Printer Friendly

Loss control on the high seas.

In 1988 a large vessel carrying automobiles capsized off the coast of Portugal. This casualty was the largest loss of the year: a reported $34 million for the hull and machinery and more than $30 million for the cargo. This was one of the 147 shipping vessels weighing more than 500 gross tons that experienced losses that year, according to the Institute of London Underwriters.

In the past ocean-going shipments were considered "marine adventures." Today this still holds true, although not for the same reasons. Where once ships were lost at sea, their structures too fragile to withstand the rigors of ocean transport, the modern era has ushered in different-though no less serious-concerns. Indeed, shipping goods entails many perils for large and small companies alike that depend on imported production materials and good relations with clients and company subsidiaries. These so-called marine losses can result from fraud, theft, disappearance, fire, water damage and contamination, among other factors stemming from the shipping process.

For the risk manager, a voyage starts long before the cargo is transported to the dock; it begins with instituting loss prevention procedures, developing expert packing techniques and improving product designs to better withstand the voyage, establishing proficient claims handling and, if needed, choosing the appropriate shipping consultants. The first step in creating a risk management program for the high seas is to realize that transporting goods has always been-and should remain-a team effort. The parties involved in each shipment have unique, separate duties, even though there are times when their jobs overlap. These parties include the cargo shippers, receivers and underwriters, the shipowner's liability underwriters and the freight forwarders.

In determining a company's shipping risks, risk managers must consider the quantity of goods being shipped and their destination. If the amount to be shipped is large, using in-house expertise is probably the most cost-effective method. The risk management team can investigate losses; it can photograph the cargo, obtain witness statements and pursue recoveries from the shipowner. But if the goods in question are of great value or importance, the risk manager should consult a shipping expert.

Cargo shippers are mainly concerned with ensuring that the goods are received by their customers in good condition. If the goods arrive damaged, whether the cargo underwriters or shipowners can be found liable for the damage is not a foremost concern to the risk manager. What is important is the fact that the delivery of damaged goods may mean the loss of a valued customer.

Claims payment is not always a top priority for cargo shippers because the claims costs are eventually passed back to them whatever the outcome. If the underwriters pay a resulting claim, the cost can be passed on to the owner of the goods in the form of higher premiums. If the shipowners pay the claim, the company may be faced with higher freight rates. Therefore although certain safeguards can ensure that financial loss is nominal and short-term, the goods' owner has an added incentive to ensure that the cargo arrives safely and on time.

Freight forwarders play an important role in the shipping process. They advise how to pack the goods for shipment and they can consolidate the goods with those of other companies, thereby negotiating cheaper freight rates with shipping companies. They also give advice on the administrative aspect of shipping cargo. When a claim occurs the administrative costs associated with reimbursement can be sizable, which is why it makes sense to invest in prevention measures.

As in any business transaction, make sure the parties involved in the contract are financially sound. This is especially true when transporting goods. Do not rely on parties that have not been previously screened. A shipping company in financial difficulty may be using cheap labor and services and failing to maintain its vessels properly. In turn, companies may incur severe damage to their goods from mishandling or improper stowage/storage or, in the worst case, a total loss of the cargo or vessel.

Risk managers should study the participation of each party. Who are the shipowners, intermediate charterers or freight forwarders and where does their responsibility begin and end? There were several instances during the past two decades where midway through voyages, shipowners contested that they did not have the necessary funds to complete the trip and demanded additional freight payments. This situation put the companies transporting the cargo in a no-win situation: If they did not pay their cargo would be held up and if they paid they were still taking a loss on the voyage.

Risk managers should be aware that vessels can be arrested for non-payment of debts. While this should not affect the cargo directly, the goods could be delayed for any length of time, resulting in more harm than if the cargo had arrived damaged. However, one situation that does affect the cargo is when the intermediate charterer liquidates after receiving the freight from the shipper but before paying the shipowners. In this case, the shipowners can advise the cargo owners to pay the freight directly to the shipowners, resulting in a duplicate freight payment. The shipowners could also exercise a lien on the cargo and sell it to pay the freight owed.

At one time in the late 1970s there were no less than 14 ships in Greek ports because voyages had been abandoned due to non-payment of freight. Cargoes were discharged and, in some instances, the shipowners obtained court orders permitting them to sell the cargoes. In some cases, the losses suffered by the cargo owners were recoverable from the insurance companies. However, insurance policies on cargo are intended to cover fortuities, accidents and force majeure, in other words, matters over which the insured has no control. They do not necessarily cover preventable losses involving insufficient packing, inadequate or damaged containers, cheap freight arrangements whereby inferior vessels are used or the insolvency of contractual partners.

What can the cargo owner do to ensure that the goods arrive in proper order? The first step is to understand the various handling stages during the voyage. It is also important to know the peculiarities of the ports and to have a general knowledge of their procedures.

