Introduction
The current pandemic and associated disruptions has led to new ways of thinking about business processes. This is especially true in the area of supply chain management. Throughout this year’s “lock down,” logistics companies and transportation carriers have maintained and increased operations to ensure availability of crucial goods. This situation has enabled us to examine supply chain risk management and to explore the creative and productive use of insurance to support business development. This paper describes some aspects of this examination.
Transportation intermediaries (TIs)
One way to look at the operations of transportation intermediaries, aka freight forwarders, third party transportation intermediaries, property brokers, third party cargo carriers, is that they are selling “risk management” to their customers. In addition to offering cost savings from bulk freight purchases, trade and customs assistance and operational efficiency, TIs are basically assuming specific risks of loss on behalf of or from their customers.
Conventional transportation contracts call for the TI to be responsible for loss or damage to the goods to the extent established under various conventions which govern liability (e.g., Carmack Amendment, Warsaw Convention, Montreal Convention). These specify a monetary limit (usually by weight) on the TI’s liability. This liability is usually subject to exemptions (e.g., acts of god, force majeure) which would not be excluded under common all risk cargo insurance on the goods.
However, today most transportation contracts seek to impose enhanced liability on the TI. Some call for higher values per unit of weight. Others impose responsibility for “replacement cost at destination” or “selling price.”1 The consequences dealing with these enhanced liability contracts can be profound:
Some TIs lack the ability to analyze and negotiate such contracts. Consumers of TI services can be very crafty, and often TIs agree to onerous terms unknowingly.
There is competitive pressure for the TI to accept as much risk as necessary because, in the current logistics market, there are many options for TIs, resulting in those who will sign any contract to accept the business.
The TIs’ cargo “legal liability” insurance will either exclude these enhanced risks or an additional premium charge will be assessed which will erode the margin obtained from the contract.
From a risk management perspective, TIs would benefit from a cargo legal liability insurance program which cares for the spectrum of these risks (viz., from “conventional” to “enhanced” liabilities for cargo loss or damage). A well-designed program helps the TI answer questions like:
What is the scope of risks associated with a given contract?
Do we want to accept or push back on these risks?
If we accept them, does this acceptance aid our business (in terms of differentiation, competition or margin)?
Do we have insurance to back our decision? If so, can we factor the cost of this insurance into our bid?
Utilizing shippers' interest cargo insurance
Beyond the informed use of standard cargo legal liability coverage described above, shippers’ interest cargo insurance brings another level of risk management to these issues. If the TI can induce its customer to arrange cargo insurance under its shippers’ interest cargo program several good things happen:
1. The TI can offer the insurance to the customer for more than the TI pays for it. This sentence is a gross simplification of a very complex subject2, but let’s just assume there is SOME margin between the “buy” rate and “sell” rates.
2. The shippers’ interest insurer waives rights of subrogation or recovery against the TI. This means the insurer, the TI and all other parties can still engage in recovery from the carrier responsible for a cargo loss, to the extent of those carriers’ limited liability.
3. The TI and its customer have defined, well-understood coverage which avoids convention liability exemptions and does not exclude “acts of god” or force majeure events.
4. Cargo insurance valuation is typically based upon replacement cost or selling price which should satisfy the customer’s demand for enhanced liability for cargo loss or damage.
5. Another way of saying this is that a shippers’ interest program subsumes the liabilities imposed on the TI under the contract, thus permitting the TI to accept contracts which it would not otherwise willingly accept.
So, with this risk management support, risk can become, for an astute TI, a business development tool and a market differentiator.
This is an admittedly simplistic introduction to the area. Careful thought needs to be given to:
Administration of the program and cargo coverages.
Regulatory issues associated with the margin between the “buy” and the “sell” rate.
Claims management and loss prevention.
Marketing to customers and inducing them to agree to be protected.
Economies of scale arising from the consolidation of other insurance placements in support of the shippers’ interest program.
Nevertheless it behooves any TI who negotiates transportation contracts with its customers to be aware of these tools and techniques.
CARGO LIABILITY INSURANCE (CLL)
Coverage for the Transportation Intermediary’s (TI’s) liability for loss or damage to customers’ goods, either arising under “convention” (e.g., Carmack, COGSA) or contract between customer and TI.
Most TIs are confronted with enhanced liability contracts which they have signed (or would like to sign) which make them responsible beyond conventions. CLL covers the entire scope of these liabilities.
