Eliminating the Hidden Cost of Cargo Claims Management - An Alternative Model

(*Follow-up Article on Shippers Not Looking to Brokers for Cargo Claims)

I have always believed that if you are going to critique an issue you should be able to provide a superior alternative. The following article outlines such an alternative.

I recently published an article on the legal and economic futility of shippers looking to brokers for cargo claims liability. The article received some interesting comments mostly along the lines of tradition, rather than any alternatives being used to avoid this practice.

The agreement by brokers to be responsible for cargo claims, without any contractual or other legal obligation, has historically been referred to as a "commercial decision", albeit not a very profitable commercial decision, and it can be avoided with proper diligence.

In two previous articles I have written on some of the following observations regarding cargo claims management:

• At least 90% of the top 20 (revenue volume) 3PLs do not accept cargo claims liability, even though they may offer cargo claims processing to shipper customers.
• All such 3PLs have an immediate competitive advantage over 3PLs who do accept cargo liability as a function of the higher cost of contingent cargo insurance and the much more complicated claims management process.
• All 3PLs who accept cargo claims liability also suffer much greater litigation and/or insurance expense in all instances wherein their carrier and contingent cargo insurer decline liability on any cargo claim. (That point is obvious, but usually sadly missed by the 3PLs who accept such cargo claims liability exposure. Once the carrier and contingent cargo insurer decline cargo claim liability, the 3PL has the Hobson's choice of paying the claim or litigating it...or in some instances, going out of business.)
• Shippers continue to leverage the least likely 3PLs to accept cargo liability, representing a prime example of "be careful what you wish for...you may get it". The result is that only the financially less secure 3PLs accept such liability in order to acquire the shipper's business, but then do not have the financial wherewithal to face a large claim when it occurs.
• Notwithstanding that the shipper has held the 3PL responsible for freight loss or damage, more times than not this results in a long protracted claim processing time, and often results in the carrier, contingent cargo insurer, and 3PL declining liability.
• It is currently estimated that more than 50% of cargo claims are initially declined by the carrier and insurers.

All of the foregoing facts portray a nightmare of process inefficiency, wasted resources, and doubtful claims collection by the shipper. Moreover, all parties to the transaction are impacted by litigation costs, destruction of formerly productive business relationships, and overall hidden cost of non-conformance, all of which surely raises per shipment costs to all parties.

I.?No Rationale Can Justify the Current Claims Management Process

The inefficiencies described above are so embedded within the status quo of supply chain management they have come to be protected by silos of "we have always done it this way". Within such silos, the shipper's initial interest is making sure that someone is contractually "responsible" for cargo loss and damage, even if that party may be the least culpable and capable of indemnifying the shipper when such loss or damage occurs. This myopic approach is then exacerbated by a 3PL who only wants to make sure they have passed along inordinate liability to the carrier.

3PLs submit to shipper leverage and carriers then submit to 3PL leverage, all without any idea of the future cost of claims management. Along the way, empty pacifiers are used to make this process seem more worthy. 3PLs present their certificate of insurance to shippers; and, likewise, carriers submit their certificate of insurance to 3PLs. For the most part, even within Fortune 100 companies, neither party has any idea exactly what the certificate of insurance represents; whether it is current; how much of a deductible is behind the certificate; what exclusions apply; and, is litigation necessary in order to get the 3PL contingent carrier and/or carrier primary insurer to pay the ordinary claim?

With the filing of an ordinary cargo claim, usually at least five entities have multiple resources dedicated to a resolution of the claim. Shipper, 3PL, 3PL insurer, carrier, and carrier insurer all do their best to prove or disprove the validity of the claim.

But that is before the lawyers for all such parties get involved. Then it really gets crazy in terms of inefficient use of capital, professionals, process and even the courts.

Pardon my generalization here, but by the time the average disputed claim has been resolved, more often than not, no one has been made whole, resources have been expended which are larger in economic amount than the claim (especially claims of several hundred thousand dollars), each party is looking at damaged, if not destroyed, business relationships, and all parties are about to pay more for insurance coverage, as those costs continue to escalate.

II. Is There a Better Way?

Of course, there is, even within the context of no free lunches. While the entire alternative process is more than space here allows, it begins with recognizing the cost of capital (human and process). The new process begins with eliminating all adversarial processing of the claim among the primary supply chain business partners. In a very high altitude description of the process, it goes somewhat like this: (This model already works on a limited basis by process conscious 3PLs)

Cargo loss or damage claim occurs.

Shipper is fully insured with "no fault" cargo insurance, for which all of their 3PLs/carriers agree to pay a per load fee (all to be priced into each participants rate per load)

Shipper receives all claim data from 3PL, and one request (claim) is filed for payment from the carrier in possession of the load at time of damage or loss.

Carrier makes full payment or refuses for clear statement of reasons.

Neither shipper nor 3PL further processes the claim in a very inefficient adversarial process, nor do they seek to prove liability among the business partners.

Shipper files claim with "no fault" insurer wherein shipper is only required to document proof of value and proof of loss, with no requirement that shipper prove carrier/3PL fault.

Shipper is paid properly documented value of claim within 30 days.

Just as in auto liability pooling and mediation among insurers (rather than insured), shipper's insurer settles claim among insurers participating in the inter-company internal clearing house.

Settlement by the internal clearing house avoids hugely expensive adversarial process among shipper, 3PL and carriers, and usually allocates the real "loss run" to the insurer of the party at fault.

III.?Conclusion Toward an Alternative Risk Management Model

The foregoing is an alternative risk management model which could be led by the shipper or 3PL, but it requires getting away from the silo mentality of "we have always done it this way". Leading this process could be a function of a shipper who finally "gets it" that they need complete recovery of value without a battle of contracts, leverage over insufficiently capable carriers/3PLs, and less than a proper return on invested capital necessary to manage the traditional risk management department.

Alternatively, the 3PL, who must continue to deliver more value to the shipper, could make this program work for their shipper, bring more realized value of claims at risk, and eliminate for themselves all of the non-returnable value of the risk management process and adversarial relationships with their shippers and carriers.

We all know those within the status quo who would perhaps respond that this new paradigm is a pipe dream. To which the leader who thinks outside the silo would most certainly, and for good reason, respond...it may require leadership, but it is very doable and would replace a current "nightmare" of inefficiencies as to process, capital and business relationships.