Manufacturers Beware: Are Your Products in Process and Transit Adequately Covered? ICM 006

Speakers: Lester Brown, Partner, Perkins Coie LLP Todd Marumoto, Risk Manager, Mattel Inc. David Cole, Cargo Practice Leader, Allianz Global Corporate & Specialty Tom Pfister, Vice President Director Aon Risk Services

   

What Is Cargo Insurance?

The cargo is covered from the warehouse at point of origin to the warehouse at point of destination

Coverage extends to all intermediate transit by rail or truck Domestic and/or foreign inland transit can be insured Covers Marine, War Risk and includes Terrorism in transit Worldwide Coverage Subject to the Office of Foreign Assets Control (OFAC)

Covers physical loss and/or damage to goods during the ‘ordinary course of transit’

Terms of Average – covers all risks of physical loss or damage from any external cause unless specifically excluded.

Additional Coverages Deliberate Damage – U.S. Customs Service Import Duty Fraudulent bills of lading Concealed damage Contingency insurance for unpaid vendor Contingency insurance for Assured as consignee Difference in conditions/ increased value/ guarantee

of collectability Brands and Trademarks, Labels, or Cartons Refused shipments Shortage from intermodal containers

Ocean Cargo Policies Key Clauses

Inland Transit Policy

Ocean Cargo Policy Inland Transit Policy

Local Property Policy

Suppliers Insurance?

Warehouse/DC Facilities Final Destination

Final Destination

Local Property

Policy

Export

Domestic Local Property Policy

Suppliers Insurance?

Typical Coverage “Maze” for Movable Assets

Cargo Stock Thru-Put Introduction •  What is Stock Through Put Policy

•  Origin of Policy – mid- 1970’s

•  What is covered?

Definition: Transportation programs which include sold and un-sold finished product, raw materials and work in process at:  

owned locations distribution hubs suppliers

processors

Installations un-named locations options for retail distribution sites.

Cargo Stock Thru-Put Programs

Coverage Terms of Cargo Stock Thru-Put Policy

•  Goods in transit worldwide

•  Stock – finished, work in process (WIP) and raw materials

•  All locations – including at Insured’s locations, sub-contractors, consolidators, warehousemen

•  Also can include miscellaneous property, including business personal property

Departure  of  Raw  

Materials              

Port  of  Loading  

           

Port  of  Des6na6on  

           

Arrival  of  Raw  

Materials  at  

Processing  Warehouse  

       

Departure  of  Finished  Goods  

       

2nd  Port  of  Loading  

         

2nd  Port  of  Des6na6on  

         

Warehouse  Facility/  

Distribu6on  Center  

           

Retail  Loca6on/  Final  

Des6na6on            

Cargo Stock Thru-Put Flowchart

Import Export Exposure required Satisfactory COPE information on locations No cover for Real Property or Furniture Fixtures etc. Stock location limits “primary” under STP excess layered

into property program. Earthquake, Flood, Wind sub-limits or Policy Annual

Aggregates in CAT prone areas. Schedule locations above $ dollar threshold Un-scheduled location limits provided below threshold

Cargo STP “General” Underwriting Guidelines

Cargo STP Rating Information •  Transit Values – Annual Turnover

•  Stock Values – List of Locations with COPE

•  Annual Sales

•  Three Year Losses for transit and stock

GEOGRAPHICAL LIMITS: Covers at and from ports and/or places in the world to, and at, ports and/or places in the world, including transshipments by land, air, water, or otherwise, unless prohibited by U.S. law or Governmental decree. U.S. ECONOMIC AND TRADE SANCTIONS CLAUSE Whenever coverage provided by this Policy would be in violation of any U.S. economic or trade sanctions such as, sanctions administered and enforced by the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC"), such coverage shall be null and void. ·

Stock Thru-Put Cargo Key Clauses

APPLICATION OF WAREHOUSE TO WAREHOUSE AND MARINE EXTENSION CLAUSE:

