When Hanjin Shipping, the world’s seventh-largest container line, collapsed in September of last year, it sent tremors throughout global industry. An estimated $14 billion worth of goods from some 8,300 owners was tied up on the stricken carrier’s vessels, many of which were moored in sight of ports but not allowed to dock and discharge their loads. Shippers were left scrambling to find ways to get their cargo to its destination, in many cases missing vital deadlines.
At the first creditors meeting in a Korean court in early June this year, more than 180 plaintiffs were in attendance, and the claims filed added up to about $10 billion, but many cargo owners did not bother because they had low expectations of recovering any funds.
“Hanjin was an eye opener: It highlighted how important it is to have comprehensive coverage,” says Paul Friel, national cargo leader at insurance firm Marsh. The incident showed that shippers should not rely only on the carrier’s liability insurance, he adds.
Shippers have to asses the total cost of risk and determine how much they want to cover. They should also make sure that there is a process in place to take care of their claim fast and efficiently, he advises.
If American companies needed reminding of the need for insurance for their goods, the recent floods in the Gulf should provide ample illustration. Usually losses caused by flood or wind are not covered by the liability insurance of warehouse operators, Friel points out. “Shippers are sometimes surprised by limited liability,” he says.
Many cargo owners look for comprehensive solutions that cover the entire process from beginning to end, observes Dan Negron, vice president of Thomas Miller Americas, the managing agent for the Americas of international insurance firm TT Club.
“Most shippers want a solution that covers the entire transit. Door-to-door is almost expected,” confirms Friel.
Door-to-door service is difficult to get in some countries of destination, although overall the situation is getting better, remarks Negron. In such cases it is advisable for the exporter to get the receiver to pick up the goods from a safe location, such as a port, he says.
Shippers may be tempted to vary the extent of cover depending on the risks, especially in the country of destination. Friel counsels against this. “In the course of transit, you don’t know where the damage occurs. It may be dropped by a stevedore in New York,” he says.
Many insurers offer a range of standard policies covering such aspects as liability or errors and omissions. Players like TT Club that specialize in logistics offer seamless cover based on an assessment of the specifics of the logistics provider (such as types of activities, geographical areas, types of goods handled, terms and conditions of service), as well as cargo programs for shippers to complement these.
Increasingly, forwarders have taken to offering insurance policies to their clients, working together with insurance carriers or brokers, notes Friel. “We see this as a large trend in the industry,” he says.
He attributes this to the fact that cargo rates have been driven drown relentlessly, which is pushing logistics firms to expand their service portfolio and come up with comprehensive solutions. Marsh itself is increasingly working with logistics providers that want to add insurance to their service.
Typically, this is shipper’s interest insurance, which covers the shipper’s insured value of the goods against physical damage or loss without the need to prove fault. Carriers can underwrite such a policy giving specific cover for any potential damage.
Such an engagement may accelerate the claims process, as the logistics firm is usually the first to know if something has gone wrong, Friel reflects.
“One concern with logistics companies is that they may only cover the parts where they are involved in the logistics. You don’t want to leave any gaps,” he warns.
Shippers should also ensure that both the logistics firm and the insurer understand their industry and are aware of the specific concerns and requirements associated with it, Friel adds.
Negron stresses the importance of written documentation. Without this, shippers may encounter difficulties if a dispute arises. “You can get into a ‘he said, she said’ situation,” he warns.
For shippers who take out insurance through their logistics provider, it is important to look beyond the terms of the coverage. They should examine their total cost of risk and also weigh the logistics expenditure to assess the cost of the total package, Friel advises.
Negron suggests that shippers should do a background check on their logistics provider. By the same token, if a different logistics firm is employed in the country of destination, this company’s credentials should be checked.
He advocates a systematic approach to the insurance issue. “A shipper should follow a checklist,” Negron says.
Friel points to the importance of information flow between different departments at the exporting company. “Make sure there is communication and connectivity, that risk management and insurance departments are well aligned with the logistics department that negotiates rates and space,” he remarks.
For their part, shippers should do more to make sure their cargo is properly packaged and does not pose any risk. According to TT Club, just 5-10 percent of ocean cargo is hazardous, but between one-third and half of all incidents of reported cargo damage on ocean carriers have a cause that involves dangerous goods. In partnership with global liner and shipper organizations, the insurer is promoting cargo integrity, with an international code of practice for packing cargo transport units at the core.
Shippers are unlikely to see any financial pressure from the insurance industry for greater compliance through raised premiums, though. According to Marsh, global insurance rates have declined for 17 consecutive quarters, although the rate of decline has moderated over the past 18 months. For the foreseeable future, the initiative will continue to focus on raising awareness of the issues with shippers and promoting safe packaging standards.
However, the liabilities arising from an incident caused by improperly packaged or misdeclared hazardous materials are potentially far more serious.