March 2006

YOU'RE A FREIGHT FORWARDER - AND QUITE POSSIBLY AN INSURANCE BROKER!

In Canadian law and practice the term "freight forwarder" has a distinct meaning. It is not defined by statute or regulation. The role of the freight forwarder has been developed in the case law by reference to basic principles drawn from the law of contract and agency. The nature of the mandate is simply a function of what the forwarder undertook to do. As a general rule, the freight forwarder facilitates the movement of cargo. Sometimes it will act as a consolidator or a packer of goods. These services all come within the conventional, or primary functions of the freight forwarder.

The freight forwarder might however also incidentally offer to place insurance on a shipment for a shipper This only makes sense. The forwarder is having some type of discussion at the 'front end' with the shipper. What better time to ask about insurance? There is usually very little discussion on point-a "box" on a form simply being "checked" as a matter of course transaction. Chances are that any discussion will focus on time frames for delivery, or any special handling or temperature requirements for the cargo.

The freight forwarder who offers to place insurance for a shipper will usually do so as the holder of an "open cargo policy" of insurance purchased from a marine insurer. The forwarder will (under most such policies) in due course report the shipments for which insurance has been placed to the underwriter. For its efforts the forwarder will have invariably charged the customer an increased premium - from that paid or payable to the underwriter - involving some "markup". Through this process the freight forwarder may well have assumed the role of an insurance broker regardless of such a simple, often incidental (if not technical) transaction, with what liability and regulatory compliance issues as may attach. This may be "heavy stuff" for an "inadvertent" insurance broker.

The Freight Forwarder

As a general rule, the freight forwarder facilitates the shipment of cargo. Historically its mandate was acting as an agent on behalf of the shipper in arranging for others [ie.actual carriers] to ship cargo, thereby assuming any liability as an agent, but not as a carrier or a "principal". Freight forwarders now frequently act as "contracting carriers" (for example, in ocean carriage, as an NVOCC, or non-vessel operating common carrier) As a 'contracting carrier' the forwarder acts as a carrier vis a vis the shipper and in turn the forwarder acts as a shipper vis a vis the carrier it subcontracts to actually perform the carriage.

Where the freight forwarder has undertaken a carriage obligation, as a principal to the shipper, the freight forwarder's liability will then be assessed under the particular rules governing the mode of carriage in question as applied to carriers. As to when a freight forwarder would be considered having acted as an agent as opposed to a principal is a question of fact in each case. Through precedent, a list of indicia has developed as to either possibility, which discussion is beyond the scope of this article.

It is understood that in comparison to the 'case by case' defining of the "freight forwarder" in Canada, that that term has a distinct meaning in the United States, as defined under the Interstate Commission Termination Act of 1995.¹

The Freight Forwarder as an (Inadvertently or Otherwise) Insurance Broker

Freight forwarders who place insurance for shippers of goods have to be aware of their possible exposure to errors and omissions claims by the shipper (or a consignee as the case may be) for insurance indemnity issues and problems as well as regulatory compliance and enforcement issues relative to being licensed as insurance brokers. This last point is particularly a source of potential concern given the lack of regulatory harmonization in Canada, insofar as the licensing of insurance brokers is regulated on a province by province basis.

As mentioned, the freight forwarder may have purchased an "open cargo policy" from a marine cargo insurer. Typically, this type of policy provides transit insurance in respect of cargo, the freight forwarder being vested with authority to extend coverage to its shipper customer who has an insurable interest in cargo. There is usually a requirement that the freight forwarder have received written instructions from the customer prior to the commencement of the transit so as bind the underwriter to such coverage - and so as to avoid "moral hazards". While a flat annual premium might be payable by the forwarder/insured to the insurer, the more common practice is for the forwarder to report all shipments insured on a regular and fixed basis to the insurer.

As mentioned above, the forwarder will usually charge a "markup" to the customer relative to the premium calculation reported to, and remitted in due course to the actual insurer. This mark up is frequently significant - it can be 100% of the premium actually remitted to the insurer, perhaps more. This mark-up is often an attractive profit center for the forwarder. When insurance is placed the forwarder may issue a certificate such that in the event of a claim the consignee of goods as assignee might present a claim directly on the insurer.

