Benefit of insurance

This is for all those who must be wondering, why this general topic out of the blue — Please read the title carefully. It is not ‘Benefits of insurance’ but ‘Benefit of insurance’. Hold it for the moment!

Let us look at the term ‘ Logistics’. A term which is very commonly used but the exact meaning of which, escapes many, most of the time. Is it transportation involving different modes of transport or something more? Then the terms floating around are 2PL, 3PL,4PL, Integrated logistics,Production logistics, Distribution logistics, etc. Is marine cargo insurance a part of logistics or to put it differently, do logistics operators have the need for marine cargo insurance? 

First, look at the key elements of logistics. It may be noted that all of these need not be present in a single chain to christen it Logistics.

• Inland transportation involving trucking, railway movements & also Air
• Overseas transportation involving sea or air
• Customs clearance
• Warehousing including consolidation, packing/re-packing
• Inventory control
• Order processing
• Reverse logistics for returns, reuse, recycling

Is insurance required at every stage? Yes. Who is responsible for insuring – the logistics provider or the principal (owner of the goods) would depend on the nature of contracts entered into. Question is, are appropriate insurance solutions available to meet the needs of logistics providers? There are numerous insurance products available but which is the right fit is often difficult to fathom.Most of these products are liability-based where negligence of the logistics provider needs to be established, which again becomes an onerous task. 

We confine the discussions here to inland transportation involving a logistics provider. The logistics provider would handle goods worth billions of rupees during a year and should there be any loss/damage, he could be held accountable. The owner of the goods may have an Inland transit insurance but even if that be the case, the cargo insurer after settling the claim will proceed against the logistics provider under subrogation. The Insurance Institute of India along with TCI brought out a detailed report on the Insurance requirements of the Logistics industry, wherein the insurance requirements, available products were discussed and recommendations given too. The report pointed out that contrary to popular belief that the amended Carriage by Road Rules, 2011 was tilted in favour of transporters/logistics providers, the reality was different. Rightly so and let us see why.

There are two diametrically opposite poles in which the principal-logistics providers (inland transport logistics) contracts are structured.

1. Where the carrier clearly is able to push through the condition that the goods are transported entirely at ‘Owner’s risk’ ( notwithstanding the Carriage by Road Rules) and he will only issue a Certificate of facts to facilitate recovery of claim from the principal’s cargo insurer. In cases where COF is not given, the maximum liability is fixed at some notional amount, usually INR 5000. In short, the transporter gets the owner of the goods to waive recovery rights against him by this contract. The cargo insurer who settles transit claims and then under subrogation proceeds against the transporter gets a rude jolt. Many clients seek waiver of subrogation against one and all and insurers continue to give this waiver.
2. At the other end of the spectrum are those clients who do not buy inland transit insurance of their own but put the entire onus on the transporter for any loss or damage in transit, howsoever caused.The sheer size and volumes offered by the clients makes the transporters succumb to such contracts. Some of them merely state that whatever be the loss/damage, same will be recovered from the transporter. More refined versions state that the transporter has to arrange marine cargo insurance protecting the clients’ goods. In some cases, the contracts provide for reimbursement of the insurance premium to the transporters while in some cases, even this is not done.

What is the insurance option open in case of (2)? How will the transporter meet this contractual obligation to insure? Many insurers refuse coverage citing ‘Benefit of insurance’ under 15 of ICC ( 8 of Inland Transit clauses) which states that this insurance ( marine cargo policy) shall not benefit the carrier or other bailee. My submission is that in case of contractual requirement of the nature discussed earlier, the transporter has an interest in ensuring that the goods are protected whilst in his care and custody and the ‘Benefit of insurance’ condition does not come in the way at all. The wording of 15 from ICC ( from which point 8 of ITC is drawn) reads as under:

“This insurance
15.1 covers the Assured which includes the person claiming indemnity
either as the person by or on whose behalf the contract of
insurance was effected or as an assignee,
15.2 shall not extend to or otherwise benefit the carrier or other
bailee.”

While the benefit of the insurance i.e. claim payments cannot be made to the transporter (carrier), the highlighted portion under 15.1 recognizes that insurance can be effected on behalf of someone else. In this context, the transporter is contractually bound to effect a contract of insurance on behalf of the owner of the goods. The claim amount in such cases should be paid directly to the owner of the goods. The policy may be made out in the name of the transporter as insuring the owner of the goods which he is bound contractually to do. In such cases, where the transporter is the proposer on behalf of the goods owner, obviously he would seek waiver of recovery against himself. When insurers waive recovery against carriers in case of (1), why not in the case of (2)? In effect, in both types of contracts, recovery against carriers get waived. Can they escape liability totally even when gross negligence or wilfull misconduct is proven? The answer is No, but in all other cases, a suitable deductible could be the only penalty against the transporter.

Any thoughts? Any better solutions?