If you are moving product from one location to another with a freight company do you know the amount of risk  associated with this movement?  In most cases the freight is protected from loss or damage to some extent, but the amount of protection can be dependent on how you negotiate the transportation contract or the freight classification that is assigned to the shipment.

In nearly all shipments a standard release rate is provided that establishes a reimbursement to the owner of the goods based on the weight of the shipment, or a standard amount per shipment.  In the case of UPS, the standard release rate is $100.00 per shipment.  In standard tariff the amount can be $50.00 per shipment or $0.50 per lb per article up to the cost of the product. 

Carriers are required to provide an option to allow for greater coverage up to the cost of the goods.  They can do this several different ways including:

  • Establishing a full valuation tariff, typically at a higher cost per cwt. 
  • Provide “additional valuation” at a set rate for every $100 of declared value. 
  • Provide a one time insurance policy through an insurance company (not the carrier) for the value of the shipment. 

Needless to say these and other options will all have specific exclusions on what does and doesn’t constitute a claim.  You should read your contract carefully to fully understand your duties and rights for coverage.

So, what options are best?  It depends on several factors but primarily the cost of the goods, the loss ratio, and your appetite for risk.

Let’s work through an easy example to identify on how these three items work together:

You are a furniture e-tailer that ships a bedroom set of furniture from the distributor to your customer.  You have negotiated a good contract with the carrier with a standard release rate of $0.60 per lb per article.  You have shipped a 5 piece shipment to your customer with a total weight of 400 lbs (2 items at 60 lbs, 1 item at 80 lbs. and 2 items at 100 lbs.) with a wholesale cost of the goods shipped at $1500.00.  Unfortunately, the shipment is not delivered and after a short time, the carrier declares it lost and indicates you should file a claim for the missing product.   The wholesale cost of the shipment is $1500.00. 

The carrier provides an option to ship the product with full coverage at an additional cost of $1.25 for every $100.00 of declared value.  The cost of this shipment would be $18.75.

Now we look at the company’s tolerance for risk:

  • If you are have a very low tolerance for risk, you would probably choose to include full coverage on every shipment.  It will assure payment in full on any loss or damage that is related to improper handling by the carrier. 
  • If you have a high tolerance for risk, you would not even consider choosing the full valuation option. 
  • If you are somewhere in the middle, then you will want to review historical data and determine what the “tipping point” is where the cost of risk is greater than the actual cost of protection.  Once this is determined, you may take several different steps such as purchasing the additional coverage from the carrier, or establishing an accrual account based on estimated costs and debit against this account.

The loss ratio with the carrier is 0.5% or 1 shipment lost for every 200 shipments.  When we compare the cost for full replacement coverage against the retained loss for the shipment, we see that 67 shipments at $18.75 per shipment would need to be covered to equal the retained loss, or the equivalent of a lost shipment ratio of 1.49%.

  Rate Extended Amt
Cost of product   $1500.00
Maximum allowance on std release rate $0.60 per 100 lb $ 240.00
Retained $ Loss   $1260.00
Cost of Additional coverage $1.25 per $100 $  18.75
Number of shipments to equal $ loss* $1260.00 / $18.75 67
Loss incident ratio to equal cost of coverage   1.49%
Current loss incident ratio   0.50%
* based on similar declared value

With a lost incident ratio of 0.50%, the retained loss amount is $6.30 per shipment (based on all shipments being $1500.00 value) or $0.42 per $100 of your cost. 

Naturally this is a very simple example and does not factor into consideration all the shipments and claims processed and looks only at a lost shipment, not a damaged shipment which could have a lower retained expense, but it does provide you with some thoughts on how to look at the potential claim costs associated with your products while in transit.