Quest News™

October 12, 2015

A Catastrophic Cargo Loss: What You Need to Know


El Faro Ship
The missing cargo ship, El Faro

No one can anticipate catastrophic loss, especially during hurricane season. On Oct. 1, Hurricane Joaquin hit its maximum strength of a Category 4 storm. Areas of the Bahamas withstood 130-140 mph winds. Tragically, in the eye of the storm the TOTE cargo ship, El Faro, went missing. The El Faro departed from Jacksonville, Florida bound for San Juan, Puerto Rico on a four day voyage with 33 crew members. Sadly, hopes for its crew ended after a week-long search. The cause of the loss may be a culmination of weather, mechanical malfunction or even negligence – all still currently under investigation.

Shipments in transit are at risk due to the many perils inherent in the environment. Storms, fires, stolen or mishandled goods and even collisions are all possible. In addition to the many risks, there are time tables that shippers may not be patient for. When loss occurs, it can take significant time for adjustors to assess damage. In situations of complete or partial loss to cargo, questions arise about who is liable. Understanding a carrier’s limit of liability, cargo insurance and general average is important.

Carrier’s Limited Liability

For carriers’ liability, carriers only pay claims when they are legally liable, but even then, their liability is limited depending on the mode of transport.

The “Carriage of Goods by Sea Act” (COGSA) governs liability for ocean carriers and NVOCCs moving cargo to/from the United States and limits recovery to $500 per customary freight unit (CFU) when the carrier/NVOCC is negligent. Measurement of the CFU is broadly defined, and can vary from one container to one pallet.

Hague Visby Rules govern liability for ocean carriers outside of the United States, with similar defenses to COGSA. Limitation of liability is also based on Special Drawing Rights (SDRs) but is set at 666.67 SDRs per package or per kilogram of gross weight of the goods lost or damaged, whichever is the higher. In an effort to better define carrier liability, Hague Visby Rules were created to define 17 circumstances under which the carrier cannot be held liable.

  1. Act, neglect, or default of the carrier in the navigation or in the management of the ship
  2. Fire (unless by fault of the carrier)
  3. Perils, dangers and accidents of the sea
  4. Act of God
  5. Act of war
  6. Act of public enemies
  7. Arrest, restraint, or seizure
  8. Quarantine restrictions
  9. Act of omissions of the shipper or owner
  10. Strikes, lockouts, or labor shortage
  11. Riots and civil commotions
  12. Inherent defect, quality, or vice of the goods
  13. Insufficiency of packing
  14. Insufficiency or inadequacy of marks
  15. Latent defects not discoverable by due diligence
  16. Saving life or property at sea (general average)
  17. Any other cause arising without the actual fault of the carrier

Key Reasons to have Cargo Insurance

  • Carrier’s limit of liability under COGSA or Hague Visby
  • Covered losses are paid without the need to prove carrier negligence. There is no need to demonstrate where the loss occurred.
  • Claim payments based on insured value, not weight of pieces missing/damaged or carrier’s limited liability.
  • General Average

What is General Average?

General Average is a legal principle of maritime law. A General Average occurs when a voluntary sacrifice or expenditures are incurred for the joint benefit of the vessel and cargo interests (e.g., jettison of cargo to extinguish a fire, refloating a vessel that was stranded, towing a vessel with dead engines). All parties contribute to the loss/expenditures based on the cargo and vessel value. When a General Average is declared, whether your cargo was damaged or not, your cargo can not be released until either a cash deposit is posted or a General Average Guarantee is issued. If Cargo Insurance is purchased, the insurance company provides the General Average Guarantee to meet the cargo owner’s contribution and facilitates the release of the cargo. If no cargo insurance, the cargo owner must post a cash deposit. This deposit may be held for years since the necessary computations conducted by special adjusters may take years.

Consider Cargo Insurance

For all the above reasons, logistics providers should consider obtaining Cargo Insurance. Avalon Risk Management offers an “All-Risk” Cargo policy which offers the broadest form of coverage which includes General Average, sunk or capsized vessel. Our flexible policies allow our customers to insure most commodities immediately and those requiring special quotes within a 24-hour turnaround time. With Avalon’s Cargo Insurance program, you’ll receive competitive rates, marketing support and exclusive Web Merlin™ technology to streamline certificate issuance.

For more information on Cargo Insurance, contact marketing@avalonrisk.com or visit our cargo insurance product page.

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