What Warehouse Insurance is Required For In-House or 3PL Warehousing?

What Insurance is Required When You Operate Your Own Warehouse and When You Use a 3PL Warehouse?

Operating a warehouse, whether your own or a third-party logistics (3PL) warehouse, comes with risks and liabilities. To mitigate these risks, various types of insurance coverage are required. These coverages can differ based on whether you’re operating your warehouse or using a 3PL warehouse.

Warehousing is a critical component of the supply chain. It involves storing goods and products, often for extended periods, before they are shipped to their final destination. However, the operation of a warehouse, whether owned by a company or outsourced to a 3PL provider, comes with potential risks. These risks range from property damage and theft to worker injuries and legal liabilities. Therefore, insurance coverage is crucial to protect your business from potential financial losses.

Understanding Warehouse Legal Liability Insurance, Business Interruption Insurance, and Transportation Insurance When Using a 3PL Warehouse

Your goods are your business. Their safe transport from your production facilities to their subsequent warehouses and their safe storage is one of the most important considerations that you have to make as a business owner.

If your goods are lost or damaged while in the hands of a third party warehouse provider, you could be looking at losses in revenue of tens of thousands of dollars or more without the ability to recoup those losses.

That’s why asking the right questions and choosing the right fulfillment center is such a critical decision. Our clients often ask us questions about what kinds of insurance is required when using a 3PL warehouse provider and what kind of insurance should they include in their contracts?

This post is all about answering those important questions and giving you a deeper understanding of the warehouse industry so that you can make informed decisions.

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What Kind of Insurance is Required When Using a 3PL Warehouse and What are You Covered For?

There are several types of insurance that any warehouse and transportation provider can possess. Each one has a different level of coverage and will cover your goods for different scenarios. Warehousing insurance is a type of insurance that protects businesses storing goods or inventory in a warehouse. The warehouse insurance covers the physical building and its contents, including any equipment or machinery used to store or move the goods. It also covers loss of income due to interruptions in the business caused by covered events.

We are going to cover four of the most common types of insurance that you need to be aware of when contracting a 3PL provider for warehousing and transportation services as well as what each one means for your business.

1. Warehouse Liability Insurance

Warehouse liability insurance is a type of coverage that protects your business from any legal liability resulting from damage or injury to third parties. It includes bodily injury, property damage, and other types of losses. With this type of coverage, warehouse operators protect themselves from potential claims made by customers, employees, or other third parties.

2. Warehouse Legal Liability Insurance

Warehouse legal liability insurance is also known as warehouseman legal liability insurance. It covers legal liability arising from the handling and storing of goods. Warehouse legal liability insurance is only liable if it’s led by negligence. Warehouse legal liability insurance is specifically tailored to safeguard physical goods owned by third parties. This coverage typically includes storage and transportation, cross-docking activities, packaging, labeling, and other related services.

Liability claims can stem from various situations, such as theft, fire or flooding, pest invasions, alterations in temperature, misplaced or lost items, and inadequate maintenance. Legal liability protection, often known as Bailee’s coverage, is particularly aimed at covering losses resulting from negligence.

Warehouse legal liability insurance covers a range of claims that include:

• Damage to goods due to careless handling
• Theft of goods because of poor security measures
• Mishandling of goods by the employees
• Failure to deliver goods to the intended destination
• Environmental damage due to mishandling
• Faulty climate controls

Warehouse legal liability insurance means that the warehouse provider is responsible for the safe storage of your goods and must provide “reasonable care” to your goods while in their care. If the warehouse provider does not provide “reasonable care” and their negligence results in loss or damage of your goods, then the warehouse provider’s insurance company will cover your losses and pay your for the goods.

Under this kind of insurance policy, you are still responsible for your goods for any other kind of damage or loss of goods i.e fires, floods, windstorms, hurricanes, etc.

It’s important to note that with warehouse legal liability insurance, the insurance provider that is covering the policy will only pay your damages if “negligence” is the cause of the loss or damage.

Furthermore, if the warehouse provider is offering you a level of care that goes beyond the legal definition of “reasonable care” the insurance provider will most likely not cover damages in the event of lost or damaged goods. So, if your warehouse provider is offering added storage benefits or a higher degree of care than what their insurance policy defines as “reasonable”, you need to make sure that your contract specifies who will cover damages in the event the insurance provider declines to cover the costs.

