Identifying Transportation Risks

• Risks associated with transportation depend on

several factors.

• These include the issue of title ownership of the

property while in transit and the responsibility of
the carrier for damage to goods in its custody.

21-1
 Parties Exposed to Loss

Damage to property in the course of transportation

may be a source of loss to two interests:

• The owner of the goods, and

• The person or organization to whom the goods

have been entrusted for transportation.

21-2
 Terms of Sale and Risk of Loss

• The risk of loss to goods being shipped may rest

with the buyer or the seller, depending on the
terms of the sale.

• When goods are shipped "F.O.B. Point of Origin,"

title passes to the buyer when the goods are
loaded on the conveyance.

• Goods shipped "F.O.B. Destination," on the other

hand, remain the property of the seller until they
arrive at their destination.

21-3
 Terms of Sale and Risk of Loss

Sellers that ship goods F.O.B. Point of Origin

(where the title to the goods passes when the
goods have been loaded on the transporting
conveyance) often arrange coverage to protect the
interest of the buyer, thereby making certain that
the goods are insured and that their interest in the
goods is protected.

21-4
 Mode of Shipment

• The risk associated with the shipment or

transportation of goods depends on the mode of
shipment.
• The goods may be shipped by common carrier,
by contract carrier, or they may be carried on the
owner’s own trucks.
• The risk of loss depends on which of these three
approaches is used.

21-5
 Carriers for Hire

Because common carriers and contract carriers

may be liable for damage to goods in their custody
for transportation, the owner’s exposure is reduced
when a carrier for hire is used, since it may be
anticipated that at least a part of any loss will be
recoverable from the shipper.

21-6
 The Liability of Common Carriers

• A common carrier is defined as a person or

organization that carries goods for hire for the
public (in contrast with a contract carrier, which
carries goods for specific firms under contract).
• The legal liability of a common carrier for goods it
transports is quite strict
• Only a few causes of loss are considered to be
beyond the control of the common carrier, and
with the exception of these exclusions, the
common carrier is legally liable for any loss of or
damage to goods which it transports.
21-7
 Exceptions to Common Carrier Liability

1. Acts of God.
2. Acts of the public enemy (a foreign power).
3. Exercise of public authority.
4. Fault or neglect of the shipper.
5. Inherent vice, which is defined as a quality in a
good that causes the good to destroy itself (e.g.,
butter will spoil).

Even losses caused by one of these five causes

may result in the carrier being held liable, if the
carrier's negligence contributed to the loss.
21-8
 Common Carrier Liability

• With the broad liability imposed on common

carriers by the common law, it should not be
surprising that common carriers have sought
ways of avoiding a part of this liability.

• However, the only way that a common carrier can

limit its liability to the owner of property to less
than the full value of that property is to enter into
a contract to this effect.

21-9
 Released Bills of Lading

• The contract between a carrier and a shipper for

transportation of the goods is called a "bill of
lading."
• The terms and conditions of the bill of lading of
carriers operating in interstate commerce are
tightly controlled by federal law and most states
have similar laws relating to bills of lading used
in intrastate transportation.
• A bill of lading may be a "Straight Bill of Lading,"
or a "Released Bill of Lading."

21-10
 Measuring Frequency and Severity

• The potential loss severity associated with the

transit exposure varies with the value of the
largest shipment made.

• In measuring potential loss, the maximum dollar

value for shipments by any one truck, train, or
aircraft should be determined.

21-11
 Measuring Frequency and Severity

• If a shipper sends a large number of shipments

on a regular basis, it may generate sufficient
experience to establish a frequency rate for lost
or damaged shipments.

• Depending on the amount of experience on which

this frequency rate is based, it may be possible
for the shipper to make reasonably accurate
estimates of future losses.

21-12
 Department of Transportation Standards

• As part of its responsibility for regulating carriers

in interstate commerce, the U.S. DOT has issued
advisory standards for transportation operations.

• The DOT’s Cargo Security Advisory Standards

deal with seal accountability, high-value
commodity storage, and internal accountability
procedures.

21-13
 Department of Transportation Standards

• Before releasing these advisory standards, DOT

solicited and received the comments of many
large air and surface carriers in the U.S.

• Hence, they reflect widely held professional

views and should be consulted in any protection
program involving transport and related storage
of material.

21-14
 Loss Prevention and Control

• Transit losses are highly susceptible to loss

control measures.
• The extent of the organization’s loss control
efforts will depend on the exposure.
• A firm that makes frequent shipments needs to
consider control measures to control loss
frequency.
• A firm that makes only occasional shipments, on
the other hand, will probably judge the transit
exposure to be insignificant.
21-15
 Title During Transit

• Risk of loss to goods in transit can be transferred

to the other party in the transaction through the
terms of the sale.

• A seller will prefer terms of sale that transfer title

to the buyer at the point of origin (F.O.B. point of
origin) and the buyer will prefer terms that
transfer title at the end of the transportation
(F.O.B. destination).

