With criminal double brokering, a freight broker awards the job to a fraudulent motor carrier, who could be posing as a 3PL. This motor carrier then re-brokers the load to a second carrier, who they either underpay or fail to pay at all, so they can pocket the difference.

It happens without the knowledge of the shipper, the original freight broker, and sometimes even the secondary carrier, who could end up shipping the load for free.

Neither the shipper nor the original freight broker has any idea of the conditions the load is being transported in, who’s driving it, or whether it’ll arrive at its destination, which causes all kinds of supply chain complications.

Within double brokering, a type of straight-up theft called load phishing has also emerged. With load phishing, it’s the carrier moving the goods that’s fraudulent, usually impersonating an established trucking company with an almost-identical name, to fool shippers that need to get their goods out ASAP. The carrier picks up the load, flashes their fake credentials, and drives off into the distance with the cargo.

Inflation is contributing to the steep increase in cargo fraud more generally. As the value of certain goods increases, they become more attractive to criminals, who are getting more resourceful and ingenious.

Allowing Cargo Fraud to Thrive

A huge number of variables are at play in freight and logistics, all operating in a platform economy. That means shippers are navigating digital marketplaces, TMS boards and more, which minimizes visibility between organizations in the supply chain, allowing double brokering and other types of cargo fraud to thrive.

This crime is dually profitable. Not only does the fraudulent entity get the fee for being awarded the load in question, but the shipment could be stolen and resold too—meaning they would profit from the value of the load itself. This series of events is a nightmare for shippers, who are left to deal with a range of difficult consequences, such as goods being damaged in transit or being stolen for resale.

With so many shipments in transit uninsured, these risks wreak havoc on the supply chain and profits of small and mid-sized enterprises. Even if a shipment is insured, there’s no guarantee it’ll be covered for loss or damages caused by double brokering.

There are big implications for cargo insurance providers too. Inevitably, a spike in double brokering means a higher number of claims for brokers to deal with, which can cause a backlog for companies without efficient automated claims processes.

Equally, when insurers pay out, they can often recoup some of the settlement from the carrier (if they’re liable). With claims resulting from double brokering, the carrier might be completely unknown, so underwriters swallow more of the loss than they would normally, which isn’t sustainable over the long term.

Procuring the correct type of freight insurance is among the essential steps shippers can take to minimize the impact of cargo fraud—in all its evolving forms—on their business.

Shipping delays are a very real possibility at the moment. In fact, 75% of companies surveyed recently say they’re experiencing supply chain disruptions because of coronavirus-related transportation restrictions. And that’s in addition to the many other risks that your supply chain regularly faces.

With the right risk-management plan, you can better understand the risks facing your operations and make sure your business is prepared by protecting the value of the goods you ship globally.

Know Your Risks

When importing or exporting goods, it’s critical that you identify the types of risks your cargo could face. These risks can include not only the ongoing pandemic, but also major events like hurricanes, floods and political unrest, as well as everyday problems like theft, counterfeiting and documentation errors. Any of these circumstances can delay or ruin delivery of the most perfectly planned global shipment.

Once you understand your risks, you can insure your goods to protect their value against potential losses that can happen while they’re in transit as part of air, ocean and rail shipments.

Keep in mind: Most cargo insurance plans don’t cover revenue that’s lost because of a public health crisis, like the coronavirus pandemic. However, in China, the virus caused an extended Chinese New Year that delayed the product exports. As factories return to full efficiency, many importers from China are utilizing expedited shipping services to restock inventory—and cargo insurance will help them avoid additional vulnerability.

Put a Price on Your Risks

Cargo insurance that protects the value of shipped goods from physical damage, theft or other calamity is readily available. But before you buy it, you or your consignee must make sure the coverage you purchase is the best fit for your unique risk exposure.

You can do this in a fairly straightforward way. First, estimate the chances of a risk event happening and multiply it by the cost of your cargo value to identify your potential loss. For example, if you determine there’s a 0.5% probability of a risk event occurring and you’re transporting $1.5 million in cargo value, multiply those two numbers together. In this case, your potential loss would be $7,500.

Then, with that estimate in hand, you can reduce the expected loss by reducing the probability of the occurrence, or the cost of the occurrence. This can help you buy the appropriate amount of insurance.

Three More Tips

In addition to buying the right amount of insurance for your cargo, there are some other best practices you can use to reduce your cargo risk. For example, make sure the valuation clauses for your shipments define the maximum amount an insurance company will pay for a loss. Most valuation clauses include the commercial invoice value and any prepaid charges associated with the shipment, such as freight, customs clearance or duty.

It can also be helpful to use an insurance intermediary that has specific training or experience in international logistics and transportation insurance.

Finally, if you use a third-party logistics provider, make sure it has in-house risk-management professionals. They often have valuable experience that can help you uncover potential liabilities in the supply chain, so you can understand your specific risk-management needs and create the right solutions.

Protection Equals Peace of Mind

These difficult times are a reminder that moving goods around the world comes with risks. And while cargo insurance may involve a lot of complexities, it’s crucial that you be able to understand and navigate them so you can get the right protection. That way, if and when the unexpected does happen, you can take comfort knowing that you’ve protected yourself.

One of the main roadblocks in the relationship between intermediaries and customers is the lack of clarity about terms in the event of a loss, damage, or delay during the shipping process. Carriers and freight forwarders are responsible for handling the liability of shipping claims and any reimbursements.

This exemption does not mean that 3PL companies cannot be part of this process. On the contrary, 3PLs can become an ally for their customers, providing outstanding customer service and support for a smoother and easier claims process. This is why 3PL companies need to cultivate and invest in knowledge for their teams through specialized training programs that are customized to their needs, mitigate risks, prevent errors, and yield results.

Essential Aspects of Processing Claims

Regularly follow up on the claim: Assertive communication is vital. With a team designed to handle these processes, customers can be supported by an expert staff that will help minimize risks, losses, damages, and delays. This team will continually monitor the case and its progress until the carrier provides the outcome. The final response can take up to 120 days, but with efficient follow-up, the wait time can be significantly reduced.

