What is a Third-Party Logistics Firm?
Third-party logistics firms, often referred to as 3PLs, manage the transportation and handling of goods or materials for a third-party without taking the title of the product. A 3PL may be contracted to coordinate every aspect of the supply chain for the customer, including inventory management, brokering of the freight, warehousing and transport. For example, a manufacturer may elect to hire a dedicated logistics firm to transport their products from factory to warehouse to end user, rather than allocating resources to fleet and driver management. From a risk management perspective, hiring a 3PL may also benefit the manufacturer by mitigating the auto liability risk. In this article, we will explain why it is essential to assess potential risk in the hiring of a 3PL.
Why is it Important to Assess Third-Party Hauling Risk?
In assessing auto liability risk, a phrase often used is ‘the insurance follows the vehicle.’ Although true, the liability for a vehicle may not stop at the driver’s seat. Liability arising from the driver’s negligence may extend to the parties involved in hiring a driver and even in the scheduling of shipments.
The current judicial environment has produced large settlements and judgments against 3PLs. In some cases, the 3PL’s insurance may not be adequate to absorb the claim and the next ‘deep pocket’ becomes the party who hired the 3PL. Suits may also name the hiring party alleging they contributed to the negligence in question. Real claim file examples include:
- A subcontracted transportation company allegedly triggered a grass fire, which may have caused poor visibility and led to an auto accident. The auto liability suit named all parties, including the freight brokerage firm and the manufacturer who hired the 3PL.
- An auto liability suit alleging negligent hiring of a motor carrier involved in a rear-end auto accident.
What Information May an Insurer Use to Assess Potential Third-Party Hauling Risk?
An insurer may want to understand the indemnification language in the 3PL agreement and the annual volume or cost of transported goods. They may also wish to confirm in the agreement what valid and collectible insurance exists, including limits available, before the insured’s policy may be triggered. Lastly, it is essential to understand the additional insured status of the insured.
Reviewing contractual arrangements and discussing potential auto liability risks with a trusted insurer and intermediary partners helps to ensure a claim does not take your organization by surprise.
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