Regardless of terms of purchase, sale, bill(s) of lading or other documentation, provided the Insured is obligated to insure the primary transit, this insurance covers from warehouse to Warehouse in accordance with the clauses contained in this policy. LOADING/UNLOADING: Covers…during the loading process prior to dispatch (including, Into containers, trailers and rail cars) continues while awaiting transit and after arrival destination, until unloaded (from containers, trailers and rail cars) throughout unloading process. INTERRUPTION OF TRANSIT: Extended to cover goods and/or merchandise and/or property insured under this policy whenever same are stopped in transit, anywhere in the world, short of final destination. ·

Stock Thru-Put Cargo Key Clauses

London Policy Key Clauses Voyage Clause …attaches from the time the subject-matter becomes at the Assured’s risk or the Assured assumes interest and continues whilst the subject-matter is in transit and/or in store, or elsewhere including whilst held as stock (whether at warehouse, retail outlet or elsewhere) whether or not in the course of transit and including any interest held for the purpose of consolidation and until Assured’s risk and /or interest finally ceases at final destination… Further including the risks of loading prior to dispatch and unloading after arrival at Assured’s or consignee’s premises. Insurable Interest With respect to the coverages provided in this policy whether they be contingent, extended, or otherwise, the insurable interest of the Assured is admitted at all times.

Storage / Inventory / Processing Covers: raw stock, materials, goods in process, finished goods, and packaging materials or goods of others which Insured is liable. Worldwide, except in countries, which are the subject of trade or economic embargoes Insured against, all risks of physical loss or damage from any external cause, subject to policy exclusions Valued, in accordance with the VALUATION CLAUSE contained in this Policy, plus the actual amount of import duty paid or payable. Limits of Liability and Scheduled Locations, as per schedule of locations and statement of values on file

Storage / Inventory / Processing Catastrophe Perils - ANNUAL AGGREGATE LIMITS To the following CATASTROPHE perils; a.  Earthquake b.  Named Windstorm c.  Flood AN AGGREGATE LIMIT IS APPLIED. Separate Towers for each peril can be arranged. The most Insurers would pay for all losses caused by a CATASTROPHE peril at all NAMED LOCATIONS during the policy period is the "AGGREGATE LIMIT".

Target Customers:

•  Manufacturers

•  Wholesalers

•  Importers and exporters

•  Contractors with shipping needs to Project sites

•  Suppliers

•  Processors

•  Distributors

•  Retailers

Cargo Stock Thru-Put Programs

Coordination of Logistics and Distribution of Product worldwide

under one policy. Continuity of Valuation for sold and unsold product anywhere in

the world. (Selling price or other agreed value options) Local Admitted Policies Property and Marine where required In the end, it’s up to the broker to advise client

Cargo Stock Thru-Put Programs Client Perspective

 

Selling Points: Stock Throughput Policy

Eliminates Coverage Gaps •  Stock covered under one policy anywhere in

the world •  Can include coverage in retail stores and

during processing Broader Coverage

•  The exclusions on a Stock Throughput Policy are few versus pages of exclusions on a typical package policy

CAT Coverage Available •  Earthquake, Wind and Flood coverage

available with flexible limits •  CAT deductibles starting at a flat amounts per

occurrence versus a large percentage on a typical package policy

 

Advantages of Cargo Stock Thru-Put •  Seamless coverage – “cradle to grave”

•  Broad manuscript marine forms

•  Coverage for earthquake, flood, and windstorm includes stock at fixed locations.

•  Combined with property policy to obtain lower deductibles and increased capacity

•  Broader terms and possible premium savings over property markets

•  Combining Marine and Property to provide greater account capacity – with Marine limits up to $500 million with quota share and excess placements.

Disadvantages of Stock Thru-Put •  No standard forms

•  Possible application of two deductibles between marine and property programs

•  Must coordinate underwriting between property and marine underwriters. Market Marine first.

•  Premium credit under property policy may not be sufficient to “off-set” price of STP policy

Examples of Programs

•  Combining Transit and Stock may include retail locations

•  Cargo Stock Thru-Put as primary, Property as excess

•  Overall Higher Earthquake, Flood, and Windstorm Coverages in layered program

•  Lower Stock and Transit Deductibles

•  Possible Premium Savings in layered programs

•  Quota share participation in Marine common to create capacity.