This insurance should also supplement insurance coverage the TI’s customers expect primarily from the carriers’ cargo liability coverage. This acts as excess, contingent or DIL coverage (around the carriers’ insurance) for cargo liability.
Cutting edge markets will, if properly engaged, support their TI customers in this space.
“Legacy” markets default to convention liability with an ambiguous grant of extended coverage for “approved” contracts. This approval process is the source of much of our engagement with TI clients and prospects.
Key focus points here:
1. Delivery and installation risks – coverage for loss or damage arising from TI (or its agent’s) installation of purchased goods at the delivery site. Many key clients and prospects (e.g., Best Buy, Home Depot, Lowes, and Amazon) either have this exposure or will as they move into this space. When they engage TIs they often pass this liability on to the TI by contract. There is only one market of which we are aware which will provide meaningful coverage in this area.
2. Cold-chain – specialized liabilities arising out of supply chain services provided for temperature controlled goods
3. Perishables – specialized liabilities arising under the Food Safety Modernization Act (FSMA). This often entails “recall” and regulatory risks which blur the line between coverage for loss or damage and coverage for “undamaged” goods.
4. “Project Cargo” – typically high value cargo with specific stowage arrangements and special carriage characteristics.
5. Consequential loss / delivery delay coverage – available from specific markets.
“ALL RISK” CARGO COVERAGE
Under this banner we provide “shippers’ interest” (SI) coverage.
This coverage can also apply to goods in which the TI takes an “ownership” interest as a consignment or pursuant to a long terms supply arrangement with its customer.
Legacy web-based technology supports this area where administration, quotation, fulfillment and claim reporting are required.
1. Most of the insurers with whom we deal have their own systems, most on legacy platforms.
FREIGHT BROKERS’ LIABILITY (A/K/A CONTINGENT AUTO LIABILITY, HIRED & NON-OWNED AUTO LIABILITY)
Vicarious liability imposed on the TI for liability arising from the negligence of the carrier in the operation of their transportation assets.
This is the area which is described by the infamous liability cases in which CH Robinson (et al.) were engaged.
This coverage drives our engagement with TIs and arises in conjunction with the transportation practice’s activity.
Important distinctions between this coverage and “contingent auto” or “non-owned auto” coverage.
Emerging issue: do OEMs and major shippers, even those who engage TIs to manage transportation, also have a vicarious liability in this space? If so, where do they find coverage?
CHASSIS / TRANSPORTATION EQUIPMENT LIABILITY
Coverage for direct liability arising out of defects in the chassis or trailer being moved (being hauled over the road) by third party truckers. A typical illustration is an allegation that an occurrence was caused, to any extent, by a failed brake system on the unit.
1. A trailer lessee stands in the shoes of the asset owner / lessor in terms of this liability exposure.
2. This is a direct exposure, not contingent or vicarious, arising out of the TI’s obligation to ensure that the equipment is in working order.
3. This coverage should also apply to any liability claimed against the TI arising out of the presence of the equipment at any yard, dock or location. This aspect of coverage does NOT include while the equipment is being hauled over the road.
PHYSICAL DAMAGE COVERAGE FOR TRANSPORTATION ASSETS OWNED LEASED OR OPERATED BY TIS.
Forklifts, intermodal ramps, cranes, etc.
Markets have a varied appetite for these exposures
Available coverage can include breakdown and “new for old” valuation.
LOGISTICS ERRORS & OMISSIONS LIABILITY
Covers TI’s liability for financial damages (excluding BI & PD) arising from its operations.
Typical situations include customs and regulatory penalties imposed on the TI.
This coverage is not the same as errors & omissions coverage available from the FINPRO market, although a robust FINPRO E&O program will cover these exposures.
MARINE CGL
Several marine markets offer CGL coverage as an adjunct to their logistics coverages. Some offer manuscript coverage for “third party liabilities” and others use ISO CGL terms.
EXCESS LIABILITY
Many marine markets provide excess liability coverage attaching excess of CGL, freight broker liability and, with sufficient underlying limit, auto liability coverage.
This excess program can also include excess warehouse or cargo liability limits as underlying.
1Some seek to impose delay damages or consequential loss damages, but these are beyond the scope of this article.
2Overall, state insurance regulatory constraints limit the extent of revenue a TI can generate from the “sale of insurance.” The nuances of these regulations are the subject of another paper.