When it comes to insurance, we only tend to find out the inadequacies of our cover when we make a claim.

For example, when we purchase car insurance we may perhaps choose the cheapest option, but when we have to make a claim, we might face a staggeringly high excess, no courtesy car to keep us on the move, and no legal fees cover for when the other driver tries to take us to court.  The costs mount up, and that’s with insurance.

So too with liability insurance for freight forwarders.  Prudent freight forwarders already appreciate the importance of purchasing liability insurance for their business. They are already aware of the financial strain they could face if they are liable for another party’s loss.  What that freight forwarder might not be aware of is how inadequate their liability insurance is, until it is too late.

So here are some tips to ensure your liability insurance will protect you when you need it:

• Make sure you purchase marine liability insurance – general non-marine liability insurance does not provide cover for international forwarders, but is often purchased in the mistaken belief that it does. 

• Ensure you have full liability protection to cover all of your forwarding operations. Some forwarders only request cover for their house bills of lading, but if you work in customs broking, warehousing or distribution, then the liability exposures for these need to be covered as well.

• Check that your insurance covers you for Errors & Omissions and Legal Liability – all freight forwarders have a contractual liability for a loss, regardless of who is responsible.

• If you trade internationally, check that you have adequate limits of liability, particularly for Errors & Omissions claims. Being sued and found liable in a Californian court can be expensive.

• Defending an action brought against you, even if you were not at fault, can be time consuming and costly so ensure that your cover includes Defence, either “ground-up” or “first dollar” if possible (so that you do not have to pay a deductible or excess).

• Make sure that General Average and Salvage Charges are included as these types of claims can fall back onto the forwarder.

• Utilise your own “Conditions of Trade” to limit your company’s liability in your day-to-day business where no standard limitations of liability are employed (such as FIATA or COGSA), and make sure that you refer to them on your company website, letterhead paper and invoices. Get your insurer to view and approve these before the inception of your liability insurance contract, and if you make any changes to the conditions or your limits of liability, you must get prior approval from your insurer.

• Never accept liability without first speaking to your insurer.

There are also ways to avoid losses, which we encourage all freight forwarders to consider:

• Never agree to release containers or cargo without the production of the original Bill of Lading, no matter how well you know your customer or how long you have done business with them.

• Always keep original Bills of Lading in a secure place and ideally separate some of them so that if there is a fire, for example, you will not lose all of the originals.

• To lower the chances of a customer seeking compensation from you for loss or damage to their cargo, always encourage them to purchase cargo insurance.

The best advice we can give to freight forwarders is to use the services of a specialist marine insurance broker.  They will be able to find you the most competitive deal available, whilst ensuring that the cover is tailored according to your company’s needs.  An experienced marine insurance broker can make sure that the insuring conditions under your freight services liability insurance are wide enough to protect your company against the liabilities you face and that the insuring premium is competitive for that level of cover.

The maritime news continues to be filled with articles about pirate attacks in the Gulf of Aden, while piracy also continues less reported in several other key areas such as Nigeria, the Philippines and Brazil. There has been some discussion, and perhaps confusion, about what support is available to shipowners in the event of a pirate attack.

To mitigate the risk, some shipowners are avoiding the area but at substantial additional expense, and others are using organised convoys or employing security staff for the vessel.

Marine Kidnap and Ransom insurance can play a key part in any shipowner’s risk management strategy because it covers the specific costs associated with piracy attacks, however there has been some misunderstanding regarding the detail of the cover.

Andrew Brooker, director at marine insurance brokers FP Marine Risks, says: “We are often asked what insurance protection is available to shipowners in light of the increased risk of piracy. Marine Kidnap and Ransom needs to be seen as a service that shipowners can draw upon that isn’t catered for by traditional hull insurance.”

Traditional hull insurance only protects the shipowner from loss or damage to the vessel as a result of piracy and is only designed to work in a reactive manner once the claim is made after the event.

In the absence of physical loss or damage, the ransom and associated costs would be considered a General Average expense and settled by all parties against their respective values. However, the legitimacy of these costs being claimed in GA has never been tested and could be disputed by the cargo parties’ insurers.

Given the amount of shipping traffic that transits areas such as the Gulf of Aden, statistically the risk of a pirate attack is quite low. However, when it does happen, shipowners are faced with a challenging range of issues they are unlikely to have encountered before.

Brooker explains: “Shipowners suddenly find themselves with a host of questions about how to move forward – how do they find the necessary help from specialist negotiators; how do they enter into effective communications with hijackers; how do they deal with threats to their crew, vessel and cargo; how do they raise and deliver the ransom?”

Marine Kidnap and Ransom insurance is designed to specifically meet the needs of shipowners in dealing with these issues. It also provides the security of having an insurance in place that ensures the shipowner receives priority treatment from kidnap negotiators and other personnel involved. It covers all the necessary related costs that are needed to secure the safe and quick release of the vessel, crew and cargo, including the ransom and its delivery.

Furthermore, if a shipowner were to declare General Average in an attempt to raise the ransom, it could jeopardise their commercial relationships.

Brooker says: “There is generally no deductible with Kidnap and Ransom insurance, so owners are not exposed to additional costs after the premium and our cover ensures the Kidnap and Ransom insurers do not seek to recover any aspect of the costs from cargo or charterer interests, thereby preserving those commercial relationships. It also has the effect of protecting the owner’s existing Hull & Machinery or War cover from a loss which exposes them to an increase in rating for the following year – in effect, Kidnap and Ransom insurance has no memory and will not seek to recover claims through increases in premium.”

