Millions of goods are stuck on container ships waiting for a space to be unloaded at U.S. ports or to be hauled away in trucks, leading to massive traffic jams and supply chain bottlenecks. Fueled by a surge in online spending during the pandemic and exacerbated by a shortage of space, chassis and workers, the supply-chain disruption is hampering the ability of logistics service providers (“LSPs”) and others to meet client demands.
While short- and long-term solutions to rectify the various challenges are being discussed, it’s important for LSPs, cargo owners, warehouse operators and other stakeholders in the supply chain to understand their insurance programs, contractual agreements and best practices to properly protect their businesses.
Cargo insurance
Whenever money is lost due to an issue with cargo, the question we get is, “Would that loss have been covered by cargo insurance?” Recently, many people have asked us if cargo insurance will cover shipment delays. Cargo insurance is designed to step in should there be an occurrence of physical loss or damage to goods (i.e., fire, accidents, theft) but not in the event of losses as a result of delayed products and loss of revenue. To help mitigate financial loss due to delays, cargo owners and LSPs may need to consider alternative routes of delivery. It is also recommended that stakeholders in supply chain factor in potential transit delays when evaluating suppliers and where they are located and examine the cost to maintain larger inventories versus the financial impact of shipping delays.
Another common question is whether the cargo owner and LSP are covered for demurrage charges. These charges are typically levied by the shipping carriers if containers are not picked up when they arrive at the port. Charges are levied on a daily basis after a specific number of free days for using the carrier’s equipment (container and/or chassis) until the cargo is removed. If the cargo owner is responsible for picking up the goods and fails to do so, the owner would not usually be covered for the demurrage charges under a cargo policy. However, if an LSP arranged the cargo pickup and the consignee fails to take delivery of the goods, the LSP could be covered for their own legal liability for the demurrage charges as per the specific terms of the LSP’s cargo legal liability policy.
Cargo owners
While cargo insurance provides door-to-door coverage from physical loss or damage for the cargo owner’s goods, it’s important to review the specifics of how individual policies address goods stored at a warehouse. Typically, a cargo policy provides coverage for goods at a warehouse for a limited time (15 days in the port city of arrival, 30 days outside the port city of arrival). This coverage may be extended with a “consolidation/deconsolidation” clause up to 60 or 90 days for an additional cost. Warehouse storage coverage may be purchased if you plan to have goods in a warehouse for longer periods of time.
Cargo owners should also review if a waiver of subrogation clause is included in their contractual agreement with warehouse operators. This waives the cargo owner’s right to seek redress or compensation for losses from the warehouse operator if they are responsible for a physical loss to the owner’s goods in their care, custody, and control.
Warehouse owners/LSPs
For warehouse operators and LSPs with warehousing activities, it’s important to carefully track the values of the goods stored and understand that these values are aligned with the limits under a warehouse legal liability policy. This is particularly critical today due to transportation delays that have caused inventory to remain at warehouses for longer periods of time. These delays increase the volume and value of goods at a warehouse at any given time. In addition, the warehouse operator is advised to review the contractual language of their warehouse receipts, which limit the operator’s financial liability to clients in the event that physical damage or loss occurs while goods are in your control. Verify the way in which the liability limit applies. For example, if the limit of liability is based on goods per pound, a record of the weight of the goods must be available.
Errors and omissions insurance: First-dollar defense
Cargo owners, who suffer financial loss due to the shipment delays and loss of business caused by today’s supply chain woes, may lay blame for their losses on contractors in the supply chain including LSPs. Whether or not the LSP’s negligence caused the delay, the LSP could still be the target of a lawsuit for failure to deliver goods on time. Having first-dollar defense insurance in an E&O policy provides coverage to defend you against a lawsuit without having to pay a deductible and even if that lawsuit is ultimately deemed frivolous. It’s important for LSPs to review the terms of their E&O insurance policies for the type of defense coverage that’s available as policy forms vary greatly. It is recommended that LSPs select an E&O policy that includes First-Dollar Defense coverage.
Terms and conditions review
The National Customs Brokers & Forwarders Association of America (NCBFAA) provides members with standard terms and conditions that spell out the responsibilities of each party in a shipment transaction. It’s important to understand these terms and conditions and how any modifications in a contractual agreement may impact the LSP’s liability and insurance program. It is best practice to engage an attorney who understands the logistics industry to review the governing documents so that risk can be effectively limited, transferred or mitigated. If contracts or agreements are altered, these changes must be conveyed to the insurance company so that the right insurance and limits are in place. In addition, LSPs should ask for certificates of insurance from third parties they hire (such as trucking companies) to ensure that they are properly covered. It is highly recommended that LSPs request that contractors add the LSP as an additional insured on their insurance policies.
There are many aspects of risk management to review to help protect organizations throughout the supply chain, particularly in today’s environment in which delays and other challenges are upending businesses. Though the pace of business is high, LSPs who take the time to discuss their insurance programs and risk management practices with a trusted insurance broker will benefit greatly and determine where improvements can be made and the impact of future losses can be mitigated.
About the Author:
Patrice Lafayette began her career at Roanoke Trade in 2007 in the Western Division Bond department and has held various positions, including managing both the west coast bond team and west coast sales team, until becoming Vice President – Sales in early 2021. She has over 20 years of insurance and financial services experience with the last 14 years focused on the international trade community.
She is a licensed broker in 12 states, and a graduate of California State University, Northridge where she earned a Bachelor of Science Degree in Finance. She serves on the Executive Committee for the Board of Directors for the Foreign Trade Association (FTA) and is also an active participant in numerous other West Coast trade associations.
Disclaimer: This information is provided as a public service and for discussion of the subject in general. It is not to be construed as legal advice. Readers are urged to seek professional guidance from appropriate parties on all matters mentioned herein.