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Industry profile: risk transfer fallacies in shipping. (Global Perspectives).

Acme Manufacturing makes widgets at its factories in Asia and sells them all over the world. To get the widgets from the factories to the stores, Acme contracts XYZ Movers. This makes Acme a shipper. XYZ Movers transports the widgets with its own ships or makes arrangements to have them moved. This makes XYZ a carrier. The risk manager's concern in this relationship is the legal contract that determines which party takes responsibility for the widgets while in transit.

If only it were so cut and dry.

Out in the real world, the transportation industry is in deep trouble. The global economy is sagging, freight rates are dropping sharply, sailing schedules are being trimmed and terrorist attacks are pushing up insurance premiums. Tighter security at seaports and airports is sure to cut the industry's profits, while inspections of vessels, cargoes and crews have intensified, threatening to increase delays.

These headlines may worry the world's major shippers, but the freight carriers are the ones stuck in the middle. As insurance companies raise rates and tack on war risk surcharges and premiums, the shippers are trying to transfer the responsibility of insurance onto the carriers. This presents a dilemma for carriers, part of which is caused by the confusion between liability insurance (which carriers purchase) and shipper's interest insurance (which shippers purchase).

Where the Risk Goes

The carrier purchases P&I (protection and indemnity) liability insurance, which covers third party damage and liability for the cargo while it is in the carrier's care, custody and control. The shipper can and often does carry shipper's interest insurance, which protects the shipper's interest on its cargo. The carrier, however, is not a party to this insurance. In fact, shipper's interest insurance is predicated on the notion that the insurance company will have subrogation rights against the carrier if the carrier damages the cargo. All carriers seek to limit their liability, and normally their pricing (freight rate) is based upon these limits, which means higher rates for increased liability assumption and lower rates for less liability.

Meanwhile, insurance companies are raising their rates on both policies. The larger shippers are transferring the risk and cost of shipper's interest insurance back to the carriers. For example, Acme Manufacturing tells XYZ Movers that if it wants Acme's business, XYZ must be responsible for the entire value of Acme's cargo; and Acme wants XYZ to accept this additional liability at no additional charge.

The fallacy of this alleged risk transfer is that shipper's interest insurance (which the shipper is seeking to give up) is primary, while a carrier's liability is third party to the shipper. This means there are ways that the cargo can be damaged and the carrier will not be legally liable.

As long as the shipper is seeking a contractual arrangement with its carriers concerning the liability for the freight, it has added the proverbial kitchen sink as far as risk transfer goes: waiver of subrogation (even if the shipper is at fault, the carrier will still pay); consequential damages (if the cargo does not arrive, the carrier could wind up paying for all of the consequences); and additional insured status (thereby piggy-backing the shipper's liabilities onto the carrier's insurance policies).

Watching the Contract, Keeping the Account

These risk management problems can also become sales problems. Salespeople have a tendency to promise the store, leaving the risk manager to mind it. The bigger the shipper, the more one-sided the contract it demands, and sales people--eager to make the sale and naive about the risks--will often succumb. The worst provisions can be negotiated out, but the unfortunate reality of being a risk manager in this industry is that management wants the account. Risk managers must stand their ground. Although Acme might threaten to use another carrier if XYZ does not agree to its standard language, the risk managers for XYZ must not back down. Acme will then most likely agree to the revised language, and the widgets will get to the store.

Blair Basham has over twenty years of risk management experience in the shipping industry.

Blair Basham ("Global Perspectives," p. 7) has over twenty years of risk management experience in the transportation industry, most recently as the director of risk management for Itasca, Illinois-based USF Worldwide, Inc. (
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Comment:Industry profile: risk transfer fallacies in shipping. (Global Perspectives).
Author:Basham, Blair
Publication:Risk Management
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 1, 2002
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