February 16, 2017 | Industry Insights, Insights
The Cost of Getting Paid
Transportation intermediaries should carefully consider all costs involved in the pursuit of unpaid freight charges. These difficult situations are often further complicated when the transportation intermediary is presented with a counterclaim alleging delays in delivery and/or loss or damage to cargo to offset the freight amount due. Although those counterclaims can trigger insurance coverage, that counterclaim can ultimately make the cost of litigation prohibitive. Therefore, transportation intermediaries need to consider not only the cost to litigate a freight claim against the amount that can be recovered but also any potential cargo claims that may be raised and the complexity of the potential counterclaim – especially if that customer has previously put you on notice of any cargo claims or has claimed a setoff.
Unpaid freight charges often result in litigation. Strategically, the intermediary may want to retain counsel for the collection on a contingency basis, with the understanding that the net recovery could be reduced by as much as fifty percent depending on the amount in controversy.
After the complaint for unpaid freight charges is filed, cargo owners inevitably seek an offset for real or imagined cargo damage, and claims for consequential or special damages. That offset becomes the basis for a counterclaim for loss or damage to cargo.
Consider the following example:
A transportation intermediary is owed $50,000 in unpaid freight charges from their customer. Their customer has failed to respond to the requests for payment. Subsequently, the transportation intermediary sues their customer. Their customer responds with a counterclaim refusing to pay the charges on the basis that several shipments were delivered damaged and the transportation intermediary is responsible for the damaged cargo.
In many cases, the counterclaim is tendered to the intermediary’s liability insurer for defense and indemnity under their Errors and Omissions or Cargo Legal Liability policy. However, before the transportation intermediary tenders the counterclaim to their insurance company asking that defense be provided, they should consider if the benefits outweigh the costs. Key points to consider are:
- Does the claim deductible apply to the defense costs?
- Is the cargo claim less than or equal to the deductible?
- What is the aggregate policy limit?
- Does the policy give the insurer the right to settle the claim?
- What is expected in mediation?
- What effect will the insurance claim have on future premiums?
When first presented with such a claim, the insurance company will likely advise a client that the costs to pursue the outstanding receivables are not covered by the policy. The policy may respond to defense costs as it relates to the allegation of cargo loss/damage. In addition, some policies may not have first dollar defense, meaning the transportation intermediary may be obligated to pay the costs to defend the allegation until their deductible is exhausted.
Defending cross-claims can also affect policy limits. Most E&O policies have aggregate limits per year, so transportation intermediaries need to be aware that the money spent to defend a cross-claim will reduce the overall limit available under the policy.
Transportation intermediaries should be aware that most policies give the insurer the right to settle claims as they deem appropriate. Depending on the circumstances the insurance company may decide to settle the counterclaim even though the freight charge is still in dispute. Settling the counterclaim will often streamline the litigation and give the insurance company a clear path to recovery from liable third parties. However, not all transportation intermediaries favor such settlements and expect the insurer to vigorously defend the counterclaim, even if it can be settled for less than the cost of defense. While the allegations in the cross-claim may be baseless, typically some form of investigation must take place in order to determine the liability of the intermediary. Consequently, these actions in turn will incur more costs. Intermediaries should not expect the insurer to spend more in fees and costs than they would to settle the counterclaim.
If the case is mediated, all parties are expected to participate in good faith and arrive at a compromise. The intermediary should expect to modify the amount of the freight claim. The cargo owner should be prepared to modify its unpaid freight charges. The amount of compromise, by either party, will depend on the facts and circumstances of the case.
Recovery of unpaid freight charges requires a thoughtful strategy that addresses all factors involved in pursuit and settlement. Transportation intermediaries should be prepared to respond to counterclaims from their clients and then weigh the benefits versus costs of involving their liability insurer.