Many businesses depend on the daily export and import of goods. International shipping can increase the profitability of a business, whether through access to more consumers or the opportunity to purchase goods or raw materials at a lower cost. However, regulations, paperwork, manpower and other factors concerning international trading may be intimidating, and most businesses are not equipped to deal with the intricate logistics of such a task. Businesses can solve this problem by contracting with freight forwarders, who manage the shipments, as well as the hassles associated with the shipping process.
Freight forwarders act on behalf of importers, exporters and other freight forwarders to arrange the safe, efficient and cost-effective transportation of goods. Freight forwarders perform a complicated – and ever-evolving – array of services. From an insurance perspective, coverage needs can vary based on the services provided by each freight forwarder and the associated exposure.
Basic services provided by freight forwarders include but are not limited to:
Extended (and now common) services include:
Accurate analysis of an individual freight forwarder’s exposure depends on the services it provides and historical losses. Instead of a Named Perils Covered Policy, Freight Forwarders Legal Liability is a Named Services Covered Policy. A freight forwarder arranges all transportation, and even if it is not directly executing the carriage, it can be dragged into a legal dispute if the goods are lost or damaged during transit.
Determining the scope of a freight forwarder’s liability in a claim is not an easy task. When goods are damaged in transit and there is no All Risk Cargo Policy or the shipper does not want to file a claim, the shipper will try to recover from all parties involved in the carriage of their goods. There are instances when numerous entities are in possession of goods during transit, including ocean, inland and air carriers, warehousemen and the freight forwarder.
In most cases, ocean, inland and air carriers are protected by conventions which limit their liability to a certain amount of money per package or weight. For example, ocean carriers include in the wording of their Bills of Lading that their liability is limited in accordance with the Carriage of Goods by Sea Act (COGSA) to $500 per unit. Regarding cargo by air, there are acts like the Warsaw Convention, later amended by the Montreal Convention, stating the liability of the carrier and compensation is based upon the weight of cargo.
In the case where there is an All Risk policy and the insured is covered, the shipper will not hesitate to subrogate if the legal fees are in line with possible recovery. The amount recovered from the carrier may not be enough to cover the losses of the shipper, resulting in the shipper going after the outstanding parties.
The liability of a freight forwarder is determined by the roles it plays. These roles will determine the scope of coverage and the forms required on the freight forwarder’s insurance policy.
Potential roles of freight forwarders include:
Freight Forwarders Legal Liability and Carriers Legal Liability policies require the insured to be legally or contractually liable in order to cover both legal representation and losses resulting from court determination of the freight forwarder’s legal responsibility. Contractually liable does not mean unfulfillment of contract; rather, it means that the contract states the freight forwarder’s liability in case of a loss. These two issues are commonly confused, resulting in the inclusion of Errors & Omissions coverage to fill the gap.
The most common transportation-related liabilities required by freight forwarders, depending on their services, are Carrier Legal Liability and Freight Forwarders Errors & Omissions (E&O).
Carriers Legal Liability encompasses:
Freight Forwarders E&O covers the insured’s Legal Liability arising out of the breach of any obligation, negligent act, error or omission, including but not limited to incorrect instructions, faulty arrangements or clerical errors of any officer, director or employee of the insured. Coverage extends to whenever or wherever the act was committed or alleged to have been committed within the performance of the insured’s business or by others on behalf of the insured in their professional capacity as shipping/forwarding agents, custom house or freight brokers.
All Risk coverages available to freight forwarders include:
The amount of freight forwarders operating in the United States has doubled in the past 10 years, and their risk will soon make up a large portion of the transportation insurance market’s total premium. In addition, the functions of freight forwarders are evolving to encompass more services. As the role of freight forwarders around the world continues to develop, they are subsequently generating new risks. From an underwriting perspective, the necessity of “fast pace” adaptation and innovative solutions without compromising service and integrity to the insured will continue to be the key differentiator in this market segment.
AmWINS Specialty Logistics Underwriters (ASLU), an AmWINS Group company, is a managing general agency specializing in the complex risk factors of the logistics and cargo industry. ASLU is dedicated to offering a high level of service to their clients through a unique balance of industry knowledge, responsiveness and technology. To learn more, visit amwins.com/aslu.
This article was written by Alex Rosas, Executive Vice President of AmWINS Specialty Logistics Underwriters (ASLU).