In addition, keep in mind that there is no substitute for expertly packed goods. Professional packing is expensive, but offers considerable savings on the claims end of the equation. If shipments are made on a regular basis, the packing procedures should be constantly reviewed. Each package should be clearly and individually marked, and handling and storage instructions should be easy to read. Extra packing is often required after customs examination, so send additional packing materials with the goods. Contrary to popular belief, most damage sustained by goods transported by sea occurs prior to the loading or after the discharge process. While there are numerous ocean-going vessels expressly designed to carry particular products, risk managers should consider how the product itself can be designed or redesigned to better withstand the rigors of ocean transit.

Cargo owners should consider consolidating their goods with other shippers via freight forwarders. However, do not sign up with the first offer. Request trade and bank references as well as information on their liability cover, all of which will help in the event a dispute arises. Keep in mind that different operations have different levels of liability. Some liabilities are determined by the weight of the goods, while others are limited to an amount per package. For most voyages to and from the United States, the shipping companies can limit their liability to $500 per package or equivalent freight unit for bulk cargo. The cargo owners should be aware of the limits of liability and act accordingly. Most carriers will accept higher liability limits when there is a higher freight rate. In addition, it is possible to purchase a value-declared bill of lading where the limit of liability is the actual value marked on it.

Unless a freight forwarder assumes responsibility for transporting the cargo from the owner's facility to its final destination, each aspect of the voyage must be considered. The trucker is responsible only when in control of the goods, likewise with the rail carrier, warehouser, shipowner and so on. Even freight forwarders, who normally have limited liability in any event, are reluctant to assume full responsibility because they do not have direct control over the goods. Therefore, make sure that adequate receipts are obtained at each transfer point and that the delivery receipt is properly claused, dated and signed.

Bill of Lading

The bill of lading is a contract between the shipper and the carrier designating the pickup point, the ports visited and the final destination of the cargo. Each one can have different time limits and limits of liability. The significance of a bill of lading varies with each case, however, for general cargoes, it serves as a receipt of the consignment in good order by the shipowner, as evidence of the contract of carriage with the shipowner and/or carrier and as a document by which title to the goods can be transferred.

Three bills of lading are usually issued per shipment. Because they can be negotiable documents and can trigger payment under the letter of credit, the banks and the cargo owners' finance department oversee them. Most bills of lading contain clauses that outline the conditions of carriage and are needed by accountants as well as risk managers.

Of greater significance are statutory rules. Most countries have enacted the Hague Rules into their legislation by way of the Carriage of Goods by Sea Act. This means the shipowner or carrier is legally bound to provide a seaworthy ship and to properly load, stow, carry and discharge the cargo. The shipowner has to exercise "due diligence," but realistically the burden of proof as to whether the ship is liable floats back and forth between the cargo owner, shipowner and carrier. Yet, the fact that a clean bill of lading was issued and the goods arrived damaged is sufficient reason to shift the burden to the shipowner who then must prove that the damages occurred due to circumstances beyond his control.

When a Claim Occurs

In the event of a claim, various mechanisms should be in place so people at the cargo site know the necessary steps to take. The goods should be checked upon receipt, and when they are lost or damaged, notices of claim should be sent to the carriers as soon as possible. A complete set of documents should be sent to the cargo underwriters, including a copy of the bill of lading and invoice, and evidence of the damage should be sent to the shipowners. If the damage or loss is severe, the cargo owners should hire an independent surveyor who can verify the damage and recommend ways to mitigate the loss.

In some cases it may be known that damage occurred to the consignment before the vessel arrived in port. The shipowner may be advised of a problem during the voyage, or it becomes evident that serious damage has occurred upon discharge of the cargo. The cargo owner should then consider whether or not to obtain security from the ship. Because most ships fly flags of convenience and are owned by special one-ship companies, it is difficult to secure any award against the shipowners, especially in the case where the vessel has already been sold. Most vessels are entered with protection and indemnity associations that will reimburse the shipowner in the event they have paid a claim. Yet these associations are not liability insurers. If cargo owners cannot obtain compensation from the shipowner, they do not normally have separate rights against the associations.

Most cargo underwriters consider it prudent to obtain security for claims in excess of $75,000. If the cargo owner instructs his attorney to obtain security, providing the underwriter's approval is obtained, the legal costs can be recovered from the underwriter. Remember, it is easier to obtain security at the time of loss than after the fact.


Containerizing cargoes has been the most significant factor in loss control for cargo shipments in the last three decades. If the cargo owner assumes responsibility for containerization, it must be certain that the weight is balanced and the goods are packed correctly inside the containers. In addition, the container itself must remain undamaged and properly sealed. It is difficult to verify the actual contents of the container when a receipt is issued. Seals can be broken and resealed in a way that makes it difficult to prove the ship liable. However, if a unique type of seal is used, detection is easier. The container should also be weighed at each transfer point. If the weight varies, it is possible that the goods have been tampered with. Likewise, photographing the container after packing and before unpacking can also detect tampering.


Most steel products are shipped in bulk carriers and are often the only cargo on board. Consequently, only one shipper usually charters the vessel, their contract of carriage being a charter party. If the steel arrives damaged, experts may be able to locate the cause and, to some degree, determine whether it occurred during or after shipping. Water damage can be a concern even if the steel is wrapped, and steel cargo should not be loaded or discharged in the rain. If there are signs of rust, determine whether it is from freshwater or seawater. If damage is caused by the ship's sweat, the ship can still be held liable if the goods were properly inspected at loading time and preshipment damage was accurately noted.

