Here, There, and Everywhere

An Overview of Transit Exposure and Insurance for the Agribusiness Account

#IRMI2016

Property exposure begins with insurable interest. When goods are shipped, when does insurable interest begin? How does this relate to the responsibility of the hauler? How does this vary between overseas and inland transportation? Most importantly, what does this mean to our customer and what solutions are available in our insurance world? This review will focus on some practical answers to these questions.

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2 Here, There, and Everywhere

An Overview of Transit Exposure and Insurance for the Agribusiness Account

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Seminar Objectives

• Identify a when transportation exposure begins. • Defining the term FOB. • What is a bill of lading and why is it important? • How do standard package policies cover transit? • A review of the transportation application to identify exposure. • What are intermodal shipments? • Can you depend on carriers liability? • An overview of International cargo insurance. • Key areas for your customers protection.

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3 Shipping Parties

• When goods or merchandise are transported there are usually three parties involved: • The Shipper – The company sending the goods • The Carrier – The company transporting the goods • The Consignee – The company receiving the goods

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Other Forms of Transit Insurance

• First class mail insurance • Parcel Post insurance • Motor Truck Cargo Legal Liability • Trip Transit (Trip Certificates)

Our focus today is on the shipper’s (your customer) goods hauled by others on their behalf on it’s way to their warehouse, store, or factory then on to their customer.

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4 Where To Begin

• FOB (Free On Board) - An INCOTERM* describing a term of sale that details the responsibilities of the buyer and seller for the international trade transaction. Under this term, the seller fulfills his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The seller must clear the goods for export. • For domestic shipments this means that once shipping instructions have been followed the buyer is responsible for all risk to the goods.

*International Chamber of Commerce

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FOB—Where Exposure Happens

• FOB point of shipment—The most frequently used terms of purchase. The buyers exposure begins virtually at the loading dock. This is the beginning of your customers insurable interest. • FOB point of delivery—This is also known as COD. In this case the seller bears all the burden of responsibility until delivered and accepted at the customer’s premises. Determining which type of FOB is customarily used by your customer is an important part of risk analysis. Point of shipment is the most frequently encountered form of FOB in practice.

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5 In and Out Is More Than A Burger

• Incoming shipments will usually be FOB point of shipment, which means upon purchase they are at your customers risk. • Outgoing shipments will usually be the same way—FOB Point of shipment which means they’re at their customers risk. • This is important to understand in order to evaluate how the insuring agreement should be tailored to cover both ends of the shipment. • To protect your customers goodwill the agreement can include your insureds contingent interest in FOB shipments.

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Contract of Carriage

• Unless delivered by own vehicles, commercial carriers will be the usual form of delivery. • While in their custody, their responsibility for damage to the goods is a matter of contract called a bill of lading. • Public carriers for hire are regulated by the PUC or DOT or both and have a Uniform Bill of Lading outlining their minimum responsibility. • Contract carriers’ responsibility resides in the contract between shipper and hauler.

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6 The Bill of Lading

• Bill of Lading (B/L)—The contract of carriage between the shipper and the carrier that serves as a receipt for the goods delivered to the carrier for shipment and evidence of title to the goods. • Carrier—In general, the firm which transports merchandise from one point to another. May be a vessel owner, an airline, a trucking company or a railroad.

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Bill of Lading Liability

• Motor carriers for hire are subject to federal and state insurance regulation and filing requirements. This includes providing evidence of insurance at certain minimum limits for which the insurance company endorses the policy and makes certain filings. Self-insurance arrangements are permitted for carriers with an acceptable level of financial stability. • A contract carrier is responsible only to the extent of the contract with its customer. The contract itself provides the details of the liability assumed. If the contract does not address legal responsibility, the contract carrier is responsible only for loss or damage resulting from its own negligence, and not the strict liability imposed on the common carrier.

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7 Common Carrier and Contract Carrier

• Common carriers provide for-hire truck transportation to the general public. They must file liability (BI&PD) insurance but are not required to file cargo insurance. • Contract Authority Contract carriers provide for-hire truck transportation to specific, individual shippers based on contracts. Contract carriers must file liability (BI&PD) insurance but are not required to file cargo insurance. Both common and contract motor carriers of household goods are required to file cargo and liability insurance

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Released Bill of Lading

• On motor carrier shipments, the carrier is responsible only for a minimum limit compared to the full value of the goods. • For example with household furniture their responsibility may only be for no more than 60¢ per hundred per pound of cargo. • In order to increase this responsibility the shipper has the option to declare full value on the bill of lading. This obviously increases the shipping costs. • This still does not provide complete protection while in the custody of the carrier.

