by Jason Odgers, SVP, World Insurance
Freight forwarders and other intermediaries face potentially serious financial consequences resulting from the expiration of the labor contract between USMX (US Maritime Association) and the ILA (International Longshoremen’s Association).
Supply chain disruptions from the resulting port closures from NY to Texas and consumer turmoil aside, a prolonged USEC/USGC port closure compels forwarders to carefully consider the impacts and to take action to mitigate the potential harm.
Impact of Port Closures on Freight Forwarders
Prolonged port closures may force ocean carriers to declare “Force Majeure” to mitigate their losses. Force Majeure is a French term which translates to “Superior Force,” and it is used as a basis to terminate contractual responsibilities when performance is prevented by causes beyond the contracting party’s control.
A declaration of “Force Majeure” would permit carriers to discharge cargo at an alternate port of convenience and terminate the contract of carriage (bill of lading). Here’s the concern: it then becomes the cargo owner’s responsibility to move the cargo to the final destination at their own expense. This poses a number of risks and financial challenges to both forwarder and shipper.
Understanding the Added Cost and Insurance Coverage
First, the cargo owner is likely to be faced with significant additional costs associated with the handling and transportation of cargo to the final destination. If the shipper has cargo insurance, however, there may be some limited assistance found in the “Sue and Labor” language of a shipper’s interest cargo insurance policy. Insurers remind us that this type of insurance is intended to address actual (or imminent) physical loss or damage to the cargo.
Similarly, if shippers claim against their transportation intermediary, there may be some coverage available under the terms of a cargo liability policy, such as a “Forwarding Expense” clause; yet, these types of coverage extensions typically have very specific terms, and the insurer’s response will depend on the specifics of the claim.
The Immediate Need for Cargo Owners to Examine Insurance Coverage
Insured cargo owners should review their shipper’s interest insurance terms to familiarize themselves with their responsibility to notify insurers whenever cargo is taken out of the due course of the intended transit. In a force majeure situation, cargo insurance typically terminates whenever cargo is discharged at an alternate port and the contract of carriage is terminated.
Required to Notify Insurers When Transit is Deviated
To continue coverage, the insured party must notify the insurer of the changes in transit and pay any additional premium. Failure to notify insurers may result in declination of claims if cargo is lost or damaged during the subsequent completion of transit to the final destination.
Common Exclusions
Most cargo insurance policies exclude any loss or damage associated with delay. Therefore, claims for spoilage, deterioration, loss of market, or loss of use are not likely to be covered.
Another common exclusion is the use of a barge. In the event cargo is discharged at an alternate port, barge transport may be the primary mode of transit connecting the alternate port to destinations in the USA. Most shipper’s interest cargo insurance excludes transit by barge unless it is used as a connecting conveyance.
When the bill of lading is terminated at a port of convenience and cargo continues on to its final destination via barge under a separate bill of lading, this is usually considered to be a “transshipment” and would be excluded under the standard terms of many shipper’s interest cargo insurance policies.
Special Considerations for the NVOCC
NVOCC’s should consult with legal counsel regarding the potential necessity of declaring force majeure for cargo moving under their House Bill of Lading on a “back to back” basis with the declaration of the underlying ocean carrier. Failure to do so may obligate the NVOCC to complete carriage per the terms of their house bill of lading at their own expense even though the master bill of lading issued by the underlying ocean carrier has been terminated.
When faced with a declaration of force majeure, it is essential all effected parties act like “prudent uninsureds.” Cargo owners and transportation intermediaries should assume they will bear all additional expenses without the contribution of insurers, and necessary steps should be taken to move cargo as efficiently, effectively, and economically as possible. Insureds should also proactively review their policy terms and consult with their insurance broker to ensure they are satisfying all obligations and warranties necessary to preserve their right of indemnity for losses ultimately covered by the policy.
For more information regarding Force Majeure or to review the terms of your shipper’s interest or cargo liability policy, please contact your local World Insurance Services (WIS) representative. As a value-added benefit of membership in the WCA, the staff at WIS is your resource for high quality risk management information, support, and products to protect the longevity of your business.