What service do you provide?
1) Do you act as an International Freight Forwarder?
This operation often offers a multitude of services, where each assumes different liability. For example, you may act purely as freight forwarder or domestic freight broker moving cargo either for export/import or domestic transit. This may be done through the use of a third party carrier including trucking operations, airlines, steamship lines or rail carriers. Your service may include deconsolidation and consolidation of cargo preparing for export in ocean containers or dealing with it on import shipments. For imports a very critical service you may provide is seeing to it that proper documentation is provided. This among other things confirms the shipper’s have been paid for cargo imported prior to releasing cargo to the consignee or their agent.
2) Do you act as a Custom House Broker?
This operation includes processing documentation, collecting duty, the purchase of U.S. Custom bonds on behalf of importers, etc. These processes all relate to the importation of cargo into the U.S. In providing such services, you may operate under specific trading terms and conditions. A common format approved by the NCBFFA (National Custom Brokers and Freight Forwarders Association) is used by many firms and has been used effectively to limit liability to $50 a shipment or entry. Trading terms are often posted on their web site, as well as on the back of the CHB’s invoices. Ideally you have clients sign a contract where these terms are reflected which, among other things, confirms the services you will provide, the charges associated with your services, the responsibilities of the parties involved and the extent of the logistic firm’s liability. If the Shipper/Freight Forwarding contracts are in place and signed by both parties, it is common that they do not have to be issued and signed for each and every shipment in a similar fashion to bill of ladings. As the contract lays out there will be a steady stream of shipments and this contract is intended to address the above issues.
3) Do you act as an NVOCC (Non Vessels Operating Common Carrier)?
NVOCC’s issue House Ocean Bill of Ladings. With this your clients are reflected as the shipper and consignee. They then make arrangements with actual ocean carriers for the actual transit, who in turn issues the Master Bill of Lading where you are reflected as the shipper and an agent you assign at destination is reflected as the party to receive cargo. Ocean bill of ladings, among other things, speak to the extent of liability assumed by the NVOCC and the actual steamship line. These are issued on a shipment by shipment basis. There is often reference to COGSA “the Carriage of Goods by Sea Act” in Ocean Bill of lading formats, as well as Hague Visibly. COGSA applies to shipments to and from the U.S. The essence of COGSA suggests that an ocean carrier liability is limited to $500 a shipping unit, which, depending on how the bill of lading is issued, could be $500 for an entire container. There are often other exclusions commonly present in the bill of lading which could invalidate any liability for the ocean carrier. The reason why owners of cargo should have Shipper’s Interest Cargo insurance in effect is due to the fact that steamship lines and NVOCC’s can limit their liability. Shipper’s Interest Cargo Insurance protects the owner of cargo for the total insured value of a shipment (commonly the C.I.F plus 10% value of the product) should it be lost or damaged in transit. It is common for International Freight Forwarders to have a “Shipper’s Interest Cargo Insurance Policy” in place so they can offer this form of coverage to their customers. The cost of the insurance is passed along to shipper or consignee. It is common to see a fee added to cover the expense of administrating this cargo insurance. The policy form is NOT a legal liability format, but rather a direct physical damage form of coverage. With this you do not have to prove who is liable for the theft or damage of cargo, but rather that it took place during the course of an insured shipment. Shipper’s interest cargo insurance also protects the owners of cargo and freight forwarders for General Average claims which can be significant. General Average is a principle of maritime law where in the event of an emergency, such as the cargo is jettisoned or expenses incurred due to the emergency, that loss is shared proportionately by all parties with a financial interest in the voyage.
4) Do you act as an “Indirect Air Carrier”?
An Indirect Air Carrier offers a service similar to that of an NVOCC, and typical operations are that of issuing the House Airway Bill. The liability of International Air Carriers was established by the Warsaw Convention which limits an air carrier’s liability to $9.07 per lb. Once again, this limited liability creates the need for a Shippers Interest Cargo Insurance.
What is the understanding between you and your client on the extent of liability you assume if something goes wrong? It is important that your client understands the extent of your liability for the services you offer to them. As noted above, it is common practice for an international freight forwarder to operate under the trading terms and conditions of the NCBFFA (National Custom Brokers and Freight Forwarders Association). It is wise to have specific contracts in place with clients so everyone understands the responsibilities and extent of liability assumed by each party. Having awareness of each parties liability helps to identify where and when insurance coverage should be in place.
Insurance Policies to consider as an International Freight Forwarder.
Shipper’s Interest Cargo programs. It is common practice for international freight forwarders to have shipper’s interest cargo insurance programs in place. This allows the freight forwarder to put a very broad form of “direct” physical loss or damage coverage in place for the cargo in which they organize international transit on. This coverage is “Customer Friendly” in that, when a claim occurs, the principal issue that has to be proven is that the cargo did suffer physical loss or damaged during the insured transit in order to be collected.
