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
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"
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
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)
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:
- "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
.. 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
- "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
- 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:
- 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
- "If you are not out, then you are considered
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
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
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
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.
The freight forwarding operation with which we are concerned
is not otherwise exempted by the regulations in these provinces.
- "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.
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
© Gordon Hearn, 2006
- 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.
- Bossin, Duties of Insurance
Agents and Brokers, Aurora Professional Press, 1995 at p. 2
- 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.
- Fletcher v. Manitoba
Public Insurance Company , 74 D.L.R. (4th) 636 at 655.
- Fines Flowers Ltd.
v. General Accident Assurance Co. Canada , 81 D.L.R.
(3d) 129 [Ont. C.A.] at pp.148 - 149.
- G.K.N. Keller Canada
Ltd. v Hartford Fire Insurance Co. (1983), 1 C.C.L.I. 34 (Ont.
- 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
- 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.
- As to this licensing requirement
see the Insurance Act, R.S.A. 2000 c. I-3, section 465.
- 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.
- Financial Institutions
Act, R.S.B.C. 1996, c. 141.
- "Insured salesperson"
is defined as an "individual who is employed by an insurance
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."
- See the Manitoba Insurance
Act, C.C.S.M. c. I40 and the Saskatchewan Insurance Act,
- R.S.O. 1990, c.I.8.
- R.S.O. 1990, c.R. 19.
- 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
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