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Transport Liability Policy – What Limits?


Jagan - October 31, 2020 - 2 comments

The Charterers P&I recently published a guideon What limits of liability to purchase for Charterers Liability Insurance. This set us thinking on similar terms for a Transport Liability Policy (“TLP”). While the TLP encompasses various functions of a Transport Operator (“TO”) including that of a Stevedore, Terminal Operator, Slot Charterer, Non-Vessel Operating Common Carrier (“NVOCC”), Freight Forwarder and Consolidator, this note focusses on NVOCC, Freight Forwarders and Consolidators and is meant to be guidance note only. If readers require further advice, they should contact their Insurance Brokers and who should be able to assist by recommending the limits required for their Transport Liability Cover.

  1. The main heads of cover in a TLP are:
    • Cargo Liabilities
    • Errors & Omissions
    • Third Party Liabilities
    • Fines & Duty
    • Costs
      While there are additional risks which can  be covered under a TLP such as Carrying Equipment, Business Interruption, etc., we are not considering it under this article.
  2. Cargo Liabilities: The cover provided under this head is for their “liability for physical loss and damage of cargo and resulting consequential loss” subject to the application of the compulsorily applicable cargo conventions and / or contract of carriage approved by the Insurers.
    1. Loss and Damage to Cargo: One of the requirements of the TLP is that the TO contract on the basis of the compulsorily applicable cargo conventions (The Hague or The Hague Visby Rules) and in their absence, contract on terms which have been seen and approved or deemed approved (say by incorporation of the Hague Visby Rules by the Clause Paramount or Standard Terms and Conditions of the National Freight Forwarding / Logistics Associationii).
      1. If the TO acts purely as an agent i.e. Freight Forwarder, they would be acting on behalf of the Cargo Interests and contract with a contractual carrier. If there is a loss during the carriage by the Carrier, Cargo Interests should pursue them for recovery. With respect of pursuit of the TO (in their role as Freight Forwarder) by the cargo interests, given that they acted as agents, they would have a defence. However, if the Cargo Interests are able to allege a personal fault or negligence on the part of the TO (say incorrect cargo details provided to the Carrier) in the formation of the contract with the Carrier, they would be entitled to pursue for recovery for their loss. This is more of an Error and Omission issue and which we are considering in 3 below.
      2. The Hague Visby Rules entitle a carrier to exclude liability as provided in Article IV 2(a-q)iii subject to their having fulfilled the requirements as provided in Art III 1iv (exercise due diligence at the beginning of the voyage) and Art III 2v (continuous care of cargo). If the Carrier is unable to exclude liability, they are still entitled to limit liability to SDR 2 per kg or SDR 666.67 per packagevi. However, limitation may be broken if the Carrier is recklessvii. Additionally, the Hague Visby Rules make a claim time barred after 1 year from the date of delivery or the date when the cargo should have been deliveredviii.
      3. A TO, when acting as the contractual carrier, is by definition not the actual carrier. The question would be whether they (TO) are entitled to avail of the defences available under the Hague Visby Rules. In this regard, Art 1(a)ixof the Hague Visby Rules do not restrict the definition of the Carrier and therefore we submit that TO’s fall within the definition provided in the Rules. This being the case, a TO, would be entitled to both exclude and / or limit liability as provided in the Hague Visby Rules.
    2. Consequential loss: The TLP is designed to deal with a consequential loss claim, say by defending it on the basis of the applicable law and or contract, and if the TO is held liable, to make payment of such claims. The Hague Visby Rulesdo not have any provision for consequential loss. Hence, a TO would invariably incorporate clauses in their contract (say Bill of Lading) to entitle them to deny such claims.
    3. With respect to coverage, the TLP schedule would provide a limit for any one incident or occurrence (commonly known as aoioo). Accordingly, a TO should consider their cargo exposure per voyage/bottom to ensure adequate coverage. A review of previous shipments handled by the TO would ascertain the prospective values and which should be the basis of the cargo exposures per voyage. If the limits insured are below the claimed amounts, the TO would be acting as “Self-Insured” for this gap. In this case, TLP Insurers would be entitled to adjust the claim basis the claimed amount and the limits provided under the policy.
    4. The limit for this head of cover, Cargo Liability, would depend on the value of cargoes being carried. Given that the TO’s are involved in carriage of both primary and finished goods, we would suggest that at the very minimum, this cover, in our opinion, should be at least for USD 500,000 aoioo and upwards (we have also seen policies for limits in excess of USD 5 million aoioo) depending on the values of cargoes being carried in any voyage / bottom.
  3. Errors & Omissions: The cover provided under this head is for the financial loss incurred by their customers due to the failure of the TO to perform their contractual obligations. Losses dealt under this head of cover is for release or cargo without the surrender of original Bills of Lading or cargo being shipped to an incorrect destination. Insurers would generally require the TO to prove that they have established systems and processes but the loss however occurred due to an isolated error.
    1. Given that the loss occurs outside the ambit of the Carriage Conventions i.e. prior to loading or after discharge, we submit that the TO is not entitled to defend the claim on the basis of the exclusions, limitation of liability and time barxi provided in the cargo conventions.