3. Business Interruptions Insurance

Business interruptions insurance covers the warehouse in the event of a natural disaster or other business interruption and pays the warehouse their profits during the time that they were unable to conduct business.

This is a step beyond property insurance as it covers the profits associated with loss of business and not just the costs of repairing the property.

This kind of insurance will only cover the warehouse provider, not the customers that are storing their goods there.

If the warehouse that you’re storing your goods in is located in an area prone to natural disasters, you could add a provision to your contract that would require the warehouse provider to give you a portion of your losses out of their payment from the insurance provider who underwrites their business interruption insurance. However, this would be a very hard bargain and is unlikely that most (or any) 3PL providers would agree to it.

However, there is also contingent business interruption insurance which means that in the event one of your warehouses cannot operate and you lose profits during the time that they were inoperable, you would be able to file a claim with your insurance provider to cover the losses during that time.

This would be something that you would need to purchase outside of any warehouse provider you decide to do business with, but could be incredibly beneficial to you as you expand your business and increasingly rely on third party logistics providers throughout the country.

4. Transportation Insurance

Much like the warehouse legal liability insurance above, transportation insurance has varied clauses, legal definitions and limitations to when and how much you’ll get reimbursed if your goods are lost or damaged.

Basic transportation insurance specifies that the carrier is responsible for the safe transport of your goods and their insurance provider will pay your for loss or damage as long as the carrier was negligent during transport.

Again, you’re still responsible for loss or damage due to natural disasters or other circumstances outside of the control of the carrier. When you’re reviewing the contract for responsibility during transport make sure you understand the definition of negligence that the carrier is using.

Another consideration for transportation insurance is whether or not the payment will be made to you based on loss of profits, wholesale price of your goods or price per pound of your products. Depending on how payments are specified, you could be looking at a varied amount of payments.

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What Warehouse Insurance do You Need to Understand When You Operate Your Own Warehouse?

When operating your warehouse, you need to consider several types of insurance coverage. These other types of warehouse insurance coverage include:

Commercial Property Insurance

Commercial property insurance protects a business’s physical assets, including the warehouse building and contents. This policy reimburses the property to its current market price. It covers repairing or replacing damaged property and any lost income or extra expenses incurred due to the damage.

This type of insurance safeguards your warehouse structure and everything within it, encompassing elements like storage shelves, cooling systems, forklifts, office furnishings, digital data, and software. It offers protection against financial losses stemming from natural calamities, fire incidents, damages due to fluctuations in humidity or temperature, and instances of theft.

Commercial property insurance is an essential safeguard for any warehouse business. It shields your enterprise and its tangible assets from unforeseen incidents such as severe weather conditions, fires, theft, acts of vandalism, and damages caused by vehicles or aircraft. This insurance encompasses crucial elements of your business property, including the warehouse structure itself, office machinery, stock, and outdoor items located on the property.

Before purchasing commercial property insurance, taking an inventory of your business is advisable. This helps you determine what property you want to insure, its replacement value, and if it’s worth insuring. The property you might insure could include the building that houses your business, all office equipment, accounting records, important company documents, manufacturing or processing equipment, inventory kept in stock, fence and landscaping, signs, and satellite dishes.

Commercial property insurance policies compensate for damages based on the item’s replacement cost or cash value. The replacement cost refers to the funds required to mend, substitute, or reconstruct property at the same location, using materials of similar quality, without considering depreciation. On the other hand, actual cash value is the expense of replacing the property with a new one of similar design and quality after accounting for depreciation.

General Liability Insurance

General liability insurance protects a business if it is legally responsible for bodily injury or property damage to third parties. The damage has to occur on the business’s premises or as a result of its operations. General liability insurance can cover the cost of legal defense and any damages awarded to the injured party.

Employee Dishonesty Insurance

This type of insurance provides coverage for losses that result from theft, fraud, or other dishonest acts committed by an employee of the business. Employee dishonesty insurance can cover losses related to the theft of inventory or money, embezzlement, forgery, and other types of fraud.

Worker’s Compensation Insurance

This insurance is essential if you have employees working in your warehouse. It covers medical expenses and lost wages if injured on the job.

Amazon Warehouse Insurance

Amazon seller insurance coverage may be required if you’re storing and fulfilling orders through Amazon.

Commercial Umbrella Insurance

This policy provides additional coverage beyond the limits of your other policies. It’s beneficial in the event of a significant claim or lawsuit.