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8 Bill of Lading Liability Exclusions

• Acts of God, such as an unanticipated storm or other natural event • Acts of the public enemy, which includes warlike acts or political strife against the country • Inherent vice, which is a fault or condition in the property that causes its deterioration, damage or self-destruction • Acts or faults of the shipper, such as negligent or careless packaging • Acts of a public authority, such as a drug bust by police who confiscate or quarantine a truckload of goods because they suspect the cargo to be contaminated

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Contract Carriers

• Your customer is more likely to use a contract carrier such as FedEx, UPS, or DHL. • Their liability for goods in their custody is expressed in the contract. • Some examples follow. • In most cases, the shipper has the option to declare full value. This obviously would be reflected in the shipping rate which could be a good incentive to buy transportation insurance.

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9 Contract Carrier Example—FedEx

18.1 Unless the Sender enters a higher Declared Value for Carriage on the (Air) Waybill and pays the required fee, the liability of FedEx is limited to the higher of a) the amount provided by the applicable international convention or local law; b) € 22 per kilogram; or c) US$ 100 per Shipment.

Source: FexEx website (http://www.fedex.com/)

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Contract Carrier Example—UPS

UPS’s liability for loss or damage to each UPS domestic Package or international Shipment, or to each pallet in a UPS Worldwide Express Freight® Shipment, is limited to a value of $100 unless a greater value is recorded in the declared value field

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10 Putting It Together

Lets examine the following. • FOB terms. This is when your customers exposure in their supply chain begins. • Mode of transport. We’ll start with motor carriers. This is the prevalent mode of conveyance. • Carriers Liability. Bill of lading or contract? Released value or fully declared? • Why important? Released value reduces the subrogation potential and is important for underwriting and rating.

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Incoming Shipments

• Remember, most terms of purchase for their inventories and raw material would be FOB point of shipment. • Lets review the transit application to measure exposure. • This will help us decide if the limits granted in our package policy is sufficient (more on that later). • We are using ACORD 143 to help us. • Let’s review the key points in this application together.

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11 Key Areas

• Coverage territory description: “Within and between the continental United States and District of Columbia” for starters. • What about Canada and Alaska? • Any shipments to/from Hawaii? • Check exposure against policy territory in the policy term. • Limit per conveyance? Describe conveyance, should be planes, trains or automobiles. • “ any conveyance used for transportation”

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Outgoing Shipments

• Terms of sale, with the exception of COD, will typically be FOB point of shipment. This means title has transferred to the customer. • Why should we bother? Customer goodwill. • If materials are shipped FOB point of departure, the buyer is liable for damages. • If indicated coverage is desired on FOB shipments. Contingent coverage is either in excess of or in lieu of coverage provided by the shipper and affords protection when the buyer insurance is incorrect or inadequate, or when differences in conditions (DIC) exist.

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12 Review Exposure

• What is the territory? • What are the conveyances? • Are the BOL and/or contracts released value? • What is the exposure per conveyance? • Is there any storage in transit aggregating value? • Are the embedded limits in your proposed package policy up to the task?

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Valuation of Marine Shipments

• C&F: “Cost and Freight”—A former INCO Term replaced by the abbreviation “CFR.” A term of sale whereby the seller quotes a price that includes the cost of the merchandise and the cost of all transportation to a named destination. For Inland Marine, invoice cost plus freight. • CIF: An abbreviation for “Cost, Insurance and Freight,” a term of sale whereby the seller quotes a price that includes the cost of the merchandise, all transportation charges to the named port of destination and the costs of insurance coverage. This valuation plus typically 10% for handling expenses is common in Ocean Cargo insurance.

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13 Embedded Limits

• Lets look at the embedded limits in the property policy. • First the bureau property policy (CP). • Next, the bureau BOP. • Last, consider the bureau based proprietary company form.

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CP 10 30

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14 Commercial Property Form

• CP 10 30 with Special Form extends a limited amount of transit insurance for covered personal property, • It is for specified perils. • It is limited to owned or leased vehicles. • It is capped at $5,000. • Based on your exposure review is this adequate? • What do you recommend?

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BOP BP 00 03

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15 BOP Form

• Extends coverage somewhat broader. • States coverage to be “in transit” with no definition restricting the type of conveyance. • Based on risk analysis, is this enough?? • What about interplant or shipments between store and warehouse? • If not, what's next?

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Non—ISO Forms

• Proprietary company forms are generally designed to be broader. • Examine the extensions of coverage. • Is the transit limit enough? • Are all modes of exposure covered (Planes, trains and motor vehicles)? • Is the covered territory appropriate?

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16 If not….

• Can the limit, mode, or coverage territory be endorsed to fit the exposure? • If not, a companion IM transit policy can be negotiated. • Most transit options are limited by the package filings. • A separate transit policy will become the best option for addressing exposure.