Meet the "concealed freight damage claims" deadline: When damage or shortage is not immediately recognizable, and the loss is discovered after the delivery receipt is signed, the customer has 5 days to report the concealed damage to the carrier. An expert team aware of the guidelines and changes to the NMFC rules will help speed up the claim filing process and meet the deadlines to avoid the inability to report or the annulment of cases.

Prepare a shipment avoiding unnecessary risks: When transporting goods, each process must generate and follow detailed documentation. These files provide a record of each load, including all transactions and instructions, to successfully reach the destination. This is critical in order to ensure the service fulfills the guidelines demanded by the customer.

For example, completing the box that says "value of these products" on the front page of the bill of lading helps avoid a total loss. If the value information is missing, the carrier will have the power to assume the release rate. A dedicated team will review the documentation and make sure that each item is designated correctly, therefore protecting the company from unnecessary risks that may arise from carelessness or negligence.

Cover the shipment with insurance: It is essential to determine the type of insurance that a shipment needs in order to be covered throughout the entire transportation process. To define the type of insurance required, a customer should consider the type of cargo being shipped, the type of service needed, and the liability of the carrier. By adding extra protection to the cargo and checking that the 3PL has a variety of insurances available such as Auto Liability Insurance and Primary Cargo Insurance, the customer will have peace of mind knowing their cargo is safe.

Logistics solutions experts can leverage the advantages of their expertise to create more specialized services. These services should not only focus on execution and delivery but also safeguard the best interests of a company and its people.

Customers will find support on quoting and dispatching as well as assistance with handling problems that may arise at any stage of the shipping and delivery process. This added value will strengthen business relationships, build trust, and foster long-term partnerships.

In general, insurance companies and brokers have limited industry knowledge and understanding of what warehouse operations entail. Not only that, but warehouse risks and vulnerabilities are increasingly complex, and many policies simply aren’t keeping up with today’s sophisticated new systems and regulations.

Here are five emerging risks and vulnerabilities for warehouse companies to watch:

1. Fourth-party warehouse agreements

4PLs have been on the rise over the past five years. While outsourcing offers cost-effective advantages for 3PLs (a larger network of warehouses, additional assets, and labor, etc.), there are inherently increased complexities and risks involved and few carriers offer truly robust policies that cover these emerging risks. For example, package handling by multiple agents could result in damage to the customer goods, despite adhering to 3PL protocol and consistent inventory tools. With few policies in place that protect 3PLs, companies should be aware that they may not have coverage if a claim occurs.

2. Legal defense coverage

More and more responsibility is being extended to the warehouse with customers expecting them to assume more liability. Even with comprehensive ironclad policies, if a customer falsely accuses a warehouse of negligence (for example, theft loss damage), legal fees can be astronomical, and additional complexities can extend litigation as well as cost. There is now a greater probability of a claim finding the warehouse negligent not just because of their actions, but contractually as well.

3. The Food Safety Modernization Act (FSMA)

The FDA is requiring more tracking of food products than ever before. Warehouse companies are required to track and trace where a product originated and where it’s going, increasing the liability in the supply chain and gaps in coverage.

4. Dated products

With the rise of FSMA and tighter regulations, as well as manufacturers trying to protect their product and brand, managing products by their use date is often becoming the responsibility of the warehouse. If a date has passed on a product, the question of whether it is considered damaged goods is a significant grey area. This expands the number of exposures for warehouses, making them more liable for losses.

5. Product recall

Product recalls cost the U.S. economy billions of dollars a year, with the average product recall costing $10 million. Manufacturers are beginning to mitigate their risk in regard to product recalls and instead are looking to transfer that risk onto their vendors, including the warehouse. Product recall coverage can be costly, but a growing number of 3PLs are requesting it now where few did previously.

Warehouse and logistics companies have always faced challenges in trying to mitigate risk, but these and other emerging risks pose new threats. It’s important to work with a broker who is experienced and knowledgeable in third-party logistics and the bailment laws that govern this industry.

Incoterms Set the Standard

In 2015, losses due to cargo theft hit $22.6 billion, according to BSI Group’s Global Supply Chain Intelligence report. And, in November 2016 alone, the Transportation Asset Protection Association recorded 231 freight thefts in the EMEA (Europe, Middle East and Africa) region. The average loss topped 60,000 euros, or about $64,000.

Cargo insurance, which covers products in transit, can protect against these risks. Although it is sometimes referred to as “marine insurance,” cargo insurance can cover shipments moving via ship, truck, rail, and/or air, depending on the policy.

“Any time you’re shipping something where you have an insurable interest, you should look into protecing the goods,” says Karen Griswold, senior vice president of ocean marine for insurance provider Chubb Ocean Marine, North America.

Many instances of cargo theft go unreported, as companies want to avoid the publicity. Half of cargo premium dollars go to cover theft, estimates David Lee, director, inland marine with insurer Tokio Marine America. Lee also chairs the transportation committee of the Inland Marine Underwriters Association (IMUA).

Theft, of course, is only one type of loss. About 2,700 containers were lost at sea each year between 2011 and 2013, according to the World Shipping Council. Weather, temperature changes, breakage, and other events can also damage cargo.

While the risk of cargo loss is real, the decision to purchase insurance usually rests with the shippers. They typically have no legal obligation to carry this coverage, although some financial institutions may require it before they’ll lend money.

DIY Insurance

Companies with strong balance sheets may decide they can withstand a cargo loss and essentially self-insure. Businesses that take this approach need to regularly assess their exposure and loss data, and use their analyses to check the adequacy of their reserves, recommends Mark Robinson, vice president, global operations, with UPS Capital.

Ensign-Bickford Industries Inc., a global science and technology organization that operates in the aerospace and defense sectors, tailors its use of cargo insurance to the types and volumes of business it is doing, the locations it is shipping to, and shipping terms, says Rick Roberts, director, risk management and employee benefits and former president of risk management society RIMS.

