Insurance offers cover against relatively extensive damage that occurs relatively rarely. But what about the carrier’s or forwarder’s legal liability? This white paper describes difference between the two and helps you to decide whether you should purchase insurance.
Here is a sneak preview of some of the considerations.
Incoterms and liability
The Incoterms rules describe the rights and duties between the purchaser and vendor of the transportation and delivery services. The Incoterms clarify who pays for what. They also set out who is liable in the event of any damage or loss of goods in transit.
Special Drawing Rights (SDR)
What are SDRs and what are they used for?
What is "General average" and when is it applicable?
Like it or not, lots of things can go wrong during the transport of goods. Companies who outsource the transportation of their products to a professional carrier or freight forwarder often mistakenly believe that the carrier or forwarder is fully liable for any damage. But in fact what often happens in the unfortunate event of a problem occurring is that they are presented with a long list of terms and conditions that are impossible for non-specialists to understand. In this document, we explain what you need to bear in mind, what the most common risks associated with goods transport are, and when it makes sense to arrange insurance cover.
1. What do you need to know?
When using a logistics company to transport your goods, it is important to have a clear understanding of the issues you will face in the event of damage, loss or theft.
Important standard terms include:
Incoterms and liability
Carriers and freight forwarders
Cargo insurance cover
Incoterms and liability
The Incoterms rules describe the rights and duties between the buyer and seller of the transportation and delivery services. The Incoterms clarify who pays for what. They also set out who is liable in the event of any damage or loss of goods in transit. The carrier or freight forwarder is only liable if damage or loss occur through demonstrable mistakes or negligence during transport. Likewise, there are limits to the extent of carriers’ or freight forwarders’ liability and to the maximum amount of compensation they are required to pay (see Figure 1).
Carriers and freight forwarders
There is a considerable difference between the liability of a carrier and of a freight forwarder. A carrier is a company that takes care of physically transporting goods from A to B. A freight forwarder is an intermediary that arranges transport on behalf of customers. So a freight forwarder is only partially liable in the event of damage or loss. If a customer works directly with a carrier, the carrier is liable as shown in Figure 1.
If the value of your consignment is higher than the maximum amount your carrier or freight forwarder is liable for, it is wise to ask about transport insurance. Transport insurance gives you the certainty that, if something should go wrong in transit, you will receive compensation of the value based on the commercial invoice.
Figure 1 - Overview of the conditions and limitations that apply to a freight forwarder’s and a carrier’s liability during transportation by air, sea or road.
||SDR19 per kilo
SDR666.67 per package or
SDR2 per kilo if this is more
|Road freight - International
||SDR8.33 per kilo
|Road freight - National
||£1.300 per tonne
SDR = Special Drawing Rights: a virtual unit of currency which is maintained by the International Monetary Fund (IMF) and represents a claim to a number of major currencies (SDR 1 is approx. EUR 1.16).
CMR = Convention Relative au Contrat de Transport International de Marchandises par Route (Convention on the Contract for the Internantional Carriage of Goods by Road).
If there is no invoice, the market value will be used to determine the amount. Transport costs will also of course be reimbursed.
It is the shipper’s own responsibility to arrange insurance as necessary. In some cases, the option of insuring the cargo is something the carrier or freight forwarder will highlight specifically to the customer.
The level of the insurance premium depends on several factors, including:
The value and nature of the goods
The selected mode of transport
2. What are the risks and procedures?
This includes goods which get scratched, dented or wet in transit.
The sender is responsible for ensuring that the consignment is suitably packed. If a consignment has damaged or inadequate packaging when the carrier receives it, the carrier records this fact on the transport documentation. In the case of air or sea freight, if the goods inside are visibly damaged upon receipt by the consignee, then the carrier must be held directly liable. In the case of road transport, a note written on the transport documentation is sufficient. In all cases, notice must be given immediately and in writing.If the damage to the consignment is not immediately visible, the carrier must be informed within three working days that it is to be held liable in the case of air or sea freight, or within seven working days for road transport.The goods are usually delivered to the consignee even if they are damaged, unless continuing to transport them is pointless or impossible.
Lost or stolen goods
This includes the loss or demonstrable theft of part or all of the consignment. In such cases, it is important to demonstrate that the loss or theft has occurred during transportation of the goods. In principle, a loss is indicated with a note on the transport documentation which lists the contents and quantities of the consignment. The carrier signs the transport documentation when they receive the consignment. If the consignee discovers a loss upon receipt, and makes a note of it on the transport documentation, this serves as evidence that the loss occurred in transit.