Uniquely, there was no longer a vessel or cargo being held for ransom.   The captain was now the only hostage, but within a standard (UK or American Institute or Norwegian Plan) Hull and Machinery policy there is no specific cover for ransom payments made specifically for the crew. This is also the case for P&I policies.

A ransom is only covered by existing H&M policies in a General Average claim if the pirates do not specify the amounts for the separate release of the crew, cargo and vessel. This usually does not present a problem because the pirates tend to take the crew hostage as part of the vessel hijacking and effectively hold all parties to ransom for a single amount.

However, in this instance, the pirates’ demand for a ransom was only tied to the holding of the captain on the drifting lifeboat. It would therefore be difficult for a shipowner to recover an insurance claim for the ransom, when the hostage was being held away from the vessel itself. If the ransom was paid, the owner would have to submit the claim to their P&I Club, likely under the discretion afforded by the Omnibus Rule.

On this occasion, the US navy launched a successful operation and rescued the captain so we do not know how the situation may have unfolded had the shipowner entered into ransom negotiation talks.

Moreover, the recent attacks on the American-flagged Maersk Alabama and the two French yachts have seen the respective navies taking military action against the pirates to secure the release of the hostages, whereas previously ransoms were paid.

According to mainstream media, the immediate effect of this action appears to be retaliatory. From an insurance perspective, we are likely to see an increase in premiums for vessels transiting the area as the risk of violence escalates even further.

Unless the shipowner had specific Kidnap and Ransom insurance, any claim made to cover the ransom for the crew would only be at the discretion of the P&I Clubs’ board and only then if it was an International Group Club.

If any party is interested in learning more about what is covered under their existing Hull policies and what additional services Kidnap and Ransom insurance provides, please do not hesitate to contact any one of our shipping team to discuss further.

International security efforts have increased, but their presence is having minimal impact on what is unquestionably a lucrative crime.

Somali pirates are making ransom demands of up to USD10million, threatening the crew and warning the shipowners that they will ground the ship if their demands are not met.

Understandably, the safety of the crew and the release of the vessel take priority. However, whilst the affected shipowner does what is necessary to secure the release of the crew and vessel, cargo owners can be significantly affected.

The cargo is often more valuable than the vessel itself, yet in the event of a hijacking, cargo owners may not be alerted to the situation and are unlikely to be involved in the subsequent negotiations and ransom payment.

Recent hijackings have lasted between seven and 100 days; 58 days is the average duration of a hijack in Somali waters. Cargo owners can see disastrous delays particularly affecting any seasonal or other time-critical cargo, and in the worst case, deterioration or material damage to the cargo itself.

We are also witnessing an increasing number of shipowners attempting (some successfully) to recoup a share of the paid ransom from cargo interests in General Average.

Given the cargo is more often of significantly greater value than the vessel it is being carried on, ship owners will seek to recover the significant majority of the ransom payment and any other general average charges from them.

Irrespective of the ultimate position, shipowners are likely to have a prima facie right to demand general average security and we would expect owners to exercise their lien over the cargo in order to obtain that security where they consider it necessary to do so. Unsurprisingly, we are also aware that cargo interests are attempting to resist the claim in General Average.

What action can Cargo Interests take to protect themselves?

It would appear critical to establish a protocol for communications with shipowners in the event of an incident.

In addition, we suggest cargo interest obtain confirmation from shipowners regarding adequate Hull and Machinery, P&I, and War Risks insurance for the voyage in question.

There is specialist Marine Kidnap and Ransom Insurance available which provides not only cover for the ransom payment but, arguably more importantly, access to specialist security consultants who will assist in negotiations for any ransom payment. We recommend that cargo interests check with the shipowners to see if they have purchased this cover.

We are also witnessing collaboration between the parties involved in the voyage (charterers, owners and cargo interests) to purchase this cover for all interests.

Please see our separate news article on Marine Kidnap and Ransom Insurance for details or contact us to discuss your requirements further.

To keep up to date with reported piracy incidents and to learn more about prone areas, please visit http://www.icc-ccs.org/prc/piracyreport.php

Andrew Brooker, Associate Director of FP Marine Risks, a leading marine insurance broker based in Hong Kong, explains: “The S&P market can have a huge impact on the ability of shipowners to receive full reimbursement from their insurers in the event of certain types of loss, specifically a salvage, general average incident or total loss.  Unfortunately, many assureds don’t realise this until they come to make a claim”.

The science is simple – for example, a vessel valued at USD2.1million and insured accordingly could see its market value rising to USD3million as a result of a buoyant S&P market. If the valuation on the insurance cover is not adjusted accordingly, the assured could find themselves having to meet the additional costs.

Andrew says: “For example, if a vessel has to be towed to port as a result of an accident or breakdown, salvage charges are payable from both the ship and cargo.  However, if a vessel is underinsured, the amount of reimbursement the shipowner will receive from the insurer for these charges will be reduced by the same proportion that the ship is underinsuerd.”

It is up to the assured to advise insurers of any changes in the value of their vessel.   “We recommend that shipowners keep an eye on the S&P market and speak to their insurance broker if they believe there have been significant changes in the value of their vessel,” Andrew continues.

And for those who are thinking the easy solution is to overinsure, unfortunately the insurer may refuse to accept the increase in value and demand proof by way of an independent valuation.