Taking Ownership

For instance, when Ensign-Bickford purchases goods on FOB shipping point terms, it doesn’t take ownership until the goods arrive at a domestic port. The company needs coverage only from the port to one of its plants. Moreover, these shipments typically travel by truck. Given the size of the products, it’s difficult to load enough on a truck to meet the company’s deductible. As a result, it often makes sense to self-insure for these trips.

In contrast, Ensign-Bickford recently started shipping to Europe, South America, and the Mideast. The volumes are larger, and some customers have requested the shipments be covered by cargo insurance. “Customers want to make sure if the ship goes down, they’ll still get their important products quickly,” Roberts adds.

It may seem that the company transporting a shipper’s goods would have some liability if the products don’t arrive as they’re supposed to. But in most cases, the carriers’ liability is very limited.

The industry standard can vary depending on transport mode. An ocean carrier typically is liable for $500 per customary shipping unit, such as a pallet or container. That means a company that loses a container filled with $1 million in goods may recover a scant $500. “Cargo insurance provides more protection,” Robinson says.

Some questions a supply chain professional will want to address when considering cargo insurance include: Which parts of the shipping journey are most likely to present risks? Does my company ship products that are prone to theft and/or damage? At what point does my company take ownership of the goods?

“Know the risk characteristics,” says Steve Connor, president of Wyvern International Insurance Brokers Inc., Barrington, Ill. That’s critical to determining how best to mitigate them.

Companies also need to determine the approach they’ll take. Some purchase insurance just for catastrophic events. Others companies’ supply chains are prone to more frequent, but less severe events, and they may adjust their deductible to reflect this. “Deductibles can range in amount and vary according to the level of risk companies are willing to absorb themselves,” Griswold adds.

The Broker’s Role

Cargo insurance can be complicated. It’s also less regulated than some other types of insurance. As a result, it can be a “potential minefield for unsophisticated buyers,” Connor says.

For these reasons, most cargo insurance is sold through brokers, who are fiduciaries by law. “They represent the customer, not the insurance company,” Connor says. Equally important, reputable brokers are experts in pricing, coverage, and other elements of cargo policies.

Brokers also can help companies minimize potential risks in their supply chain, says Ted O’Sullivan, head of Protecht Risk Solutions with Falvey Cargo Underwriting, North Kingstown, R.I. For instance, to take advantage of lower wages, some manufacturers in China have shifted operations from the Chinese coast to central China. Rather than continue to use ocean transportation, some of the companies moved to the China-Europe Block Train, which spans 8,000-plus miles through Asia, Russia, and eastern and western Europe.

“We had to understand the risks of companies considering a shift from ocean to rail,” O’Sullivan says. Train cars typically aren’t heated, and travel through Siberia at times during winter. In addition, rail cars aren’t always secure, so the goods could be vulnerable to theft.

While many freight forwarders offer cargo insurance, that convenience can come with its own costs. For starters, the shipper is one step removed from the actual insurer, and typically won’t know the freight forwarder’s loss history, both of which will influence price and coverage. “It may be a great policy, but it’s hard to know,” says John Miklus, president of the American Institute of Marine Underwriters.

Companies that ship infrequently may decide the convenience of working through a freight forwarder outweighs any downsides, notes Gordon Adams, vice president, risk management, Servco Pacific Inc., which operates auto dealerships across Hawaii, among other businesses.

They’ll want to continually reassess their decision as the volume and/or value of their shipments increases. Frequent shippers with a decent loss history may find coverage less expensive on their own.

Open Cargo

Shippers also need to decide whether to purchase cargo insurance on a transaction-by-transaction or on an “open cargo” basis. As the term implies, insurance purchased on a transaction-by-transaction basis covers a single transaction. An open cargo policy lasts until it’s terminated, although most companies and insurers review them annually.

Companies that ship infrequently and aren’t overly concerned with loss may find a transactional model adequate. “But once you start getting into high-value goods or sensitive products, you need to make sure you have adequate insurance and take a more proactive risk management approach,” says Mike Falvey, president of Falvey Insurance Group.

Shippers can assess the three V’s to determine when to shift to an open cargo policy: the value of their shipments, the velocity or frequency with which they ship, and the volume of each shipment. As any of these increase, the case for an open cargo policy becomes stronger, O’Sullivan says.

Warehouse to Warehouse Coverage

Most ocean cargo policies typically offer coverage from “warehouse to warehouse,” says Ralph Santoro, regional manager, ocean marine with Tokio Marine America. If a shipment travels from a U.S. warehouse via truck to a port, and then on a ship to Europe, where it docks and again moves via truck to a French warehouse, many policies will cover the entire journey. “If a loss occurs, we know what policy it’s under,” Santoro says.

Similarly, many bills of lading are titled multimodal, or contain terms and conditions that mention multiple modes of transportation, in case the carrier needs to substitute one form of transportation for another. This might be needed if, for instance, shipments that were scheduled for air transport wind up moving by rail because bad weather grounded the planes.

Correspondingly, shippers’ cargo policies “should be robust enough to handle all modes of transportation,” notes David Pasco, senior account manager with Roanoke Trade, a subsidiary of insurer Munich Re.

An “unnamed location” provision covers a shipment if there’s a break in the voyage and the goods are temporarily stored. “It’s a catch-all if something happens you can’t control,” Adams explains.

Some cargo policies include provisions specific to the mode of transport or items being covered. For example, an insurer may require a company shipping high-value freight via truck to keep at least two drivers in the truck cab at all times, and to never leave the cab unsecured, Santoro says. Similarly, the insurer may require the shipper to keep the packages free of content descriptions, which could tempt would-be thieves, Santoro says.

Taking Stock

Stock-throughput policies, or STPs, are growing in popularity, Falvey says. These provide coverage for materials as they change from stock to raw materials to work-in-process to finished goods, and whether they’re in storage, a processing location, or on their way to a final delivery.

