Chartering an Aircraft or Vessel? Forwarder Beware!


The latest in the world of insurance



   Posted 2020-05-21

Due to increasing global demand for supplies related to Covid-19, chartering is on the rise.  If not careful, freight forwarders and logistic operators that become party to a charter agreement could be taking on enormous financial liability.

Chartering of a vessel or aircraft, in simple terms, is employment of the entire Vessel/Aircraft for a voyage/flight, or over a period of time. The carrier will load and discharge and travel between locations requested by the Charterer.

Forwarders that charter will enter into a Charter Party Agreement with the carriers’ owners and operators. That agreement will specify each party’s responsibilities and liabilities to each other, and to third parties.

The Risks of Aircraft Chartering

Aircraft charters in particular are seeing unprecedented popularity during the pandemic as global demand surges for medical PPE, face masks, test-kits, machinery and parts.

There are two things freight forwarders must know before entering a charter agreement with an air carrier.

Firstly, your freight liability and errors and omissions policy very like excludes coverage on claims that involve the chartering of aircraft (and vessels).  It is a standard exclusion. In practise this means that the policy excludes any losses, liabilities, third party claims connected to Chartering of aircraft including, but is not limited to exclusions for the following:

Any damage to the cargo, misdirection claims, document error etc.
Excluding damage to the plane and auxiliary equipment/cargo handling equipment by the cargo.
Excluding any loss of property or life as a result of an aviation accident or disaster.
Unless agreed otherwise there will also be no coverage from the pick-up at origin to airport and destination airport to final destination.

Secondly, potentially the greatest exposure to a Freight Forwarder entering an air charter agreement is the risk of being named in a lawsuit related to an aviation incident. These lawsuits tend to be for large amounts and require extensive legal defense costs. 

Claimants may argue that the incident would not have occurred had the forwarder not chartered the aircraft. Furthermore, they may allege that cargo was the proximate cause of the aviation accident. 

Charter Agreements typically include a clause stipulating that the charter party (forwarder) indemnify, defend, and hold harmless the owner and/or operator of the aircraft from and against any and all liabilities, losses, damages, claims, suits, recoveries, awards, judgments, executions, fines, penalties or other costs and expenses.

HOW FORWARDERS CAN PROTECT THEMSELVES IN AN AIR CHARTER

To protect your liability each Freight Forwarder or Logistics Operator can ask to be named on the aircraft hull & liability policy as an additional insured and charterer.  Note that this is often refused.

Another option to is purchase an “Air Charterer’s Liability policy” which in the aviation world is often referred to as a Non-Owned aircraft liability policy “NOL”.  Many risk managers recommend limits in the tens of millions of dollars, a process that calls for a specialised insurance market and involvement of multiple insurers

The best protection before being signatory party of an Air Charter agreement is to have the agreement reviewed by legal counsel and changes made to transfer liability back to the air carrier.

The Risks of Vessel Chartering

Like Air Charters, vessel chartering is also a common exclusion under a Freight Forwarder Liability insurance policy.  Vessel chartering risks are not perceived to be as high as for air chartering, and insurance coverage is more readily available and affordable.  Forwarders serving as “Charter Party” need to acquire a “Charterer Liability policy” which will have typical limits of USD 50 million upwards. 
The policy includes coverage for such things as …

the liability for loss of / damage to the Chartered vessel (Damage to Hull)
liability for loss of / damage to the cargo being carried (Damage to Cargo)
other general liability risks associated with the operation of the vessel and the carriage of the Cargo (P&I which is Protection & Indemnity)

Summary

If entering into any kind of charter agreement, please consult with legal counsel and your insurance provider. Lack of proper protection could be disastrous for your company.
For more information please contact Angus Galbraith, Senior Underwriter, World Insurance Services
angus@worldinsuranceagenc.com