    2. If the TO contracts on the basis of Standard Terms and Conditions, they may be able to avail of both the limitation of liability and / or time bar provisions. It is therefore in the best interests of the TO to ensure that they have such additional clauses to deal with such exposures.
    3. Insurers are generally loath to provide cover for higher limits for this head of cover. The limits we generally see being provided is USD 100,000 aoioo and in the aggregate. If this limit is considered insufficient, a TO should seek an increase in the limits or instead consider insuring under a Professional Indemnity policyxii.
  4. Third Party Liabilities: The cover provided under this head is for liability to Third parties for loss and damage to their (third party) property and personal injuries. The instinctive reaction whilst taking TLP cover is to focus on Cargo Liability. We submit that this is a red herring and a TO should first focus on their exposures to third parties given that they would be unable to exclude and / or limit liability (as there would be no contractual provisions between the TO and the Third Party) for such claims.
    1. Examples of Third-Party Liability Claims are:
      1. Improper lashing of cargo inside the container by the cargo interests leading to collapse / breakage of the container floorboard and leading to injury of the stevedores at the time of operations. In this case, the cargo would, under common law, be also considered as Dangerous Cargoxiii.
      2. A fire in a vessel arising out of mis-declared cargo could easily result in a claim for say a few millions. This being the case, prior to onboarding any customer, a TO should have robust KYC processes (which should be regularly reviewed) to not only understand the background of their customers but also the type of cargoes that they deal with it. This will help the TO to consider the cargoes they are involved together with their associated exposures.
    2. We understand that Insurers, unless specifically requested, generally provide cover for lower limits than that provided for Cargo Liability. Accordingly, subject to a risk profiling exercise, a TO should consider at least seeking similar limits, if not more, as provided for Cargo Liability.
  5. Fines & Duty: The cover provided under this head to the TO is for their liability to authorities arising from various breaches related in their role as a TO. While the fines may not be substantial, given that they may result not only in adverse publicity and hamper future business, a TO would wish to defend the charges as far as possible. Legal Costs to defend such charges, in some jurisdictions, may be substantial and therefore the limits sought should be keeping this in mind.
  6. Costs: The cover provided under this head to the TO is generally for the following:
    1. Mitigation costs: The Insured is under an obligation under law to mitigate their loss. Hence, following a loss, which may result in a claim under the policy, the Insured is obliged to take measures to mitigate their loss say by taking alternative action. If the policy provides for English Law and Practice, S 78(1) of the Marine Insurance Act 1906xiv would apply and which would entitle the Insured to recover these additional expenses (if a sue and labor clause is part of the policy) or as may be provided in the policy.
    2. General Average and Salvage: A TO may be pursued for both General Average and Salvage security/contributions by the overlying carrier given that they have a express contractual relationship. In such circumstances, this would be a liability of the TO and this head of cover will be triggered to deal with such claims.
    3. Uncollected Cargo: The TO has an exposure to costs and charges arising from the cargo being uncleared at destination. The problem which arises is that it would be difficult to pursue the consignee under, say the Bill of lading, particularly, when they have not come forth for delivery. While the TO could certainly pursue the Shipper for recovery, the TO still has a duty to mitigate their loss and which would mean dealing with the uncollected cargo say by arranging for disposal, etc. The policy provides for recovery of such costs.
    4. Insurers are wary of providing a high limit for this head of cover and instead limit their exposure to a smaller amount say USD 25,000 aoioo and in the aggregatexv.  Limits should depend on previous loss experience, jurisdiction’s where the TO is trading and the value of the cargoes (high value cargoes are generally of a lower risk).
  7. Other suggested covers: Both NVOCC’s (using their own equipmentxvi) and Consolidators/Groupage operators should consider seeking additional cover for the provision of interim security for cargo following a General Average / Salvage (in our experience, about 60% of the cargo are uninsured in the short sea sectors). This would allow for early release of cargoes detained, say at a port of refuge / intermediate port due to say termination of adventure by the Vessel Owners, allowing the Carrier to continue with the on-carriage.
  8. Further comments: We understand that the premium rating for TLP is on the basis of Gross Freight Receipt (“GFR”) and / or number of moves estimated for the policy year. It may be difficult for a young Transport Operator, to seek higher limits, particularly when their GFR or the move count is not substantial. Additionally, requirement of higher limits, would lead to higher costs and which may result in the business proposition being unviable, particularly in a downward market. There obviously has to be a balance between costs and risk management, and we leave it to the Transport Operator to decide this on the basis of their risk appetite.
  9. Conclusion: It is important for TO’s to regularly review with their Brokers / Insurers the TLP coverage together with the limits and deductibles provided. The ultimate test of a TLP is on its application at the time of an incident. If the TLP is found to be wanting both in the cover and the limits at this time, the effect can be disastrous to the TO. We would recommend that TO’s keep an ongoing communication with their Brokers / Insurers to constantly review their risks and coverages and ensure that the TLP is fit for use.

