Loss, Damage, and Claims

Joseph Zodl

(excerpted from remarks to Export Operations Seminar,

Boston, Massachusetts, April 18, 2000)

The questions of loss, damage or claims, is important on both the seller and buyer side. The first responsibility is on the seller's side to try to avoid the situation by proper packaging.

Assuming proper packaging for shipment, the next question is: If loss or damage occurs in transportation, whose responsibility is it that there was loss or damage? If terms of sale were used properly, the question can usually be resolved immediately. It will become gray if, for example, a container is loaded at origin, sealed and shipped, not inspected by Customs or carriers, and damage is not noted until the consignee unloads, then it becomes difficult to determine: was it in fact improper packing, or was it in fact mishandling by the carrier? This is where it becomes helpful to have cargo insurance where you need only prove that the loss or damage occurred. Of course, there remain still other questions such as deductibles, whether or not the insurance was written to cover the type of damage that occurred, and so on. Insurance, however, makes it much easier.

While only two terms of sale (CIP and CIF) specifically require the seller to provide insurance coverage for the buyer, still any business can arrange for insurance to cover its particular risks. On an FOB Long Beach, California sale, for example, a U.S. seller can arrange for insurance to cover itself from their door up to ship's rail. On an FOB Yokohama, Japan purchase, a U.S. buyer can arrange for insurance to cover itself from ship's rail Yokohama to their door.

Policies can be purchased from freight forwarders, which I can recommend if you have an occasional international transaction. If you are selling and/or buying on a regular basis, then I suggest you contact the insurance carrier who is writing your casualty, fire, theft insurance on your business and ask about purchasing a policy on an annual basis. It will be less expensive to begin with, and you can also benefit from increased discounts because you have more policies with one insurance company. Also, real world, when there is a claim, you have leverage for faster handling of a claim because you are a more valuable customer.

So let's say you have insurance coverage for your international shipments for whenever you are at risk. You as seller, or your supplier on your import purchases, take all appropriate steps for proper packing of the products for transportation. But upon arrival, there is in fact loss or damage. What does the receiver of the cargo do?

Many companies with insurance make the mistake of saying, "Well, I have insurance so I'm covered." They must prove that the loss or damage occurred during transit. The one single most important thing is for the receiving clerk to note the situation on the paperwork at the time of delivery.

Examples:

"One carton crushed."

"Two cartons dented in right top corners."

"One drum punctured and empty."

It is also important that if the load is shown to have been sealed, and is delivered with a broken seal or a different seal number, that this be noted on the paperwork.

Suspicion is to be raised whenever a driver pulls up with a delivery of a sealed load, and walks in with the broken seal in his hand. When questioned, the driver will usually say something to the effect, "I always break the seal before I pull up, so that you can start unloading right away. I didn't know you wanted to see me break it." The trick is that the driver may have stopped somewhere to offload some of your product, particularly if you have consumer products, easy to sell. So he had to break the seal. At delivery, of course, he ahs a different explanation. If the load is accepted without notation of a broken seal, and turns out to be short, then the only explanation (as far as the paperwork is concerned) is that the seller shipped short.

If there a sealed load, the driver should be instructed immediately upon arrival to wait with the load until a representative of the receiving department comes out to break the seal. Then, if the seal turns out to be broken, there is no question but that it happened prior to arrival.

This is what will later demonstrate that the damage occurred during transportation and not after receipt at the buyer's premises. This is especially important if your insurance coverage is not from the same company that provides your facility coverage. On domestic shipments, which we'll look at in a moment, it is extremely important because most policies are written to exclude domestic transportation. Therefore, your claim would be directly against the carrier.

Most claims that are denied--by insurer or carrier--are denied because the damage or shortage is not noted on the carrier's paperwork. A notation on the packing list or other document won't do.

Another important point is that the driver making the delivery must countersign the report of loss or damage. If the driver refuses, but the shortage or damage is indeed there, call the dispatcher and ask for a supervisor to come down if necessary. (Usually, the terminal will get the driver on the line to check the facts and, if there is a claim situation, instruct him to sign. Otherwise, you don't sign until a supervisor appears.)

