Logistics and the Law: Freight claims in plain English
July 01, 2012
It’s been said that the one area that most shippers are the least knowledgeable in is that of claims for cargo loss and damage. However, this does not mean that an understanding of claims isn’t vital to running an efficient transportation and logistics department.
The late William J. Augello, co-author of Freight Claims in Plain English, had a passion about this topic as few others have. I believe that there are at least two reasons why Bill felt so strongly about the importance of understanding claims.
The first reason is financial. Unrecovered claims have a direct impact upon the bottom line of a company—and the tougher the economic times and thinner the margins the greater the impact. As depicted in the accompanying chart, if your company operates at a 5 percent profit margin, to recoup the net revenues that would be lost by failing to recover a $1,000 cargo claim, it would have to generate $20,000 in sales!
Second, Bill believed that this knowledge is vital for shippers because they’re on their own when it comes to claims. For carriers, whose core business is transportation, the processing of claims is an integral part of their business, and all but the smallest of carriers are quite knowledgeable and very competent when it comes to defending against claims. For most retailers, manufacturers, and distributors, the transportation function is an unwanted headache—and claims represent a migraine.
However, just because something is difficult does not mean that it can be ignored. George Pezold, co-author with Bill of Freight Claims in Plain English, emphasizes that: “Knowledge of the basic legal distinctions and the applicable laws and regulations is critical in dealing with cargo claims.” My goal over the next few pages is to provide transportation professionals with a refresher course in the basic legal principles relating to claims for cargo loss and damage.
Basic legal principles
The starting point in understanding cargo claims is to understand that a claim is based upon a breach of contract by the carrier, not whether the carrier was negligent. This arises out of the fact that the essence of a transportation contract is that the carrier agrees to move a piece of cargo from point A to point B. In return, the shipper agrees to pay the carrier.
Implicit in this arrangement is that the cargo will indeed arrive at destination in an undamaged condition. When the cargo is lost or damaged, the basic contract for carriage has been breached, giving rise to the shipper’s claim.
The contract for carriage can either be an individually negotiated contract between the shipper and the carrier; or, if none, the bill of lading, waybill, ocean bill, or other document issued by the carrier. These bills will typically incorporate, by reference, the terms of the carrier’s tariff or service guide or otherwise titled terms and conditions. The term “incorporate by reference” simply means that the contents of one document are incorporated into the document at hand; for example a bill of lading, simply by referring to the other document such as the carrier’s tariff.
Generally speaking, in order to prevail on a claim, the claimant has the initial burden of proving its claim. The claimant must prove good condition at origin, damaged condition at destination, and the amount of its damages. After establishing these three elements, the burden of defense shifts to the carrier.
Different rules apply depending upon mode
Another very basic principle that must be kept in mind when dealing with a claim is that different legal principles and rules will apply depending upon the mode of transportation. Motor, rail, domestic water, international ocean, domestic air, or international air all have different time limits for filing claims and different deadlines for initiating lawsuits if a claim is denied.
At one time the majority of carriers only operated in one particular mode. Now, many entities operate in more than one mode. For instance, UPS is licensed as a motor carrier, air carrier, and a non-vessel operating common carrier (NVOCC).
Accordingly, an important initial step in analyzing any claim is to determine which mode the carrier was operating in at the time of the loss and thus which liability regime would apply. This can be very challenging for international movements involving multiple carriers and various modes.
Basics of motor & rail carrier liability
The starting point for rail and motor carriers are two federal statutes, one for rail and one for motor that are colloquially known as the Carmack Amendment. Under both of these statutes the liability imposed is “for the actual loss or injury to the property.” However, carriers are allowed to limit their liability in exchange for a lower rate, and most do so.
Carmack also sets minimum time standards for filing claims (nine months from the date of delivery) and for initiating lawsuits (two years from the date the claim is denied). It should be noted that the federal statutes do not themselves set these limits, but only prescribe the minimum. The significance of this is that if there is no tariff—as is often the case with small trucking companies—then there is no time limit to file a claim nor a two-year limitation on filing a lawsuit.
It should also be noted that Carmack only applies if the carrier is providing a regulated service subject to federal jurisdiction. When transporting an exempt commodity, like livestock, or operating in intrastate commerce (totally within one state), Carmack does not apply. For such shipments, the carrier could have tariff rules providing for shorter time limits than the minimum required by the Carmack Amendment.
The essence of Carmack is that the carriers are considered to be a virtual insurer and are strictly liable for cargo claims. There are, however, five recognized exceptions or defenses: (1) an act of God, (2) an act of the public enemy, (3) an act of a public authority, (4) an act of the shipper, or (5) an inherent vice of the product. And, even though one or more of these factors might be present, the carrier must also show that it was free of negligence.
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