Adams provides an example: A company delivers vessels of raw tuna to a cannery, where they’re cooked, cleaned, and canned before traveling to a warehouse and then on to their final destination.

“People assume that cargo insurance covers goods to the site, through the value-add processes and the continuation of the voyage, but that’s not always the case,” Adams says. For instance, cargo insurance typically wouldn’t cover spoilage that occurred if the power went down while the fish were in processing. A stock throughput policy—essentially, an enhanced cargo policy—likely would cover the cargo as it’s being processed. “It’s a broader policy and covers more of the risks you face in this scenario,” he says.

A number of terms and documents are important in cargo insurance policies. The information presented in the bill of lading (BOL), such as the cost and weight of the goods and their starting and ending points, typically is used to determine the value of the goods being insured, Lee says. (The term “contract of affreightment” is used at times. This refers to the agreement under which a ship owner agrees to carry a shipment via water.)

For goods traveling via ship, a copy of the BOL is given to the ship captains, Adams says. If they have to jettison cargo, this is noted on the bill of lading. If a shipment is damaged, the type and extent of the damage also is noted. “These determine the extent to which you can claim cargo loss,” he notes.

Another key piece of information is the point at which ownership transfers from seller to buyer. This typically follows the terms of sale, which are usually stated in the invoice or sales contract. Shippers “have to demonstrate title to goods at time of loss,” Connor says. In contrast to most insurance transactions, shippers may not even own the goods when they purchase a cargo policy. However, to file a claim for a loss, they typically will need to show they had title to the goods when the loss occurred.

General Average

One concept unique to ocean insurance policies is that of “general average.” This comes into play if a ship’s captain determines that to save the vessel, the crew needs to jettison some of the cargo. “It’s called a ‘deliberate sacrifice’ for the greater good,” Griswold says. This can occur because of bad weather, engine trouble, or a fire, among other events.

The idea behind “general average” is that all parties—the shippers and the carriers—benefit when some cargo is tossed overboard. So, rather than place the loss entirely with the company whose products were sacrificed, everyone takes a financial hit.

While the calculations can become complicated, each shipper’s portion generally is based on the percentage value of its goods relative to the combined value of all the goods on the vessel, and the ship itself, says Pasco.

After a general average has been declared and the vessel arrives at port, no cargo typically is released until the shipper has posted a general average bond or guaranty. “If you have insurance, it will provide the guaranty,” Bernas says. Companies that don’t have insurance need to come up with a guaranty or some instrument that shows they can pay.

If a vessel completely sinks and there’s no recovery, the general average concept doesn’t come into play. “There’s nothing to be saved from the venture,” Griswold says.

The coverage provided can differ from one cargo policy to the next. “Open cargo insurance” is designed to cover frequent shippers, Robinson says. It typically covers most risks, including damage, theft, piracy, general average, and shipwreck. Losses resulting from cyber attacks, illicit trade, civil and military unrest, and the delayed delivery of time-sensitive or perishable goods tend to be excluded, he says.

Some other specific losses may be excluded as well. Griswold provides an example: a policy for a company that’s shipping intricate machinery might exclude mechanical derangement, or damage to the electrical or mechanical components or workings of the machine.

Many cargo insurance policies are written for what’s known as “CIF plus 10.” This refers to the cost of the goods, plus insurance and freight costs, with 10 percent for profit. If a company presents a claim, it generally will recover CIF plus 10.

Some insurance companies don’t require documentation on the value of the shipment(s) in order to obtain cargo insurance. However, if a shipper files a claim, the insurer may require an invoice or other information in order to validate the value of the goods on the claim.

At What Cost?

The price of a cargo insurance policy depends on numerous factors. These include the items being shipped, their origin and destination points, and the carrier’s loss history. Items at greater risk of theft are, not surprisingly, more expensive to insure.

The way in which the goods are packed also can impact price, Bernas says. Goods that can be shipped within crates or containers tend to be priced more favorably than goods that can’t be packed, or are simply shrink-wrapped, where they’re more vulnerable to both damage and theft.

The mode of transportation can come into play, Bernas says. Shipments via barge tend to be more expensive than vessel shipments, because barges are more open, smaller, and likelier to capsize in heavy weather. Ocean shipments tend to be more expensive than air, because the goods are exposed to various risks for a longer time.

Shippers will want to work with their brokers and insurers to confirm they’re complying with any regulations that come into play when their shipments cross national boundaries. For instance, certain countries require shippers whose goods travel on their roads or rail systems to obtain a local transit policy, Griswold says.

“A cargo policy is a living, breathing thing,” Pasco says. Shippers need to regularly review their coverage to make sure it continues to adequately protect against the risks to which their shipments are exposed.

Incoterms Set the Standard

Incoterms are a way of standardizing terms of trade and indicating when title to a good or service transfers from seller to buyer. “When someone uses these terms, everyone knows their risks and responsibilities,” says Mike Falvey, president of Falvey Insurance Group. “They indicate who’s responsible for the risk of loss.”

One common Incoterm is FOB, or Free (Freight) on Board, in which the seller is responsible for transport of the product to the designated domestic ocean port. Under another, DDU, sometimes referred to as “door-to-door,” the seller maintains title up to the buyer’s door.

First, it is important to understand that a cargo claim is based on a breach of contract by the carrier, and not whether the carrier was negligent. In a transportation contract, the carrier agrees to move cargo and the shipper agrees to pay the carrier. Implicit in this arrangement is that the cargo will arrive undamaged. If the cargo is lost, damaged, or delayed, the basic contract for carriage has been breached.

In order to prevail on a claim, shippers have the initial burden of proving their claim. Shippers must prove good condition at origin, damaged condition at destination, and the amount of damages. After establishing these three elements, the burden of defense shifts to the carrier.

Determining the Rules

The mode of transportation dictates which legal principles apply. For instance, motor, rail, domestic water, international ocean, domestic air, or international air all have different time limits for filing claims and different deadlines for initiating lawsuits if a claim is denied.

