The role of insurance in compliance
The challenges of risk mitigation and compliance impact daily business operations of the logistics community. It is not sufficient to rely solely on statutory and/or contractual limitations of liability to limit or avoid potentially catastrophic claims. Even where limitations are enforced they can be substantial. Moreover, the litigation record is full of instances where such limitations were not enforced by courts for a host of reasons, not least of which was the failure of a company to follow necessary requirements to enforce them.
Consequently, a comprehensive and integrated insurance program is absolutely necessary to cover the almost inevitable claims that can arise when providing services to domestic and international shippers, importers and exporters. When building your risk management program and also the correlating products recommended to help abate that risk, there are some important items to consider.
For every transportation service company wishing to protect their business from a potentially door-closing catastrophe, carrying marine and logistics liability insurance package policies is a must. Standard general liability (GL) or commercial general liability (CGL) insurance policies do not provide cover for cargo liability, errors and omissions, nor virtually any other professional logistics risk. Designed to cover bodily injury and property damage (slip and fall, damaging the building of a landlord, product recalls, etc.) this type of insurance does not include cargo and freight. Nor does it cover 90% or more of the activities of domestic and/or international forwarder, customs brokers, warehousemen, and related service companies.
Many such companies operate under the idea that general liability extends to cover all of their operations. As with any specialized profession, a special program is a necessity. Therefore it is important for transportation service companies to discuss the scope of their operations, activities, and contracts when speaking with their insurance broker - the broker’s advice on what insurance is necessary to cover company’s activities is only as good as the information it is provided. For example if a company’s operation extends from forwarding and NVO activities to warehouse, distribution and customs house broker operations, it should ensure any insurance coverage it obtains covers the full scope of those activities.
Another must-have coverage in any transportation service company’s insurance portfolio is errors and omissions (E&O) or professional legal liability. It's true that the statutes under which service companies operate provide limitations of liability, and most such companies supplement the statutory limitations with contractual limitations in their terms and conditions. However, most of these limitations cover only loss damage or delay to goods. However, there are numerous other ways in which a claim of liability which would expose companies to common law liability which could not be limited by conventional limitations. One simple example of the myriad liability claims that might arise in the course of providing transport related services is allowing a letter of credit to expire. That is where E&O coverage comes into play.
In our litigious society it is commonplace to be named in a lawsuit (no matter how frivolous). Regardless of who is at fault, the case must be defended. There is always a possibility that the act of a third party will result in a situation where the client holds the freight forwarder they hired accountable on a theory that is outside the scope of an otherwise statutory or contractual limitation of liability, such as negligent selection of the culpable third party.
An errors and omissions policy helps provide legal defense and settlement costs for covered claims. Typically, the legal defense component will cover the initial filing of the lawsuit all the way to final resolution. So a “ground up defense” or “first dollar defense” is an important aspect of these programs. Any program not including such defense is not very useful as a significant percentage of costs incurred relate to pre-trial discovery, defense and potential alternative dispute resolution of the claim, such as mediation or arbitration.
Empowering your organization by creating customized terms and conditions, bills of lading, warehouse receipts, and other form documents will help to limit your company’s liability across all of your business operations. Be sure to refer to them on your company website, email signature and invoices to maximize the notice to customers necessary to enforce the limitation, among other possible essential steps. Moreover, it is critical to educate staff members on the importance of maintaining such forms, their purpose, and the need to issue documents in a timely fashion.
Following are some of the products that are important when building any logistics operator’s risk management and compliance program. While it is by no means an exhaustive list, you should be familiar with the products when working with your broker to design your risk management program.
Transportation bonds - required for licensure
The Freight Forwarder Bond (US$50,000) and the NVOCC Bond (US$75,000)
OTI bonds are required by the Federal Maritime Commission (FMC) from all ocean freight forwarders (OFF’s) and non-vessel-operating common carriers (NVOCC’s) who desire to become duly licensed as ocean transportation intermediaries (OTI’s) and conduct operations in the United States. OTI surety bonds are required by the FMC, guaranteeing that licensed freight forwarders and NVOCCs will comply with FMC provisions and regulations. Requiring these bonds is also meant to guarantee to shippers and carriers who work with such businesses that they will be treated by organizations that are accountable.