Markets •  Allianz, AIG, ACE, XL, Zurich, Starr, – most USA domestic

underwriters

•  London/European underwriters

Market Capacity

London Allianz AIG Starr Zurich ACE XL Travelers CNA Endurance Markel Chubb Hartford Navigators

$10 Million

$20 Million

$30 Million

$75 Million

$150 million

Market CAT Capacity

London Allianz AIG Starr Zurich ACE XL Travelers CNA Endurance Markel Chubb Hartford Navigators

$10 Million

$20 Million

$30 Million

$75 Million

$150 million

Business is global so are the risks

Indirect Supplier

Power Supplier

Direct customer

Indirect customer

Indirect and direct Supplier

Insured location 5

Insured location 2

Insured location 3

Insured location 4

Insured location 1 (HQ)

An admitted policy is a policy issued or coverage provided by

an insurer to a policyholder domiciled in a territory where

that insurer is licensed.

Local insurance law (more than 200 different laws) mandates that a policy is issued

or coverage provided only by an insurer licensed in the country where the risk is located.

Admitted

Non- Admitted

A Non-admitted policy is a policy issued or coverage

provided by an insurer to a policyholder domiciled in a

territory where that insurer is not licensed.

The Question of “Admitted” versus “Non-Admitted”

Need Global Risk and Insurance Strategy

Expanding business and global footprint

Global supply chain

integration

International legal & cultural environment

Global customer

needs Insured (HQ)

Insured faces: §  need for an integrated

approach to risk and insurance management, combining central co-ordination with effective local delivery

§  Degree of insurance responsibility at corporate vs. local level.

§  Integration of arrangements for Marine and Property

Potential Legal Issues Is Stock Thru- Put Marine Insurance?

If so, special rules apply that are Less Favorable to the policyholder and need to be understood before any application is completed. Marine Insurance Policies require the application of an ancient English doctrine called uberrimae fidei , or utmost good faith. The applicant has a Duty to reveal all facts within his/her knowledge that are material to the calculation of the risk. This Duty is imposed whether or not the Underwriter asks for the information. Materiality includes any information that would have an effect on whether the Underwriter would write the risk, how he/she would write it or whether the Underwriter would write it at all.

Potential Legal Issues Utmost Good Faith

Even an unintentional misrepresentation of a “material fact” can result in lost coverage The penalty of a failure of Utmost good faith is no coverage and a recession of the policy with the return of the premium. Generally courts will apply Federal Common law and state law regarding the rules for Marine insurance. Recent trend is to question the severity of the application of this rule in modern society where extensive information is available from multiple sources about the risk including the internet. Exemplar Case: Certain Underwriters at Lloyds, London v. Inlet Fisheries Corp., 518 F. 3d 937 (9th Cir. 2008)(“Inlet Fisheries”) Requirement may be modified by EXPLICIT WRITTEN WORDING in the Policy. See New Hampshire Ins. Co. v C’est Moi, Inc. 519 F.3d 937 (9th Cir. 2008)

Possible Legal Issues •  CHOICE OF FORUM AND LAW

London New York Other Locations

•  ARBITRATION v LAW SUIT

ENGLISH/BERMUDA Restricted Discovery and High Expense

AMERICAN More Open Discovery and Lower Expense

Potential Legal Issues OTHER ISSUES    

•  IN TRANSIT Dairy Am. Inc. v New York Marine & Gen. Ins. Co., 2009 WL 2184547 (9th Cir. Dec. 16, 2010)

•  INSURABLE INTEREST

•  CAUSATION

•  SUE AND LABOR

Potential Legal Issues OTHER ISSUES:  PHYSICAL DAMAGE If the STP policy only responds to Physical Damage what happens if the cargo/stock is not damaged but cannot be accessed and thus its value is diminished?