Theft must be proven, for example with the aid of CCTV footage. Any case of theft must always be reported to the police, and the responsibility for doing so lies with the party that possession of the consignment at the time of the theft. If there is no actual proof of theft, the incident is treated as a loss.
If just part of the consignment is lost or stolen, the affected party is compensated on a pro rata basis. In the event of loss or theft of air or sea freight, the carrier must be directly held liable. For road transport, a note on the transport agreement suffices.
Late delivery of goods can sometimes lead to financial losses, known as ‘consequential damages’ or ‘special damages’. Carriers and freight forwarders almost never accept liability for damages of this kind. At most, they are required to reimburse the freight costs paid if mistakes or negligence can be demonstrated. It is not usually possible to insure against consequential damages. This is because it is difficult to quantify the exact extent of such losses and to estimate the associated level of risk.
General average (sea freight only)
Although it does not happen often, it is important to bear ‘General Average’ in mind. This is collective damage to both a ship and its cargo. If a ship is in danger, it may be necessary to make sacrifices to safeguard the ship itself, its crew and its cargo. All the costs associated with the salvage operation including the value of any goods sacrificed are shared proportionally between the owners of the ship and the owners of the cargo. In practice, this means that the consignor of the sea freight bears part of the costs. However, it is possible to insure against such risks.
How great is the risk of damage or loss?
In reality, the risk of damage is extremely small. In fact, it is way below the average chance of your car being stolen in a Northern European country.
Filing a claim for damage, loss or theft?
To hold a carrier liable, it is necessary to file a claim for the damage, loss or theft within a certain period of time. For uninsured consignments transported as sea or air freight, the consignor must claim for damages within two years. For road transport, the relevant timeframe is shorter at just one year.
If the consignment was insured, the consignor must first hold the carrier liable and then contact the insurance company in order to file a claim. The timeframe for filing a claim varies from one insurance policy to another. If the claim is approved, the insurance company will reimburse the full value based on the commercial invoice. If there is no invoice, the market value will be used to determine the amount.
The insurance company in turn holds the carrier liable for reimbursement of the relevant costs.
When opinions differ
Generally speaking, most carriers and customers manage to resolve things without too many problems. However, there can sometimes be conflicting opinions about an incident. In that case, it is important to collate all the relevant documentation such as bills of lading and transport agreements. These documents indicate the condition and the contents of the consignment at the moment the carrier received it. If the difference of opinion persists, help should be enlisted from an independent loss adjuster. It is generally the carrier’s responsibility to take this step.
3. Further considerations
Costs and benefits
There is no doubt that insurance is money well spent, not least because it is so rare for a consignment to have a value lower than the amount the carrier or freight forwarder is liable for. Conversely, remember that if a shipment has a higher than usual value and something does go wrong, the balance can change dramatically.
Your relationship with the carrier or freight forwarder
Perhaps you have a good relationship with your carrier or freight forwarder, and you are convinced that they will go beyond their legal obligations in the event of loss or damage and reimburse you in the interest of retaining your business. If the damage is small, a carrier or freight forwarder may indeed make a gesture of goodwill. However, you should not expect a huge payout. The carrier or freight forwarder will make the decision based on the amount of time needed to recoup the extra costs. If that will take too long, they will only pay you the legally required minimum.
A carrier with insurance
Your carrier might also have insurance of its own. However, this is of no relevance to you as a customer. Carriers can only arrange insurance to cover their own liability. In some cases, such as force majeure, they will not be liable at all and you, as the customer, will bear the full cost of the damage.
There are always factors which are not covered by liability, so when deciding whether or not cargo insurance is necessary for your shipment, it is important to bear in mind the principle behind insurance. Insurance offers cover against relatively extensive damage that occurs relatively rarely. If the value of your consignment exceeds the amount that the carrier or freight forwarder is liable for or if you are shipping to unfamiliar or less well-organised destinations, the relatively low extra costs of cargo insurance should most definitely be given serious consideration.
Disclaimer: This document is a summary of the situation surrounding cargo insurance. No rights can be derived from this document.
About the author
Stine Monefeldt Holm is Director, Marine Insurance at DSV. She is an attorney specialised in transport law and has extensive underwriting experience in marine insurance both in Denmark and UK, building up the AIG Marine Insurance Centre of Excellence in London.
Jesper Groennebaek is Director, Insurance Sales at DSV. He has an extensive background in Logistics and Shipping with several leadership roles in commercial positions.