OTI surety bonds are an article of protection against licensed and bonded OFFs and NVOCCs who don’t comply with the rules, or partake in fraudulent activity. The bonds offer financial recourse to their business partners.
The Federal Motor Carrier Safety Administration Bond aka Property Broker Bond
Freight Broker Bonds (also known as BMC-84) are required for operation as a transportation (freight) broker in the United States, and are regulated by the Federal Motor Carrier Safety Administration (FMCSA). The bond demonstrates a broker's financial responsibility, guaranteeing payment to motor carriers and shippers if a broker falls short of complying with the contracts and agreements in place.
This is a type of insurance policy that provides coverage to a business for bodily injury, personal injury, and property damage caused by the business' operations, products, or injury that occurs on the business' premises. For logistics providers this coverage is extremely important due to the inherent risk of injury in handing cargo at their locations. This coverage, however, does not extend to cover liability for cargo, errors and omissions, or other operational and financial issues and is thus only one piece of a reliable insurance program.
Product: general liability/third party liability policy
All risks cargo insurance
This insurance is a value-added service every logistics operator should take time to understand, and offer every customer on a per-shipment basis. An assured’s operations can vary according to the customer and services involved. For example in some policies the assured reports only those shipments selected to be covered rather than every shipment as automatically covered, and thus must issue a certificate each time or provide a report on a monthly or quarterly basis. In addition, the breadth of commodities and volumes a transportation service company may handle means that the underwriter must provide a varied rate and conditions table that allows for a broader array of goods to be included. Anything outside of the scope must be approved on a case-by-case basis.
It is extremely important to carefully examine your operations to ensure you have obtained the best quality coverage. Pay particular attention to deductibles, exclusions, geographic and commodity restrictions, and forms of coverage. Since this type of insurance can vary widely from provider to provider, coverage should be evaluated prior to rates as there are typically reasons why certain programs are less costly than others.
Always bear in mind that when it is done correctly cargo insurance offered customers whose shipments are being services is the best option as it provides maximum indemnity from liability exposure and the ability to offer additional services. It also ensures that the customer is fully covered. However, if a cut-rate program is offered, there is an increased likelihood of denied claims, which can result in major liability claims for failing to provide adequate insurance.
Cargo legal liability risks
Companies should always maintain industry standard terms on their bills of lading, AWB and warehouse receipts and standard term and conditions. These terms are widely accepted by courts and thus protect the industry as a whole by ensuring widely accepted understanding and approval. Nowadays, many shippers are asking logistics providers to sign their own form contracts to obtain their business. In this scenario, the logistics operators are exposing themselves to liability beyond the scopes of their standard terms and conditions. Such greater exposure is not typically included in the scope of a liability program until and unless submitted to, rated by, and approved by the underwriter. Thus, it's important to review shippers’ contracts carefully and submit them to your insurance provider prior to accepting.
Product: cargo legal liability coverage (aka freight liability or bill of lading liability)
This insurance covers physical loss or damage to a client’s cargo traveling under your bill of lading at the terms specified by international law, domestic law, or your terms and conditions rather than at the full value of the loss. If a special contract has been signed, it can typically be endorsed to this policy citing the higher limits of liability for additional cost.
Errors and omissions - professional liability exposure
This covers the consequential or financial loss suffered by your clients as a result of the logistic operator’s error or mistake while transacting business. Typically, this important type of coverage assumes financial losses whereas cargo legal liability (above) assumes physical loss or damage.
Product: errors and omissions policy
As customers’ expectations increase regarding the ability to track shipments in real time across multiple carriers and modes of transportation, companies must improve their ability to share data electronically. This increased need for accessible data creates greater exposure to potential data breaches.
Product: cyber liability coverage
- Other products to consider:
- General liability umbrella
- Warehouse legal liability and bailee coverage
- Packers liability coverage
- Motor truck cargo
- Contingent motor truck cargo (property brokers)
- Contingent auto (property brokers)
- Import bonds (customs bonds)
- CRIME coverage
- Employment practices liability coverage
- Directors’ and officers’ liability.
This article was written by Bradford A. Boyd, Esq. and Brendan Walsh of Anova Marine Insurance