Cargo Liability Insruance: Should Shipper's Share Liability with Railways

When it comes to Cargo Liability Insurance, North America's rail system is in a quandary.

Firstly, railroad operators are not allowed to refuse any cargo, no matter how hazardous it may be, as long as appropriate regulations are met. Secondly, current legislation deems railways liable for all damages incurred in any railroad mishap and up to an unlimited amount, even if the mishap did not occur due to railroad negligence. This is different from marine and air carriers who may limit their liability as a condition of carriage.

Backed by the Association of American Railroads (AAR), these rules have been under review since a disastrous accident in Quebec, Canada, last July forced a small railroad to file bankruptcy. 

Sixty-three (63) tank cars containing crude oil derailed in Quebec last July. Forty-two people died and the town center was destroyed. Reparations, including clean-up and compensation for death, injury, and property damage, will cost hundreds of millions of dollars. The small railroad, Montreal, Maine & Atlantic, had liability insurance of only $25 million. Overwhelmed by the costs of the accident, the company filed for bankruptcy a month later. 

Some believe the minimum amout of cargo liability insurance required by railways should be raised. This requirement alone may put some small railroads out of business. Others, like the AAR, insist that there simply is not enough coverage possible to adequately address catastrophic events like that in Quebec.

Other measures are taken when shipping hazardous cargo by rail. Trains carrying dangerous materials are designated as "key trains" and held to speed restrictions, prioritized over all other trains on the network, and are routed away from heavily populated areas when possible.

Railroad advocates insist the best solution is shared liability between shipper and railway as a condition of carriage. Such an arrangement will boost coverage in the event of an accident. Some claim it may also motivate shipping companies to take better safety precautions when preparing materials for shipment.

Hazmat shippers disagree, citing their rail transportation rates were already increased in order to compensate for risks. Shippers also claim that keeping liability assigned to railroads maintains higher standards for safety and accountability.

Ocean Freight E-Commerce Standards for International Freight Forwarding

The EIPP Standards Advisory Board, established in 2010, is comprised of a self-funded global team of ocean industry leaders.  Conceived as a neutral forum for the top ocean carriers and international freight forwarding executives to partner with customers; its purpose is to expedite e-commerce best practices for success in a digital world.  This independent body has regular meetings to collaborate on, and advance e-Invoicing messaging and process standards for ocean freight commerce.  This November, the organization focused on enhancing the best practices already under development.  The discussion centered on three such processes.

One of the items on the agenda was A Payment Advice Process for invoice payments including the use of electronic messaging to provide remuneration information to collectors.  The process will ensure that all participants share understanding of how using remittance messages can automate IT processes for payment applications and proper payment verification.

Another discussion covered A Credit Note Process to streamline the issue and sending of electronic credit notes whose purpose is to correct prior invoices or shipments from ocean carrier to shipper.  In this case, it helps create a converged understanding of the process for exchanging messages in the ocean freight industry. It also supports the automation of credit note acknowledgement, confirmation, accounting, auditing, and reporting for tax purposes. 

Recognizing the value of electronic invoicing in enhancing customer collaboration, efficiency and cost savings;  the players in the ocean freight industry are becoming more demanding of improvements.  Further development of relevant EDI message guidelines will encourage adoption and sustained e-invoicing in ocean freight commerce.  Electronic invoicing standards which satisfy market demands will lead to instant information delivery, automatic routing to the appropriate parties and improved lead time for speedy invoicing.

Every day millions of tons of freight travel the globe.  Every step produces documentation related to logistics, schedules, exports, imports, custom clearance, duties and more.  Requiring critical focus, the management of information in ocean shipping is uniquely challenging due to the complexity of rate and contract administration.  Embracing established best practices of the latest developments in e-commerce will help advance and streamline the international freight forwarding industry

Is The Carmack Amendment Relevant In International Shipments?

International shipments are common in today’s global market with the result that it has become common for product shipment to cross borders to reach the consumer.  The distance and necessity for using different modes of transportation can lead to an increased risk for damaging accidents.

The Carmack Amendment provide a well-established procedure for handling such incidents that happen on interstate trucking shipments in the United States.  However, when an accident occurs in the domestic portion of an international shipment the applicability of the Carmack Amendment is a work in progress.

Currently the Carmack Amendment provides a  standardized national scheme of liability and damages for interstate rail and motor carriers in order to give certainty to both shippers and carriers.  One objective of the amendment is to relieve cargo owners of the onus of discovering which is the offending carrier among what is often a myriad of carriers involved in the interstate shipment of goods.

What is at question is whether the Carmack Amendment applies to multi-transit domestic segments of an international shipment which is covered by one contract such as a bill lading.

In a recent court case, Kawasaki Kisen Kaisha Ltd versus Regal-Beloit Corporation, the Supreme Court ruled that the Carmack Amendment does not apply to the domestic portion of a shipment that originated overseas under a single bill of lading.  Under the Carmack rules only the receiving carrier is required to issue a Carmack compliant bill of lading.  The receiving carrier as defined by Carmack is only the carrier who accepts the shipment at its point of origin. In the Kawasaki case the carrier, Kawaski received the cargo under a through bill of lading that covered the shipment to an inland location in the US and there was no rail carrier who was required to issue a bill of lading under Carmack. 

This Supreme Court decision thus limited Carmack application in international shipments.  However,  it left to open whether the Carmack Amendment applies when the goods intended for export are received in the US and whether it applies in instances involving a freight forwarder or other intermediaries.

More recent lower court rulings appear to expand the direction of the Kawasaki  Court Case with their conclusions that other bodies of law or contracts apply in the domestic portion of international shipments.  This trend of limiting application of the Carmack Amendment in the domestic portion of the international shipment provides strategies for carriers to avoid Carmack liability when drawing up contracts and in litigation.