POSSIBLE SOLUTIONS: ACCESS TO PROPERTY ENDORSEMENT Should a civil authority deny Assured access to cargo/stock as a result of damage to a building and/or structure and/or conveyance from an insured peril, such cargo/stock which cannot be retrieved, shall be considered a total loss under the terms of this policy. INGRESS/EGRESS ENDORSEMENT This policy is extended to cover the “actual loss sustained” during the period of time when, in connection with or following a peril insured against, access to or egress from real or personal property is impaired. Subject to a 30 day maximum period.

Learning Objectives Key learning objectives and takeaways

•  Cargo Stock Thru-Put combines goods in transit worldwide with stock

coverage at locations, subcontractors and other third party logistics

providers.

•  Capacity and Creativity found in the Marine Market

•  Coordination with Property Underwriters Key

•  Local Admitted Insurance important for Global STP Programs

•  Utmost Good Faith representations required in Marine submissions

•  Potential legal issues require review and special knowledge

•  Property clauses crossing over to Marine may have issues.

Lester  Brown  Partner,  Insurance  Recovery  Perkins  Coie  LLP  

Les  Brown,  a  partner  in  Perkins  Coie's  Insurance  Coverage  Li:ga:on  prac:ce,  has  extensive  experience  in  complex  commercial  li:ga:on  in  federal  and  state  courts  throughout  the  country,  with  an  emphasis  on  represen:ng  policyholders  in  high-­‐stakes  insurance  coverage  disputes.  He  has  represented  electric  and  gas  u:li:es,  high-­‐technology,  telephone,  chemical  and  oil  companies,  as  well  as  manufacturers,  landlords  and  municipali:es  facing  cyber,  media,  cargo,  environmental,  product  liability,  first-­‐party  property,  adver:sing  liability,  directors  and  officers  liability  and  terrorism  claims.  Mr.  Brown  represents  clients  with  interests  throughout  the  world.  His  accomplishments  include  obtaining  one  of  the  largest  awards  ever  secured  against  London  Insurers  in  an  arbitra:on  for  a  public  u:lity;  moving  a  first-­‐party  coverage  maIer  brought  by  Lloyd's  of  London  from  the  High  Court  in  London  to  the  client's  home  country  and  seIling  the  maIer  for  the  full  amount  of  the  loss;  assis:ng  an  energy  company  client  in  obtaining  a  nine-­‐figure  seIlement  of  a  terrorism  loss  aJer  a  successful  trial;  and  helping  a  client  facing  a  major  securi:es  class  ac:on  case  to  seIle  with  tens  of  millions  of  dollars  provided  by  his  insurance  companies.  Mr.  Brown  has  assisted  clients  for  over  25  years  in  recovering  hundreds  of  millions  of  dollars  from  their  insurance  companies.  He  has  represented  clients  in  federal  and  state  courts  in  over  17  jurisdic:ons,  and  assisted  in  the  prosecu:on  of  claims  in  courts  in  the  Caribbean  and  in  England.  Mr.  Brown  is  a  Fellow  of  The  American  College  of  Coverage  and  Extracontractual  Counsel,  and  has  been  honored  by  the  Daily  Journal’s  California  Law  Business  list  of  rainmakers  for  over  seven  years  and  by  Los  Angeles  magazine  as  one  of  Southern  California’s  top  “Super  Lawyers.”    

Phone:  310.788.3203  Email:  lbrown@perkinscoie.com  

Todd  Marumoto  Director  of  Risk  Management  MaIel,  Inc.  