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What To Look For

• We note the limitations of embedded package limits. • We have to compare them with exposure to arrange coverage options. • Lets take a quick look at the ACORD transit application. • We look to this first for exposure analysis. • Based on what we learn, we can offer appropriate coverage recommendations. • Let’s take a peek together,

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17 ACORD Transit Application

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ACORD Transit Application

18 ACORD Transit Application

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ACORD Transit Application

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19 ACORD Transit Application

ACORD Transit Application

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20 ACORD Transit Application

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The Multimodal World

• Other modes of transit besides motor vehicle freight • The air freight way bill • The railroad bill of lading • The cargo container carried by rail, truck and seagoing vessel • This is the dominant means of transport in a global economy. • Is this your customer’s exposure?

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21 Air Freight

• Air waybill (AWB) is a transport document, which is used in air shipments, issued and signed by an airline cargo carrier or its agent, generally on a pre-printed air waybill format, evidences the terms and conditions of the carriage of goods over routes of the airline carrier(s). • Air waybill should be used in airport-to-airport shipments, as a result it cannot be used in conjunction with the incoterms available only sea shipments such as FAS, FOB, and CIF. These are appropriate for Ocean Cargo insurance (more later). Domestic shipments, Inland Marine, International Flights, Ocean Marine.

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Railroad

A rail carrier providing transportation or service subject to the jurisdiction of a railroad board must issue a receipt or bill of lading for property it receives for transportation. That rail carrier and any other carrier that delivers the property and is providing transportation or service subject to the jurisdiction of the board are liable to the person entitled to recover under the receipt or bill of lading. • See example, value must be declared

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22 What About International Shipments?

• Global economy, international supply chain. • Look at most major ports and you will likely see your customer is sending or receiving goods by container ship. • Getting goods from warehouse point of origin to warehouse point of destination will often involve the truck to haul it to the railhead, the train to take it to the port then another truck to take it to the yard and the crane that loads it on the boat. These steps in reverse at the shipyard to get it to the destination loading dock. • Intermodal.

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Intermodal Containers

• Intermodal Containers: Also referred to as “Freight Containers” - any of a wide variety of ocean and air cargo unit load devices designed to allow multiple items to be shipped together and travel on and between modes of transportation without the need to de-stow and re-stow the cargo. The standard sizes are 20 and 40-foot long by 8 feet wide by 8.5 feet high and the basic model is the general purpose, fully enclosed, end loading container. However, there are several other lengths available and purpose-built units for specialized commodities, such as perishables and heavy, oversize pieces.

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23 Intermodal transport

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The largest container ship to ever call at a United States port—the CMA CGM Benjamin Franklin, just pulled into Long Beach, CA for its second visit to the US

It's big: longer than an American aircraft carrier and more than 20 stories tall, the ship is capable of carrying 18,000 twenty- foot containers.

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24 The ABC’s

• INSTITUTE CARGO CLAUSES ‘A’(ICC-A): This is the widest of the covers granted. IC”A” protects against All Risks of loss or damage to the insured cargo except the losses/damages arising out of the following: Willful misconduct of the Assured • Ordinary leakage, loss in weight or volume or ordinary wear and tear of the insured cargo. • Insufficiency or unsuitability of the packing or preparation of the subject matter insured. • Inherent vice or nature of the cargo. • Delay • Insolvency or financial default of the owners, managers, characters or operations of the vessel

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Global Economy, Global Coverage

• If your customer has a worldwide supply chain, an Ocean Cargo policy can cover imports and exports by all modes of conveyance. • An “Open Cargo Policy” is designed to be “pay as you go” covering all shipments within the negotiated territory with values reported usually monthly against two rates. • A “marine” rate covering all perils except war and strikes, riots and civil commotion (srcc).

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25 War Risks and SRCC

• An ocean marine coverage provision that excludes damage from strikes, riots, civil commotions, lockouts, vandalism, and sabotage, including terrorist acts and any other acts carried out for political or ideological purposes. Coverage can be added back with an SR&CC endorsement • A separate policy is carried companion to the Open Cargo policy covering war and srcc. • These perils are reinsured among member companies in the Marine Institute.

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War Risks

• Since war risk insurance is written in a separate policy from the ordinary marine insurance; it is desirable to take out both policies with the same underwriter in order to avoid the ill effects of a possible dispute between underwriters as to the cause (marine peril or war peril) of a given loss. • War and SRCC are written on a companion policy to the Marine policy with rates published and (depending on territory) revised and updated by the Institute.

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26 Duration Of Transit

• “Warehouse to warehouse.” Covers from point of origin to point of destination. • Covers all modes of transit en route (planes, trains and automobiles). • Any deviation from transit not covered unless reported to company. • Review bill of lading (important!).

