A Catalyst for Supply Chain Profitability

Managing Freight Claims - an Introduction

An Introduction to Claims, Packaging & Liability

In my many years in the industry, I think few areas have been less well understood by the supply chain partners I have interacted with than freight claims. Common misperceptions include: the carrier is liable for the full cost of the damage that may have been incurred regardless of the factors that contributed to the damage: the carrier is responsible for  full replacement cost even if the damages are repairable; the shipper can file for damages based  on their contractual quality obligations to their customer (this is most frequently associated with high cost shipments such as electronic devices, for which determining functionality is difficult). Another frequent misunderstanding: that a shipper can refuse to make payment for the transport of the freight until the claim is settled.  I will speak to this last one now just in case I lose you before the end of this discussion: a shipper is not entitled to file a claim for damages under a transportation contract unless they have paid for the transportation first. The claim is made against the contract of carriage. In the absence of paying for the contract of carriage, the shipper has breached the contract. It is the carrier who is in a position to file for breach of contract at this point. And they may, if the value of the claim is less than the value of the transport contract. This, and the obligations discussed on the following pages, are well documented in legal libraries. If you ship freight, it is to your advantage to be familiar with the basics of claims management.  Damages happen.

 In this discussion, I am going to speak to shipments within Canada, transported by road.  Other conditions may and do apply for different modes, and / or cross border shipments. This is not intended to be a legal document, but rather is compiled from my years in the industry and handling of claims involving items as far ranging as Ming vases, antique furniture, pianos,  automobiles, machinery and computers. In the event you have a potentially expensive claim on your hands now, the best place to start is with your insurance company. If you want to prevent finding yourself in that situation, please give me a call.  And if you just want to get some degree of understanding of how claims work in the transportation sector, please read on.

Terms & Conditions

If you don’t change your car’s engine oil according to the manufacturer's requirements, and your engine fails, regardless of whether or not that engine failure can be directly linked to the oil change lapse, there’s a pretty good chance your manufacturer’s warranty is not going to respond.  That’s because the manufacturer offered a warranty contingent upon you changing your oil at specified intervals.   

If you have an accident with a vehicle, your insurance has a deductible. And the higher the deductible you are willing to accept, the lower the premiums you pay. 

If your freight is damaged in transit, how the carrier will respond is similar to the above examples. When a carrier accepts your freight, you and the carrier have entered a legal agreement known as a bailment.  There are several types of bailment under the law, but for the purposes of this discussion, this is as good as any other definition:  The transfer of possession of something (by the bailor) to another person (called the bailee) for some temporary purpose (eg. repair or storage (or transport)) after which the property is either returned to the bailor or otherwise disposed of in accordance with the contract of bailment.*(Source: Duhaime.org)

It is important we appreciate that the bailment relationship establishes a condition where one party is entrusted with a good, and is responsible for the condition of that good, without becoming the owner of it. This is important in the event of a dispute and what rights each party has. As with almost every transaction where a financial liability is incurred by one party in relation to another, the act of entering a bailment with a carrier is subject to certain terms and conditions established in contract law and regulatory oversight.  Those terms include an obligation on one party (the shipper) to prepare and package the shipment such that it will withstand the normal handling it will experience in transport (change the oil, in our car example); and the shipper agrees that in order to keep the overall cost of transportation as low as possible, in the event of a claim the shipper may be required to accept some cost in returning the goods to their original condition, or replacing them, as may be the case.  This equates to the deductible in our car accident example above. With freight however, the deductible applies when the value of the claim exceeds a certain limited liability. It is to be noted that a separate contract between a shipper and a carrier may stipulate different terms. This is often the case where a high volume shipper is entering into an arrangement with a carrier. But bear in mind, all parties to the transaction must be able to realise a profit for the relationship to be successful, and possibly, the contract to be legally binding.  Any such contract should be developed so as to provide the best protections to each party in the relationship.  Depending on the characteristics of the freight, additional elements may need to be considered.

