Current Legal Precedents on Insurance Disputes Involving Forwarding Agent's Liability for Losing Cargo

19 07 2018

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Since recently there have been an increasing number of cases on disputes arising out of insurance agreements for forwarding agent's liability. Such insurance is procured as voluntary third party insurance pursuant to article 6(4), clause 15, of the Law of Ukraine on Insurance. Unlike many others "more common" insurances, this insurance and, accordingly, disputes arising out of this legal relationship are distinctive in terms of a number of parties involved in the legal relationship in dispute and complicacy of obligations that arise between them.

More so as the forwarding agent's liability is not the only thing insured, but the cargo as such as well. Thus, if the cargo is lost, damaged, destroyed, spoiled or comes short, the relevant legal relationship arises between all of the parties at the same time: forwarding agent, carrier, cargo owner, insurer who insured the forwarding agent's liability, insurer who insured the cargo, consignee, etc. Sometimes, such legal relationships are even more perplexed due to certain multi-jurisdictional aspect, i.e., when a non-resident is involved, so that a foreign law becomes applicable, etc.

Moreover, if the cargo is lost, the company who ordered the carriage usually does not to feel comfortable with finding out what happened and who is in fault, so that it makes its claim for damage directly against the forwarding agent with whom it made the contract. More so, it is usually the case that the forwarding agent, cargo owner and carrier make efforts to reach an amicable settlement and then the forwarding agent would seek damage from the insurer.

So, what is the forwarding agent's liability? Who should compensate for damage if the cargo is lost and to whom? What are disputable aspects of the forwarding agent's liability insurance agreements and what is the position usually upheld by courts in these disputes?

Forwarding Agent's Liability

Many consignors and consignees (cargo owners) are interested in their cargo being delivered safe and sound to the point of destination. Moreover, both consignors and consignees want to have certain additional assurances that their loss will be compensated should the cargo be lost, damaged, destroyed, spoiled or come short. An insurance may often give such assurance.

A forwarding agent, who often arranges for the carriage of cargo, is usually responsible for its actions not alone, but the actions of the carriers whom it hires. In addition, a forwarding agent is responsible for the cargo, as well as its timely delivery and damage that may be caused to the cargo by third parties. Thus, a forwarding agent may be held liable both to the customer and to third parties.

The forwarding agent's liability is usually insured against the following risks:

• cargo liability, being the liability the forwarding agent bears to the cargo owner (consignor or consignee) for any loss caused by losing, destroying, damaging or spoiling the cargo;

• liability for untimely delivery of cargo, being the liability the forwarding agent bears to the cargo owner (consignor or consignee) for any loss caused by delay during delivery (untimely delivery of the cargo);

• liability for incurred expenses, being the liability for other losses caused to the cargo owner (consignor or consignee) if the cargo is destroyed in full or in part or is lost (expenses to pay the cost of the carriage services, customs and other duties, other costs and expenses connected with the carriage of the cargo);

• liability for damage inflicted by cargo, being the liability the forwarding agent bears to third parties should any harm be done to them due to the loading, carriage or unloading of the cargo.

Who should compensate for loss if an insured event occurs (cargo is lost) and to whom?

Most cargo owners do face such a question if they suffered loss due to the forwarding agent's improper performance of its obligations under the contract. It is complicated since the cargo owner usually has a contractual relations with the forwarding agents, so that, at the first glance, it appears there are no legal grounds to make a claim against the issuer who insured the forwarding agent's liability.

On the other hand, if the forwarding agent has insured its third party liability with an insurance company, then such company should perhaps compensate for cargo owner's loss as well.

Thus, a dispute between the parties arose for such very reasons in cases No. 910/1978/17 and No. 910/2503/17 heard by the Kyiv City Commercial Court.

The cargo owner entered with a forwarding agent into a freight forwarding service agreement. The forwarding agent insured its liability. The forwarding agent failed to fulfill properly its obligations under the agreement as some of the cargo delivered to the place of destination was missing. Thus, the cargo owner addressed the insurance company that insured the cargo. The insurance company that insured the cargo paid the indemnity and made a recourse claim against the forwarding agent.

The first instance court (decision of the Kyiv City Commercial Court dated 19/07/2017 and rendered in case No. 910/1978/17 and decision of the Kyiv City Commercial Court dated 10/05/2017 and rendered in case No. 910/2503/17) and appellate instance court (resolution of the Kyiv Commercial Court of Appeal dated 04/10/2017 and rendered in case No. 910/1978/17 and resolution of the Kyiv Commercial Court of Appeal dated 03/08/2017 and rendered in case No. 910/2503/17) sustained the claim and recovered funds from the forwarding agent. Having ascertained that the cargo entrusted in the forwarding agent had not been delivered to the place of destination in the amount as originally shipped, the courts concluded that the forwarding agent had not proved any circumstance that could excuse its liability for losing the cargo, while there were all elements to identify a civil offense.

