Matching insurance cover to the logistics chain

Careful analysis of contractual obligations is an important part of ensuring that proper insurance cover is in place when goods are moved through the logistics chain

The logistics of moving goods through various phases from inland sources to collection points at or near ports or airports is a challenge for freight operators. To get agreements with various service providers to match the flow and storage of goods – and to make sure that appropriate insurance cover is in place – requires a careful analysis of contractual obligations and an assessment of how risks relevant to the services rendered have been allocated.

As a general rule, it is the party that bears the obligation that carries both the risk and the cost – among them transporters, bailees and other third parties. To some degree, standard terms of trade – such as Incoterms – concisely cover these aspects, but all too often, cargo interests, brokers and freight operators do not fully appreciate how risk transfer works on a contractual basis.

This scenario can create gaps where contractual obligations, costs and risks are vague, in conflict with other similar terms, or left entirely unregulated.

Also, the use of incorrect Incoterms where goods are being shipped in containers may place the buyer or seller in a position where risk of loss or damage to the goods will not pass, even though the parties and their service providers assume it has – leaving one or other of them uninsured or with costs incorrectly allocated.

In this regard, cost, insurance and freight (CIF), cost and freight (CFR) and freight on board (FOB) should never be used where goods are being containerised. These terms deal with risk passing on loading onto a ship. Usually risk passes much earlier than that – either on the vanning of the container, or when the container is placed for collection by the carrier to the port.

Another common example is the gap created where a haulier delivers goods and insurance cover ceases prior to, or on, unloading – and thereafter only covers the goods once “in storage”, a flexible notion at best. Goods may be subject to various movements between unloading and being “in storage” which other contractual terms – including insurance – do not cover.

In these circumstances, it pays to take the time to carefully analyse the multi-modal movement and storage of goods and to make sure that all contractual obligations match the required services, and that the insurance cover clearly protects the risks and locations involved.

Most standard goods-in-transit cargo clauses do not cover storage – unless in the ordinary course of transit – and suitable cover should be obtained prior to and after unloading, for example, with storage areas identified as accurately as possible.

In this regard, bulk cargoes of various grades present unique challenges where the mis-delivery of part of a parcel into the wrong designated storage area can contaminate another trader’s stockpile. Not only is there a loss of the seller’s product, but there may also be huge costs and liabilities arising out of contamination – resulting in a Gordian Knot that is not easily cut through without the support of insurers and, dare I say it, lawyers!