Understand the general principles, what the most common risks associated with goods transport are, and when it makes sense to arrange for cargo insurance.
Cargo shipments are generally safe and secure, but as with unforeseen events, things can sometimes go wrong during the transport of goods. If you outsource the transportation of your products to a professional carrier or freight forwarder, you could be forgiven for believing that the carrier or forwarder is fully liable for any damage or loss. This is not the case.
Carriers and forwarders only have limited liability. If an unfortunate incident occurs, you may be faced with a long list of terms and conditions that are difficult for non-specialists to understand.
That’s why it helps to know the general principles, what the most common risks associated with goods transport are, and when it makes sense to arrange for cargo insurance.
Incoterms and liability
For freight forwarding, the Incoterms rules define the rights and duties between the buyer and seller of transportation and delivery services. The Incoterms clarify who pays for what. They also set out who is liable in the event of any damage or loss of goods in transit.
The carrier or freight forwarder is only liable if damage or loss occurs through demonstrable mistakes or negligence during transport. Likewise, there are limits to the extent of carriers’ or freight forwarders’ liability and to the maximum amount of compensation they are required to pay.
Cargo insurance cover
If the value of your consignment is higher than the maximum amount your carrier or freight forwarder is liable for, it is wise to ask about cargo or transport insurance.
Cargo insurance gives you the certainty that, if something should go wrong in transit, you will receive compensation of the value based on the commercial invoice. If there is no commercial invoice, the market value will be used to determine the amount. Transport costs will also be reimbursed.
As the shipper, you are responsible for arranging insurance as necessary. In some cases, the option of insuring cargo is something the carrier or freight forwarder will specifically highlight to you.
The level of the insurance premium depends on several factors, including:
- the value and nature of the goods
- the destination
- the selected mode of transport
Risks and measures
Common risks associated with the transport of goods are damage, loss or theft.
Damage: This includes goods that get scratched, dented or wet in transit.
The sender is responsible for ensuring that the consignment is suitably packed. If a consignment has damaged or inadequate packaging when the carrier receives it, the carrier records this fact on the transport documentation. In the case of air or sea freight, if the goods inside are visibly damaged upon receipt by the consignee, then the carrier is held directly liable. In the case of road transport, a note written on the transport documentation is sufficient. In all cases, notice must be given immediately and in writing. If the damage to the consignment is not immediately visible, the carrier must be informed within three working days that it is to be held liable in the case of air or sea freight, or within seven working days for road transport. The goods are usually delivered to the consignee even if they are damaged, unless continuing to transport them is pointless or impossible.
Lost or stolen goods: This includes the loss or demonstrable theft of part or all of the consignment. In such cases, it is important to demonstrate that the loss or theft occurred during transportation of the goods. In principle, a loss is indicated with a note on the transport documentation which lists the contents and quantities of the consignment. The carrier signs the transport documentation when it receives the consignment. If the consignee discovers a loss upon receipt, and makes a note of it on the transport documentation, this serves as evidence that the loss occurred in transit.
Theft must be proven, for example with the aid of CCTV footage. Any case of theft must always be reported to the police, and the responsibility for doing so lies with the party in possession of the consignment at the time of the theft. If there is no actual proof of theft, the incident is treated as a loss.
If just part of the consignment is lost or stolen, the affected party is compensated on a pro rata basis. In the event of loss or theft of air or sea freight, the carrier is held directly liable. For road transport, a note on the transport agreement suffices.
Delays: Late delivery of goods can sometimes lead to financial losses, known as ‘consequential damages’ or ‘special damages’. Carriers and freight forwarders almost never accept liability for damages of this kind. At most, they are required to reimburse the freight costs paid if mistakes or negligence can be demonstrated. It is not usually possible to insure against consequential damages. This is because it is difficult to quantify the exact extent of such losses and to estimate the associated level of risk.
General average (sea freight only): This does not happen often, but is important to keep in mind. General average refers to collective damage to both a ship and its cargo. It a ship is in danger, it may be necessary to make sacrifices to safeguard the ship itself, its crew and its cargo. All the costs associated with the salvage operation including the value of any goods sacrificed are shared proportionally between the ship owners and the cargo owners. In practice, this means that the consignor of the sea freight bears part of the costs. However, it is possible to insure against such risks.
Filing claims for damage, loss or theft
To hold a carrier liable, it is necessary to file a claim for the damage, loss or theft within a certain period of time. For uninsured consignments transported as air or sea freight, the consignor must claim damages within two years. For road transport, the relevant timeframe is shorter at just one year.
If the consignment was insured, the consignor must first hold the carrier liable and then contact the insurance company in order to file a claim. The timeframe for filing a claim varies from one insurance policy to another. If the claim is approved, the insurance company will reimburse the full value based on the commercial invoice. If there is no commercial invoice, the market value will be used to determine the amount.
The insurance company in turn holds the carrier liable for reimbursement of the relevant costs.
When opinions differ
Generally speaking, most carriers and customers manage to resolve things without too many problems. However, there can sometimes be conflicting opinions about an incident.
Always collate all the relevant documentation such as bills of lading and transport agreements. These documents indicate the condition and the content of the consignment at the moment the carrier received it.
If differences of opinion remain, get help from an independent loss adjuster. The carrier is generally responsible for taking this step.
Weighing cost and benefit
Insurance is money well spent, because it is rare for a consignment to have a value lower than the amount the carrier or freight forwarder is liable for.
There are always factors that are not covered by liability, so when deciding whether or not cargo insurance is necessary for your shipment, bear in mind the principle behind insurance. Insurance offers cover against relatively extensive damage that occurs relatively rarely.
If the value of your consignment exceeds the amount that the carrier or freight forwarder is liable for, or if you are shipping to unfamiliar destinations lacking a well-organised infrastructure, you should seriously consider taking on the relatively low extra costs of cargo insurance.
