New Legal Potholes in the Insurance Landscape

In this fast changing landscape some transport operators may learn that being considered a small business is as much of an advantage as a hindrance.

Imagine this: after colliding with a bridge, a transport operator is clearly at fault and probably negligent – but they can deny liability for loss or damage of goods under the terms of the contract.

And, as a result, it will be up to the cargo owners or their insurers to try and find a way around that contract term. As it stands, the above scenario is lawful – but that could soon change following amendments to Australian Consumer Law (ACL).

In particular, the Unfair Contract Terms (UCT) provisions have now been extended to cover general insurance contracts, potentially increasing liability exposure and insurance claims for transport operators.

In the past, domestic transport companies have provided services based on an ‘all care but no responsibility’ approach when it comes to the carriage of a customer’s goods.

This means they did their best to carry goods safely but, when failing to do so, they did not accept liability for the loss or damage of goods. Rather, there has been the expectation that the owner of the goods insured the cargo separately.

I believe that this has tended to create difficulties for the transport operator, the cargo owner and the insurers involved.

This is something we’ve been giving a lot of thought at Zurich in light of the amended UCT provisions, which remove the transport operator’s power to deny all liability – regardless of whether they are at fault or not.

In fact, I anticipate that the strict contractual requirements on the timing of claims may now be deemed unfair, along with any clauses limiting the size of liability payments to small monetary amounts.

Furthermore, clauses specifying very short collection periods before goods can be placed under lien and sold, with little or no notice to the customer, may also be deemed unfair.

However, this is just the beginning. With more changes to the ACL announced last November, I think all parties in the industry need to consider the consequences of further extensions to the UCT laws.

The exact timing of these changes remains unclear, but it’s expected that under the new amendments the small business definition will be widened to include any company with up to 100 employees.

The current threshold for a small business is 20 employees.

The coverage of small business contracts is also anticipated to be broadened by removing the dollar value threshold on the upfront price payable, currently $300,000 for less than one year’s duration or $1 million where a contract is over 12 months.

This means many more transport operators will have to comply with the ACL and the extended UCT provisions.

As a result, I imagine that these companies may find that the courts will not allow them to deny or limit liability, pushing up claims costs and potentially impacting premium levels or policy terms, such as excesses.

That said, we’re still in the early stages of seeing any impact from the changes as the widening of the small business definition is not yet in place.

Interestingly, while more companies are using the existing UCT provisions to attempt to recover damages from transport operators, to date the frequency or value of successful court settlements has not increased.

Nonetheless, the recent changes have had a long lead time, allowing many in the industry to be well prepared.

The better operators got organised early, but in my mind some companies are still playing catch-up.

To successfully negotiate any potential potholes, transport operators should get specialist legal assistance to review their contract clauses, softening or adapting these where possible so they are less likely to be deemed unfair by a court.

I think it’s important for transport operators to demonstrate flexibility by allowing customers to select their preferred level of risk transfer.

A customer should understand that they will be unable to make a recovery for damaged goods by agreeing to a defined liability level with the transport operator. Providing that insurers on both sides are aware of the position and understand the approach, this can be a viable insurance solution for all.

To help transport operators deal with the changing landscape, Zurich will work closely with insurance brokers to ensure they comply with their policy’s terms and conditions.

We can also recommend specialist law firms to assist transport operators in adapting their contractual terms, thereby ensuring they are properly protected.

Cargo owners have relatively low-cost insurance cover available to insure their goods in transit and, considering the low profit margin that transport operators achieve, I expect that the contract terms between the cargo owner and the transport owner should reflect this.

On reflection, it is possible that cargo owners may benefit from the changes since transport operators will be forced to accept a greater level of risk transfer.

However, I anticipate that the new laws may also favour some transport companies as they will not have to accept the terms and conditions of large customers or those of their subcontractors.

This is because the approach of ‘you sign it, or you don’t get the work’ will not be possible under the new UCT provisions. Consequently, I suspect that some transport operators may learn that being considered a small business is as much of an advantage as a hindrance.

Ian Sharples.

About the author:

Iain Sharples is National Manager, Marine and Transport Liability at Zurich Financial Services Australia and has been in the insurance industry for the past two decades. He works with freight forwarders, logistics operators, port, terminals, charterers, marina operators and ship repairers to manage their marine liability.