What if there is no insurance and under the term of sale used, your company is responsible (at risk for) the loss or damage? Can you collect on a claim? For international shipments, it is difficult to collect from the carrier.

International Ocean:

The Hague Rules limits you to a maximum recovery of US$500.00 per package. For most merchandise, this is sufficient. (This limitation is on your rights against the ocean carrier, not your rights against the insurer if you have one. The insurance is primarily summarized by the terms of your policy.) The Hague Rules have been adopted in the United States by Congress under the Carriage of Goods by Sea Act.

First, you must prove that the loss or damage occurred while the goods were in the possession of the carrier. Sometimes this is easy to prove, as in an FCA or a CPT transaction where one carrier had custody of the cargo from door-to-door either by direct custody or by agents selected by it (e.g., the steamship line retains trucking companies in the origin and destination countries to provide you door-to-door service).

It is something different if you provided the transportation of a full containerload, sealed, shipment to the port of export, and/or the buyer arranged for delivery from the pier to their building. How do you [prove that the shake-and-break occurred while in ocean transport? The answer you can't. If could have happened while in the possession of any one of the carriers. They can all sidestep your claim. With insurance, you need to prove the loss or damage somewhere in transit, which you can if the receiving paperwork is done correctly.

If you prove loss or damage while in the hands of the ocean carrier, there is an additional problem because the carrier can usually get out of the claim by showing that certain things occurred which were not within their control. So it is extremely difficult to collect from the ocean carrier compared to collecting from an insurance company.

International Air:

The Warsaw Convention limits you to $20.00 per kilogram which is $9.07 per pound. This is usually sufficient for most merchandise.

It is more difficult for an air carrier to sidestep the responsibility for loss or damage that occurred while the goods were in their possession, but we still face the question of when the loss or damage occurred. If, for example, a consignee picks up the cargo at the destination airport and does not note a shortage or damage on the paperwork, a column is not going to be honored later. The presumption from the documents will be that the consignee lost or damaged the merchandise after pickup.

Here again, insurance is important.

Domestic Truck

A brief mention of domestic truck is important because so much of your cargo is moving that way. Essentially, a domestic truck carrier has an absolute responsibility for loss or damage except under the following circumstances:

1) Act of God (usually weather, must be both unforeseen and unavoidable. It is not an Act of God if the cargo is stored overnight outside in the terminal yard and are damaged during a thunderstorm).

2) Act of public enemy (not a common reason for denial in the United States).

3) Lawful duty (e.g., in a blizzard, a truck driver is instructed by state police to leave the snowbound truck and ride with them to the emergency shelter).

4) Inherent vice of the goods (e.g., wool sweaters were infested with moth eggs and the sweaters arrived with holes. This is the fault of the shipper, not the carrier).

5) Act or omission of shipper (e.g., not marking a package "this side up).

6) Improper packing

The last, improper packaging, is perhaps the most common reason for domestic claims to be denied. If you feel that the packaging was appropriate for the merchandise, it is time to appeal the claim both to the carrier's home office and through the sales representative for your carrier. Preferably, at points where you are at risk for loss or damage, you are always controlling your own transportation and never in a situation where you are using the other party's carrier (e.g., FOB destination purchase in the U.S. or CIF destination seaport purchase internationally). If you are controlling the transportation, you have additional leverage with the carrier for your claim to be taken seriously and be properly expedited.

One way in which you can pursue a claim denied for improper packaging, is to check the NMFC (National Motor Freight Classification), published by the American Trucking Associations. Your trucking company representative will have a copy. If your trucker is a party to the NMFC (and it will be in almost every case); if there is a specific regulation for proper packaging for your product; and if you are complying with that specification, then it is almost impossible for the trucker to deny your claim on this ground.

Incidentally, on domestic claims: the claim process is also outlined in the NMFC.

So to summarize our key points:

1) Proper packing by the seller is important to try to avoid loss or damage in the first place.

2) Insurance is important on international shipments.

3) The inspection of the cargo by the receiver and proper notation on the delivery paperwork is the consignee's most important action to prove the claim later on.

4) Should a claim be denied: if it was worth filing, it is worth appealing at least one time.