Shipping Advantages Provided By an NVOCC (Non Vessel Owning Common Carrier)

Today when an International shipper is looking for their best options, they might want to consider the benefits of using a Non Vessel Owned Common Carrier (NVOCC).  These shippers are able to accommodate the needs of both large and small companies.  Many government agencies also regularly utilize the services provided by a NVOCC. 

According to an article in Maritime Journal, “The N.V.O.C.C. is a freight forwarder who sells a combined transport package incorporating a sea transit. He is not a ship owner, nor does he appear to be normally involved in the chartering of ships although no doubt he could do this.”  

OTI 

Prior to a company becoming a NVOCC, they will need to obtain their ocean transportation intermediary (OTI) license.  This means they will have to be qualified as a shipper by following a variety of steps required by the Federal Maritime Commission. 

Bills of Landing 

A NVOCC operates in the same way as any other cargo carrier.  They are able to issues bills of landing (BOL).  This is a document that confirms that goods have been taken on board a vessel.  It verifies the goods will be shipped to a particular destination and consignee for end delivery.  

Experience 

Most NVOCC shippers will have all the experience necessary to handle a wide variety of cargo types.  They will be able to do importing as well as exporting.  NVOCC shippers can handle everything from over sized items to temperature sensitive cargo and more.  

Tariffs 

NVOCC will file tariffs with necessary government regulatory bodies.  This will generate the required public tariffs.  

Experience 

An experienced NVOCC will know every important aspect of cargo shipping.  They will know how to successfully book space with shipping companies.  A NVOCC will be able to provide all required documentation for the shippers they utilize.  They will be able to coordinate the efficient delivery of cargo domestically as well as internationally.  

If you would like to know more about how an NVOCC (Non Vessel Owned Common Carrier) can meet your cargo shipping needs we can help.  Contact us today and learn more.

Pirate's Moving West

The recent attack by Somali-based extremists at a mall in Kenya has renewed discussion about Somali pirate attacks along key shipping routes.

The International Maritime Organization (IMO) initiated a long-term anti-piracy project in 1998, and it continues today. Through regional seminars and workshops for government officials from piracy-riddled areas and using evaluations and assessment missions, IMO has worked toward regional agreements for anti-piracy measures.

Although IMO's work has largely been toward creating a network of consistent and collaborative anti-piracy measures, their emphasis continues to be on self-protection. The best defense is a well-protected merchant ship.

There has been success in recent years, which has largely been attributed to $3 billion in annual spending on shipboard security and navy patrols. Thanks to increased shipboard defense spending, attacks off the Horn of Africa have fallen 70% since 2011. At a time when company and state budgets are seeing massive cuts, there is worry that reduced spending on shipboard defense measures will lead to a rise in Somali hijackings.

The conditions favoring Somali piracy have not changed. Poverty and instability in the region feed extremist movements. Merchant ships passing through the Gulf of Aden between Yemen and Somalia continue to be at risk.

With increased piracy activity, merchants and freight forwarders would likely see steep rises in ocean freight insurance premiums. A 2008 report on Ocean Piracy and Its Impact on Insurance described a dramatic increase in insurance rates after a surge of piracy activity between 2007 and 2008. In 2007, it cost $900 to insure a container. After a rise in pirate hijacking, that cost rose to $9,000 in 2008.

Regardless, all warn against complacency. Declines in pirate attacks have come at a significant financial cost. As conditions in Somalia remain unchanged and as companies examine budgets, defense against piracy remains imperative. A well-protected ship and insured cargo are the best defense against attacks.

The MOL Comfort Ocean Calamity

The Carrier of Goods by Sea Act states that the carrier is responsible for vessel seaworthiness, the safety of goods in route, and the proper manning of the vessel. Items the carrier is not responsible for include negligence of the master navigator, fire, accidents at sea, acts of God, acts of war, seizure, mutiny, insufficiency of packing of goods, and other situations in which the ocean carrier's actual fault is in question. 

Without ocean freight insurance, a company can be held responsible and liable for such incidents. In order to protect your company and your assets, a viable and comprehensive insurance plan must be set in place.

In June of this 2013, the MOL Comfort ocean container vessel fractured in two separate sections during an incredible storm on the Indian Ocean. The vessel suffered extensive damage to the bow and stern; as a result, the ship surrendered all of its cargo to the sea. Presently, officials are still rooting for the cause to the catastrophe aboard the MOL that caused such devastating loss. 

A possibility that is currently under investigation points to structural weakness that caused the wreck of the UK container ship, the MSC Napoli, in 2007. The investigation into the UK ship's demise showed flaws which were concluded to have been caused by a change in the hull design of the ship. The MOL Comfort ship was constructed one year after the Napoli, at which time the change in design of the hull had not yet been corrected. 

Following the MOL disaster, Mitsui OSK lines pulled the six sister ships of the MOL in order to inspect their hulls. Each were designed and constructed around the same time and at the same shipyard as the MOL Comfort and the UK's MSC Napoli. It is feared investigation will show discrepancies in the hull designs. 

At this time, insurance agents in the US feel the MOL disaster will not effect current insurance rates for cargo carriers. It is certain Mitsui's MOL disaster will send shockwaves through the Japanese ocean shipping market because of he number of ships involved in the bad hull design. 

Ocean freight insurance is sometimes a company's only defense from potential disaster. It is important to have a thorough and comprehensive plan and agents that have the knowledge to protect your investment even in the most unique situations. For more information, please contact us.

International and Domestic Freight Logistics Operations – A Review of Exposures and Means of Addressing Them.

International and Dometic Logistic Operations, Exposures reviewed.

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.

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.

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.