Commercial Auto Insurance

If your warehouse operations involve the use of vehicles, commercial auto insurance covers any damages or injuries caused by these vehicles.

Cyber Liability Insurance

If your warehouse stores sensitive data, this insurance protects against data breaches and other cyber threats.

Inland Marine Insurance

This insurance covers goods in transit, which is especially important if your warehouse is transporting goods for customers.

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How Are Warehouse Inventory Losses Valued by Insurance Companies?

The value of warehouse inventory losses determination is by the replacement cost method. It calculates the cost of replacing the lost items with new ones of the same or similar kind and quality. This method considers the cost of materials, labor, and other expenses necessary to replace the lost inventory.

The replacement cost ensures the business can replace the lost items with new ones without incurring additional costs. This method also ensures that the insurance company pays the firm fairly and accurately for the losses.

It’s important to note that each insurance company may have specific policy terms and conditions. Therefore, businesses must carefully review their insurance policies and understand the terms and conditions related to warehouse inventory losses.

How Much Does Warehouse Insurance Cost?

The expense associated with insuring a warehouse can fluctuate greatly, contingent on the nature of the warehouse and its specific use. For instance, a warehouse storing hazardous or explosive substances would necessitate a higher insurance level than one that houses non-hazardous goods. Similarly, a warehouse maintaining a substantial quantity of refrigerated or frozen compartments for food storage may require a more comprehensive insurance plan than a warehouse for storing construction materials.

Warehouse Legal Liability Versus General Liability – What is the Difference?

Warehouse legal liability insurance is designed to protect the commodities stored within a warehouse. In contrast, general liability insurance offers a more extensive scope of coverage, encompassing risks such as injuries to third parties, copyright infringement, and legal defense expenses. However, it’s important to note that general liability insurance doesn’t offer complete protection against all potential risk factors.

Which Type of Warehouse Insurance Provides You with Coverage If You Suffer from Theft or Natural Disaster?

Commercial property insurance typically covers losses caused by theft or natural disasters. However, it’s important to read the policy carefully, as exclusions or limitations may exist.

What is Meant by Warehouse Stock Insurance and Inventory Insurance?

Warehouse stock insurance and inventory insurance are crucial to cover your warehouse contents. These types of insurance cover replaces your stock or inventory if it’s damaged or destroyed due to a covered event. To clarify, the policy for warehouse insurance typically includes various coverages, and the specific coverage for contents is not referred to as “content insurance.” Instead, it is encompassed within the other ranges outlined in the policy.

Whether you operate your warehouse or use a 3PL warehouse, having the right insurance coverage is crucial to protect your business from potential financial losses. It’s always better to be safe than sorry. Warehouse insurance is a necessity.

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How to Mitigate Risk When Working With a 3PL?

Let’s look at ways to mitigate risks when working with a 3PL.

• Choose a 3PL wisely – Companies must start by researching and evaluating potential providers based on their industry experience, track record, and customer reviews. You should define specific requirements and expectations for the 3PL provider, such as the types of products and the frequency of shipments. Clearly understanding their needs, companies can select a 3PL provider best equipped to meet those needs.
• Write specific concerns into your agreement/contract with the 3PL -You should have a solid 3PL warehouse agreement/contract to minimize inventory loss, including particular inventory management procedures, loss prevention, and liability provisions. Additionally, the contract should specify the level of liability that the 3PL provider will assume in case of inventory loss or damage.
• Invest in your insurance policies – While the 3PL provider may have insurance coverage, more is needed to cover the total value of a company’s inventory. Companies must consider taking comprehensive insurance policies to protect the goods and ensure adequate coverage in case of any issues. It gives you peace of mind and minimizes the risk of financial loss in case of any problems.

Final Thoughts on Warehousing Insurance

These examples are some of the most common kinds of insurance required when running your own warehouse or using a 3PL warehouse. Based on your specific business needs or products being stored & transported, these may be insufficient for your needs. It’s always best to consult a professional or a lawyer when drafting or signing contracts that could impact your business’s bottom line.

Insurance for warehouse storage is a critical component of risk management for businesses that operate warehouses or storage facilities. Investing in it provides financial protection in the event of unexpected losses, ensuring the long-term success of your business. Companies must purchase warehouse insurance coverage to avoid suffering losses.

If you have any questions about insurance or any other aspect of warehousing or 3PL warehousing or transportation, feel free to contact us.