NVO 3rd Party Liability Cover

1. We recently came across a trade advisoryⁱ, from a leading container feeder/vessel operator (VO) requiring NVOCCs (NVOs) to provide proof of at least USD 5 million in third-party liability coverage – or face rejection of their SOC bookings. While we do support insurance as an essential risk management across the maritime sector, we do not believe that one size fits all i.e. imposition of a blanket limit. Accordingly, the purpose of this article is to argue that while Insurance is one of the methods to ensure that parties are able to deal with their operational exposures, VO’s should also actively weed out suspicious bookings and also consider naming and shaming any irregular practices such as misdeclaration of cargo (which may be one of the reasons for the fires in container vessels).
2. We had written earlier on Cargo Liability Exposures to Transport Operators but focused only on the contractual cargo liability exposures. The cover sought by the VO is for 3^rd party Liability i.e. liability to 3^rd parties for both personal injury and property damage arising from the fault or negligence of the NVO. The crucial word, in our view, is the aspect of fault or negligence. In the absence of any fault, NVO’s would be entitled to defend any claims raised against them.
3. Claims may arise due to improper packing (which may make the cargo initially non dangerous to dangerousⁱⁱ) or misdeclaration of cargo (say dangerous cargo is declared as general cargo) causing danger to all.
   1. If these acts are done by cargo interests without any fault of the NVO’s, we submit that the NVO’s would have a defence to claims pursued by 3^rd In any event, barring quaⁱⁱⁱ Owners/Owners, NVO’s would be entitled to defend all claims based on law including the Shipowners Limitation of Liability Conventions^iv.
   2. Negligence / Fault of the NVO:
      1. The basis of Insurance coverage provided to NVO by liability Insurers is that the NVO contracts on similar terms i.e. with both their sub-contractors^v (which in this case is the VO) and the downward parties/cargo interests^vi.
      2. It is rare for NVO’s to be involved in the actual loading and lashing (including declaration of cargo) given that the NVO generally contracts with cargo interests including Freight Forwarders on FCL/FCL^vii basis.
      3. It is our view that the chances of the NVO being negligent would be rare, at least for an FCL/FCL shipment, given that NVO’s would be relying on the declarations made by the cargo interests. However, if it is ascertained that the loss was due to fault or the negligence of the NVO, the NVO could certainly be held liable for the loss or damage to 3^rd party property. In this case, , the NVO’s liability policy would be triggered to deal with any claim subject to the policy limits.
4. Industry practice:
   1. There is presently no industry practice of requiring cargo interests to have a liability insurance policy^viii. The practice is generally for the cargo interests to be only insured for the cargo^ix(which is basically a property policy).
   2. The NVO may sometimes contract with a Freight Forwarder (“FF””) acting either as agents or as Principal instead of the actual cargo interests. If the FF acts as a Principal (they issue their Bill of Lading to the cargo interests), they are then acting as a downward^x. Accordingly, it could be argued that the upward NVO’s should similarly seek evidence of 3^rd Party Liability Insurance from the downward NVO’s/FF. While it should be best practice of every FF to be covered for their liabilities (including 3^rd party liability), the fact is that most of the FF’s are uninsured – and even if insured, would not be insured for the limits sought by the VO’s. Imposition of any compulsory liability insurance limits may result in FF’s booking with other NVO’s/Shipping Lines which have no such requirements.
5. Casualty:
   1. We believe that the reason why the VO wishes to impose a limit of USD 5 million for 3^rd party liability is to ensure that they can recover in case of major casualties from the negligent NVO’s.
   2. If there is a major casualty, then the losses would certainly be much above the USD 5 million limit. This being the case, the limits proposed would not actually resolve the issue. If the limits are further increased, given the additional premium spends, this would force NVO’s to reconsider whether they should contract with the VO in the first instance.
   3. We believe that sufficient data is available to at least put VO’s on notice of problem areas/cargoes. Accordingly, we believe that it would be far better to have a risk management culture in which all parties (both VO’s and NVO’s) continuously assess their counterparties, the locations where they trade (including whether the jurisdiction provides for any assistance on the occurrence of an event and/or sanction to wrongdoers) and consider best practices to deal with issues as they arise (in this regard, we appreciate the initiative of Hapag Lloyd for DG cargoes).
6. Conclusion:
   1. The initiative of seeking a minimum 3 Party Liability Cover does not go deep into resolving the issues presently plaguing the container industry. Instead, at least to us, it appears to unnecessarily increase premium spends for NVO’s and who may become non-competitive vis-à-vis others who may not have any such requirements.
   2. It would be best to promote among all maritime parties a continuous risk management culture including the regular vetting of counterparties^xi and the use of best practices together with the sharing of data/ resources.

^i. See Customer Advisory from Xpress Feeders.
^ii. See The Giannis NK which defines common law dangerous cargo.
^iii. Latin of as or in the capacity of.
^iv. See our earlier article – Limitation of Liability – NVO’s.
^v. Which in this case is the VO.
^vi. The contracts between VO and NVO and NVO and cargo interests are mirror contracts in that they provide for the application of the compulsorily applicable cargo conventions such as the Hague or the Hague Visby Rules or in its absence the application of the Hague Rules by contract, say by way of a Paramount clause.
^vii. See explanation of FCL/FCL in an article “Container Service Types” posted by Shipping & Freight Resources.
^viii. See our earlier article, Cargo Owners Liability.
^ix. Say cover under the Institute Cargo Clauses 1/1/2009 (A), (B) or (C).
^x. We mean no disrespect but would wish to state that the downward NVO is purely acting in a contractual capacity. Some of the downward NVO’s are major Freight Forwarding entities such DHL, Kuhne Nagel, etc.
^xi. We are aware that parties do conduct a KYC of their counterparties. However, the extent of the KYC appears to be limited. Instead, we would suggest the conduct of a proper KYC on regular intervals to not only understand the counterparty but to also understand the impact on the business if something were to go wrong.