The booming e-commerce industry has shined a light for insurers in an industry previously flying under the radar: third-party logistics (3PL) companies doing over-the-threshold deliveries. While these services offer convenience for retailers and customers, they can expose businesses to unforeseen risks that could damage their bottom line.
Over-the-threshold refers to deliveries where the 3PL provider goes beyond simply dropping off a package at the curb or entryway. It involves carrying the product inside the customer’s home or business, typically for installation or setup. The most common products in this category are furniture, appliances, electronics such as large flat-screen televisions, or other big and bulky items.
When a 3PL provider delivers and installs products within a customer’s home, it’s an intricate dance of hired labor, shifting liability, and insurance policy nuance and complexity. Many businesses, however, don’t fully grasp the subtleties of this dance and often mistakenly assume an existing insurance policy covers the risks.
In most cases, 3PLs service and perform over-the-threshold work. They contract the work to a labor force called ICCs (independent contracting carriers). The 3PLs push the scope of work and liability down to the ICC via contract and assume the necessary insurance coverage is in place by accepting a simple COI (certificate of insurance) from the ICC as an example of their insurance coverage.
But what happens when an ICC doesn’t have the right insurance as they procured coverage from an insurance provider that doesn’t know the full nature of their operation? Or worse, lied about having coverage at all in the first place? Is the 3PL then held liable by the shipper for the injury/damages potentially caused by the ICC? If so, does the 3PL have the right coverage in place as a backstop?
First, let’s start with the ICC as it relates to common insurance coverage, they carry to insure their business properly:
Coverage for autos that are owned, leased, rented, hired, or borrowed for use within the business operations of the ICC. Remember that not all insurance policies are created equal, so exclusions for loading/unloading should be sought while ensuring the ICC has proper coverage for supplementary rentals.
Coverage for third-party’s liability that extends beyond the automobile. In the case of over-the-threshold work, this frequently revolves around an ICC’s installation services. Simply checking for General Liability on a COI won’t confirm if that ICC’s policy has any relative installation exclusions, especially concerning the perils of water.
Coverage for theft, loss, or damage to third-party’s goods in the care, custody, and control of the ICC during transit. Typical limits for this class can range from $25k to $100k per truckload, depending on the commodities carried. Even a policy of this nature can have its shortcomings, too, with unfavorable exclusions for unattended or unlocked vehicles or a scheduled unit limitation, which can sometimes rear its ugly head in a claim involving rental units.
With many 3PLs utilizing a Broker/Carrier model, the need for proper work injury coverage carried by the ICC becomes ever more critical. What specific coverage the ICC carries depends on the nature of their operation and the use of W2 or 1099 Drivers or helpers. But just like the other lines of coverage, the devil is in the details here, too. Checking a COI for Workers’ Compensation coverage won’t necessarily protect you from a singular ICC operator holding a “paper only” policy and excluding themselves from such coverage.
Even with a well-structured contract, insurance requirements, and a strong compliance team, incidents occur when the 3PL will need to rely on their insurance to assist them with a claim. Here are common coverages for the 3PL to provide further protection:
It is the most critical insurance coverage offering that a 3PL can carry. HNOA coverage provides defense/indemnity coverage for the 3PL for auto-related accidents caused by the ICC, for which the 3PL may become liable. The nature of the claim can be an auto-related incident and extend to loading/unloading. Partnering with an insurance carrier that is well versed in this exposure is critical as this policy, too, can be laced with coverage concerns relating to the primary coverage of the ICC and whether or not their policy was in force or responded at the time of loss. Knowing these policy limitations before buying such a policy will be worth its weight in gold should you ever face this type of claim scenario.
As noted in the ICC section, GL coverage for the 3PL is no different. Coverage considerations are the same. However, the contingent nature of this coverage placement should help with the rate structure.
Same here as well when it comes to Cargo insurance. However, some cargo forms present a concern regarding the Broker/Carrier model and the subsequent brokering of loads from the 3PL to the ICC. Coverage limitations could come into play at the point of loss depending on how the ICC policy may or may not respond, so knowing this is important.
When suggesting the devil is in the details, no such coverage could represent this better than Workers’ Compensation. The model of the 3PL and the state(s) in which they operate predicate several solution offerings for this type of coverage. Traditional Worker's Compensation, Occupational Accidents, PEOs, ASOs, or third-party TPAs can all come into play here. Having strong legal and insurance advisors who understand the nature of your operation can help prevent many headaches regarding this coverage line.
A must in today’s insurance toolbox of the 3PL is a full coverage Umbrella/Excess Liability policy. While most contracts for shippers in this space are starting to require such coverage of the 3PL, the 3PL carrying it regardless is a wise idea in today’s legal environment. With claims litigation and settlements reaching all-time highs (particularly on the auto), having Umbrella/Excess Liability to build a tower of insurance limits for your operation is a good idea. Remember that a full coverage policy would apply over the underlying Auto Liability, General Liability, and Employers Liability of the Workers’ Compensation. Having one without the others is only buying a fraction of the coverage, setting you up for gaps in the event of a claim.
As with most things, the cost to one’s business will start to play a role as to what additional insurance coverage a 3PL may carry. A few other notable coverage considerations would be:
Most importantly, coverage for theft against a third-party’s goods, i.e., a driver stealing from a homeowner during the course of delivery.
Coverage for harassment, discrimination, or wrongful termination in the workforce. Coverage extensions for actions of the ICC drivers to cover infractions against third-party (a driver sexually harassing a consumer) are essential.
Identity theft, fraudulent transfers, and invoice manipulation all come into play within Cyber Liability coverage. Given the transactional financial nature of a 3PL, they have recently become targets of cyber criminals, so having a good cyber policy is essential.
With insurance premiums continuing to rise (especially auto insurance), many insureds seek ways to spend less or cut back on coverage or even their labor force. Saving a few bucks can be tempting. However, cutting corners is a gamble with potentially devastating consequences. Here’s why:
Further, having coverage gaps can potentially leave your business vulnerable to claims arising from:
Remember, cutting corners is not just about saving money; it’s about taking a calculated risk with your business’s future. There can be other creative ways to reduce insurance costs, something a good insurance advisor should be able to help you navigate.
Before hitting the road, work with an experienced broker and consider the following:
Review your insurance policies to understand what’s covered and what’s not. Ask specific questions about over-the-threshold deliveries and ensure your coverage aligns with the risks involved.
Establish clear internal protocols and expectations for deliveries. This includes training employees to identify potential risks and report any incidents promptly.
Communicate openly with your customers about the delivery process and the potential risks. This can help manage expectations and mitigate potential liability.
Investing in qualified, insured partners and implementing robust safety protocols can ensure your deliveries are smooth and safe and protect your bottom line and reputation.
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Connect with the Risk Strategies Transportation team at transportation@risk‐strategies.com.
About the author
Bryan Paulozzi specializes in insurance and risk management for courier, last mile delivery, expediting, freight forwarding, and brokering businesses. He and his team help transportation companies identify and mitigate safety risks, including those related to winter weather driving.