Error and Omission Claim – Delivery without Bill of Lading

Circumstances in which a NVOCC could face a claim arising from wrongful delivery of cargo without collecting the bill of lading are always unpredictable. It is common to assume that such claim will come from the holder of or party named in the bill of lading. However whether this party is a customer of the carrier or a rightful party entitled to delivery of the goods can be uncertain.

Insurance with Error and Omission extension is intended to cover the liability of the insured NVOCC for such wrongful delivery. However policy intention may not be similar. One could cover only such liability to a customer of the insured while another policy may include liability to any other person entitled to delivery under a bill of lading issued by the insured NVOCC. Such variable scope of cover is in practice amongst insurers. To determine whether liability for such wrongful delivery will be indemnified by the policy, insurer will consider whether the error or omission is a result of a reckless act or an unintentional act having exercised due care. Reckless act is naturally not insurable.

The following brief narration of a claim against an insurer would highlight the above features of policy cover and determination of liability.

In this claim, the insured was in the business of freight forwarder, warehouseman and road transportation. It had entered into a business contract with an importer of wearing apparels and in this contract the insured would be performing storage, custom clearing and distributions of such goods to the customers of the importer. The insured operated a bonded warehouse facility and upon goods clearance would incur the custom duty upfront and such duty would be billed against the importer who would pay the insured accordingly. The status of the importer was deemed an owner of the goods or legal agent of the owner of such goods (which would include the shipper or manufacturer). In a slightly unique situation, the insured was also named as the delivery agent in the bills of ladings issued by a certain carrier.

In the course of services performance, the insured ran into a situation in which there was a substantial sum of money owed by the importer with regard to custom duty incurred by the insured on the importer's goods. Apparently there were settlement delay and default in payment. To secure its own position, the insured decided to exercise a lien on the goods in their possession and notices of lien were served on the importer and the shippers. The shippers not surprisingly challenged the lien placed by the insured.

Negotiation process commenced and ultimately a certain arrangement was concluded amongst all parties, the essential issue was to ensure there were free flows of goods for the importer, which of course would help in improving its financial position. Such free flows of goods involved the carrier providing release of goods without bills of lading up to a certain pre-agreed quantity. Here is the essence of claim. The insured (most probably with intention for the importer to better its financial position) decided to release more than the pre-agreed quantity. Unfortunately the financial position of the importer took a reverse turn, with its business subsequently placed under receivership. Many parties would of course suffer in consequence of this event. The insured in delivering goods without bill of lading in excess of the pre-agreed quantity was faced with claims coming from shippers and manufacturer who were holding some of these bills of lading. Some of these have banks' interests therein.

Upon submission of the claim against the insurer, features of the cover were determined relating to this case. It was necessary to determine whether the parties that claimed against the insured were its customers and whether the deliveries without bills of lading were in consequence of error or omission or could the wrongful deliveries be deemed to arise from reckless acts. The claim was denied following such consideration.

Note: This article in not intended to convey scope of policy cover. The case as narrated was determined according to the particular policy involved .