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Whether you are shipping products to customers, delivering goods
to distributors, or receiving goods from vendors, the risk of loss
or damage in transit is real. Even more consequential, carriers and
freight forwarders limit their liability in the event goods are
lost, delayed or damaged during shipment, which can leave
businesses exposed.
In this blog, we review the liability rules for different types of
carriers – truck, air, or ocean freight, as well as the role
of insurance and freight forwarders in this context, and review
ways in which businesses can mitigate their risk when shipping.
Shipments via Truck – the Carmack Amendment
The Carmack Amendment1 governs liability for interstate truck shipments within the U.S.2 Under this rule, a carrier is strictly liable for losses or damage to goods during shipment, but allows a carrier to contractually limit its liability. Typically, carriers limit their liability in the following ways:
- Posting tariffs or terms and conditions of service on their websites that contain liability limitations;
- Including liability limitations in the bill of lading3 issued to the shipper; or
- Entering into contracts with shippers that contain a liability limitation.
Liability is often capped at small amounts (e.g., per pound, per package, or a set dollar amount), unless the shipper pays extra for additional coverage.
Shipments via Air – Warsaw Convention as Amended by the Montreal Convention
International air shipments are governed by the Warsaw Convention, as modified by the Montreal Convention,4 covering the carriage of baggage, people, and cargo between or within member countries (note – the U.S. is a member country.) Air carriers are liable for loss or damage to cargo if it occurs during the air carriage. With respect to goods, this liability is capped at about $35 per kilogram. Carriers may also defend against claims if goods were improperly packed by a person other than the carrier, damaged by acts of war, or inherently defective.
Shipments via Ocean – Carriage of Goods at Sea Act
The Carriage of Goods at Sea Act5 (COGSA) governs shipments to and from the U.S. between shippers and ocean carriers. The COGSA limits carrier liability for cargo loss or damage to $500 per package. For this limit to apply, however, the COGSA requires the carrier to provide adequate notice to the shipper, and provide the shipper an opportunity to pay for increased coverage. In light of these requirements, most carriers incorporate the terms of the COGSA directly into bills of lading.
The Role of Insurance and Freight Forwarders
Insurance plays a key role in protecting shippers against the loss or damage to goods during shipment, especially since carrier liability limits rarely cover the full replacement cost of goods. For example, U.S. trucking companies typically carry only $100,000 to $150,000 in cargo insurance. Although they could increase this coverage for a fee and pass through the added cost to shippers, many businesses that ship goods prefer to maintain their own property insurance that covers the replacement cost of goods in transit.
Freight forwarders (FF) offer another option for shippers seeking peace of mind during the transit process. Freight forwarders arrange shipments for companies by contracting directly with carriers6 and often provide warehousing, customs, and logistics services, which can be particularly helpful for companies that lack logistics experience. Unlike carriers, they are not strictly liable under the Carmack Amendment; however, their liability for loss or damage may arise if a freight forwarder is negligent under applicable state law or if there is a separately negotiated contract between the freight forwarder and the shipper that provides for it. Most freight forwarders will seek to limit their liability to no more than the actual carrier's liability, yet this item can sometimes be negotiated.
If you use freight forwarding services to ship goods via truck, it may be helpful to consider the following issues before entering into an agreement with a freight forwarder:
- Does the FF have a comprehensive truck carrier
selection process?
- Satisfactory safety rating by FMCSA (Federal Motor Carrier Safety Administration)Commitment to enforcing hours-of-service rules for driversProof of key insurance coverage (commercial general liability insurance, workers compensation, business auto liability insurance, and motor truck legal liability insurance)Proof of carrier operating authority/licensingCompliance with environmental/safety rules
- Special requirements for hazardous materials
- Is the FF allowed to subcontract? With or without your prior consent?
- Do the liability limits reflect the value of your goods?
- Does the FF maintain Errors & Omissions (E&O) and contingent cargo insurance?
Although shipping will always carry some risk, it is helpful to understand the rules governing such commercial activity, especially carrier liability limits, so that you can take appropriate steps to protect your bottom line.
Footnotes
1. See 49 USC 11706 and 14706.
2. The Carmack Amendment preempts state laws. While the Carmack Amendment also applies to shipments by rail, this blog focuses on shipments by truck.
3. A bill of lading is a receipt that a carrier provides to the shipper and typically contains limitation of liability sections that: (a) limit the liability of the carrier to specified amount, such as a specific dollar amount, a specified amount per unit of weight or per package; and (b) a time period limitation on when claims for loss or damage can be made. In some cases, the bill of lading will refer to limitations of liability in the carriers tariff/terms and conditions of service.
4. The full name is the Convention for the Unification of Certain Rules Relating to International Carriage by Air signed at Warsaw, Poland, on October 12, 1929, as amended by that Convention for the Unification of Certain Rules for International Carriage by Air, Montreal, May 28, 1999.
5. 46 USC 28.
6. In the case of ocean carriers, it is important to note that the freight forwarder can either be an agent for the shipper or an NVOCC (Non Vessel Operating Common Carrier) if it buys space from the ocean carrier and resells the space to the shipper and issues a bill of lading to the shipper.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
