A stock throughput policy (STP) is used to insure items from the time they are shipped, manufactured, processed, stored as inventory, and eventually delivered to their final destination, be it a storage facility or customers’ locations.
This insurance may offer broader coverage than a traditional property policy or standalone cargo policy, as it covers your goods through the full extent of the supply chain cycle and eliminates any question or gaps as to where coverage under one policy ends and another begins.
Stock throughput policies extend the cargo policy to include coverage for goods insured while they are under a process or being worked upon, such as during manufacturing or assembly, for physical loss or damage from an external cause that is not part of the manufacturing or assembly process (i.e. fire at the manufacturing plant). STP does not cover manufacturing defect or contamination caused by the manufacturing or assembly process itself. Many cargo brokers and insurance professionals will recognize this as the process clause.
The process clause excludes loss or damage caused by or resulting from an error, human or machine, that occurs while under a process. Over the years, Cargo markets have further clarified contract clauses that losses for damage or contamination that makes the product useless or dangerous are not covered by the stock throughput policy if caused during the creation, adjustment, or finishing of the product.
The following case study demonstrates an example of such damage that occurred during a manufacturing process, that would fall into this gap, and not be covered, by a traditional STP:
Insured makes wax pins that are embedded into the engine and control the amount of coolant released into the engine. As the engine heats up the wax expands, and the pin triggers the release of coolant. As the coolant cools the engine the wax contracts and restricts the flow of coolant. Unfortunately, due to an incorrect heating process during manufacturing, the wax was splitting instead of expanding and this was causing engines to overheat and cut out. Although the part only cost less than $0.50 and was fit to 15k vehicles, resulting in a loss of parts valued at $7,500. However, stockthroughput policies do not cover loss of use or financial loss resulting such as product recall. In this example, the overall cost of the recall due to the dangerous parts was well over $2M for the time taken for engineers to replace each part on the vehicle.
Had the insured supplemented their STP with a Product Defect Recall and Contamination (PDRC) policy, this process error would have been covered and saved them millions. Without a PDRC policy, the insured would have had to spend hundred of thousands identifying where in the supply chain the wax became faulty only to discover it was caused during the manufacturing process itself, which is excluded by the STP.
No matter the stage of your inventory – raw materials, semi-finished/work in process, or finished goods – an STP and PDRC policy unification can protect insureds from physical damage during AND BY the process. For questions, please click here.
