SOLAS Considerations for Beneficial Cargo Owners and Transportation Intermediaries

In January, we covered the new International Maritime Organization (IMO) amendments to the International Convention for the Safety of Life at Sea Convention (SOLAS), which requires shippers verify gross container weight prior to shipping beginning July 1, 2016. These new amendments have sparked controversy with some shippers saying it will be difficult, if not impossible, to comply with the rule or that it could cause congestion at ports and snarl supply chains, and a Congressional committee took up the issue two weeks ago. There are other issues as well, including insurance considerations, which we cover here.

• The SOLAS Verified Gross Mass Rule is not law yet and lack of unified implementation has created confusion. Given the mixed messages that the U.S. Coast Guard has sent regarding their role in enforcement and the interpretation by some stakeholders that non-compliance of the SOLAS Verified Gross Mass (VGM) rule has little or no consequence, a concern by some is that non-compliance and any resulting bodily injury, physical damage or financial loss will not be covered by insurance. Most ports and steamship lines are eager to accept the VGM rules as they have been the principal drivers behind the creation of the rule, but apprehension lies with those parties that may seek to exploit the lack of enforcement and those parties that fail to understand the consequences of non-compliance. Beneficial Cargo Owners (BCOs) and Transportation Intermediaries along with their employees tasked with VGM compliance may not have adequate incentive to follow the VGM rules for the following reasons:

1. Smaller and mid-sized BCOs and Transportation Intermediaries may simply lack the manpower, guidance, or expertise to follow new export rules and regulations. Exporters as with other industries are making due with less manpower while the number import and export regulations have increased. ‘Regulatory Overload’ may be overwhelming companies of this size, with rules like SOLAS VGM simply misunderstood.
2. BCOs shipping heavy cargo may be motivated to continue to load and ship overweight containers to save money on freight or keep certain shipments unitized into fewer containers.
3. Transportation Intermediaries may be complicit in the BCO’s non-compliance of the VGM rule for fear that the BCO may seek an alternate transportation provider if VMG Compliance is questioned.
4. The industry’s focus on the transmission of a VGM ‘document’ and the process of data transmission may undermine the intent of the rule.
5. Management within BCOs and Transportation Intermediaries may view the VGM rules solely as a compliance task and fail to recognize the liability to shareholders.

• The SOLAS VGM Rule has focused safety issues on ports, vessel stability and the international leg of container transport, however, the visibility of the issue will likely create additional focus on overweight containers following accidents involving trucks and freight trains.

Should overweight containers be the cause of an accident, its investigators and those representing injured parties are likely to include BCOs and Transportation Intermediaries in such claims.  For example, a wrongful death suit in 2010 involving an overweight import container included the importer (BCO), the customs broker, the owner of the customs exam site, and the trucking company as defendants, with plaintiff’s counsel arguing each of the defendants had a duty to advise the next defendant of the weight of the container.

3. Non-compliance to the SOLAS VGM could lead to uncovered claims for BCOs and Transportation Intermediaries.

While not law yet, intentional deviation from SOLAS VGM compliance may be viewed as a dishonest, knowingly wrongful, fraudulent, and possibly malicious act and as a result most insurance policies could deny coverage using any one of these exclusions.

Under a Commercial General Liability (CGL) policy, it’s doubtful the Expected or Intended Injury Exclusion could be invoked as a Bodily Injury (BI) or Property Damage (PD) loss stemming from misdeclared container weights would likely not be considered ‘expected or intended’, but there could be argument as to whether intentional container weight misdeclaration would be considered a covered ‘occurrence’. The CGL requires that BI or PD be caused by an ‘occurrence’ and case law indicates some degree of fortuity must be established to constitute an occurrence.

For those courts that may decide the ‘act’ must be the fortuitous event, would the act of misdeclaring container weights be considered fortuitous and unintentional or intentional?  Or for those courts that take the view of the result being the ‘fortuitous event’, would the result of the misdeclaration be considered?

The following scenarios are possible areas in which BCO or Transportation Intermediary may find themselves in a position with no insurance protection:

1. The BCO misstates VGM on an export and transmits a false VGM ,which is less than actual VGM. The container is involved in a bodily injury or property damage claim and the BCO’s CGL insurer denies coverage citing that the claim was not a fortuitous occurrence.
2. The BCO acting as the importer knowingly accepts overweight containers from its overseas supplier and one such container is involved in a bodily injury or property damage claim. The BCO’s General Liability insurer denies coverage citing that the claim was not a fortuitous occurrence.
3. The Transportation Intermediary knowingly accepts incorrect VGM documentation and am overweight container is involved in a bodily injury or property damage claim. The Transportation Intermediary’s General Liability insurer denies coverage citing that the claim was not a fortuitous occurrence.
4. A third-party BCO seeks to recover consequential losses from an NVOCC who consolidated individual BCO shipments into an overweight container and knowingly transmitted inaccurate VGM. The Transportation Intermediary’s Professional Liability Insurance and/or Cargo Liability Insurance would likely deny the claim citing exclusions found in most common Professional Liability and Cargo Liability insurance forms in the US market. For example, a Professional Liability policy will not respond to any claim arising out of dishonest, criminal, fraudulent, malicious, or knowingly wrongful act of any insured or willful violation of any ordinance. Cargo Liability insurance excludes losses due to infidelity, conversion, or dishonest acts of the assured, or the assured’s employees.
5. A BCO following a container/truck overturn, container floor collapse, with a container the BCO loaded seeks to recover a loss via their cargo insurer. The cargo insurer may try and deny the claim citing improper packing or willful misconduct.
6. If fines and penalties become part of SOLAS VGM enforcement, most intermediary policies will not cover fines and penalties if they are assessed directly against the Transportation Intermediary. Depending upon the circumstances, fines and penalties imposed upon a shipper for negligent actions caused by the intermediary would likely be covered under the intermediary’s Professional Liability policy.

Best Practices for BCOs and Transportation Intermediaries

Both BCOs and Transportation Intermediaries must take their responsibilities for SOLAS VGA compliance seriously and be able to demonstrate a process that places accountability on the individual’s responsible for this task. BCOs and Transportation Intermediaries have a shared responsibility and are co-dependent on each other for full compliance, therefore, full transparency as to the responsibilities of each entity must take place.  Following are best practices considerations to implement:

1. Transportation Intermediaries should broaden BCO indemnification agreements in their Terms and Conditions of Service to address SOLAS VGM and BCOs may want to consider incorporating reference SOLAS VGM compliance in their own Master Service Agreements. Insurers must be more diligent at reviewing Transportation Intermediaries Terms and Conditions as part of their underwriting process as this will serve to help insurer and insured minimize losses.
2. The traditional silos of risk management and trade compliance need to come together on SOLAS VGM to ensure that all parties understand their responsibilities and the possible consequences of less than complete compliance.
3. Risk management within BCO and Intermediary companies need to reinforce the importance of taking a risk vs. reward view on activities within the company to avoid the price and price only decision of freight and logistics vendor selection.

Roanoke Trade specializes in insuring logistics service providers and the transportation industry, providing a portfolio of insurance products and risk management services to respond to the unique exposures this sector faces. If you would more information about our products, please contact us at 1-800-ROANOKE (800-762-6653).