provide you with coverage that suits your situation.
Property Insurance: Property insurance is for everything that a 3PL business/owner could take with them when they leave a building (the warehouse), and that they own (the 3PL’s assets). Typically, this covers business computers, furniture, supplies, inventory (not customer assets), tools, and equipment that can be found within one hundred feet of the building. The intent is to only cover the property of the 3PL and not the property of others.
Property insurance covers any potential loss of business income and/or extra expense a 3PL would incur in a covered loss. This could include net income, additional rent, and other financial responsibilities the 3PL would incur while their property is being repaired or replaced. Personal property they use in their business but do not own and are not required to insure is covered as Personal Property of Others. This category includes property that belongs to someone else but is not subject to a lease, and property you lease under a contract that does not oblige you to insure the item. (“Insuring Property That Belongs to Someone Else - The Balance”)
Coverage is triggered by property damage caused by a covered peril such as fire, wind, or theft.
General Liability: A general liability insurance policy could help cover claims if the 3PL caused:
Third-party bodily injury: ex. a customer gets hurt after slipping and falling at the 3PL, they can sue the 3PL. The insurance policy includes bodily injury liability coverage, so it can help pay for their medical bills.
Third-party property damage: If a 3PL, for some reason, has employees that work at a client’s house, the 3PL faces a risk of causing property damage. Property damage liability coverage can help pay for repair or replacement costs if the 3PL damages someone else’s belongings. This does not apply to the 3PL’s customers’ property in the 3PL’s care, custody, or control and why a warehouse legal liability policy is needed (Yep, we will get to Warehouse Legal Liability further in this article).
Reputational harm : Someone can sue the 3PL for libel or slander because of something the owners or employees said. If this happens, general liability insurance can help cover the 3PL’s legal costs to defend the business.
Advertising injury : The 3PL can get sued for copyright infringement. For example, a photographer can sue the 3PL if they use their photo in your ads without permission.
Automobile Liability: Hired auto coverage means the 3PL has coverage when owners or employees drive a rented, leased or borrowed car for business. (“Hired and Non-Owned Auto Coverage | HNOA | The Hartford”)
"Non-owned auto applies to employees using their own cars for business." (“Hired and Non-Owned Auto Coverage | HNOA | The Hartford”) It provides extra coverage over the employee’s personal auto coverage for bodily injury and property damage liability.
Workers’ Compensation: Statutory coverage that provides medical and wage benefits to people who are injured or become ill at work.
Employer's liability: Insurance is coverage that helps pay a business owner's costs related to a lawsuit resulting from an employee's work-related injury or illness. These would be negligence lawsuits typically brought by families post accidents.
Umbrella: Additional liability coverage that provides additional limits over general liability, auto, and employers liability.
Professional Liability: Professional liability will cover legal defense and any settlement awarded to the customer, per the policy terms. A professional Insurance policy is applicable to a wide range of claims alleging damages or losses because of the services the 3PL provided. (“Errors & Omissions for Transportation & Logistics Professionals”)
Warehouse Legal Liability: Some of the most common types of claims under the policy include failure to follow instructions, shipping delay caused by the negligence of an employee, incorrect document preparation, unauthorized release of goods, misdirection, failure to collect documents, failure to properly clear goods upon entry, incorrect classification of goods, negligent selection of trucker or other carriers, among other activities. (“Errors & Omissions for Transportation & Logistics Professionals”)
Warehouse Legal Liability has certain triggers that activate coverage in an event - the most important of which is physical loss or damage. (“Unpacking Warehouse Legal Liability - Amwins”) This can cause confusion, as Warehouse Legal appears to have the same coverage trigger as first-party property coverage, even though Warehouse Legal is casualty coverage. The key difference is that Warehouse Legal is only triggered when the insured, as a warehouse operator or Bailee, is liable for the physical loss or damage. "In short, because a warehouse operator has a responsibility to keep stored property out of harm’s way, failure to do so might result in being legally liable to the property owner." (“Unpacking Warehouse Legal Liability - Amwins”)
Here are examples of claims that are typically covered by warehouse legal insurance:
- Product damage due to careless handling or storage
- Inventory damage due to negligent climate control
- Destruction due to insufficient facility maintenance
- Property damage due grossly to a fire caused by employees smoking in a non-smoking area.
Cyber Insurance: Cyber insurance is designed to protect a 3PL from these primary risks through three distinct insuring agreements: Network security and privacy liability, Network business interruption, Media liability. (“Cyber Insurance Explained - Part 1 - LinkedIn”)
Privacy liability coverage protects the 3PL from those liabilities arising out of a cyber incident or privacy law violation. These third-party costs can arise, for example, from liabilities required in a contractual obligation, all the way to regulatory investigations by governments and law enforcement.
Here are two examples of what privacy liability coverage covers:
- Defending the 3PL from consumer class action litigation and funding a potential settlement in a cyber incident or data breach. (“Cyber 101: Understand the Basics of Cyber Liability Insurance”)
- Legal expenses, fines, and/or penalties incurred due to a regulatory investigation by government or law enforcement, both federal and foreign.
When a 3PL network or the network of a provider that they rely on to operate goes down due to an incident, the 3PL can recover lost profits, fixed expenses, and extra costs incurred during the time the business was impacted. This includes losses arising from: Security failures, like a third-party hack/System failure, such as a failed software patch or human error. (“Cyber 101: Understand the Basics of Cyber Liability Insurance”)
Media liability provides coverage for intellectual property infringement, other than patent infringement, resulting from the advertising of the 3PL’s services. It often applies to online advertising, including social media posts, and printed advertising.
Crime: Employee Theft Coverage, also known as employee dishonesty coverage, protects companies from theft committed by employees. Employee Theft Coverage provides financial coverage for losses or damages to money, securities, and other property resulting directly from theft committed by an employee, whether identified or not, acting alone or in collusion with others.
Employment Practices Liability Insurance (EPLI): Includes coverage for defense costs and damages related to various employment-related claims including allegations of Wrongful Termination, Discrimination, Workplace Harassment and Retaliation.
We hope this blog helps business owners to make more informed decisions when thinking about insurance. In the end (pun intended), it is the business owner’s responsibility, not the 3PL, to make sure they have your assets covered.