March 23, 2020 | Industry Insights, Shipping
Best Practices for Freight Forwarders: Mitigate Losses Due to COVID-19
Global shipping has been one of the biggest casualties in the wake of the coronavirus (COVID-19) pandemic with challenges getting cargo to and from the docks. The Port of Los Angeles, which handles more containers in a year than any other port in the Western Hemisphere, expects in the first three months of the year to experience the biggest decline in volume since the financial crisis of 2008, according to a recent article in the New York Times. The Port of Long Beach has already reported a 17.9% year-over-year drop in imports in February. According to the Maryland Port Administration, the Port of Baltimore’s sole container terminal was closed on March 12 and will close again March 17 in response to the decline in cargo volumes triggered by the coronavirus.
As freight forwarders navigate the choppy waters of an increasingly fluid crisis resulting in air travel bans, port closures, cargo delays, and city lockdowns, we would like to address some of the issues regarding contractual liability and insurance coverage while at the same time stress the importance of implementing measures and best practices to help mitigate and minimize losses.
“Force majeure” in contractual agreements is the legal term to describe a situation or event in which the affected party has no control over the outcome. This includes Acts of God, war, riots, and terrorism. Most freight forwarders in their Master Service Agreements and Conditions of Carriage include a force majeure clause. Force majeure, when invoked and formally declared by a freight forwarder, protects an operation from having any responsibility for an event outside of its control. It’s important to reaffirm with your clients the force majeure clause that exists under the terms and conditions of the contract so that there aren’t any assumptions made in the event their cargo is delayed or stranded as a result of actions taken by a government during the coronavirus pandemic.
Errors & Omissions Liability
Shippers rely on freight forwarders to provide professional advice along with the ability to move cargo from point A to B. While it’s always important to underscore that delivery dates cannot be guaranteed under normal circumstances, it’s critical you make it even more clear that despite your best efforts to deliver products on time, failures may occur particularly during a time when airports are scaling back flights, ports are closing and entire cities are being closed off.
If a disgruntled client takes action against you for failure to perform as a result of a delayed shipment, an Errors & Omissions Liability policy may step in to cover defense costs. The best course of action, however, is to communicate with clients upfront about the fluidity of the situation and the risk of delayed shipments during this crisis.
Cargo insurance provides coverage for physical loss or damage to goods within the supply chain, with shippers opting to arrange insurance through the freight forwarder or on their own. Cargo insurance does not provide coverage for delay of goods. This exclusion includes circumstances wherein cargo has not been delivered to its final destination due to quarantine, delivery to another port, or return to the original port.
Cargo policies may include clauses, however, that can help recover some costs, particularly when goods are at risk of physical loss or damage. To illustrate, an Extra Expense clause may be included within the policy to provide coverage for costs involved in undertaking proactive measures to save the goods. For example, let’s say cargo valued at $150,000 is on its way to a port that is subsequently closed. The cost to redirect and preserve the value of the goods is $5,000. This extra expense may be covered under the policy. It’s important to look at what opportunities are available to mitigate cargo losses. Consult with your Roanoke representative or insurance broker to determine if and how the Cargo policy will respond. Prior to shipping any goods during this time, be sure to check with your transportation carriers to determine the likelihood that the cargo will arrive and, if so, will there be workers at the port to service the cargo.
Perhaps the largest potential exposure for freight forwarders and other transportation professionals from the effects of the coronavirus on the supply chain is failure of customers or agents to pay you or the carrier. If product is not delivered, the shipper won’t receive payment and in turn will not be able to pay you. It is important to note that credit Insurance does not cover non-payments due to disputes. Take a proactive look at your payment terms to determine how you can better manage your receivables to minimize inevitable casualties along the way. Look at your customer base to assess modifying your payment terms, including limiting extended credit.
Summary of Best Practices
These are challenging times and we’re here to help you better manage the potential impact the coronavirus can have on your business. Following is a quick summary of the best practices we recommend to help mitigate losses:
– Communicate clearly with all your clients on potential delays that can occur; don’t offer guaranteed delivery dates
– Reaffirm the contractual terms in Master Service Agreements and Conditions of Carriage including the force majeure clause
– Be open and transparent with your clients regarding the ability to get freight to the intended destination; check with your transportation carriers to find out if cargo will land and will workers be available to unload it
– Look at opportunities to mitigate losses such as rerouting cargo; be sure to speak with your insurance broker to determine if the extra expenses involved in redirecting cargo will be covered
– Take a hard look at your receivables and credit terms and be ready to adjust these terms
– Contact your insurance broker to discuss the coverage you have, how your policies are written, and what is and isn’t covered
We encourage you to contact your Roanoke representative at 1.800.ROANOKE (800.762.6653) to discuss these and other issues you may have.
About the authors:
With over 28 years of insurance industry experience, Cyndee Garbrecht is Vice President, Claims Administration for Roanoke Claims Services specializing in cargo insurance claims and marketing. Cyndee is trusted with claims handling and payment authority on behalf of Munich Re Syndicate, Ltd. Her previous insurance experience includes auto/casualty adjuster at Certified Collateral Corporation, subrogation adjuster at Safeco Insurance Company and subrogation adjuster and intercompany arbitrator for American Family Insurance.
Rick Bridges, Vice President, Client Development of Roanoke Trade, has over 18 years of international trade and insurance experience. He is a well-respected advisor on insurance and risk management matters involving the trade and transportation of freight. In addition to his experience in transportation insurance and bonds, Rick is a skilled multi-line commercial insurance agent licensed in several states and sits on the Air Forwarders Association Board of Directors.