Phone:  310.252.3208  Email:  todd.marumoto@maIel.com  

Todd  Marumoto  is  the  Director  of  Risk  Management  for  MaIel,  Inc.  and  the  Director  Risk  Management  and  Vice  President  and  Board  member  of  Far  West  Insurance  Company,  a  wholly  owned  Cap:ve  subsidiary  owned  by  MaIel.  Responsibili:es  include  management  of  worldwide  risk  and  insurance  programs,  casualty  and  property  loss  control,  business  con:nuity  and  management  of  MaIel’s  insurance  cap:ve  Far  West.  The  MaIel  family  of  companies  (Nasdaq:  MAT)  is  the  worldwide  leader  in  the  design,  manufacture  and  marke:ng  of  toys  and  family  products.  MaIel’s  poreolio  of  best-­‐selling  brands  includes  Barbie®,  the  most  popular  fashion  doll  ever  produced,  Hot  Wheels®,  Monster  High®,  American  Girl®,  Thomas  &  Friends®  and  Fisher-­‐Price®  brands,  including  LiIle  People®  and  Power  Wheels®,  MEGA®  Brands,  including  MEGA  BLOKS®  and  RoseArt®,  as  well  as  a  wide  array  of  entertainment-­‐inspired  toy  lines.        Todd  is  a  graduate  of  CSULB  –  Business  degree,  UCLA  –  Accoun:ng,    Associate  in  Risk  Management  (ARM),  RIMS  Fellow  Designa:on  (RF),  member  of  Risk  and  Insurance  Society  (RIMS),  Former  Board  member  of  LA  Chapter  of  RIMS,  Former  CommiIee  member,  Vice  Chair  and  Chair  of  Member  Chapter  Services  CommiIee  for  the  Society  of  RIMS.    He  is  a  California  licensed  Insurance  Broker.  

David  R.  Cole,  CPCU  AMIM  Western  Region  Cargo  Prac:ce  Leader    AGCS  Marine  Insurance  Company  

David Cole currently serves as the Western Region Cargo Practice Leader – Allianz Global Corporate and Specialty, responsible for service teams located in Seattle, San Francisco, Los Angeles and Denver. Prior to AGCS, David was at the Fireman’s Fund McGee Marine Underwriters where he held several positions. From 1999-2003 he was the Southwest Region Marine Executive responsible for four Underwriting offices handling Inland Marine, Ocean Marine and Hull & Marine Liability lines in Southern California, Arizona, Nevada, New Mexico, and Colorado. From 1983 – 1999 he was Marine Branch Manager in Irvine California responsible for Cargo and Hull & Marine Liability underwriting in Southern California, Arizona, Nevada, New Mexico, Colorado and Yacht Underwriting in Washington, Oregon, California, Arizona, Nevada, New Mexico and Colorado. From 1976 – 1983 He served as a Branch Manager, Ocean Marine Lines in Dallas, Texas , Senior Underwriter, in San Francisco California, Underwriter, Los Angeles California. David has a Bachelor of Science Degree, Economics and Business Administration from the University of Redlands, Redlands, California

Phone:  213.861.7300  (Ext:  394-­‐3)  Email:  david.cole@agcs.allianz.com  

Tom  Pfister  Director,  Marine  Aon  Risk  Insurance  Services  West,  Inc.  

Tom  started  his  Insurance  Career  working  for  the  Insurance  Company  of  North  America  as  a  Marine  and  Avia:on  underwriter.    Moving  to  San  Francisco  in  February  1972,  he  worked  in  the  California  market  un:l  April  1978  moving  on  to  Atlanta  as  the  Commercial  Hull  and  P&I  Manager.    Tom  then  accepted  a  posi:on  with  the  Atlan:c  Mutual  Insurance  Company  back  in  San  Francisco  and  was  responsible  for  all  lines  of  Marine  Insurance  for  the  West  Coast.    He  then  accepted  a  posi:on  with  AIG  and  was  their  Cargo  Manager  for  the  West  Coast  un:l  January  1994  when  he  accepted  a  posi:on  at  Alexander  &  Alexander  (A&A)as  a  Marine  Broker  and  handled  all  Marine  lines  of  business  for  clients.      Tom  now  works  for  Aon,  who  acquired  A&A  in  1999  as  their  Director  of  Marine  Insurance  for  the  West  Coast.    Tom  is  experienced  in  all  lines  of  both  Ocean  and  Inland  Marine  Insurance,  has  his  CPCU  and  AMIM  designa:ons  and  also  taught  various  Insurance  Courses  for  the  Insurance  Educa:onal  Ins:tute,  including  Property,  Marine  and  Ethics  and  has  taught  classes  on  Marine  Insurance  in  China.    

Phone:  415.486.7274  Email:  tom.pfister@aon.com