The Supreme Court did not concur with such conclusions and set aside the courts' decisions and remanded the case for a new trial to the first instance court. Reversing the decisions of the inferior courts, the Supreme Court noted that the forwarding agent insured its third party civil liability with respect to its freight forwarding operations. Therefore, the Court opines that article 1194 of the Civil Code of Ukraine should be applied to identify a scope of the forwarding agent's liability for the damage caused by losing the cargo during its carriage, which article states that the insured (in this case, the forwarding agent) bears civil liability for the damage inflicted by such person to the extent of the difference between the actual damage and the insurance indemnity paid by the insurer who insured the forwarding agent's liability (resolutions of the Supreme Court of Ukraine dated 26/04/2018 and rendered in case No. 910/1978/17 and dated 27/02/2018 and rendered in case No. 910/2503/17).

Thus, the Supreme Court said that, if the forwarding agent's civil liability was insured, then the loss suffered due to the fault of the forwarding agent should be recovered from the insurer who insured the forwarding agent's liability, while the forwarding agent was responsible to the person who suffered the loss (insurer who insured the cargo) to the extent of the amount not covered by the insurance indemnity. Such amount may, inter alia, be the deductible.
What is the threat of and what risks are inherent to a settlement agreement with the carrier?

As stated above, it is often the case that the forwarding agent, cargo owner and the carrier, due to whose fault the cargo was lost, make their efforts to settle the dispute as soon as possible by entering into a settlement agreement so that to discharge all claims of the cargo owner against the forwarding agent and of the forwarding agent against the carrier, and then the forwarding agent would seek an insurance indemnity from its insurer.

However, such a settlement agreement made with the carrier may sometimes cost the forwarding agent the insurance indemnity.

Thus, in case No. 910/10138/17 dated 13/06/2018, the Kyiv City Commercial Court dealt with a dispute between the insured (forwarding agent) and insurer relating to the payment of insurance indemnity. The parties entered into an insurance agreement covering the forwarding agent's liability. In pursuance of one of the orders, the forwarding agent hired a carrier who lost the cargo, so that an insured event occurred.

Instead of having the cargo owner's claims satisfied at the expense of the insurer, the forwarding agent entered into a settlement agreement with the carrier and compensated, on its own, for the loss suffered by the cargo owner. In addition, the settlement agreement set out the full, final and uncontestable amount that covered all existing and potential claims (either tangible or intangible) of the forwarding agent against the carrier.

The insured (forwarding agent) applied to the insurer claiming that an insured event had occurred and seeking an insurance indemnity. The insurer made a claim report, but did not pay any insurance indemnity, so that the insured filed a claim with the court to recover the insurance indemnity.

The first instance court rejected the claim (decision of the Kyiv City Commercial Court of Kyiv dated 16/08/2017). The court assumed that the insured (forwarding agent) failed to comply with the insurance agreement stating that the insurer shall compensate for loss caused due to the fault of the insured or persons hired by the insured to fulfill its freight forwarding obligations directly to the third parties who suffered loss and filed claims against the insured.
The appellate court (resolution of the Kyiv Commercial Court of Appeal dated 19/10/2017) did not concur with the first instance court's conclusions and set aside such court's decision, but dismissed the claim all the same. Moreover, the appellate court stated that the settlement agreement between the carrier and the forwarding agent, under which the forwarding agent determined on its own the amount payable for the lost cargo prevented the insurer from making a recourse claim against the persons who were in fault in view that the forwarding agent received compensation directly from the person in fault.

The Supreme Court (resolution dated 13/06/2018) rejected the forwarding agent's arguments that the carrier compensated only partially for the suffered loss and upheld the decision of the appellate court. Considering terms and conditions of insurance that authorized the insurer to reject, either fully or partially, paying an insurance indemnity if, among other things, the insured waived its right to be compensated by the persons due to whose fault the loss was caused and/or if the insurer was prevented from making a recourse claim against the persons in fault due to the fault of the insured, the Supreme Court concluded that there were no grounds to sustain the claim.

Thus, a settlement agreement made between the forwarding agent and the carrier who lost the cargo and setting out the full, final and uncontestable amount covering all existing and potential claims (either tangible or intangible) of the forwarding agent against the carrier poses a risk that the forwarding agent (insured) would subsequently be unable to seek an insurance indemnity.

Published: Yuryst & Zakon, #25, 13.07.2018-19.07.2018

Authors: Oleg Kachmar, Oleksandra Bortman