Bumper to Bumper Protection

As we said, it is the shipper’s responsibility to package the freight in a manner that will protect it during transportation. Like your vehicle maintenance, the packaging requirements are definitive[1]. How you package a skid of metal parts is going to be different from how you package sensitive electronics. Once it’s packaged, make sure it’s labelled appropriately – heavy; fragile, top pack, do not stack (be aware some of these handling restrictions may also have an impact on your shipping rate).  Don’t forget to secure it to the skid so that it won’t move or shift (“unitizing”). Shrink-wrap has its place – but it is to be considered as a part of your packaging solution, not the sole unitizing component. Wooden crates, protective wraps and strapping / binding all have their place in making sure your freight will get to its destination in the same condition it left. Returnable packaging, under certain circumstances, may be the best solution.

The Deductible

Crash your car and your insurance company will give you a settlement based on depreciated value of the vehicle. This doesn’t mean you can find another car of the same year in the same condition for the money you receive. The insurance company may give you $20,000 for a vehicle that costs $28,000 to replace. And, you pay a deductible – $300, $500, $1000 on top of that. We do this to keep the cost of the insurance lower year over year. And as long as we don’t have an accident every year, we end up paying less in the long run.

It’s the same with your shipment. The carrier has a maximum liability they will accept for any given shipment. If your freight is worth more than that liability, then you have to consider how to manage that delta.

Carrier Liability

But, back to the discussion at hand: to establish a starting point for any TL or LTL shipment travelling in Canada, first, ask yourself this question: what is your freight worth? Is it more than $2.00 per lb? This is important: $2.00 / lb is the maximum liability a Canadian carrier is exposed to under the standard terms of carriage. This means that, unless you buy additional insurance (at additional cost) from the carrier at the time of pickup, and indicate so on the Bill of Lading in the event of damage, the carrier’s maximum liability is limited to $2.00 / lb. So, for example, if you have a skid of electronic components that weighs 1800 lbs, and it’s worth $65,000, you have assumed an uninsured liability (think: deductible) of $61,400. You can buy a lot of packaging for $61,400! On the other hand, if you have a 2000 lb shipment of paper with a value of $2000, you have an additional $2,000 in valuation protection to help you recover transportation and other costs. 

The True Cost of Freight Claims

Freight claims are an “Iceberg” cost, and the associated direct and indirect costs of delays, customer satisfaction and reputational damage can be significant. When we calculate the bottom line cost of the freight claim, and relate that to our revenue requirements to generate those monies, the true cost is significantly higher than the replacement invoice. Therefore understanding the true impact of freight claims is essential.  See our discussion and example on this concept at https://www.sclinksconsulting.com/services/how-effective-can-it-be

In Transit – Some Standard Conditions for Freight Handling

Are you shipping Truckload, LTL or courier?  In all of these modes, your freight may get stacked on, or it may be stacked. It will be nudged and bumped and lifted and twisted and leaned and banged; it may go over mountains at steep angles, into potholes, over poorly maintained railroad crossings; it may have to avoid a careless driver, or make a sudden stop; it may experience humidity or temperature changes. These are all standard transit conditions. Truckload shipments are handled at the time of loading and unloading – where damage opportunity is mainly from packaging and (un)-loading – which are shipper / receiver activities, making identification of the time of the damage relatively easy.  But an LTL shipment that is travelling across the country may be handled and trans-loaded 10 times or more before it reaches the destination. That’s a lot of damage-opportunity for the unprepared.  And it makes identifying where the damage occurred more difficult.  Remember, we are governed by our agreement (Terms of Carriage): all freight must be packaged to withstand these conditions if we want to ensure the carrier is legally required to respond to the damage. If those conditions are not met, then the carrier is not required to answer to the claim. Their position is, the freight was entrusted to the carrier in a negligently prepared condition, and the claim may be denied. It then becomes incumbent upon the shipper to disprove the carrier’s position. Your 3PL (if you are using one) won’t be responsible for any damages beyond the carrier’s liability either, unless you have specific wording in your agreement. They may be a party to the process if they are paying the freight charges, but they likely don’t have any liability above the carrier’s (some conditions may apply where this is not the case, but those are outside the scope of this discussion). And, again, there are libraries of legal precedents, and more than one quite successful law firm, based on these matters.