21-16
 Labeling

• Another issue related to packaging is labeling.

• Except where necessary for other reasons,

packages should not be labeled in a way that
reveals that the contents are worth stealing.

21-17
 Selection of the Carrier

• The second loss control measure with respect to

the transportation exposure is the selection of
the carrier.
• When goods are to be shipped by common
carrier or contract carrier, the selection of the
particular carrier that will be used is a loss
control factor.
• In addition to truckers, which are the most
common type of carrier, other carriers include
railroads, air carriers, and U.S. parcel post.

21-18
 Railroads

• As common carriers, railroads also limit their

liability through their bills of lading.

• A released bill of lading limits the railroad’s

liability to a specified value, based on the
carrier’s tariff or charges, which vary with the
type of goods being transported.

21-19
 U.S. Parcel Post

• U.S. Postal Service is not a common carrier and

does not incur liability unless the parcel is insured
by the post office.
• Regular transit insurance excludes coverage for
parcel post shipments, but a separate parcel post
policy is available from some insurers.
• The Post Office provides insurance up to $200 per
parcel for third and fourth class and priority mail.
• Registered mail can be insured up to $10,000 per
parcel, or by private insurers
21-20
 Segregation of Values

• The concentration of values on a single

conveyance should be limited, where possible, to
reduce the severity of any loss that does occur.

• When goods are shipped by a carrier for hire,

shipments should be scheduled to avoid high
concentrations of values at any one terminal.

21-21
 Collecting From the Common Carrier

• Collecting for lost or damaged shipments from

the common carrier is a post-event loss control
measure.

• It is usually easier and quicker to collect a claim

from an insurance company than from a common
carrier.

21-22
 Damage to Goods

• When signing for goods, the consignee should

carefully inspect the goods for damage or
shortage.

• Goods should be checked for concealed damage

as soon as possible. Notification for concealed
damage is usually limited to 15 days.

• The carrier should be notified immediately so that

a representative can inspect the damage.

21-23
 Time Limit For Notice

• The time limit for notice of loss required by

common carriers is usually shorter than that
required by insurance companies and is stated
either in the bill of lading or in the carrier's tariffs.

• Shippers usually prefer to seek reimbursement

from the common carrier first before charging a
loss against their own insurance carrier because
most transit policies are experienced rated; the
fewer the losses, the lower the premium.
21-24
 Retention of Inland Transit Exposures

• Transit exposures often represent ideal risks for

retention. More often than not, transit losses
represent relatively small amounts.

• When the firm makes a large number of

shipments, each of which can produce a loss of
only modest proportions, the firm will generally
find self-insurance cheaper than purchase of full
insurance.

21-25
 Retention of Inland Transit Exposures

• The need for insurance depends on the types of

property shipped, the value of shipments, the
frequency of shipments and whether shipments
are by common carrier, contract carrier, or on the
insured’s own trucks.
• Often, when transit coverage is purchased, it is to
obtain the insurer’s services in collecting claims
from the common carrier rather than to obtain
indemnification for the loss.

21-26
 Ocean Marine Exposures

• With the increase in international operations,

many U.S. firms have encountered the risks
associated with transportation of goods abroad.

• The exposures associated with ocean

transportation are similar to inland transit
exposures in some ways, but differ in others.

21-27
 Hazards of Ocean Shipping

• Although transportation by water is an

inexpensive means of transporting commodities,
it exposes property to a variety of hazards and
perils which almost defy the imagination.
• Even though modern safety devices and
precautions are used in maritime transportation,
the perils of the sea can strike at any time,
sometimes with unbelievable force.
• Bad weather, errors in navigation, fog, hidden
objects, and frequent fires make this form of
transportation extremely hazardous.
21-28
 Parties Exposed to Loss of Ocean Cargo

• One of the most complicated aspects of ocean

marine transportation is in determining which
interest is at risk when goods are shipped from a
seller to a buyer and when the risk of loss passes
from the seller to the buyer.

• The seller may agree to place the goods at the

disposal of the buyer at various points and the
seller remains responsible for the goods until
they are delivered at the particular place
specified.

21-29
 Ocean Marine Terms of Sale

There are six basic terms of sale:

• Ex Point of Origin, in which the buyer takes title

to the goods at the warehouse or factory and is
responsible for all charges from that point;

• Free Along Side (F.A.S.)