The starting point for rail and motor carriers are two federal statutes—one for rail and one for motor—that are colloquially known as the Carmack Amendment.

The Carmack Amendment also sets minimum time standards for filing claims (nine months from the date of delivery) and for initiating lawsuits (two years from the date the claim is denied).

The essence of the Carmack Amendment is that carriers are considered to be virtual insurers and are strictly liable for cargo claims. There are, however, five recognized exceptions or defenses: an inherent vice of the product or an act of God, the public enemy, a public authority, or the shipper. The carrier must also show that it was free of negligence.

The Carriage of Goods by Sea Act (COGSA) governs ocean shipments to and from the United States. Under COGSA, an ocean carrier has 17 defenses, including act of God and latent defects not discoverable by due diligence. As with the Carmack Amendment, however, even when the facts establish such a defense, the carrier must also show that its negligence did not contribute to the loss.

Watching the Time

For ocean shipments, the timeline to file a claim is only three days from delivery, and the deadline to file suit is one year from the date of delivery.

For air carriage, different rules apply depending on whether the shipment is domestic or international. For domestic shipments, the air carrier’s tariff sets the time limits and limits of liability. These limits can be short—seven days or fewer. The limit of liability can also be low—50 cents per pound.

For international shipments, the Montreal Convention of 1999, an international treaty, sets the time limits and limits of liability. A claim must be filed within 14 days of delivery for damage and within 21 days for delay.

Whatever the mode, the first step to recover a loss and damage claim is filing a claim. Shippers must file the claim with the transportation carrier, and not the insurance carrier. A claim filed with the insurance carrier is not considered a duly filed claim for purposes of meeting the claim-filing time limit.

Fighting Back

In addition, the Federal Motor Carrier Safety Administration’s (FMCSA) evolving Compliance, Safety, Accountability (CSA) program and Safety Measurement System (SMS) continue to confuse shippers. Do these safety programs impact shippers’ potential liability? What actions should they take as a result?

All these developments are prompting shippers to pay closer attention to contract language and the details of shipper and carrier insurance policies. Learning the details of shipping liability isn’t just for lawyers anymore.

Here are seven misconceptions some shippers hold about their liability status.

Myth #1: “CSA 2010/SMS is Law.”

SOME shippers believe CSA 2010/SMS methodology is law and, therefore, they are required to use it to verify their carriers’ safety records.

Evidence of this misunderstanding is showing up in the actions of transportation insurance companies. When assessing insurability, some companies are beginning to consider whether a shipper includes CSA score verification as part of its shipping procurement methodology.

“Verifying CSA scores could be the difference between whether we will or will not insure the risk, particularly for cargo with high value or special handling requirements,” says Robert Optiz, worldwide inland marine manager for the Chubb Group of Insurance Companies, Warren, N.J.

But CSA 2010/SMS methodology is not the law, and has not been approved for the FMCSA to use for rulemaking, contends a group of transportation trade associations represented by attorney Henry Seaton, partner in Vienna, Va.-based transportation law firm Seaton & Husk, LP.

Seaton represents petitioners in ASECTT et al. v. FMCSA, which seeks judicial affirmation that only the FMCSA is required to determine carrier safety. Shippers and brokers should rely on the agency’s ultimate safety fitness determination for a given carrier, says Seaton. And, under existing laws, shippers and brokers are not required to second-guess the agency’s ultimate decision (known as a safety rating) by monitoring SMS ratings. Under the laws of Congress, the Commerce Clause of the Constitution, and the doctrine of federal preemption, federal law trumps state law, Seaton asserts.

“Shippers should have no negligent selection liability under state law concepts when they choose a carrier the agency has determined is fit to operate on the nation’s roadways,” Seaton says.

ASECTT et al. v. FMCSA came about after the agency published guidance to shippers, brokers, and insurers on May 16, 2012, suggesting that SMS methodology should be used in credentialing carriers, and that safety ratings were not a reliable benchmark. ASECTT (Alliance for Safe, Efficient and Competitive Truck Transportation) is joined by 19 other named plaintiffs in the suit.

The plaintiffs cite that the agency itself “already affirmed in a settlement of a prior suit, NASTC et al. v. FMCSA, that unless a motor carrier in the SMS has received an unsatisfactory safety rating pursuant to 49 CFR Part 385, or has otherwise been ordered by the FMCSA to discontinue operations, it is authorized to operate,” says Seaton.

Petitioners’ opening briefs were recently filed in ASECTT et al. v. FMCSA, and two other logistics industry groups have filed supporting documents.

In the meantime, the FMCSA’s actions have led to widespread misunderstanding about CSA 2010 and SMS methodology, Seaton notes. Many shippers erroneously believe that:

• CSA became law in December 2010.
• Shippers are required to use SMS methodology in credentialing carriers to avoid state law liability for negligent selection.
• SMS percentile ranking is an accurate predictor of carrier safety performance.

Shippers’ mistaken belief that they are required to use SMS ratings creates several vexing liability issues, Seaton says. Among the questions raised are:

• How does a shipper use SMS methodology and maintain its best defense against negligent selection suits? Federal law trumps state law causes of action, and the settlement in NASTC v. FMCSA makes clear it is the agency’s job—not the shipper’s responsibility—to certify safety.
• If a shipper uses SMS methodology in credentialing carriers, how does it challenge the admissibility of any carrier score by the plaintiff’s bar in a lawsuit?
• Because SMS percentile rankings will always arbitrarily find that more than half of the carriers it scores exceed one or more enforcement thresholds, how does a shipper use the scores without losing capacity and carrier choice?
• Because carrier percentile rankings change monthly and scores can fluctuate wildly—particularly for small carriers based upon single paperwork violations—how does a shipper use SMS methodology and still establish stable, long-term relationships with dedicated service providers?

