Third-party logistics (3PL) firms are enjoying increased global patronage, as 3PL has been shown to considerably bring down operational costs. However, accidents like a major fire or flood can damage the warehoused goods meant for distribution. In such scenarios, who owns the risk?
When depositors (bailors) unload their goods in a warehouse, they presume they are shifting all the associated risks to the warehouse operator (bailee). But this is not always so. To fully benefit from 3PL insurance, they are each required to follow specific Uniform Commercial Code or UCC guidelines.
The Warehouse Operator
The warehouse is free to increase its liability. But then, it would put its legal liability insurance at risk. The bailee is responsible for any damage to the goods – if and only if the damage was the result of negligence on the operator’s part (legal liability insurance). Section 11(b) of the Standard Contract Terms and Conditions for Merchandise Warehouses states this categorically: “Goods are not insured by the warehouse against loss or injury however caused.”
There is an assortment of insurance options open to the bailee: pollution contamination (for those who store chemicals), comprehensive general liability, warehouse legal liability and so forth. Therefore, the warehouse operator should exercise care with the semantics in the contract language; for example, there should be nothing in the contract that could be construed as elevating ‘duty of care.’ From the bailee’s viewpoint, the bottom line is that goods are insured against negligence, but not against loss or damage.
The risk of loss and damage belongs to the depositor, even though the goods meant for distribution are sitting in a 3PL warehouse. For this simple reason, it’s up to the depositor to insure the goods.
In case of injury or damage by fire not caused by the warehouse operator’s negligence, the depositor must foot the bill for not only removing and discarding the damaged goods, but also for the consequential environmental clean-up.
Section 7-204 (2) of the UCC requires the storage agreement to be specific about the limitation of damages – liability per article or unit stored should be mentioned in the contract. The flexibility of this limitation is subject to the jurisdiction of the state the warehouse is located in. Typically, valuation of damaged goods is not based on the goods’ selling price. In other words, the depositor cannot insure loss of profit.
3PL offers great solutions to businesses, but bailors should be aware that, according to the UCC, outsourcing logistics does not automatically translate to outsourcing the associated risks.
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