Freight Forwarder’s Risks – How to Cover Forwarder Liability?
- Adit Bhatnagar
- Oct 2, 2024
- 5 min read
Updated: Jul 14
Freight forwarders organise and coordinate the movement of goods through various modes of transport. They may not own any of the transportation themselves but are responsible for ensuring that the goods reach the final location in the best condition.
Freight forwarders are crucial to the logistics industry and hold a high-risk liability. If anything goes wrong, the forwarder is most probably held responsible. Various risks can affect freight forwarders’ liability and lead to hefty lawsuits.
Freight forwarding business must professionally understand their risk, the consequences and the ideal risk management strategies. Understanding risks and proper strategy can help a company avoid and deal with freight forwarder risks.
The article will highlight the top freight forwarder’s risks and how insurance may be the ideal way to protect their liability.
Top Freight Forwarder’s Risks
Damage Or Loss of Cargo
When a supplier or seller hires a freight forwarder, the forwarder is liable for the safety of the cargo. They will be responsible for contacting a trustworthy carrier and planning the best path to avoid unwanted incidents.
However, there is always a chance that a disaster may occur and result in damage or loss to cargo. These disasters include natural disasters, explosions, fires, theft and accidents. This is one of the top freight forwarder risks that may be unavoidable in most cases, and the forwarder will be liable to compensate their clients.
The price of freight is determined by the weight and volume of the goods being transported. This cost is referred to as the chargeable weight, which is calculated using the ratio of the weight/volume of the cargo. Different modes of transport have specific formulas for calculating this cost, as shown below:
Ground Transportation (Rail): 1Kg / 3m3 – (1:3)
Air Transport (Flight): 1Kg / 6m3. – (1:6)
Sea Transport ( Marine): 1Kg / 1m3 – (1:1)
If the freight forwarder is found liable, the compensation will be based on the weight of the damaged goods and not on the actual value of the goods. The compensation can lead to a significant financial loss, even if the accident was not their fault.
Errors & Omissions
Freight forwarders are responsible for a large number of duties from point A to B. Forwarders must ensure they handle the cargo carefully, that the goods are packed and stored correctly, and that they choose the safest route. Even if the freight forwarding business employees are not directly involved, they must clearly communicate with the carriers and handling staff.
Negligence and errors may lead to situations resulting in damage and loss of cargo. Forwarders will be liable for errors when they receive goods from clients. It is one of the freight forwarder risks that can lead to legal issues due to errors or negligence.
For instance, many forwarders fall into negligence trouble due to poor packaging of goods in the cargo container. Protecting goods from damage during rough seas, bumpy roads, or turbulent flights is vital. Neglect or errors in packaging may lead clients to sue the forwarder to recover their financial losses.
The forwarder business will have to pay for legal defence, compensation and possible settlement costs. These costs can result in severe financial loss, reputation damage and business disturbance without the proper protection plan.
Breaches Of International Trade Regulations
Freight forwarders must have an adequate understanding of international laws, tariffs, and trade agreements before importing into any country. One of the freight forwarders’ duties is to ensure they correctly fill out customs documents and that the freight does not breach international import regulations.
However, due to the complexity of importing and exporting, it can be easy to make errors and accidently breach international trade regulations. Failing to comply with specific trade regulations, customs procedures and lacking documents can result in hefty fines, penalties and confiscation of goods.
For instance, when importing to Saudi Arabia, the government has banned goods such as alcohol, and goods such as perfume require specific approval forms.
Clients trust the freight forwarder to ensure their goods reach the agreed location with the lowest chance of trouble. Hence, the freight forwarder must be aware of changing import and export laws and get the proper approval before starting the journey.
Delay Lawsuits
When a supplier or seller sends a product, they expect it to reach the location at a specific time agreed with the buyer. These details are then communicated to the forwarding business so that the best mode of transport and route within a budget can be planned. Time is one of the most important factors when dealing with cargo and trade.
The agreed schedule makes planning crucial; however, there is always the chance of things going wrong. There are various causes of delays, such as inclement weather, traffic, missing documents, accidents, supply chain issues, etc.
For example, a freight forwarder may have promised their client that the cargo would reach the agreed port in 10 days. However, due to bad weather and an alternate route, the journey takes 30 days. As a result, the client’s buyer cancels the order and refuses to pay.
The freight forwarder risk can disturb the entire supply chain and result in severe financial loss. Delays can cause frustrated clients to demand reimbursement and compensation or possibly initiate lawsuits. The delays may not be the freight forwarder’s fault, but they will still be legally liable.
Third-Party Claims
Freight forwarders are liable for more than just the cargo when providing services. They must ensure their service does not negatively impact other people or property.
Forwarders may not be liable for any third-party damage or injuries due to the ship unless a general average has been declared. However, freight forwarders will be liable for any third-party injuries or damages due to their errors or business activities.
For instance, a freight forwarder moves cargo from the warehouse to the cargo airport in a van. During the journey, the cargo falls out, hits a car behind and injures the driver. The affected third party will have the right to sue the business for medical, repairs and compensation.
It’s one of the freight forwarders’ risks that can never be predicted. The business will need to hire a legal team, pay medical expenses, and compensate the affected third party. The incident and the financial loss can negatively impact freight companies and cause unfortunate delays.
Why Freight Forwarders’ Liability Insurance is Vital?
All these freight forwarder risks can seriously impact a forwarder’s business and future. It is essential for every company that organises and manages logistics for clients to have the proper protection.
One of the most essential protections for freight forwarder companies is liability insurance. Freight forwarder liability (FFL) insurance covers cargo liability, errors, negligence, breaches of regulations, general average and third-party liability claims.
It helps freight forwarders reduce financial loss and deal with all the risks mentioned above. The insurance will cover legal, medical, compensation, and settlement costs, depending on the specific claim.
It helps in unexpected freight forwarder risks and potential lawsuits. However, it is important to understand the policies’ exclusions, as some goods may not be covered.
Liability insurance allows freight forwarders to provide the best service without worrying about freight forwarder risks.
To Learn More about freight forwarders’ liability insurance and cover freight forwarders’ risks, contact Red Asia Insurance.
Comments