SMS methodology is not the law, its use is contrary to shippers’ best interests, and it can only heighten—not diminish—shipper liability, Seaton maintains. Shippers need to rely on their transportation legal counsel to determine the right stance as the logistics community awaits the outcome of ASECTT et al. v. FMCSA.

Myth #2: “Broker/carrier contracts are standard and will protect me.”

While most shippers negotiate contracts with their favored carriers, too many at the extremes take just a cursory look at the broker’s or carrier’s document, and assume it covers them. Or they go overboard, building into contracts clauses that exhibit excess control or violate laws. The contract could also be with a third-party logistics (3PL) provider, but technically, there is no such entity in the law called a 3PL. The party that procures transportation for you and does not own the equipment is either your agent or a broker.

“Shippers aren’t really taking control of the transaction,” observes Chubb’s Opitz. “They ask a 3PL or broker to arrange for transportation, and they think that party has their best interests in mind.”

But the first interest of any outside organization—broker, 3PL, freight forwarder, carrier, insurance company—is its own. That transportation contract may very well include a high deductible, limitations, and exclusions.

Another area to examine is bill of lading variations, such as compensating for a loss based on price per pound instead of total wholesale, retail, or replacement value; courts have varied widely on how they interpret contract terms such as a shipment’s full actual value. That’s particularly the case when shipping requirements are unique. Another issue is the use of subcontractors.

Most carriers offer a legal liability contract, which is different from a standard or general liability contract. “Not everything that could happen to goods, such as acts of God, is covered by a legal liability contract,” Opitz says. So any claims would go toward the shipper’s own insurance policy.

In addition, too many shippers are writing contracts without lawyers—or without lawyers specializing in transportation, says Ronald Leibman, counsel at Riker Danzig Scherer Hyland & Perretti LLP, Morristown, N.J.

As a result, important clauses could be left out, or written in a way that violates applicable laws. For example, Leibman recently saw a California-based Fortune 100 company’s contract that contained anti-indemnification language that violated California law because that shipper, and perhaps its lawyers, misunderstood the intricacies of transportation law. Shippers sometimes think a single firm can handle all their corporate needs, including transportation-specific matters.

Contracts are not one-size-fits-all for any carrier, broker, or shipper. “There is no such thing as a standard clause, but there is standardization of concepts,” says Leibman. “My transportation contract started in 1995 and has been through 75 iterations to refine its language and keep up with legal changes.”

Laws such as the Carmack Amendment, which control and limit the liability of common carriers for in-transit cargo, are already in place to address some aspects of shipment. But a shipper moving an exempt commodity—fresh produce, for example—needs specific language about these liabilities because Carmack doesn’t cover the goods. Requirements vary within a vertical market such as foods, or by transportation mode. And specific industries must also answer to agencies such as the FDA and USDA regarding shipments.

Shipper-carrier or shipper-broker-carrier contracts must be negotiated for each shipper’s specific conditions, clearly spell out issues such as how a dispute will be addressed, and balance liabilities across the parties.

“Anyone who ships freight in any volume without a contract will have liability issues,” says Leibman.

Liability, he says, is negotiable.

“Carriers are willing to expand a contract’s normal terms to get business,” says Opitz. “Carriers are taking a more all-risk approach to insuring their loads because shippers are demanding the carrier be responsible in all cases, not just legal liability.”

He recommends shippers seek opportunities in terms of sale to shift liability to other parties as quickly as possible. For example, instead of the shipper being the responsible party from its warehouse to the purchaser’s warehouse, the shipper is only responsible from warehouse to port.

Myth #3: “I can tell the carrier exactly how to ship my cargo.”

Some shippers take the opportunity to push contracts to the extreme, dictating how the carrier should handle a shipment even after it leaves their possession. This opens the door to all sorts of legal complications, including the definition of legal relationships among the parties.

“Don’t be overbearing; don’t control in finite detail how the carrier and broker perform their roles,” urges Joseph Swift, principal at Brown & James, a St. Louis, Mo.-based firm that advises insurers in transportation matters.

But not every attorney agrees. “You have the right to ask carriers to comply with the law, and generally control their actions when they’re on your premises,” says Riker’s Leibman. “It’s a big jump from a contract that says the vendor has to comply with federal wage law to one that says you are controlling that company’s employees.”

Another liability concern is ensuring the truck to be tendered is loaded correctly. Opitz advises shippers to implement good protocols for safe loading practices, and consider hiring third-party load surveyors to offer a second opinion on those practices.

Myth #4: “I have insurance, so I don’t have to worry.”

No one wants to be subject to a lawsuit that requires their insurer to pay out. But too many shippers regard their insurance policies as filling the gaps in the carrier’s liability, or believe that the carrier’s insurance is comprehensive and will cover the claim in all cases.

The array of a shipper’s insurance policies must address cargo, injury, and property liability. Shippers who move products infrequently are sometimes unaware of the coverage they need. And sometimes the operations department doesn’t realize that an exceptional shipment will fall outside the scope of the shipper’s current insurance coverage. It’s important for operations and risk management departments to work together to prevent that, notes Leibman.

The biggest misconception involving cargo insurance is that requiring a certificate of insurance is tantamount to having evidence of coverage, says Seaton. Almost all cargo policies have exclusions, and the best policies carriers can buy will, at best, meet their legal liability under the Carmack Amendment.

A shipper can ask for more, and may get it through broadly worded indemnity, or sole discretion to not mitigate damages, but “don’t expect the carrier’s insurance company to pay the claim, and you may bankrupt the motor carrier in the meantime,” says Seaton.

Insurance terms must also fit your shipments. “You can have liability because you are uninsured or underinsured,” says Leibman.

Myth #5: “If anything happens, my broker will cover it.”

In July 2012, Congress passed the Moving Ahead for Progress in the 21st Century (MAP-21) Act. Part of this extensive highway bill requires that brokers post a bond or other financial security of at least $75,000—up from $10,000—starting in mid- to late 2013. That change is intended to ensure that the broker has adequate funds to pay a carrier for a shipment or any lawsuit stemming from that shipment. This could reduce the chance that an unpaid carrier goes after the shipper for payment—even though the shipper already paid the broker.