In effect, through the above steps the freight forwarder can be said to have "brokered" an insurance contract between the cargo interests and the underwriter.

What happens, if in the event a claim for loss or damage to the cargo while in transit, the insurer takes an off-coverage position or there is some dispute as to the amount of indemnity owing the affected cargo interest? Recall that in many (if not the majority) of cases, there was likely little if any discussion between the customer and the forwarder as to what insurance was being placed and what was being covered as opposed to what would not be covered by way of a cargo transit mishap.

A Brief Overview on the Duty of Care of Insurance Brokers in Canada

Brokers have been fixed with the following duties:

1. obtaining and understanding their client's instructions;

2. determining their client's needs and requirements;

3. providing appropriate advice;

4. effectively marketing the client's risk; and

5. confirming coverage of the absence of coverage.²

This presents a troubling issue given the fact that the focus of the transaction at the front end likely only concerned shipping logistics. As stated there was likely little, if any, discussion about the nature of the insurance coverage or any particular needs. This scenario can be distinguished from the usual insurance broker/client relationship were the primary undertaking on the part of the broker, and the reason for any discussion in the first place relates to the placement of insurance. However, if and when the freight forwarder adds the shipper as an insured to the cargo policy, the forwarder must then be concerned that it might be held to the duty of care generally expected of insurance brokers.

The duty of care expected on the part of insurance brokers, as developed by the leading case law in Canada can be simplified into the following basic propositions:

1. "They are, after all, licensed professionals,³ who specialize in helping clients with risk assessments and in tailoring insurance policies to fit the particular needs of their customers….. Subtle differences in the form of coverage available are frequently difficult to the average person to understand. Agents and brokers are trained to understand these differences and to provide individualized insurance advice".⁴
   
   
2. "The broker… is to exercise a reasonable degree of skill and is to obtain policies on the terms bargained for and to service those policies as circumstances might require. The agent also has a duty to advise his principal if he is unable to obtain the policy as bargained for so that his principal may take such further steps to protect himself if he deems desirable. The troublesome part perhaps is that there are other cases, where the client gives no specific instructions but rather relies on this agent to see that he is protected and, if the agent agrees to do business with him on those terms, then he cannot afterwards, when an uninsured loss arises, shrug off the responsibility he has assumed. Therefore, it is the duty to either procure such coverage, or draw to the attention of the [insured] its failure or inability to do so and the consequences of the gap in coverage."⁵
   
   
3. Where a customer adequately describes the nature of his or her business to the agent, the onus is then on the agent to review the insurance needs of the customer and to provide the full coverage requested. Should an uninsured loss occur, the agent will be liable unless he has pointed out the gaps in coverage to the customer and advised him or her how to protect those gaps.⁶

The Canadian International Freight Forwarders Association ("CIFFA") Standard Trading Conditions

These Standard Trading Conditions are working their way into prominence and tend to be incorporated by all of the major forwarders into their dealings with shippers. These conditions are available to freight forwarders who are CIFFA members and are not imposed as a matter of law, but have to be contractually incorporated into the dealings with the shipper. It is interesting to point out how the above "duty of care" issue is addressed in the Standard Trading Conditions. The conditions provide, in part:

13."The Customer must give the Company instructions in writing to arrange insurance on its goods a reasonable time before the tender of goods for storage or transport. The Company may carry out these instructions by declaring the value of the goods under an open marine cargo policy taken out by the Company and, upon request, provide a certificate or declaration of insurance, or other evidence of insurance. The coverage on goods so declared is subject to the terms and conditions of the policy. The Company is not liable if the Customer for any reason whatsoever fails to recover a loss in whole or in part from the insurer under the policy, even though the premium charged by the insurer is different from the Company's charges to the Customer.

