By: Jeff McConnell, CIC, CRM Vice President
A recurring question I hear is, “How should I set my loss limitation?” When making this decision, consider the following points.
First, as a professional 3PL, who’s reputation and customer relationships are paramount, the primary objective should be to ensure customer’s expectations are met at time of loss. To keep all eyes wide-open, the IWLA Standard Terms and Conditions Contract Section 11 (Liability & Limitation of Damages section) is IN ALL CAPS. There is a reason for this. It explains that the warehouse will only be responsible for loss or damage caused by the negligent acts of the warehouse. Often the limitation of damages is not filled in which leaves the warehouse open to a greater liability than expected. Many warehouse owners are understandably more concerned with getting the contract signed than drawing attention to the loss limitation for fear of highlighting issues that may prolong or completely derail the deal. But, the loss limitation is already highlighted in the IWLA Contract, so it’s a sound practice to at least have some discussion with your customer as to what that means to them should a loss occur. After a loss, it’s not uncommon for a customer to state, “I don’t care what the loss limitation says you owe me, I want ________ or you lose my business”. Unfortunately, just about all warehouse owners have had this happen and many have elected to pay the difference out of their own pocket to keep the customer. And, even if the loss is covered by your warehouse legal policy, any amount demanded by your customer in excess of the loss limitation defined within the contract can be expected to come out of your pocket. Are either of these scenarios more or less likely to happen if a discussion regarding your contractual loss limitation occurs on the front end?
A second consideration is to determine what version of the Article 7 of the UCC your state is utilizing. If it is pre-2003, then you must set your loss limitation per article or item or per unit of weight. A multiple of another variable such as X Times Monthly Storage Rate can still be applied as long as that variable (in this case Monthly Storage Rate) is based on an amount per article/item or unit of weight. If your state has adopted the post-2003 Article 7, your loss limitation can be determined by you and your customer. A final consideration is tied to your limit of warehouse legal insurance coverage. At least annually, a tabulation using the aggregate of all your loss limitations contained in all of your contracts needs to be run. The resulting amount plus a cushion factor determines the amount of warehouse legal coverage you purchase. An exception to this formula can apply if your calculated maximum loss limitation far exceeds the value of the product, or if your operation is heavy into cross-docking or trans-loading. Then it’s appropriate to make an adjustment to the limit of warehouse legal you purchase. Certainly, there are many more considerations to setting the proper limits of warehouse legal coverage as well as coverage limitations and exclusions to be wary of.
In closing, loss limitation agreements should always be shown on any rate quotation along with your Standard Terms and Conditions Contract, and they should be discussed with your prospective customer. There is no absolute right or wrong multiple or variable to use for loss limitations. The primary consideration is to satisfy your customer’s expectations on how this plays out before claim time. And finally, understanding that some customers will impose their own contracts and/or limitations, attempt to be as consistent as possible across the board.