Another important component of the legislation requires that brokers and carriers carry appropriate licenses; a transportation broker must bank at least three years of experience before being permitted to open a brokerage. These steps should help ensure that shippers are doing business with legitimate, qualified parties.

But what the measure doesn’t do is eliminate the shipper’s liability in the event of an accident, says Riker’s Leibman. That’s why it’s critical to maintain sufficient insurance coverage for cargo, property damage, and injury claims. It’s also important to ensure your brokers and carriers maintain sufficient coverage.

Myth #6: “Most truck drivers are independents, not employees.”

Shippers who use owner/operator drivers should pay close attention to movement in driver status, advises Leibman. Cases such as Luxama v. Ironbound Express, Inc. et al. and Virginia Van Dusen, et al v. Swift Transportation question whether dock workers and drivers should be considered employees rather than independent contractors. If they are deemed employees, then the contracting company becomes responsible to pay employment taxes, health care, and other benefits. The employment status has liability implications, as well. “It could create a new paradigm in how to run your business,” Leibman says.

The Luxama v. Ironbound Express case took place in New Jersey, where organized labor has strongly advocated for new laws limiting the use of owner/operators. While the intermodal freight carrier was successful in this case, the court noted that the long and exclusive nature of the relationships between the carrier and each owner-operator, and the integral value of their services, tip the scales toward employee-employer relationship status. Those contracting with owner/operators need to take great care with their practices and contract language to maintain compliance with current definitions of employee versus independent contractor status.

Myth #7: “International and domestic transportation liability are similar.”

As a growing number of shippers expand operations across the globe, they may not be aware of the differences in applicable laws and treaties. Liability issues change considerably as a shipment crosses international borders, and differ by mode as well; some are guided by statute, others by industry practices.

In the United States, for example, motor carriers ordinarily impose liability limits of 50 cents per pound per article through their service conditions on domestic ex-air moves, Seaton explains. But for international ex-air shipments, the applicable international treaty limitation is typically extended inland. The treaty limitation set forth in the Montreal Convention (applicable to most industrial nations) is 19 Special Drawing Rights, which works out to be about $12 per pound per article.

Multiple international laws—such as the Carriers of Goods by Sea Act, the Foreign Corrupt Practices Act, the Hague Convention, and the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)—may govern the liabilities for a particular shipment.

Shippers doing business internationally “should contact their insurance company to provide adequate coverage for those goods in transit,” says Chubb’s Opitz.

As with any aspect of transportation, it’s critical for shippers to select good broker, forwarder, and carrier partners by vetting them for financial health, safety record, security, communication, insurance coverage, and the ability to educate. International legal and insurance expertise is also vital.

“You may not know all the answers, but you need to know the questions to ask, such as your liabilities and protections throughout the supply chain,” says Opitz. “Being engaged in the process is key.”

Buyer Beware

Tendering shipments and taking deliveries is a routine part of daily business, but every load shipped has the potential to go wrong: an accident, theft, poor business processes, and more. While liability is rarely top of mind for those involved in procuring carriers, and building and tendering loads, the potential for major financial ramifications for shippers as a result of accidents and other events is growing. Legal experts urge those on the business side of the supply chain to keep up with the evolving legalities of transportation liability.

Nothing in this article should be relied upon as legal advice in any particular matter.

Fighting Back

Here are a few ways to stay on top of liability issues and protect your company’s interests:

• Read the major cases and ask a transportation lawyer to interpret the results.
• Engage legal and insurance counsel with transportation expertise.
• Ensure your industry associations are taking action to protect shipper interests in transportation liability issues.
• Know what questions to ask potential transportation partners.

1. Have some skin in the game. Consider different deductible levels for your insurance policy, as this can have an immediate impact on your premium—but remember that the deductible is part of your total cost of risk.

2. Invest in security monitoring. Affiliation with organizations such as CargoNet and FreightWatch may qualify you for a partial or total deductible waiver on certain losses.

3. Become a partner in loss prevention. Incorporating loss control policies, procedures, and devices, such as asset tracking and monitoring technology, can help improve the likelihood that your goods will arrive at their destination intact and undamaged.

4. Explore other options. Consider alternate risk-transfer techniques—especially the terms of sale, because these may offer opportunities to shift the cost, transportation obligations, and risk of cargo loss and damage to your trading partners earlier in the transaction.

5. Maximize recovery (subrogation) potential. A simple step such as listing the number of customary cargo transport units or packages on an ocean bill of lading can increase the carrier’s loss and damage liability. Also, seek out transportation providers willing to offer higher liability limits.

6. Operate in full-disclosure mode. The more your insurance company knows about your operations, shipment preparations, supply chain, and logistics, the more informed underwriting and pricing decisions it can make.

7. Limit the value of individual shipments on single conveyances. Do not purchase insurance limits well beyond the values you anticipate shipping.

8. Maintain a good loss record. Your company’s experience, net of deductible, and recovery from the transportation provider or other party responsible for cargo loss and damage are key factors in determining your insurance premium.

9. Hire good logistics partners. The caliber of the transportation companies you use—and the ones in the care, custody, and control of your cargo—is a key underwriting criteria, because they can be your greatest ally or your worst enemy. Using financially sound and well-managed companies with excellent commercial reputations can make a positive difference to you and your insurer.

10. Instill an enterprise-wide risk management mentality throughout your organization. Include all relevant departments—such as compliance, finance, insurance-risk management, logistics, manufacturing, operations, procurement, quality control, safety, and security—in decisions involving planning, execution, and monitoring transportation activities. Not only should these employees have a vested interest in the safety and security of your goods in transit, but they can have an impact on successful shipments.

To recap, Incoterms are an internationally accepted set of standard commercial terms used between buyers and sellers. The terms determine who pays the cost of each transportation segment, who is responsible for loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment.