If the coverage under its open marine cargo policy is not satisfactory, the Company will recommend an insurance broker to arrange insurance appropriate to the Customer's needs. After making this recommendation, the Company has no further duty regarding insurance, and no liability for loss of or damage to the goods during transport or storage that could have been covered by insurance on the goods, whether such loss or damage has been caused or contributed to by its negligence or breach of these conditions, or otherwise.⁷ "

Regulatory Compliance Issues

Further uncertainty is added to the mix on the question as to whether or not freight forwarders who place insurance on open cargo policies for shippers have to be licensed to do so. Insurance brokers are licensed at the provincial level. It is clear that the conventional insurance broker (again, primarily in business for the purpose of procuring and placing insurance for clients) has to be licensed. Unfortunately, there has not been any harmonization concerning licensing across the provinces. This necessitates a specific case by case and province by province analysis by a freight forwarder performing due diligence to ensure regulatory licensing compliance. One implication of having to be licensed is that, as a rule, a licensee has to have proper financial security in the event of any claims, which is generally required to be in the form of an errors and omissions policy. Forwarders have to be alerted to the fact that while they might have an errors and omissions policy concerning their operations as a freight forwarder that there may be exclusionary wording therein as concerns their liability as an insurance broker.⁸

A research sampling of some of the Canadian provinces suggest that there exist different licensing scenarios on a province by province basis that the forwarder will have to consider:

1. The freight forwarder may be specifically enumerated in a class of entities required to be licensed
   
   The Province of Alberta is the example that comes to mind. While as in all of the other provinces there is the "general broker" concept (the entity primarily engaged in the placing of insurance risks for others), Alberta has for some time now enumerated a class of businesses that fall within "restricted insurance agent" status. Licenses are issued for a restricted insurance agent certificate of authority. Examples of the restricted agents in this jurisdiction are transportation companies, freight forwarders, custom brokers, travel agents and deposit taking institutions. The common denominator is clear: each of these entities only incidentally might place insurance for customers, being an aside from their conventional and primary business.9 Further, effective April 1st of this year, certificate holders must have the necessary financial guarantee, being a policy of errors and omissions insurance meeting certain requirements as set by regulation.¹⁰
   
   In Alberta, there would appear to be a minimum of paperwork and inconvenience involved in the acquisition of a restricted certificate. The business itself is considered to be the licensee (as opposed to any particular individual, as would be the case for general insurance brokers) with only one "designated" individual being identified.
   
   
2. "If you are not out, then you are considered in"
   
   The other provinces in Canada are not understood to codify the freight forwarder amongst a special class, as in Alberta. The authorities in certain other provinces in which the freight forwarder conducts business may take the position that unless the freight forwarder is clearly exempted by regulation from requiring a license, that the freight forwarder is effectively considered to fall within the class of "general broker". In other words, unless exempted, you are then a broker. British Columbia is one example where freight forwarders placing cargo type of insurance are understood to come under the rubric of "general insurance agents". Apparently restrictive insurance certificates (limiting the scope of insurance that might be placed) can be provided, on a case by case or company by company basis. Insofar as marine insurance (including cargo insurance) is regulated under the governing insurance legislation in British Columbia (together with other lines of insurance) the prevailing thinking is that freight forwarders would then be caught by the requirements binding general agents. There exist certain exemptions in the governing regulations although the freight forwarder type operation being the subject of this article is not listed. Therefore, the prudent freight forwarder would consider approaching the situation on the basis that "if it is not clearly exempted, it would be caught by the regime". As mentioned above, licensees are then subject to minimum errors and omissions coverage requirements.
   
   The thinking in British Columbia is that the freight forwarder might be caught by the statutory definition of "insurance agent":

   "…a person, other than an insurance company or an extra provincial insurance corporation, who solicits, obtains or takes an application for insurance, or negotiates for or procures insurance, or signs or delivers a policy, or collects or receives a premium.¹¹
   
   That legislation prescribes that a person must not act in British Columbia as an insurance agent or an insurance salesperson¹² unless the person is licensed as an insurance agent or insurance salesperson, as the case might be.

   A research sampling of other provinces (Manitoba and Saskatchewan) indicates a very similar regime to that in effect in British Columbia, with marine cargo insurance considered to be within the class of "general insurance", triggering an obligation for the forwarder not to act as an "insurance agent" without proper licensing and in turn errors and omissions insurance.¹³
   
   The freight forwarding operation with which we are concerned is not otherwise exempted by the regulations in these provinces.
   