• Free On Board (FOB)

21-30
 Ocean Marine Terms of Sale

• Ex Ship's Tackle: the seller is responsible for the

goods until they are placed along side the ship,
on board the ship at some designated point, or
delivered on the dock at the port of destination;
• Cost and Freight (c.f.): the seller is responsible
for transportation charges to the destination, but
the buyer is responsible for loss or damage.
• Cost Insurance and Freight (c.i.f.), in which the
seller is responsible for transportation charges
and also insurance coverage up until the final
point of destination.
21-31
 Insurance as a Guarantee for Credit

• Domestic commercial transactions are usually

transacted by cash or by a direct credit
agreement between buyer and seller.
• In many foreign commerce transactions these
types of arrangements may not be possible.
• The seller may want cash on delivery, and must
depend on the carrier or some other mechanism
for the collection.
• The buyer does not want to pay until the goods
are received.
21-32
 Insurance as a Guarantee for Credit

The transfer of title and the goods themselves is

accomplished through a set of documents that
includes include

an invoice

an order bill of lading

a draft or check

an ocean marine certificate of insurance

21-33
 The Ocean Marine Bill of Lading

The basic shipping document is the order bill of

lading, which has two basic purposes:
(a) to serve as a receipt from the carrier of the
goods and
(b) to serve as a contract for transportation of the
goods.

The simplest form of bill of lading is used for

financial arrangements directly between shipper
and consignee.

21-34
 Order Bill of Lading

• An order bill of lading is, in a sense, a "claim

check" for goods that have been shipped.

• It entitles the holder to receive the goods from

the ocean carrier at the shipping destination.

• It is used in conjunction with drafts or bills of

exchange through banking channels and is a
closely guarded document because it is endorsed
to whomever is to receive the goods.

21-35
 Order Bill of Lading

• It passes through international banking channels

to the country to which the goods are shipped.
• The consignee (buyer) arranges for payment or
credit through his bank, and the foreign bank at
the destination then fills in the name of the
consignee in the space on the endorsement.
• The buyer now has title to the goods.
• He takes the order bill of lading to the carrier and
is given the goods.

21-36
 Maritime Law and Ocean Marine Insurance

Because England was for many years the most

significant maritime nation and because of the ties
of the United States with that nation down through
the years, present practices in international ocean
marine insurance were developed by that great
nation.

21-37
 Liability of Carriers by Sea

• Land carriers in the United States are responsible

for the safe delivery of goods in their custody,
except for specified exceptions.
• As a result of custom developed over many
years, the carrier by sea is liable only for loss
caused by negligence.

21-38
 Maritime Law and Average Losses

• The term "average" is considered by many

persons to be the most important single word in
the terminology of ocean marine insurance.

• It is synonymous with "loss." "Average" or loss

under an ocean marine policy may be a
"Particular Average" or "General Average."

21-39
 Particular Average

• A "Particular Average" is defined as a partial loss

to the property of a particular interest only.

• A Particular Average is contrasted with a General

Average loss, which is a loss that is borne by all
parties to the venture.

21-40
 General Average Losses

• A general average loss is a form of liability that is

imposed by admiralty courts on the participants
in a maritime venture (voyage).

• It is a doctrine based on the principle of equity

and imposed liability on all persons who have
goods or property at risk in a maritime venture,
when part of the goods are sacrificed for the
benefit of the entire venture.

21-41
 General Average Example

• The simplest example of a General Average loss

involves the jettison of a part of the cargo to
lighten the ship in time of stress.

• If goods are intentionally jettisoned in an attempt

to save the ship, and the attempt is successful,
the ship owner and the other cargo owners will
share in the loss of the jettisoned cargo with its
owner, based on the proportion of the total value
of the venture that each owned.

21-42
 General Average Example

To illustrate, assume that a ship, valued at $5

million, is carrying cargo belonging to five different
parties, each valued at $1 million.
• In the middle of the voyage the ship runs into
bad weather and is in danger of sinking.
• In order to lighten the ship, the goods belonging
to "X" are thrown overboard.
• The jettison is successful and the ship reaches
port safely.

21-43
 General Average Example

• The entire burden of the loss will not fall on "X"

or upon the insurer.
• "X" will be forced to bear 10% of the loss since
this was the proportion of the total value of the
venture that was owned.
• The owner of the ship will bear 50% of the value
of the cargo jettisoned, and each of the remaining
cargo owners will bear 10%.
• The other parties become liable to "X" for their
share of the General Average loss.
21-44
 Requirements for General Average

• The existence or imminence of some risk that

appears to threaten all interests.
• A voluntary sacrifice, or some extraordinary
expense, with the purpose of avoiding loss or
reducing it for the common interest of all owners.
• Some practical effect of the effort, with at least
some part of the values in the venture saved.
• A freedom from any fault on the part of the
interests claiming contribution from the rest of
the venture.
21-45
 Salvage

• In marine commerce, the term "marine salvage"

is intended to mean the rescue of ships and
cargoes at sea.
• A person or organization engaging in salvage
operations is known as a salvor.
• The person who does save property of another
from a maritime peril is entitled to an award for
his effort.

21-46
 Salvage

• Maritime law imposes a liability upon the thing

saved.

• This is a salvage award which is compensation

for the services of the person who aided the
distressed property.

• Most insurance policies pay salvage charges for

rescue of a ship which is covered by the policy.

21-47