Managed by the International Chamber of Commerce (ICC), Incoterms are amended every 10 years. Recent changes saw the deletion of four existing terms and their replacement with two new terms. This brought the total number of Incoterms from 13 to 11.

Understanding the Changes to Incoterms

Formerly, categories of Incoterms reflected the stages of shipment—departure, carriage (paid and unpaid) and arrival. With the 2010 revisions, the ICC recognized that the evolution in trade, supply chain management and cross-border security warranted changes to the rules and the way they are organized.

The rules are now divided into two categories that better reflect the usage of Incoterms for multiple modes of transit—one set for any mode of transportation, the other specifically for water. The first set can certainly be used for ocean, but also applies more broadly to road, rail and air. The second set refers to ports, so is exclusively for water transport, and it eliminates the confusion around the use of FOB by making it clear that the term is only for water shipments.

Deliveries by any mode of transport (sea, road, air, rail)

• Ex Works (EXW)
• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid to (CIP)
• Delivered at Terminal (DAT)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)

Deliveries by sea and inland waterways transport

• Free Alongside Ship (FAS)
• Free on Board (FOB)
• Cost and Freight (CFR)
• Cost, Insurance and Freight (CIF)

The 2010 Incoterms make more general use of the terms “terminal” and “place,” acknowledging that these locations are relevant across modes. The rules that were added—Delivered at Terminal (DAT) and Delivered at Place (DAP)—made four of the previous rules superfluous. Those were DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered at Quay) and DDU (Delivered Duty Unpaid).

An objective of the ICC for Incoterms 2010 was to foster uniformity and certainty in global business transactions, thereby reducing the potential for costly disputes. The Incoterms changed to state that export and import formalities only have to be complied with where necessary, reflecting their usage in places where these formalities have been reduced by trade agreements or trading blocs. Many countries, such as the US, are also adopting Incoterms for domestic transport, and the 2010 rules flexibly support that application.

Aside from additions and deletions to the Incoterms themselves, there were other changes in their usage.

Electronic communication— Incoterms 2010 allows for “electronic record or procedure” where this is agreed or customary. This is a progression from previous Incoterms, which only allowed for the use of Electronic Data Information. The change facilitates the adoption of new electronic procedures and supports those already in use.

Security clearance— Buyer and seller must cooperate more closely, since Incoterms 2010 allocates their obligations to supply information needed to obtain export and import clearance. This increased degree of cooperation required is a result of growing concern over security and chain-of-custody for shipped goods.

Terminal handling charges— Incoterms 2010 reduces the potential for buyers to be charged twice for terminal handling charges. Pass-through of the cost of carriage of goods to an agreed destination, which previously resulted in buyers being charged twice, disappears with amendments to CIP, CPT, CFR, CIF, DAT, DAP and CCP Incoterms.

String sales— String sales, or the multiple sale of goods during transit, is clarified in Incoterms 2010. Specifically, FCA, CPT, CIP, FAS, FOB, CFR and CIF Incoterms are amended to provide that the seller in the middle of a string sale has an obligation to “procure goods shipped” and not to “ship” the goods. The seller’s obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage.

Remember that Incoterms are not implied in the buying and selling of goods. They must be specified, along with designation of location. If you wish to still use the 2000 version, you must explicitly state that, otherwise the 2010 rules apply by default.

Amber Road (formerly Management Dynamics) is the world’s leading provider of on-demand Global Trade Management (GTM) solutions. Amber Road enables goods to flow unimpeded across international borders in the most efficient, compliant and profitable way. Visit www.AmberRoad.com for more info or contact them at Solutions@AmberRoad.com.

For additional information on global shipping procedures, find information here about customs clearance.

SMART PROTECTION

First written for the London Market in the 1990s, TDI was designed to protect businesses from financial setbacks resulting from disruptions such as embargoes, confiscation of goods, terrorism, labor strikes, political violence, or war. TDI was also intended to protect companies from financial problems stemming from covered causes of loss, such as vessel breakdowns, port closings, waterway blockages, and natural disasters. In addition, TDI was a form of protection for financial losses resulting from supplier or customer insolvency.

The thinking behind TDI is that companies should be protected against risks of indirect threats that will interrupt trading activities and, in turn, trigger a financial impact. Unlike business interruption (BI) coverage, where physical loss or damage to property is required, TDI does not require loss or damage to cargo to trigger a covered loss. Instead, it is triggered by indirect events caused by delays in a shipment’s transit as a result of an unexpected peril.

TDI IN ACTION

Here’s an example of TDI in action. An American company manufactures a product in China. A major earthquake occurs, causing a landslide that blocks the sole road in and out of the region. This interruption delays the product’s shipment to a retailer who, as a result, cancels the order. TDI coverage is triggered.

In addition to covering the loss of the retailer’s order, TDI covers additional expenses such as transporting the product by air out of the region to meet a preset order deadline. A BI policy, on the other hand, would not cover the loss because it happened outside the policy’s coverage territory, and there was no direct damage to the company’s product.

TDI serves to secure supply chain-dependent income and mitigate expenses arising from unexpected contingencies needed to address the problems generated by an unplanned danger to the supply chain. It also is a form of assurance to financing sources, investors, and strategic allies who value the fact that safeguards have been taken to protect the company’s revenue stream. Customers, too, gain confidence in knowing their suppliers are diligent in efforts to uphold shipment commitments.

Global traders must be alert to increasing threats to the supply chain. In addition to increased terrorism and political violence, inherent risks are associated with the growing use of low-cost labor in third-world nations with unstable and corrupt governments.

Further, while American businesses often take for granted that there will be a viable infrastructure for the reliable transportation of their goods, this is often not the case in underdeveloped regions. Poorly constructed bridges and roadways are commonplace in many parts of the world, and are vulnerable to natural and weather-related disasters. It is important to recognize the deficiencies that exist in other regions, and the economic risks they pose. Protecting against these risks with TDI coverage is good business.