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Spilled the beans? No worries!
June 21, 2018
This is Part 1 of a 3 part series on Damaged Goods.
We recently had a great claim outcome for a customer: XL Catlin and some damaged goods - garbanzo beans to be exact. While companies experience small losses all the time, this one showcases a best practice that all companies can benefit from.
The manufacturers stored their garbanzo beans in a warehouse that flooded due to heavy rains. Portions of the product were affected. What typically occurs is the company simply disposes of any damaged products to a salvor and then files a claim. In this case, however, the company had already in place a process to sell any beans deemed non-prime to a third party in a secondary market. Their immediate response to the flooding? Separate the good beans from bad and get the best return on the bad. They sold the ‘bad’ beans as livestock feed. By doing so, the Insured benefitted financially and reduced their claim to zero. This outcome is uncommon, but surely a win-win for all involved.
Damaged goods happen: goods stored in a warehouse get wet; designer clothing packed in a cargo container that’s damaged in transit are determined to be damaged at delivery; and so on. What results are large financial losses to companies and big claims for insurance carriers, but it doesn’t have to be that way. Secondary markets give new life to salvageable items with great results for the Insured and reduced insurance claims, too. They provide outlets for damaged goods that can be bought and sold as valuable to unintended, but important markets.
The marketplace overall for damaged goods, returns, overstocked items and the like, is experiencing impressive growth. In fact, it’s one of the fastest-growing segments of the U.S. economy, rising from $310 billion in 2008 to $554 billion in 2017 – a 79% increase – according to Zac Rogers, a supply-chain expert at Colorado State University. One only has to look at the proliferation of discounted department and bargain stores, the popularity of flea markets, online auctions and outlet stores—and our own shopping habits – for proof. Clothing marked “irregular”, labels on consumer goods at the dollar store that are slashed or in another language – these are all indicators the property may have been in an accident, or that a container was compromised or otherwise rejected by the intended retailer.
There are many benefits to moving damaged goods to a secondary market. Insured’s can offload the product relatively quickly. It benefits the insurance company if the claim pay-out decreases. The insured’s loss ratio will be lower at renewal, which means they’ll be less likely to have a change in terms and conditions or price increase.
This last point, in particular, is significant because a loss stays on a company’s loss runs. Therefore, it is in a company’s best interest to have a plan in place to offload damaged goods when possible. While some clients take the position “that’s what I buy insurance for”, they don’t realize that the loss experience lives on. Other carriers may decline to provide coverage when seeing a large claim. Conversely, a client with a high recovery ratio has an advantage. It means that, even when they have claims, they pass on a smaller net loss to the insurance company.
Contingency planning for salvageable goods reduces claims and can lead to better rates.
Companies that produce goods of any kind should be proactive about managing risk when getting their goods from point A to point B. Aside from preventing a loss altogether, they need to think about how to control a potential claim. An Insurance Broker who helps an Insured think strategically about how to mitigate claims will have an edge on the competition.
An insurance carrier can encourage brokers to think in advance about what secondary markets to approach. In addition, brokers who’ve already identified secondary markets can make underwriters much more comfortable in assuming the risk. Advanced planning may have an impact on rates, terms and conditions if underwriters know a secondary market instead of a salvor will be used.
Oftentimes a claim happens and everyone scrambles. Pre-planning on the part of the insured and the broker goes a long way in securing favorable terms from the insurance carrier.
Clients want to minimize any impact on their business. They don’t want claims. But if losses occur, they want the process to be as simple and as fast as possible so they can get back to business. The party who can facilitate this process will surely benefit. A broker who asks the question “What secondary market might be appropriate for your goods?” demonstrates they have a vested interest in and a real understanding of the insured’s business. It eliminates any finger pointing in regards to market exposure. And it can increase client retention, which impacts the broker’s bottom line.
About the Authors
Andrew D’Alessio is XL Catlin’s Ocean Cargo Product Leader in the Americas. Conor Murray is Head of Marine Claims, North America. Have the potential for some spilled beans of your own? Reach out to Andrew at firstname.lastname@example.org to discuss our available insurance solutions.Look forward to our next article, when we will discuss what happens when true loss happens and salvage occurs.
- About The Author
- Andrew D'Alessio
- Americas Ocean Cargo Product Leader,and Conor Murray,Head of Marine Claims,North America