 i. The free guide can be requested by filling in details at the form which can be viewed at https://www.themecogroup.co.uk/charterers-liability-insurance/campaigns/what-limit-of-liability-to-purchase/
ii. Singapore Logistics Association (www.sla.org.sg), British International Freight Association (https://bifa.org/home).
iii. Art IV 2 : Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from:
(a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship.
(b) Fire, unless caused by the actual fault or privity of the carrier.
(c) Perils, dangers and accidents of the sea or other navigable waters.
(d) Act of God.
(e) Act of war.
(f) Act of public enemies.
(g) Arrest or restraint of princes, rulers or people, or seizure under legal process.
(h) Quarantine restrictions.
(i) Act or omission of the shipper or owner of the goods, his agent or representative.
(j) Strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or general.
(k) Riots and civil commotions.
(l) Saving or attempting to save life or property at sea.
(m) Wastage in bulk of weight or any other loss or damage arising from inherent defect, quality or vice of the goods.
(n) Insufficiency of packing.
(o) Insufficiency or inadequacy of marks.
(p) Latent defects not discoverable by due diligence.
(q) Any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage.
iv. Art III 1: The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to
(a) Make the ship seaworthy;
(b) Properly man, equip and supply the ship;
(c) Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage and preservation.
v. Art III 2: Subject to the provisions of Article IV, the carrier shall properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.
vi. Art IV 5(a):  Unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading, neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the goods in an amount exceeding the equivalent of 666.67 units of account per package or unit or units of account per kilo of gross weight of the goods lost or damaged, whichever is the higher.
vii: Art IV 5(e): Neither the carrier nor the ship shall be entitled to the benefit of the limitation of liability provided for in this paragraph if it is proved that the damage resulted from an act or omission of the carrier done with intent to cause damage, or recklessly and with knowledge that damage would probably result.
viii. Art III 6: Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, or, if the loss or damage be not apparent, within three days, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading.
The notice in writing need not be given if the state of the goods has, at the time of their receipt, been the subject of joint survey or inspection.
Subject to paragraph 6bis the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery or of the date when they should have been delivered. This period, may however, be extended if the parties so agree after the cause of action has arisen.
In the case of any actual or apprehended loss or damage the carrier and the receiver shall give all reasonable facilities to each other for inspecting and tallying the goods.
ix.  ‘Carrier’ includes the owner or the charterer who enters into a contract of carriage with a shipper.
x. The Hamburg Rules and The Rotterdam Rules do have provision for claims arising due to delay / consequential loss.
xi. See our earlier article on Mis-delivery of cargo – Time Bar and which can be viewed at https://nau.com.sg/mis-delivery-of-cargo-time-bar/
xii. An Errors and Omissions cover is provided as an extension to the main policy. On the other hand, a Marine Professional Indemnity (“PI”) policy, although generally providing the same cover as an Errors and Omissions policy is the “main policy” and will be for higher limits. A PI policy is generally taken by professionals such as Ship Agents, Surveyors, Consultants, etc.
xiii. See article on Dangerous Cargo by Steamship Mutual and which can be viewed at https://www.steamshipmutual.com/publications/Articles/Articles/Hague_Rules.asp 
xiv. S 78(1) of the Marine Insurance Act 1906: Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-matter may have been warranted free from particular average, either wholly or under a certain percentage.
xv. The Insurer’s liability is only up to the limit under the policy for claims arising under the policy.
xvi.  A NVOCC using their own equipment for carriage would also require an equipment policy and which should provide cover various risks including General Average and Salvage. This is frequently an additional cover provided by the Transport Liability Insurers.

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2 comments

  1. Jeffrey Blum FICS FCIArb

    Thanks, dear Jagan, for your comprehensive commentary on this large topic, which is even bigger for non-liner / tramp carriage
    Best wishes, Jeffrey

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