The Importance Of Freight Forwarders Liability Insurance
- Adit Bhatnagar
- Sep 28, 2023
- 5 min read
When a company wants to move cargo from one country to another or from city to city, it must contact a freight forwarder. Freight forwarders help organise and coordinate cargo transport through road, rail, sea, or air.
A freight forwarder’s duty is far from easy; they are liable for the cargo throughout the journey and have to take some financial responsibility if anything goes wrong. Freight forwarders’ liability can bring many risks, affecting the business with financial loss, fines, and lawsuits.
Most freight forwarder companies purchase freight forwarder liability (FFL) insurance to protect and help them deal with unpredictable risks. In some countries, forwarder insurance is mandatory. The article will explain these freight forwarders’ liability risks and why FFL insurance is crucial in the industry.
What is Freight Forwarder Liability Insurance?
Freight Forwarder Liability (FFL) insurance covers carrier liability, errors & omissions, breaches of regulations and third-party liability claims. It helps freight forwarders reduce financial loss and the risks involved if something goes wrong during the journey.
Sudden uncontrollable factors and risks can test the freight forwarders’ liability throughout the journey, and the company must be prepared to face them.
What Is Covered by Freight Forwarder Liability Insurance?
Carrier’s Liability
When a carrier takes charge of cargo, it acknowledges that it is taking over the cargo in good condition and, therefore, has a presumption of liability. However, as soon as the cargo is damaged or the voyage has an issue generating a general average, the carrier will have to engage its liability.
However, even if the carrier claims responsibility for the goods entrusted, it is important to consider the extent of that responsibility. In practice, the carrier’s liability in case of disaster is regulated and limited by international conventions.
Transport costs and the pricing of freight are based on the weight and volume of goods transported, and then the limited liability of the carrier is based on the method of pricing of international transport as well (Ratio weight/volume):
For ground transportation: 1T / 3 m3.
For air transport: 1T / 6 m3.
For shipping: 1T / 1 m3.
In other words, if the carrier is found liable, the refund will be based on the weight of the damaged goods and not on the actual value of the goods. (You can’t rely only on this liability because you need to get cargo insurance based on the value of the goods).
Errors and Omissions
Transporting cargo is more than loading and unloading cargo in a mode of transport. There is a significant amount of paperwork, agreements, and back-end contracts between freight forwarders and their clients. These forms, papers and contracts are crucial to the freight’s liability and duty. Any freight forwarder error can result in lawsuits, fines, or compensation payments.
An error and omission can include wrong routes, incorrect paperwork, and negligence during loading and unloading. Clients trust freight forwarders and have paid for the cargo to reach point B from point A at an agreed-upon time. A claim can occur when a freight forwarder’s liability error causes financial loss to clients.
For example, a freight forwarder accidently left the products at the handover location and moved with only a portion of the total cargo. The cargo was severely delayed in this situation, causing the receiving clients’ financial and trust loss. Hence, the cargo company will have the right to sue, or the freight forwarding company will have to pay compensation due to the error. Many errors and omissions like this can significantly cost the freight forwarder and damage its reputation.
Third-Party Liability
Accidents can happen at any point during a journey, mainly when travelling by sea or land. These accidents can occur through collisions with other vehicles or property. When a freight forwarder’s mistake causes an accident, the outcome can be costly and surprising. The affected third party may sue the freight forwarder for the cost of damage or injuries.
These accidents are more common when travelling on the road due to the number of vehicles and the size of trucks. Routes can be narrow, and driving a huge truck through roads requires great skills and precision. One wrong turn or minor mistake can easily result in a disaster that damages or injures a third party.
For example, there have been several cases of third-party injuries and accidents in a cargo port in Bangladesh. There have been 15 accidents in the cargo port in the past two years that have seriously injured many people. In this case, the injured third parties have the right to sue the freight forwarder for third-party damage and injury.
The freight forwarders’ liability includes them having to pay legal, medical and compensation costs due to the third-party claim. These costs will add up to a large amount for the company and may affect future deals.
General Average
Like any other industry, the freight forwarder industry must follow certain regulations. These regulations can include laws, customs and country requirements. It is the freight forwarders’ liability to do their part in following all rules and laws to make the process easier and smoother for carriers. Breaching a regulation or disturbing a country can result in massive fines, general average and lawsuits against everyone involved.
Even if a vehicle company breaches regulations, the freight forwarder will still be liable for a portion of the fine. Therefore, the most minor breach can result in costly fines or bans.
The famous Egypt Canal blockage is an example of disturbing a country and breaching regulations. The enormous container ship accidently wedged itself across Egypt’s Suez Canal, blocking one of the world’s busiest trade routes. The situation disturbed many other ships and the marine supply chain. As a result, the government fined the ship owner $550 million.
In this case, the marine experts split the fine and ‘general average’ between ship owners, freight forwarders and cargo owners. A general average is a cost declared to help recover from the situation and make all involved share the losses. The cost can add up to a large amount in millions for a situation they had no control over.
Why Is Freight Forwarders’ Liability Insurance Crucial?
As you can tell, a freight forwarder’s liability is always on edge, and things can go wrong at any point. However, it’s not just the journey that comes with risks; it all starts from the point they sign a deal and fill out paperwork till the final signature.
These freight forwarders’ liability risks can take a toll on any freight forwarder company and result in substantial financial losses. Thankfully, freight forwarder liability (FFL) insurance is the perfect cover for the above risks. The insurance provides financial protection, so the company doesn’t have to pay out of its own pocket. These risks come with no warning, and there is no point in worrying about something out of its control.
However, when purchasing freight forwarders’ liability insurance, communication with the insurer is crucial to get the best coverage for your exact requirements.
Additionally, FFL insurance covers legal costs if one of the risks leads to a lawsuit. In many situations, claims may be unjustified, and freight forwarders must be prepared to prove themself. The insurance will assist the company in defending itself through industry experts, including lawyer expenses and possible settlement costs.
Freight forwarder liability (FFL) insurance covers freight forwarders’ liability, helping the business recover quickly and continue growing.
To Learn More about freight forwarders’ liability insurance and cover freight forwarders’ risks, contact Red Asia Insurance.
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