   
3. "If you are not clearly in, then you might be considered to be ou"
   
   A third scenario exists, such as appears to be the case in Ontario. Cargo marine insurance (which would include cargo insurance) is not regulated by the Insurance Act¹⁴ of Ontario. The legislation governing the licensing of brokers, in the Registered Insurance Brokers Act¹⁵ defines "insurance" as that as defined in the Insurance Act. The prevailing thinking is that as the Insurance Act does not regulate marine insurance, then the Registered Insurance Brokers Act does not then compel licensing on the part of the freight forwarder or other such entity dealing with marine insurance. Therefore, non-binding opinions taken from the regulatory officials suggest that as freight forwarders are not drawn into the licensing regime that they need not be licensed.¹⁶ In effect, the thinking in Ontario is that, cargo insurance being considered to be separate from general lines of insurance, there may not be the same licensing requirement.

Conclusion

The freight forwarder usually has enough on its risk analysis "plate" in terms of assessing its contractual mandate, concerning the movement of the shipment, and liability implications. It may however, not be aware that it may incidentally assume the role as an insurance broker. This gives rise to risk analysis issues into whether it has sufficient errors and omissions insurance coverage, which may be mandated by governing law. The freight forwarder, as an insurance broker may not be covered under the conventional freight forwarder's errors and omissions insurance. The freight forwarder will also want to avoid regulatory enforcement issues for not having a license where required. Irrespective of the foregoing the prudent forwarder would consider contractual protection along the lines of the CIFFA wording above, and, more importantly, it will the process, and steps, by which it places insurance for a customer.

© Gordon Hearn, 2006

Endnotes

1. 49 U.S.C. paragraph 13102(2). A helpful discussion if found in the article "Who's On First, What's On Second?": Carrier and Intermediary Liability and North American Cross-Border Shipments: The American Perspective" by Ryan Kelly, presentation at the 2004 Annual Conference of the Transportation Lawyers Association.
2. Bossin, Duties of Insurance Agents and Brokers, Aurora Professional Press, 1995 at p. 2
3. Maybe the freight forwarders is licensed, maybe it isn't. Maybe it has to be licensed, maybe it doesn't. The situation is not clear in certain provinces. It remains to be seen whether this affects the degree to which a duty of care is set in any errors and omissions liability analysis.
4. Fletcher v. Manitoba Public Insurance Company [1990], 74 D.L.R. (4th) 636 at 655. (S.C.C.)
5. Fines Flowers Ltd. v. General Accident Assurance Co. Canada [1997], 81 D.L.R. (3d) 129 [Ont. C.A.] at pp.148 - 149.
6. G.K.N. Keller Canada Ltd. v Hartford Fire Insurance Co. (1983), 1 C.C.L.I. 34 (Ont. H.C.)
7. I am unaware of any case law concerning this provision. It is clear that the drafters of these Standard Trading Conditions have endeavoured to address the liability issues identified above. It will remain to be determined, on a case by case basis, how the courts might interpret and apply these terms.
8. Of course, freight forwarders should assess their own risk exposures and analyze their insurance needs as concerns errors and omissions insurance as to their placement of cargo insurance for their shipper customers regardless of whether mandated to do so by statute.
9. As to this licensing requirement see the Insurance Act, R.S.A. 2000 c. I-3, section 465.
10. The insurance requirement is significant. The freight forwarder, as the holder of a "restricted certificate" is required to have coverage up to $500.000 per claim, multiplied by the number of employees of the business who act or offer to act as insurance agents, up to a maximum of five forinsurance calculation purposes. Therefore, if there are five or more persons involved in the placement of insurance for shippers then the minimum insurance coverage is $2,500,000.
11. Financial Institutions Act, R.S.B.C. 1996, c. 141.
12. "Insured salesperson" is defined as an "individual who is employed by an insurance agent…to solicit, obtain or take an application for general insurance, or to negotiate for or procure general insurance, or to collect or receive a premium for general insurance."
13. See the Manitoba Insurance Act, C.C.S.M. c. I40 and the Saskatchewan Insurance Act, c.S-26.
14. R.S.O. 1990, c.I.8.
15. R.S.O. 1990, c.R. 19.
16. Of course, an important caveat is issued here. Licensing issues and compliance analysis must always be undertaken on a case by case basis. Where in doubt, specific views of the regulatory authority must be taken. It would therefore appear that Ontario might be an example where the freight forwarder need not acquire a licensing authority to place the open cargo insurance discussed above however, the prudent forwarder will confirm the issue on the specific facts of any particular operation or case.