Ever notice how many high value important documents and shipments are sent by courier? Did you know that unless you declare an additional value and pay an additional premium, the maximum liability on the part of the courier company is $100.00?

 So be prepared. Package it; secure it; label it.

Processing a Claim 

If you do experience a claim, take a few steps to help process it quickly and efficiently:

1 Note on the carrier’s Bill of Lading that the shipment was received damaged or crushed. Be specific “3 of 5 skids crushed / damaged”. Keep a copy of this document. Make sure the delivering carrier leaves with an original signed copy of the notated damages.

2 Take photos as soon as you notice the damage – on the truck is best. Then more as you unpack and determine the extent of the damage. 

3 Notify the carrier (or 3PL if they are acting on your behalf), immediately.

4 Itemise the extent of the damage. How many pieces? Cost per item.

5 Collect an invoice for the damaged parts. What you sold them for (shipper is placing the claim) / bought them for (receiver is placing the claim).

6 Send items 1, 2, 3, 4 and 5 to the carrier (or 3PL, as appropriate), along with your contact information and the carrier Freight bill #.

7 The carrier has a right to request and inspect the freight, and you a responsibility to make this available.

8 If you are processing the claim, most carriers have an on line claims process, but they aren’t always easy to find. You may need to use the search function.

9 It can take up to 90 days for a claim to be processed. The charges for transportation must be paid in order for the claim to be processed. Be sure monitor the claim, ask for updates at 30, 60 and 90 day intervals if you haven’t heard anything. If the carrier has an online function to process the claim, look at its status – sometimes you will see notations that they require additional documentation. You may or may not receive this request directly from the carrier.

10 Be aware, all parties in the transaction have a legal obligation to mitigate any costs arising from the damage claim at each stage. As a receiver you must exercise diligence in handling, and holding for inspection, the damaged shipment so as to not incur additional damages. This includes a right on the part of the carrier to salvage the damaged items. If you do not permit salvage for any reason, this may impact your settlement.

 

Concealed damages (where you discover the damage inside the packaging, usually after the carrier has left) present an additional level of challenge. Timelines for reporting, and the ability to assign the cause of the damage to the carrier are much more difficult in these scenarios. The claim should still be initiated, and the steps identified above (where applicable) should be followed, but be prepared to go to significant lengths to establish carrier liability. And while some concealed damages can be proven to be the carrier’s liability, by far the most common cause of concealed damage is inadequate packaging.

Managing the Process

 

How and what do you ship?

Interested in more support or information on this topic? Speak with a professional.  With over 30 years of managing claims as a shipper, as a carrier, and as a 3PL, Links Consulting is well versed in the regulations, limitations and documentation requirements to realise the most beneficial outcome. Invest a little time with us. We can advise you on the most cost effective solution. Or, let us manage your claims for you.

What mode are you shipping? Truckload, LTL, courier? How much does it weigh per cubic foot? We can help identify packaging that meets your freight’s needs. You prepare it, label it, and secure it.  Basic, inexpensive procedures at the point of packaging can effectively eliminate the majority of in-transit claim costs. And when a damage does occur, you will be able to maximise the amount recovered.  

 

 

Got questions? Need help? Contact us for more information. Want us to process the claim? Send us an email or give us a call.

[1] See “Packaging Standards” last page

*Packaging Standards 

 "Annual Book of ASTM Standards", Volume 1 5.09, ASTM International, 100 Barr Harbor Drive, W.

Conshohocken, PA 19428-29 59, tel. 610-832-9 58 5, http://www.astm.org

 "ISTA Resource Book", ISTA, 1400 Abbott Road, Suite 160, East Lansing, MI 48823-1900, tel. 517333-3437, http://www.ista.org

 ISO Standards, available from American National Standards Institute (ANSI), 2 5 West 43rd Street,

New York, NY 10036, tel. 212-642-4900, http://www.ansi.org  

 "National Motor Freight Classification", available from National Motor Freight Traffic Association, 1001 North Fairfax St. Suite 600, Alexandria, VA 22314-1 503, http://www.nmfta.org, tel. 703-8381810