You need to do your homework before you take out cargo insurance when transporting goods outside the EU. Ask yourself, is your insurer selling you the right policy to ensure all your liabilities are covered at every stage of your shipment’s journey.
” As soon as a law has been duly proclaimed, no one can excuse himself by not knowing it.” – Austrian General Civil Code (ABGB) article no. 2.
This principle is built into the civil law of every democratic country and insurance services are no exception to the rule, no matter which country you are in. Yet many insurers in Eastern Europe are confident that they can turn a blind eye to the laws just because logistics insurance products are less popular than say MTPL. The question for the industry is therefore, how much can you trust that those same insurers will comply with the law in the case of a loss?
One of the most valuable things about the EU is that its open borders policy allows for the free movement of goods and services within its nations, eliminating discrimination on the grounds of nationality. The insurance market has capitalized on the opportunity by abolishing borders in favour of the convenience to be able to grant insurance coverage in different regions. For example, a logistics company with a head office in a Baltic country can obtain an offer from e.g., Lloyd`s Europe, or seek to include their subsidiaries in other EU countries under one single policy as co-assureds. Many local insurers have taken this a step further and extended the freedom of services principles to insure risks in non-EU countries, even if that doesn’t comply with the laws of those nations. There is a saying: a good example is worth a million words. So, let’s get hypothetical.
Scenario #1: validity of cargo insurance when transporting goods outside the EU and EFTA
Imagine, you are running a logistics company in Warsaw and have subsidiaries in the United Kingdom and Kazakhstan. You take your responsibilities seriously and purchase cargo liability insurance through a local insurer who offers to include your offices in London and Nur-Sultan as co-assureds in the same policy. Does the local insurer have the right to insure risks in United Kingdom and Kazakhstan? The simple answer is no. The principle of freedom to provide services in other countries applies only to EU nations. Neither the United Kingdom nor Kazakhstan are members of the EU. Nor are they members of the EFTA like Norway, Denmark, Iceland, and Liechtenstein who can, through a separate agreement with the EU, also enjoy the benefits of freedom to provide services. Not even under the WTO general trade and services agreement can your local insurance company truly provide you with the cover necessary to insure all your risks in these non-EU or EFTA countries. The WTO GATS loophole, which many local insurers have been using, allows non-resident suppliers of financial services to supply, in principle, the insurance of risks relating to the transportation of goods, providing a limited range of services in other WTO member countries provided they follow the host’s (insurer`s) national laws.
In our imaginary scenario, this isn’t going to wash in Poland because under local law the policy will only stand if the insurer establishes an office in the countries outside the EU/EFTA, in this instance the UK and Kazakhstan. Let’s face it, that is unlikely to happen. So, the reality is many local insurers act anyway, outside the regulations, reasoning that they are insuring the interests of the shareholder who is based in the EU. Sadly, insurance policies which describe the interest of the shareholder as an object of insurance are an exception to the rule. The more common straightforward approach would be to include the United Kingdom and Kazakhstan companies as co-assured, meaning the liability of the co-assured (not shareholder) in the United Kingdom and Kazakhstan is insured. Essentially what that means is your goods are not properly insured against all risks and liabilities.
Scenario #2: transportation from Gdansk to Ghana
Let`s look at another scenario. You are acting as a freight forwarder. Your task is to ship a container full of Polish products from Gdansk port to Ghana. The shipment will travel in accordance with either EXW or CIF terms. You book cargo insurance with your local insurer. Is the Polish insurer eligible to insure such a shipment?
First things first, we must identify whose property interest would be insured as per the cargo insurance policy. With EXW, the risk or liability for the goods transfers from the seller to the buyer as soon as the goods are made available at the named destination. In this case, the risk rests with the buyer in Ghana. With CIF, the risk is transferred as soon as the goods are loaded onto the ship in Poland, meaning the seller is obliged to insure the goods, but the risk and interest lies with the buyer before the goods have left the country of origin.
In the transit of goods from Poland to Ghana there is very little to no EU country involvement, so how does an EU insurance policy apply? In short, it doesn’t. The insurer might argue that they are insuring the interests of the freight forwarder, defined by its liability. These are governed by the Hague Visby rules which state that a maximum of 50,000 EUR liability (for a container weight load of 20 tons) is allowed. If the sum insured is higher, the Ghana based consignee`s interest would subsequently be insured by the Polish insurer who is seen as a non-admitted insurer in Ghana.
The good news is that most nations allow non-admitted insurers to insure goods in transit. The bad news is that there are a considerable number of countries which restrict such insurance, and it’s worth finding out which ones they are before you ship your goods! For example, Ghanaian regulations state that marine cargo insurance of imports, not including personal effects, must be insured by a local Ghanaian insurance company.
The long and the short of it is the fact that there are no EU interests in this shipment and that Ghanaian law does not allow cargo insurance for imports outside of Ghana, matters not a jot to the local insurer who will still proudly issue your cargo insurance policy, and will also accept no responsibility if you ever have to make a claim.
What’s the solution?
In conclusion, you need to do your homework before you take out cargo insurance when transporting goods outside the EU. Ask yourself, is your insurer selling you the right policy to ensure all your liabilities are covered at every stage of your shipment’s journey. There are solutions to ensure you are insured for every step of the way such as including clauses which identify the insured interest rather than leaving it for guesswork, or taking advantage of a fronting cargo liability policy with local insurers who have offices in other countries. All that requires effort, but until such a time as the Eastern regions of the EU comply with the various legal regulations on logistics insurance side, it is essential. Gone are the days where Eastern European countries were considered wild without a care for legitimacy, if we challenge and question and insist on the correct insurance for our shipments today, maybe we can bring about change so that cargo insurance policies are robust and legitimate for their whole journey, no matter what country they are going to in the future.
Gediminas Dauksa
Group Practice Leader Transportation & Logistics
T +370 616 08451
Karina Gaidukaitė
Legal Counsel
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