As supply chains become more global and intricate, the risk of loss or damage to goods in transit increases. On a long enough timeline, challenges such as extreme rigors of transit, long voyages, extensive handling and rehandling, inclement weather, targeted theft, and impostor schemes guarantee losses.
In the absence of shipper’s interest cargo insurance to protect the cargo owner against financial loss, carrier’s liability is all that remains, and cargo owners are often disappointed by the all-too-common misconception that the carrier will fully cover their loss. They might even ask the logistics service provider, “They’re going to pay for this, right?” Such misconceptions are mainly present in claims scenarios when negligence seems evident, or a party has admitted fault. Ultimately, the cargo owner is appalled by a nominal award amount that falls far short of the owner’s financial loss.
Carrier limitation of liability
Carriers of all modes — ocean, air or land conveyance — will legally limit their liability according to applicable statutes and laws. For example, the ocean carrier’s terms of carriage, which are on the back of all standard ocean bills of lading, will reference The Carriage of Goods by Sea Act (COGSA). COGSA puts forth that, even if the carrier is at fault, the cargo owner’s financial recovery following a loss is limited to the value of the cargo damaged or lost or $500 per customary shipping unit (CSU), the lesser amount prevailing. In addition to the ocean carriers’ limitation of liability, they further enjoy several liability exclusions, including acts of God, fire, theft and unseaworthiness of the vessel, to name a few.
While some shippers and logistics service providers are familiar with the inherent risk of limited carrier liability, few know that some third parties benefit from the same limitations via the Himalaya Clause. You will find this little-known provision with the exotic name in the fine print of the contract of carriage.
The Himalaya Clause
The Himalaya Clause originates from an English law case concerning a ship named the Himalaya. Defined as a contractual provision for the benefit of a third party, someone who is not a party to the contract, the Himalaya Clause language extends the carrier’s provisions, limitations, exemptions, rights and conditions to any agent or subcontractor of the carrier. These agents or subcontractors could include employees, crew, stevedores, longshoremen, terminal workers or any other vendor related to the carrier. To understand how this clause can affect a cargo owner, consider the following claim scenario.
A pallet of metalworking tools tendered to an ocean carrier is accidentally dropped and damaged during unloading from the vessel. The estimated damage amount is $10,000. During the investigation of the incident, terminal personnel admit they were at fault for the accident. So naturally, the cargo owner expects full recovery because the terminal workers have accepted responsibility. However, after filing a formal claim with the carrier and terminal operator, the cargo owner is shocked at the settlement amount of $500. To the cargo owner’s chagrin, the terminal operator is legally determined to be a subcontractor to the steamship line. Therefore, by citing the Himalaya Clause found in the carrier’s bill of lading, they are afforded the same monetary limitations of liability as apply to the carrier. In this case, it is the COGSA standard of $500 per CSU.
What you can do
It can be an unsettling experience for a cargo owner who suffers a loss and files a claim to learn that ocean carriers and their subcontractors have legal protections in place that limit their financial obligation to $500 per CSU even when they admit fault. This nominal amount almost always falls short of the actual damage, leaving the cargo owner feeling burned. But at this point, the damage is done. So how can a cargo owner keep ahead of financial loss and make choices that lead to optimal outcomes?
Whenever possible, preemptively purchase cargo insurance to avoid trifling limited liability payouts for cargo losses. Having the right coverage with the proper limits is half the battle. Knowledge and preparedness are the other half. Partner with a logistics service provider who understands the nuances of shipping terms of carriage and who makes it their business to share that knowledge with you. Also of great importance, partner with logistics service providers and insurance partners who emphasize robust subrogation and salvage capabilities.
Subrogation is a process by which the insurance company that pays your claim will seek reimbursement from the negligent party, including but not limited to a carrier, packer or service provider. This process is an excellent benefit to a policyholder because it allows for the opportunity to recover deductibles and other out-of-pocket expenses. Successful subrogation can also improve your loss ratio, a vital factor underwriters consider when determining rates and policy terms. Salvage plays a similar role in reimbursing the insurance provider for paid claims and minimizing your loss ratio. In today’s ever-evolving global supply chain, no detail is too small, and these kinds of savings add up.
When procuring cargo insurance, work with an experienced logistics service provider who understands and is comfortable explaining insurance or with an insurance broker specializing in supply chain risks. With the right cargo insurance in place, you can avoid the unwanted surprise of insufficient claim payments due to the carrier’s limited liability and the Himalaya Clause.
Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. It should not be construed as an offer to represent you, nor is it intended to create, nor shall the receipt of such information constitute, an attorney-client relationship. Readers are urged to seek professional or legal advice from appropriate parties on all matters mentioned herein.
About the author
Courtney Rossi, a licensed insurance broker, is an account executive in the Charleston office serving Roanoke’s Southeastern Region. Rossi specializes in providing customized insurance solutions for customs brokers, transportation intermediaries, warehouse operators, and importers and exporters.
A graduate of College of Charleston, she also holds a Transportation Risk Insurance Professional designation. She is also active in local and regional industry associations and lectures regularly at College of Charleston’s Risk Management & Insurance, School of Business classes as well as at the Charleston School of Law insurance courses. She is an active board member of the South Carolina International Trade Conference.
About Roanoke
Roanoke Insurance Group Inc., a Munich Re company, is a specialty insurance broker focused on surety bond and insurance solutions for logistics service providers, customs brokers and companies managing supply chains. Founded in 1935, Roanoke was the first provider of customs import bonds as well as the first appointed ATA Carnet provider in the United States. Roanoke has decades of partnership with the trade community as a trusted provider of insurance, surety bonds, ATA Carnet products and specialty services.
