Warning to forwarders who may be taking on more liability as shipper needs grow

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Changes in shipper requirements and the contracts they are looking to sign with their logistics providers, particularly freight forwarders, have fundamentally heightened the exposure to financial loss many freight service providers are faced with.

Andrew Kemp, regional director for Europe, Middle East and Africa for specialist freight insurer TT Club, told delegates at this week’s TOC Container Supply Chain event in Dubai that such was the level and pace of change in supply chains over the last 10-15 years that many operators now had little idea of the scale of risk they faced.

“It is now a very different environment – one that has become a lot more complicated – and logistics operators are now much more involved in many more aspects of the supply chain. As the level of complexity has increased, the level of risk and exposure and liability has also changed as they have taken on more and more different roles – some that they may be able to do quite easily and others that are well outside the scope of their normal operations,” he said.

He said the single biggest change was in reliance purely on standard trading conditions (STCs) – which in the UAE, for example, was set at Dir30 per kg – or similar standard monetary limitations on loss or damage to cargo during international movements such as international conventions covering sea and air modes.

“These accepted international standard monetary limitations are now being eroded, because more and more contracts drafted by non-transport lawyers are being forced on operators.

“We are seeing contracts where forwarders are being asked to take much greater liability – either enhancing those STCs or international trading conventions, or sometimes on a strict liability basis; and forwarders have to change the way they are looking at the risk.”

He said the biggest area of risk forwarders now face is that instead of their liability being limited to set monetary values, they are effectively being asked to insure shippers’ cargo at full value.

Forwarders have traditionally acted as agents, with rates based on volume rather than value of cargo – Mr Kemp said this needed to change, given shippers’ new requirements.

“With big shippers commonly asking their forwarders to be responsible for the first $250,000 of a loss, the forwarder has to change the way he’s billing for the cargo to reflect the way his responsibilities have changed – it means he has gone from being an agent to a principal, and being a principal brings with it a much bigger degree of liability,” he added.

In part, forwarders were victims of pressure within their own organisations to hit sales targets, he observed.

“The pressure to get the contract signed means it is done before the contract is reviewed by the finance manager and risk manager.  The risk manager only subsequently sees that contract, and the risk his salesman has exposed him to – and it may be unfeasible to insure against those risks.

“We have seen instances where companies have signed contracts containing liabilities they simply haven’t thought through – such as fines for delays – imposed on them by shippers. These risks can sometimes be insured against, and sometimes they are simply too much to insure against.”

This had become more of a problem as forwarders increasingly moved from booking port-to-port movements to door-to-door.

Mr Kemp told delegates: “In the Middle East in particular, it’s very rare to find hauliers operating with liability insurance, so any forwarder working in the region using a subcontractor certainly won’t be able to recover any claim from the haulier if there is loss or damage.”

And as emerging markets grow in importance, so too does the risk.

“We have seen lots of people moving goods door-to-door from the UAE to Africa. They are covered when the cargo is on the ship, but once inland there is little or no chance of recovery,” he said.

However, there are ways for the industry, working with insurers, to overcome these challenges, Mr Kemp argued.

Around 15-20 years ago, the TT Club had worked with one of the major shipping lines to change the way road transport was done in the then Soviet Union. Haulage was a rouble-based industry, but forwarders outside the country paid the shipping lines in dollars. If there was claim by the forwarder against the shipping line for damage that had happened during the haulage leg, the shipping line was unable to recover the claim from the haulier.

“We worked with the shipping line and its Soviet Union trucking companies to effectively transform the industry from rouble-based to dollar-based: the shipping line paid more to the trucking companies; the trucking companies could afford to buy insurance; and the shipping line could then claim against the trucking company if there was any loss or damage,” he said.

“That sort of thing will have to happen in the south-south trade, because while the port-to-port leg is covered, door-to-door is not – and it will need to be.”