The Changing Face of Liability Risk for Project Forwarders

Freight transport specialist insurer TT Club outlines the additional liabilities that project cargo forwarders are undertaking as a result of the growing volume and variety of value-added services they are now offering shippers, and of the more challenging parts of the world to which such cargo is consigned.

Project cargo forwarders, like many others providing freight transport services, are increasingly being called upon to expand, both to accommodate additional volumes in their sector and also to supply additional services to cargo owners.  These demands can include not only traditional tasks, such as customs clearance and documentation (not always straightforward in some regions) and on-carriage from the port of entry, but also secure staging, warehousing, sub-assembly and coordination of multi-modal traffic.

Project forwarders are finding themselves open to increasing liabilities consequent upon these various activities and to pressure from their multi-national clients to bear responsibility for often extremely valuable cargoes.  It is vital that forwarders recognise how their role is changing and the consequences of these changes.  Importantly, from a risk management perspective, companies must understand how this can result in newly acquired exposure to loss and liability.  In addition they should understand what steps they can take to mitigate the exposure by a disciplined and organised approach to the contractual terms agreed with their customers, and well-advised insurance cover.

Individuals negotiating such project contracts have many things to consider. It is therefore wise for them to consult their insurer about the liability implications of the contract before it is agreed.  In all probability, contractual obligations in relation to risk exposure – and whether or not insurance cover can be reasonably obtained – are scarcely of concern at the outset of negotiations.  The TT Club, however, advises project bidders and contract negotiators to apply their minds to such issues without delay.

Some involved in the supply chain, such as terminal operators, may have little additional exposure contractually or in relation to insurance, provided they have declared the nature of cargoes handled; the project forwarder is far less secure. It is this sector that requires particular attention in relation to liabilities for cargo loss or damage, errors and omissions, delay, customs and similar fiscal returns, and third party liabilities.

One of the most notable challenges is that contracts drawn up by the project owners are usually faits accomplis, offering little if any leeway to the unsuspecting freight forwarder. These non-negotiable contracts, which tend to be non-specific and very confusing, require special consideration. Many are generic service terms, covering all types of supplier, and sometimes considerable imagination is needed to relate them to road or sea carriage.

Our greatest concern is that the contracts which forwarders and transport operators are asked to sign may be based on no fault liability and lack typical carriage liability limitations or defences. This may be inconsistent with, or may derogate from, international conventions or locally applied law. Consequently, while international law, such as the Hague-Visby rules, may cut in for the ocean carriage, this may only benefit the sub-contractor. The forwarder or transport operator may be exposed to vast liability exposure from what is a seemingly open ended contract. The combination of such onerous conditions and the high value of many project loads means that, if they are not delivered on site, on time, a huge claim may result.

Speed also is usually of the essence in such contract negotiating situations.  So it is crucial that the forwarder’s insurer is able to examine the contractual terms at the earliest opportunity and preferably before it is signed.  This is not always possible in reality of course, in which case a contract review before transport activity starts is advisable.

The priority is to transform the contract’s theoretical conditions into practical implications so that the underwriters can make a judgment as to the risk’s insurability, which will depend on a full loss prevention analysis and on what is known about the companies involved and the scope of the project.

Non-negotiable contracts mean exactly what they say and there is usually little point in attempting to change them to fit a forwarders insurance cover. Instead, the cover, if the risk is deemed acceptable, has to be fashioned around the contract.

One of the alarming aspects is that sometimes the contracts do not even carry a traditional force majeure clause for eventualities such as hurricanes, government requisition, violent attack or withdrawal of labour.  In this case we would seek to have at least a rudimentary clause inserted.

An early course of action would be to ascertain the level of liability and whether or not there is any derogation from international law. This might involve the no-fault limitations, mentioned above. These may look frightening at first sight, but on analysis it could transpire that the contracting party may not be liable to anyone and as a result the forwarder may not face phenomenal exposure after all.  If the assignment is not the normal sort of risk the insurer is comfortable with, it might be necessary to seek an additional premium.  Alternatively, it could be necessary to reinsure the risk, or part of it, through a third-party.  There are rare occasions when liability cover cannot be arranged and freight forwarders are advised to obtain straight cargo insurance.  Normally, however a solution is at hand, provided the issue is tackled at an early stage.

Russian Case Study

The potential severity of the effects of a project forwarder being under-insured can vary in different parts of the world.  One example, where project activity is high, is Russia.  Here, because of the nature of liability regulations a number of additional challenges are often encountered when seeking adequate cover.  In helping project forwarders in this market, access to experts with a thorough knowledge of Russian law is essential for an insurer as well as an ability to draw upon reinsurance resources at an international level.

Here is an example to illustrate these requirements: a project shipment from Germany to the Russian oil fields.  Sizeable in volume and with a high value, the equipment needed liability cover up to a US$10 million limit over the extent of the three-month project. Such extended liability cover demanded by the German shipper required an international capacity.  In this case the TT Club in London was able to provide this capacity and supply the local knowledge and understanding of the underwriting and claims situation through its agent in Moscow.  The required provision of cover was therefore arranged.

The complexity of the Russian case arises in part because the usual international freight transport conventions that limit liability for transport operators, including freight forwarders only apply in Russia to inbound cargoes from foreign countries.  When the transport service provider is then contracted to break down or in any way split the load for delivery within Russia, any attempt to limit liability contractually on cargo loss for the domestic leg may cause difficulty. 

In an environment where project shippers, who are moving goods in increasing volume into Russia, are also demanding that the forwarder take responsibility for more and more domestically based transport and logistics functions, international transport conventions may not be applicable.  Project forwarders need to be aware that they may be open to increased liability in these circumstances.  They need in particular to understand the terms of the contracts which they are agreeing with international shippers, who themselves are seeking to take advantage of Russia’s current surge in buying power, particularly in the energy sector.

Today any project forwarder – in whatever part of the world it is operating – is under pressure to agree to deliver services within tight operational and financial margins, and typically will face harsh financial penalties for delays.  As a consequence of providing these services, whether sub-contracted out or provided within their own operation, forwarders are clearly taking on ever-growing exposure to risk.  They should be acutely aware of the possible additional risks which they may undertake in order to win their share of the expanding trade in project cargoes in a sustainable fashion.  Expert and specialist advice on the complexities of liability in this competitive commercial environment is crucial.

Through Transport Mutual Insurance Association Limited and TT Club Mutual Insurance Limited, trading as the TT Club. TT Club Mutual Insurance Limited, registered in the UK (Company number: 02657093) is authorised by the Prudential Regulation Authority and regulated in the UK by the Financial Conduct Authority and Prudential Regulation Authority. In Hong Kong, TT Club Mutual Insurance Limited is authorised and regulated by the Hong Kong Insurance Authority, in Singapore by the Monetary Authority of Singapore and in Australia by the Australian Prudential Regulation Authority. In the United States, TT Club Mutual Insurance Limited is approved as a surplus lines insurer in all states and is accessible through properly licensed surplus lines brokers. The registered offices are: 90 Fenchurch Street, London, EC3M 4ST.

Through Transport Mutual Insurance Association Limited, registered in Bermuda (Company number: 1750) is authorised and regulated in Bermuda by the Bermuda Monetary Authority. 

The UK VAT Identification number for Through Transport Mutual Insurance Association Limited is: GB 564 5244 35 and for TT Club Mutual Insurance Limited is: GB 564 3375 30. The Italian VAT Identification number for TT Club Mutual Ltd is: 03627210101.

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