Loss of processing goods: who is responsible?

Phương Ấu Tài | General Director, TIS Vietnam Insurance Broker  |  Series: What businesses should know about insurance

Vietnam is one of the region’s major hubs for manufacturing and export processing. In industries such as textiles and garments, footwear, wood and furniture, electronics and many other export manufacturing sectors, it is very common for a business to receive raw materials, semi-finished goods or finished goods from its customers for processing.

This also creates a very particular risk: there can be assets worth tens, even hundreds, of billions of dong sitting inside the factory that do not belong to the business.

Insurance renewal season is approaching. For processing businesses, this is the time to re-check an easily overlooked item: are the raw materials, semi-finished goods and finished goods of the goods owner (the party placing the processing order), held at the factory, actually fully insured?

This is a point processing businesses should check carefully before this year’s renewal.

Ownership and responsibility do not always sit with the same party

Suppose Company A hands over raw materials worth VND 20 billion to Company B for processing. While the goods are at B’s factory, a fire breaks out. The goods still belong to A, but that alone is not enough to determine who bears the loss. It is necessary to review the processing contract, responsibility for safekeeping, the agreement on allocation of risk, the cause of the loss and each party’s responsibility.

As a general principle, the owner of the materials bears the risk in respect of the materials, and of the products made from them, until the products are delivered, unless the parties agree otherwise. However, B has an obligation to safeguard the materials it has been given. If the loss relates to B’s breach of its safekeeping obligation or of a responsibility it has committed to, B may face a compensation claim from A, potentially up to the full value of the goods. Not to mention the risk of losing orders and standing with the goods owner.

So when looking at a loss, three separate questions should be asked:

• Who owns the goods?
• How does the processing contract allocate risk?
• Does the processor incur a liability to pay compensation?

Having property insurance does not mean the goods owner’s goods are insured too

That a business has insured its factory, machinery and goods does not mean that the goods owner’s goods at the factory are automatically covered.

The business needs to check whether the policy covers the goods owner’s property that it is holding, managing or controlling. If it does, the schedule of insured property should show clearly whose goods they are, and the sum insured for this item should be checked against the actual value of the goods.

“Insuring your own factory, machinery and stock does not mean your customers’ goods are covered too. It is an easy gap to overlook, and it usually shows itself only when the processor needs insurance most.”

— Phương Ấu Tài | General Director, TIS Vietnam Insurance Broker

The goods owner has bought insurance, yet the business can still incur liability

A fairly common thought is: “The customer has already insured its goods, so the business no longer needs to worry.” Not necessarily.

After compensating the goods owner, if the loss is the processor’s responsibility, the goods owner’s insurer may require the processor to reimburse it, up to the amount paid. This depends on the cause of the loss, the parties’ responsibilities and the contract terms.

In other words, the goods owner having insured its goods does not mean the processor is relieved of responsibility for the loss. The business may still face a reimbursement claim from the insurance company.

That is why this is also a point both parties should clarify when signing the processing contract and reviewing the insurance policy.

Don’t just look at the value of goods today – look at the peak

Processing goods fluctuate greatly with orders and seasons.

At some times a business may hold only VND 20 billion of goods belonging to goods owners, but in the peak season this figure may rise several times over.

If the insurance programme is designed only on average value, and a loss happens exactly when goods are at their highest concentration, the sum insured may not be enough. So the business should determine the value that goods owners’ goods may reach at their highest during the policy period, instead of looking only at the figure on the renewal date, and also discuss with its advisor an appropriate approach to declaring and adjusting the sum insured.

“Right and sufficient” starts with clearly identifying the assets and the responsibility

There is no single insurance structure that suits every processing model.

Before each renewal, a business should look across a whole chain:

Who owns the goods → who bears the risk and is responsible for safekeeping → the point of handover and receipt of the goods → the value the goods may reach at their peak → the scope of property and liability cover → the right to seek reimbursement after a loss.

In particular, the processing contract and the insurance contract should be reviewed together, because what a business commits to the goods owner in the commercial contract can directly affect its responsibility when a loss occurs.

From an advisory perspective, TIS always reminds clients:

“Don’t wait until a loss happens to ask: “Whose insurance policy does this cargo belong to?” For a processing business, the assets to care about are not only what it owns, but also what it holds, manages and may be held responsible for.”

— Phương Ấu Tài | General Director, TIS Vietnam Insurance Broker

Clarifying this in advance helps the business limit under-insurance or double insurance, and identify responsibilities that are not yet properly protected.

3 questions a business should answer before renewal

• Does the current insurance policy cover the goods owner’s goods that the business is holding, and does the schedule of insured property show clearly whose goods they are?
• What is the value of the goods owners’ goods at the highest point in the policy period, and is the current sum insured enough?
• What does the processing contract say about the business’s liability, and do the existing insurance policies protect it appropriately against that liability?

If even one answer is “not sure”, that is already a reason to review before renewal.

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* This article is for general information only and does not replace insurance or legal advice for a specific case. Coverage depends on the terms of each insurance policy and processing contract.