As many as 1 in 10 shipped items are damaged in transit. And with 70% of buyers reporting that they are unlikely to return to a business after a poor delivery experience, the fallout extends beyond one lost item.
The business impact of damaged goods
Imagine an auto parts manufacturer that makes specialty fuel injectors for stock cars. Each injector costs $1,500. The manufacturer sends a shipment of 10 fuel injectors to an auto parts distributor. But on arrival, one is damaged and cannot be used.
The distributor is under pressure to deliver components to race teams and must come up with a solution (stock cars aren’t very fun without fuel injectors). To keep this client, the manufacturer must expedite the delivery of a replacement injector. While the carrier liability claim is pending, the manufacturer must foot the cost of not only the expedited shipment but also the cost of the replacement injector.
Items lost or damaged in transit may seem like an issue for your shipping and claims department. But the cost of damaged goods has a ripple effect across your organization and down to your customer base.
On average, it takes two hours to file a freight claim. If you are sending a replacement, a new order must be filled, items pulled, inventory records updated, and invoice collection waived. That’s lost productivity and unrealized return on assets.
You may also need to spend time and resources to salvage, repair, or dispose of the damaged product.
All of this not only damages customer relationships, it also places a strain on your company’s finances.
What is carrier limited liability coverage?
By law, carriers have a minimum financial responsibility to shippers when items in their care are lost or damaged. This coverage is automatically included in shipping consignments. However, as the name suggests, carrier responsibility is limited. Carriers only need to cover damage in certain circumstances, and only for certain minimum amounts.
Here’s an example of standard carrier liability limits:
These limits are based on the shipping method or load weight, not the value of goods. For expensive items like machine components or medical equipment, there is no possibility of recovering the full value.
To recoup any costs, shippers must prove the loss was directly caused by carrier negligence. This means carriers will not make any payout for Acts of God (flood, storms, earthquakes, etc.), theft, third-party reckless driving, or spoilage. Nor will they make a payout if they determine that damage resulted from improper packaging by the shipper.
Other carrier liability exclusions include:
Action against a public enemy
This is when goods are lost during a defensive action by the government, police, or military against a public threat. Such incidents are rare in the United States, but the exclusion may be applied to cases of domestic terrorism.
Public authority intervention
This refers to cases in which government policy results in delayed, lost, or damaged goods. Public authority intervention can include road closures, recalls, trade embargoes, and (pandemic) stay-at-home mandates.
Failure/fault of the goods
This indicates a product defect or inherent tendency of goods to deteriorate. This exclusion is often applied to perishable items, medical supplies, and other time-sensitive, temperature controlled items.
The result of all of these exclusions is that more than half of all carrier liability claims are denied and shippers recoup zero costs.
What is declared value coverage?
Adding declared value coverage allows the shipper to pay a little bit more to extend coverage to a maximum, rather than a minimum.
If no value is declared, the carrier will default to a mandatory minimum. As per our chart above, for parcels, this minimum would generally be $100 of coverage.
Declared value coverage is usually offered in dollar amount increments. For example, for FedEx’s domestic same day service, shippers can pay $1.15 per $100 of coverage for up to $2000 of declared value.
Note, that this is not insurance and liability exclusions still apply. The shipper would still need to prove carrier negligence in the event of lost or damaged goods. Acts of God, fault of shipper, faulty goods, and all other exclusions will not be covered. And like FedEx, most carriers set maximum declarable amounts and losses above this threshold will not be paid out.
Carrier limited liability vs. shipping insurance
Because carrier limited liability seldom protects shipments for the full value of goods, many shippers take out policies from third party shipping insurance providers.
Shipping insurance, also known as cargo insurance, offers more robust coverage with fewer limitations. Shipments can be insured for the full dollar value of goods, rather than cents or dollars per pound. In addition, door-to-door coverage means businesses can recoup costs regardless of when, where, or by whom their items were damaged.
While hopefully rare, accidents happen. To help close the gaps left by carrier limited liability, Inxeption includes all-risk, full-value Shipping Protection with our logistics services. In the event of a shipping issue, customers can file a claim online in a few simple steps and receive a payout for the full value of lost goods—plus shipping costs.
Here’s a side-by-side comparison of Inxeption Shipping Protection and standard carrier limited liability:
How much does shipping insurance cost and what’s covered?
The method of shipping, the value of goods, and your policy terms are all factors that determine the cost of shipping insurance.
When shipping insurance covers the total commercial value of goods, providers often calculate policy costs using basis points (bps). This is a decimal multiplied by the dollar value of goods shipped.
For example, let’s say there is a shipment with a total insurable value of $50,000. This includes the value of goods plus the cost of shipping. The insurance provider uses a rate 50 bps, or 0.005 per dollar of goods sent. Multiply the total insurable value by the bps to find the cost of the policy.
50,000 x 0.005 = $250
The cost of insuring the shipment is $250. Considering that $50,000 worth of goods are on the line, $250 seems quite reasonable. Keep in mind, rates will vary by provider and shipping method. Don’t expect the same rates for parcel, LTL, and FTL.
Make sure to consult your provider to understand any limitations or exclusions. There may be restrictions on sending items through conflict zones, exclusions for dangerous chemicals or electronics, and limitations for high-value items like jewelry.
Do I need shipping insurance?
If you are considering whether or not to insure packages, ask yourself how easily you could replace damaged items without a significant hit to your finances.
If the average cost to insure an item is less than the average cost of replacing lost, damaged, or stolen items, insure the item. Here’s a formula you can use to calculate the average amount of lost value due to shipping issues:
Let’s revisit our auto parts manufacturer to illustrate an example. Suppose the average order value for fuel injectors is $15,000, and 1 in 10 shipments is damaged.
(1/10) X 15,000 = $1,500 Average lost value
So, if it costs less than $1,500 to insure the shipment, the manufacturer should do so.
Protect your shipments, protect your business
While shipping issues aren’t the norm, 1 in 10 odds add up. Revenue not recouped from damaged or lost goods and can jeopardize the long-term profitability of your business—and your short-term ability to cover operating expenses.
There is also a risk of reputational damage and lost business. If a buyer seeks out an alternative supplier after a botched delivery, the customer relationship is cut short.
At Inxeption, we aim to help businesses do shipping better. Our Shipping Protection covers the total value of your goods. Claims are processed quickly so you can limit the financial risks of doing business and offer the best possible experience to customers.
Packages can get lost or damaged. Your profits and your customers don’t have to.
Visit us online to find out more about Inxeption Shipping Protection.