What Happens When There is a Loss?

By Allan Finn, Director of Global Commodities, Malca-Amit

The physical precious metals market, like all markets, has many risks. A successful logistics operation requires a thorough understanding of the risks and knowledge of how to mitigate them where possible. Reputational risk, regulatory risk, and credit risk are all factors considered and managed in-depth by logistics providers.

Precious metals are inherently valuable and therefore the risk of theft of metal is always present. As a logistics provider it is dangerous to become complacent with the significant values being handled daily – the movement of hundreds of millions of dollars from country to country is extraordinary and robust security measures always need to be maintained.

Handling Shipment Robberies: the Claims Process and Liability

So, what happens when external factors intervene, and a shipment is targeted by thieves? Readers are probably aware of the recent robbery of gold at Toronto Airport in April 2023, where US$20 million worth of gold was stolen (at the time of writing, the gold has still not been recovered). A robbery like this prompts the need for understanding the general investigation and claims process that will run concurrently with any media hype.

For those affected by a loss of goods or precious metals resulting from a robbery, it is worth understanding the general investigation and claims process that will run concurrently with any media hype. A robbery like the one at Toronto Airport is one of the simpler examples, as the gold was proven to be stolen and therefore easily defined as a “total loss”. It goes without saying that any loss needs to be established through thorough investigation, which involves liaising with anyone who handled the goods, law enforcement, and other relevant stakeholders such as loss adjusters appointed by an insurer. If a total loss scenario has been factored into in a company’s risk assessments, the owner of the goods may find that the Total Loss can be reimbursed, and it is at this stage important to understand the term “liability”.

Liability and Insurance in Logistics

In the context of a logistics provider, liability is the responsibility assumed by the logistics provider to safeguard the goods in its custody and control. The extent of the logistics provider’s liability is set out in the logistics contract and the liability is often capped. A prudent logistics provider will insure its liability to be sure that there is money at hand to reimburse the customer in the event of a total loss. There are different ways to insure liability and risk of total loss. The logistics provider may choose to place polices with reputable insurers and regulated markets, they may “self-insure” the risk and manage it internally with their P&L, or they may choose to combine market insurance and self-insurance.

It should be borne in mind that the liability assumed by a logistics provider (whether or not such liability is insured) is different from insurance. A logistics provider cannot insure the goods as it has no insurable interest in them. Only regulated insurance companies can offer insurance coverage to interested parties for the goods themselves.

For a secure logistics provider such as Malca-Amit, the scope of liability and liability caps included in our logistics contracts are generous and far exceed the low liability caps stipulated in international shipping conventions. Malca-Amit generally caps its liability to the values declared by the customer but in the context of gold and silver bullion, the London Bullion Market Association’s (LBMA) published price combined with the fine weight of the lost metal is used to determine the cap on Malca-Amit’s liability. The use of the LBMA price is a more practical, transparent, and independent method and today also market standard.

Settlement and Recovery

Only the customer that signed the logistics contract may make a claim for total loss against the logistic provider and benefit from the agreed liability cover. The customer may not always be the ultimate owner of the precious metal, which the logistics provider will not have visibility of, but the customer must claim anyway as the logistics provider has only agreed to compensate its counterparty for a total loss. Once a claim has been lodged and the total loss confirmed then payment to the customer is made as swiftly as possible. Insurers are acutely aware of cash flow implications and the reputational risk of not settling claims in good time, and where facts are clear payment normally follows quickly.

The final part of the claims process for the customer is the execution of settlement and release documentation. The customer needs to agree to the terms of settlement, principally the size of compensation to be paid, and agree to pass title to the goods to the logistics provider and/or its insurer, should goods later be recovered.

Learning from Incidents and Future Risk Mitigation

Customer’s receipt of compensation for the total loss will end its claim process, but for other parties involved in the incident, the process is far from over. Logistics providers will carry out a full review of the incident, identify weaknesses, vulnerabilities, and new risks and take steps to prevent any chance of reoccurrence. In addition, insurers will seek to recover the goods with the cooperation of law enforcement or any other relevant organisations.

INSURERS WILL SEEK TO RECOVER THE GOODS WITH THE COOPERATION OF LAW ENFORCEMENT OR ANY OTHER RELEVANT ORGANISATIONS.

An interesting example of insurers’ perseverance was the recovery of the Polar Mist, a ship contracted by a logistics provider to move US$17 million worth of precious metals along the Patagonian coast. The Polar Mist sank enroute in January 2009 in 80 metres of water, with gold valued at US$857 per troy ounce. The claim was settled with the customer, and insurers subsequently launched a recovery operation. In 2011, all the gold was recovered and legally owned by the insurer at a price of US$1,780 per troy ounce. The change in global price more than compensated for the recovery operation costs.

Understanding Your Risk in the Precious Metals Market

To help understand your risk when participating in the physical precious metals market, it is important to understand:

The difference between liability and insurance.
Your place in the contractual liability chain.
Your risk appetite and the risk appetite of your chosen logistics provider.
What contractual liability your logistics provider is offering.

Thankfully, large losses are few and infrequent. An understanding of the process and terminology will, however, make the process easier should an unfortunate event materialise.

ALLAN FINN is the director of global commodities Malca-Amit, a storage and logistics company specialising in precious metals, jewellery, fine art. He has been with Malca-Amit for a decade and has a total of over 15 years of logistics experience.