The Shipper Interest program effectively covers both the freight forwarder and their clients because the freight forwarder is a named insured under the policy. Practically speaking, their client should be indemnified for covered cargo claims, which then gives their client no cause of action against freight forwarder. The freight forwarder is protected from recovery actions/subrogation claims by the insurance carrier providing this coverage as they are a “named insured” under the policy which prevents the insurance carrier from claiming against them. Furthermore, subrogation claims will be pursued against the actual transportation company who provides the transport and who had it in their care, custody and control when the claim occurred.
The premium associated with this coverage is typically generated by reporting each shipment through a “Cargo Insurance” web site specifically set up for a freight forwarder. A rate is established depending on factors such as the transit involved, whether it is an ocean shipment or an air shipment, etc. The premium associated with the shipment is billed to the freight forwarders client and collected along the freight costs associated with the shipment. Many freight forwarders charge a service fee for putting this coverage into effect and offering this service actually becomes another profit center for many forwarders.
The Shipper Interest program effectively covers both the freight forwarder and their clients because the freight forwarder is a named insured under the policy. Practically speaking, their client should be indemnified for covered cargo claims, which then gives their client no cause of action against freight forwarder. The freight forwarder is protected from recovery actions/subrogation claims by the insurance carrier providing this coverage as they are a “named insured” under the policy which prevents the insurance carrier from claiming against them. Furthermore, subrogation claims will be pursued against the actual transportation company who provides the transport and who had it in their care, custody and control when the claim occurred.
The premium associated with this coverage is typically generated by reporting each shipment through a “Cargo Insurance” web site specifically set up for a freight forwarder. A rate is established depending on factors such as the transit involved, whether it is an ocean shipment or an air shipment, etc. The premium associated with the shipment is billed to the freight forwarders client and collected along the freight costs associated with the shipment. Many freight forwarders charge a service fee for putting this coverage into effect and offering this service actually becomes another profit center for many forwarders.
Cargo Legal / Errors and Omission policy. The fact alone that most freight forwarders have the option but fail to insure every shipment provides great reason supporting the need to have a Cargo Legal / E&O policy. Cargo Legal/E&O can be designed to address the “legal liability” exposure to cargo moved for clients. A Cargo Legal/E&O policy is not a customer friendly policy, it is rather one that is designed to “defend” the freight forwarder from claims and law suits. One of the principal benefits for covered claims is legal representation and the costs associated with it being assumed by underwriters up to the policy limits in place. The costs can vary significantly in defending one's self, even if it is apparent the company doesn’t have liability under law. Just the costs to extricate the insured from a law suit can be monumental. There is no major down side for a plaintiff’s attorney to drag in as many parties as possible into a law suit to leverage some type of settlement. The cost to defend oneself versus making some type of settlement will often motivate a defendant to end the bleeding and make some type of offer. It then just becomes an economic reality to pay them something to go away and stop the costs of legal representation. This is an unfortunate result of the legal system in the U.S. where losers of law suits are not forced, in most cases, to respond to the defense costs of defendant. In many other countries in the world a plaintiff must pay the expenses of their legal counsel who can’t work for a contingent fee. In additions plaintiff’s who lose their case can be forced to pay the defense costs of a defendant. This helps to avoid a significant volume of law suits but it highly unlikely this will ever be adopted in the U.S. in our opinion.
General Liability policy. This is the most common type of business liability insurance. It is intended to cover legal liability for bodily injury, death and third party property damage. For example, should someone be visiting your office and slips and falls and then sues you for bodily injury. A general liability policy would provide your legal defense and pay any settlement amount you are legally obligated to pay. Some forms are broad enough to address exposures such as third parties who are injured or killed during the unloading of cargo. Other exposures that can be covered by General Liability policies include Personal/Advertising injury, Fire Damage Legal Liability, or Medical Payments to name a few.
An insurance agent can also help with interpretation of the policies that are put in place. It is important for your agent to fully understanding the full extent of services you offer, understand the nature of your client base and the cargo you typically move in order for them to put the proper policies in place.
Other typical Insurance policies in place for an international freight forwarder include the following:
- Contingent Auto Liability Policy.
- Crime and Employee Dishonest coverage.
- Property Insurance – Covering owned building and/or contents.
- Business Auto – Non owned and hired coverage
(if employees use their vehicles for company related work).
- Umbrella policy – Increasing the limit of GL, Auto Liability or Employee Liability policies.
- Workmen’s Compensations with employee liability coverage.
An insurance agent can also help with interpretation of the policies that are put in place. It is important for your agent to fully understanding the full extent of services you offer, understand the nature of your client base and the cargo you typically move in order for them to put the proper policies in place.
Other typical Insurance policies in place for an international freight forwarder include the following:
- Contingent Auto Liability Policy.
- Crime and Employee Dishonest coverage.
- Property Insurance – Covering owned building and/or contents.
- Business Auto – Non owned and hired coverage
(if employees use their vehicles for company related work).
- Umbrella policy – Increasing the limit of GL, Auto Liability or Employee Liability policies.
- Workmen’s Compensations with employee liability coverage.
The devil is in the details, so take time to be as diligent as possible in evaluating the exposures your company will incur with the support of professionals dedicated to your industry. That will put you in the best position to design your Risk Management, Claims Control and Insurance program to address the exposures your firm could incur moving freight.