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Intermodal

• Intermodal and Multimodal – These two terms are often used loosely and interchangeably, but the question is what is the difference.. • Intermodal – is the movement of cargo from origin to destination by several modes of transport where each of these modes have a different transport provider or entity responsible, each with its own independent contract.. Multiple carriers during a single journey.

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27 Multimodal

• Multimodal – is the movement of cargo from origin to destination by several modes of transport where each of these modes have a different transport provider or entity responsible, but under a single contract.. Single carrier during a single journey • Simply put, the key functions of both terminologies are the same, but the differentiation lies in the contract and responsibility of the movement.

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Container Ship

What kind of Bill of Lading will you expect?

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28 Combined Transport

• What is MULTIMODAL BILL OF LADING (B/L)? • B/L issued from origin to destination for different ships and/or different modes, aircraft, railcars, ships, trucks carrying containerized door- to-door shipments. The principal carrier or the freight forwarder issuing the multimodal B/L has full liability by carriage contract over all modes of transportation for the entire journey. Also known as combined transport bill of lading, intermodal bill of lading, or Multimodal Transport bill of lading. • (Law Dictionary: What is MULTIMODAL BILL OF LADING (B/L)? definition of MULTIMODAL BILL OF LADING (B/L) (Black's Law Dictionary) )

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Open Policy vs. Term

• Term policy generally used to cover specified shipments or single trip. • Open policy covers all shipments within coverage territory and schedule. Requires reporting of each shipment as soon as practicable within policy terms. • A good Ocean Cargo underwriter can help navigate the terms and conditions appropriate for your customer. • A completed company application along with copies of shipping contracts and bills of lading are the basics for the submission.

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29 Duration Of Transit

• “Warehouse to warehouse”—Covers from point of origin to point of destination. • Covers all modes of transit en route (planes, trains and automobiles). • Any deviation from transit not covered unless reported to company. • Review bill of lading (important!).

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Open Policy vs. Term

• Term policy generally used to cover specified shipments or single trip. • Open policy covers all shipments within coverage territory and schedule. Requires reporting of each shipment as soon as practicable within policy terms. • Open policies with a continuous term and annual deposit are the most common form. • Shipments valued at CIF plus 10% are reported monthly, quarterly or annually against the negotiated marine rates. • The war risks and srcc are calculated separately.

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30 Duration Of Transit

• “Warehouse to warehouse.” Covers from point of origin to point of destination including Storage In Transit (SIT). • Covers all modes of transit en route (planes, trains and automobiles). • Any deviation from transit not covered unless reported to company. • Review bill of lading (important!). • Prepaid duty can usually be insured, typically at 1/3 the marine rate.

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Freight Forwarders

• If customer uses a freight forwarder, they may arrange an open policy covering the shippers’ interest. • They include the cargo premium in their charge-back. • Review the contract to determine extent of coverage. • Recommend “contingent coverage”?

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31 Contingent Coverage

• Contingent cargo insurance only comes into play when the carrier refuses to honor a claim. • If, for example, you ship a container of yours to Antwerp, and the captain of the ship throws half of your goods overboard to save the ship, the carrier probably won't pay off the loss because the forwarders policy doesn’t cover general average (G/A).. This is when contingent cargo insurance pays you. • In effect it is DIC or excess over the forwarders’ insurance.

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Negotiation and Complexity

• These are examples of definitions and rulings that have been encountered in international cargo insurance. • This is the oldest and still the most important form of insurance providing a financial underpinning for commerce. • It still has the basics: • The value of the goods in motion against the perils of transportation. • The maximum exposure by means of conveyance and aggregated in the course of shipment (Storage in Transit)

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32 Ocean Cargo (wet marine”)

• Partner with a good marine underwriter.. • Identify exposure warehouse to warehouse. • Gather and review bills of ladings and transportation contracts with the underwriter. • Tailor a program to cover shipments for direct damage and prepaid duty on imports. • If a freight forwarder’s program in play, offer contingent coverage.

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Inland transport (“dry” marine)

• Measure exposure with a transportation survey based on ACORD 143. • Check against the embedded limits granted in the package offer. • Negotiate appropriate endorsements. • If not available, negotiate companion transportation policy. • Don’t overlook this exposure in the customer’s supply chain! • Unaddressed exposure leaves a coverage gap for the customer and a missed opportunity to improve and protect the revenue stream for the producer.

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33 Some References

• http://business.usa.gov/sites/default/files/Glossary_final.pdf for INCOterm definitions.

• https://my.yrc.com/national/pdf/gbol.pdf for bill of lading info

• https://www.wattpad.com/6652313-a-combined-transport-bill-of- lading for multimodal bill of lading info

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