In the intricate world of logistics and freight forwarding, managing risks and securing proper insurance coverage is a nuanced endeavor. Freight Forwarders, NVOCCs, Warehouse Operators and the various intermediaries in between create an intricate web of risk and liability for cargo owners and the logistics professionals they hire. The dynamic nature of this industry necessitates a thorough understanding of the exposures, and the corresponding measures required to adequately insure against them. This article delves into the practical aspects of insuring logistics risks, key considerations to ensure comprehensive coverage, and the importance of working with an insurance broker who specializes in this niche.
When reviewing any type of logistics risk, it is essential to start by identifying the current authorities and activities that they perform. Logistics providers often operate under multiple licenses and authorities, each governing different aspects of their operations. For instance, a company might hold an ocean freight forwarding license, an air freight forwarding license, and offer domestic freight and/or warehousing services. Each of these activities come with specific responsibilities and liabilities.
To properly assess and insure these risks, it is crucial to have a detailed understanding of the scope and limitations of each authority. This involves reviewing the legal structure of the company, regulatory requirements, and the operational boundaries associated with each license. By doing so, insurance brokers can tailor policies that accurately reflect the risks involved and provide adequate coverage for all activities performed by the logistics provider.
Once licensing is confirmed, it is important to ensure that logistics providers have taken proper steps to limit their liability in their transportation documents for each mode of transit or service provided. Some modes of transit are governed by international conventions which dictate specific limits of liability for loss or damage to freight. For instance, under the Montreal Convention, air carriers will pay 26 SDRs (Special Drawing Rights) per kilogram if it can be proven they were negligent. Currently the SDR is worth approximately $1.32 which translates into a liability for loss or damage of approximately $34 per kilogram.
Sometimes standardized terms and conditions are provided by industry associations or regulatory bodies. Reference to applicable liability limitations should be noted in Terms & Conditions of Carriage when acting as a Carrier or Custodian of Freight. Reference to Terms of Carriage should be clearly listed in applicable house bills of lading, house air waybills, truck or freight receipts, warehouse receipts etc.
For situations where freight is not moving under a bill of lading, it is important for a logistics providers to use Terms and Conditions of Service. Terms of Service may apply when an entity acts as an agent for freight (not issuing a house bill), serves as a releasing agent or provides Customs Brokerage services. It is prudent to make any Terms and Conditions used available on company websites, rate quotes and email signatures so that shippers can easily reference.
Terms and Conditions (of Carriage or Service) can vary significantly depending on the nature of the goods, the mode of transport, and the jurisdictions involved. It is important to ensure that all terms clearly outline the responsibilities and liabilities of each party involved in the logistics chain. This includes specifying the applicable authority, the conditions under which the logistics provider is liable for loss or damage, and the extent of that liability. It’s vital for logistics firms to have a transportation attorney review all transportation documents to ensure proper protection. It’s also important to note that Logistics Liability policies are designed to cover the liability limitations found in the standard contracts that have been approved in advance by the insurance company.
Reviewing any special contracts that require coverage or limits that exceed a logistics provider’s standard liability limitations is another important aspect of insuring logistics risks. Companies often enter into agreements with clients or third parties that impose higher liability limits or additional coverage requirements.
These special contracts can include agreements with the need to insure high-value shipments, provide waivers of subrogation, or requirements to add other risk transfer remedies. It is important to identify these contracts and ensure that the insurance policy provides adequate coverage for the increased liabilities. This may involve negotiating customized endorsements or separate policies to address the specific needs of these contracts. Review any special Certificate of Insurance verbiage requests with your insurance broker as sometimes seemingly simple verbiage requires changes to policy coverage.
Confirming the legal company name under which each authority has been established is another critical step. This ensures that policies can be properly issued with all applicable named insureds. Logistics firms often operate under different trade names, subsidiaries, or joint ventures, which can complicate the insurance process.
It is essential to verify the legal entity associated with each authority and include all relevant names on insurance policies. This not only helps to avoid disputes during the claims process but also ensures that all aspects of the freight forwarder's operations are covered. Update this information regularly as businesses evolve.
When considering insurance coverage, it is important to know whether it is an indemnity policy or a direct pay policy. An indemnity policy reimburses the insured for the losses incurred, while a direct pay policy pays the third party directly for any claims.
Understanding the differences between these two types of policies is key in determining the appropriate coverage for logistics risks. For example, if you find yourself the unfortunate recipient of a $1,000,00 E&O claim, are you prepared to pay that amount out of pocket to the claimant and wait for reimbursement?
Be aware of policies that have regular reporting requirements. This is very typical for shipper’s interest and warehousing coverages. Some policies may require regular reporting of inventory levels, high value shipments or other relevant information to maintain coverage. Logistics firms should implement robust reporting systems to comply with these requirements so gaps in coverage are avoided.
It’s important to know whether the policy premium has been quoted as a flat premium or if it includes an annual adjustment that may result in additional premiums. Flat premiums offer stability and predictability for budgeting purposes, but they may not accurately reflect changes in risk exposure over time. Therefore, many liability policies are written with an annual adjustment.
Policies that have adjustments at renewal offer more accurate pricing based on the actual risk exposure during the policy period but can result in unexpected premium increases if a company’s operations grow significantly or if risk factors change. For example, Logistics Liability coverage forms are often rated on estimated gross freight receipts at inception and then audited at renewal on the actual gross freight receipts. If actual receipts exceed estimates, additional premium may be due. Conversely, if revenues decrease, some policies may return premium. It’s important to read the fine print and understand the implications of each premium structure.
In Conclusion
To obtain comprehensive insurance coverage for a logistics operation it is crucial to work with an insurance broker who possesses extensive knowledge of the risks inherent in the industry. There are no one-size-fits-all solutions. Insurance brokers must identify current licensing/authorities, review transportation document terms, and identify special contract needs, to offer tailored coverage solutions. Collaboration and clear communication between insureds and their insurance broker is essential for managing exposures and maintaining current coverage in the ever-evolving nature of the logistics industry.