Bulk Liquids

There has been much discussion regarding the "inevitable" losses and "paper" losses associated with moving oil. The inevitable losses due to evaporation, shrinkage or clinage are impossible to prevent. If the oil is not properly carried, excessive evaporation can result. However, it is unlikely that the total loss due to the "inevitable" is more than 0.1 percent of the cargo. Indeed, measurement errors are usually minor. Different measurement tables such as "in vacuo" or "in air" do not generate losses but are simply alternative methods of measuring the quantity of liquids.

Any difference between the measurement and the bill of lading should be incorporated into the trading profit and loss. Most contracts of sale require shore tank measurements to be binding and verified by an independent surveyor at the loading and/or discharge port. However, in determining how much was released or received at a particular terminal, it is not only necessary to check that the shore tanks were accurately calibrated and the measurements correctly taken, but to determine if leakage occurred at the port and inquire about the capacity and status of the pipelines used to carry the liquid.

In the event of a discrepancy between what was loaded and what the ship recorded as being received, be aware that there are numerous cases of vessels with "hidden" tanks. Ships can store cargo either for sale or for burning as bunkers and can inflate or deflate their own figures simply by altering the ship's trim or list. It is therefore advisable to obtain full bunker surveys at the load and discharge ports. If there is a large discrepancy, send surveyors back on board the vessel or to the terminal to investigate the claim. Shipowners' liability is not simply dependent on the ship's figures alone; the cargo owners can prove the ship's liability should be based on shore measurements.

Apart from the actual loss of gross volume, there are losses associated with increased basic sediment and water and free water. Analyze oil samples taken from the bottom of the shore tanks because there may be water below where the sample was taken. In addition, the cargo or pipeline may contain a mixture of oil and water that was not detected.

If there is a significant increase in the free water on board, there may be a corresponding shortfall of oil that the vessel has in some way appropriated. The oil could have been burned, transhipped or stored in another tank. It should be possible to prove the ship liable by analyzing the bunker figures, reviewing the vessel's route and resurveying for hidden tanks. In effect, vessels can and do burn crude oil in their bunker tanks. Occasionally this is done legitimately and the proper safeguards are taken. However, if not done properly, it could cause an explosion.

Liquid cargoes can also sustain contamination. To avoid this, ensure that the ship is suitable to carry the particular type of cargo and that lines at the terminals are properly segregated. Being aware of the vessel's previous cargoes, making sure it can carry not more than one cargo if required and checking the vessel's tanks for cleanliness are all standard procedures.

In the event of contamination, immediately request that all samples from the load port, the ship and the discharge port be retained indefinitely. Obtain original sales, on-sale and standard specifications for the cargo. Then identify tests necessary to establish that the cargo is off-specification, the cause of the contamination and the quantum of the contaminant involved. Arrange joint analysis of all samples between the insured, the underwriters and the protection and indemnity association. Also, arrange for a full discussion regarding the mitigation of the loss with the protection and indemnity association and the underwriters' expert. Furthermore, obtain security for the claim from the shipowners if the ship's liability appears to be involved.

Today most oil cargoes are purchased on terms that make it clear where title and risk passes, such as when the cargo passes the ship's flange at the load port it means that the bill of lading for oil cargoes ceases to be a negotiable title document. Even when title and risk passes with the documents, a letter of indemnity is used in lieu of a bill of lading. It is rare for an oil cargo to be discharged in exchange for a bill of lading. Ordinarily for general cargoes, when a bill of lading is passed or endorsed to another party, the rights are transferred as well. However, because of the nature of oil transactions, in some jurisdictions it is considered that no rights under the bill of lading have been transferred and the cargo owner is left without a contract with the shipowner. This means that in the event of a claim, he cannot sue under the bill of lading. Therefore, it is imperative that each party in the chain of sale note the time they received the bill of lading, date any endorsements and note the time it was passed on.

On a final note, these days it is impossible to ship oil without considering the environmental risk. In the event of a pollution incident at sea, it is the responsibility of the shipowner to arrange for the cleanup and to handle any claims arising from the incident. It is worthwhile to ensure that any tankers chartered participate in the Tanker Owners' Voluntary Agreement Concerning Liability for Oil Pollution (TOVALOP) and that all cargo owners are members of the contract regarding a supplement to tanker liability for oil pollution, referred to as CRISTAL. Most charter parties give the charterers the option of taking reasonable measures to prevent or minimize pollution damage. Therefore, if the cargo owners do not consider the shipowners' actions sufficient, they can advise the owner and act accordingly, given the fact that all actions are taken as agents for the owners and would not affect the overall liability. Regardless of the measures a company takes, the authorities must be informed as soon as a pollution incident becomes known.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Grant, Michael S.
Publication:Risk Management
Date:Jul 1, 1990
Previous Article:Court considers premium payments to captive.
Next Article:A buyer's overview of marine insurance.

Related Articles
Pirates, thieves, and rovers.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters