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This presentation is not open to the press and has a legal Copyright © April 2014

Insuring Your Exposure: Limiting Risk When Delivering International Trade Services

NCBFAA 2014 Annual Conference Red Rock

April 10, 2014


Introductions

Ed Mascher Customs Surety Practice Leader Integro Insurance Brokers

Jason Odgers Senior Account Executive Roanoke Trade Services

Keith Sanchez Divisional Vice President Avalon Risk Management


TRANSPORTATION SURETY ED MASCHER CUSTOMS SURETY PRACTICE LEADER, INTEGRO INSURANCE BROKERS

TRANSPORTATION SURETY


Surety : COST vs. profit center

– CORPORATE BONDS • TYPES OF BONDS • UNDERWRITING

– CUSTOMS BONDS

• SOURCE OF REVENUE • KEEPING THE BUSINESS • HOW TO COMBAT DIRECT SOLICITORS

– HOW TO UTILIZE REPORTS

– EXPERTISE

– CLAIMS ADVICE


Surety products REQUIRED for licensing - corporate Bonds

• Ocean Transportation Intermediaries • FMC Ocean Freight Forwarder • $50,000 plus additional $10,000 for each

affiliated branch office • FMC-NVOCC • $75,000 for single office plus $10,000 for each

additonal office • China Ministry of Communications (MOC) Rider $50,000 (recently increased)


OTI Bond Verbiage

The condition of this obligation is that the penalty amount of this bond shall be available to pay any judgment or any settlement made pursuant to a claim under 46 CFR § 515.23(b) for damages against the Principal arising from the Principal's transportation-related activities or order for reparations issued pursuant to section 11 of the 1984 Act, 46 U.S.C. app. 1710, or any penalty assessed against the Principal pursuant to section 13 of the 1984 Act, 46 U.S.C. app. 1712.


OTI Bonds

• The verbiage closely resembles a Freight Forwarder E&O Policy

• Unlike E&O Policies – Surety can subrogate on a bond

• No stacking of liability on OTI Bonds (unlike Customs Bonds)

• Not uncommon to have claims which will exhaust the bond

• Historical Underwriting Procedures (qualifications, personal information, etc.)


Customs Bonds for Custodial Operations

• For handling cargo in your custody which has not been entered into commerce of the United States

• Bonded Carriers • Bonded Warehouses • CFS, Freight Forwarder, Cartman, Lighterman • Centralized Examination Station • Exposures Failure to account for unreleased merchandise Failure in recordkeeping or reporting


MAP-21 and your liability

• From Q&A release by FMCSA

Question 8: What is the civil penalty for a broker or freight forwarder who engages in

interstate operations without the required operating authority (registration)?

Answer: A broker or freight forwarder who knowingly engages in interstate

brokerage or freight forwarding operations without the required operating authority is

liable to the United States for a civil penalty not to exceed $10,000 and can be liable to

any injured third party for all valid claims regardless of the amount (49 U.S.C. 14916(c)).

The penalties and liability to injured parties apply jointly and severally to all corporations

or partnerships involved in the transportation and individually to all officers, directors,

and principals of these business forms (49 USC 14916(d)). Under 49 USC 14901(d)(3), a

broker of household goods (HHG) who engages in interstate operations without the

required operating authority is liable to the United States for a civil penalty of not less

than $25,000 for each violation.

• Friendly Competition or not? Many people have not chosen to get licensed (Self Policing)


U.S. CUSTOMS BONDS

• MARKET LANDSCAPE

ACTIVITY CODE BOND TYPE BOND COUNT

1 IMPORTER/BROKER 172,104

1A DRAWBACK 1,042

2 CUSTODIAN OF BONDED MERCHANDISE 5,745

3 INTERNATIONAL CARRIER 5,866

3A

INSTRUMENTS OF INTERNATIONAL

TRAFFIC 799

3A3 CARRIER OF INTERNATIONAL TRAFFIC 48

4 FOREIGN TRADE ZONE OPERATOR 845

5 PUBLIC GAUGER 43

11 -* AIRPORT SECURITY 454

14

MIAMI IN-BOND EXPORT CONSOLIDATOR

BOND 155

15 IPR 12

16 ISF 126

17 MARINE TERMINAL OPERATOR 20

Total 187,259


Revenue Division data (8/31/2013) ACTIVE CBP CONTINUOUS BONDS

BOND LIABILITY AMOUNT RANGE

(As of August 31, 2013)

BOND AMOUNT RANGE LIABILITY AMOUNT BOND COUNT

LE - 50,000 8,261,328,000 166,434

50,001 TO 99,999 322,541,000 4,563

100,000 TO 199,999 905,262,000 8,757

200,000 TO 299,999 653,845,000 3,209

300,000 TO 399,999 361,330,000 1,197

400,000 TO 499,999 247,265,000 616

500,000 TO 599,999 296,125,000 591

600,000 TO 699,999 160,795,000 267

700,000 TO 799,999 125,145,000 177

800,000 TO 899,999 112,445,000 140

900,000 TO 999,999 70,550,000 78

1,000,000 TO 9,999,999 2,673,760,000 1,153

GE 10,000,000 1,570,460,000 77

TOTAL 15,760,851,000 187,259


What is your surety looking for when they underwrite bonds for your importers?

• Why does the surety require a financial statement?

• What kind of financial statements are required?

• What is an indemnity agreement and why is it requested?

• Why is collateral required – Claims under the bond

– Entries made on the customs bond are not liquidating

– Stacking liability


CHB Underwriting Authority Customs Bond Underwriting Authority Schedule Endurance Reinsurance Corporation of America Navigators Insurance Company

The following Authorities apply to accounts that, to the best of your knowledge, have a clean history of importing. If the bond

exceeds your underwriting authority as scheduled below and/or involves the following bullet points, YOU MUST contact

your Surety Representative at Integro Insurance Brokers for approval.

Principals who have been sanctioned by Customs, are in bankruptcy or in insolvency proceedings Foreign principals, except those located in Canada and the U.S. territories of Puerto Rico, Guam, and the U.S. Virgin Islands When the address of the Principal is a post office box When the Principal ID is a social security number and Continuous Bond amount is over $50,000 When the Principal ID is a social security number and Single Bond Limit and/or Aggregate Exposure is over $100,000 Entries for cigarette and tobacco related products or entries for airlines and related companies Entries for goods subject to Anti Dumping or Countervailing Duty Restrictions

Activity

Code

Rate

Code

Underwriting

Requirements

Underwriting

Authority

Singles Continuous

1 1

TIB

Domestic corporate principals only with verified street address. $20,000 NONE

2

WHS

Domestic corporate principals only with verified street address. $100,000 NONE

3

AUTO

No Authority – You Must call your Surety Representative at Integro for approval - specific security requirements exist for vehicles not conforming with EPA and/or DOT.

NONE NONE

4

ADD/CVD

No Authority – You Must call your Surety Representative at Integro for approval – specific security requirements exist for merchandise subject to AD/CVD investigations.

NONE NONE

5

FDA/CPSC

Although you may issue a single entry bond up to $20,000, your Single Bond Authority is capped “per principal” at $50,000 in aggregate exposure. You Must call your Surety Representative at Integro for approval when the bond required exceeds limits for entries involving: food items; medical equipment; drugs; medical herbs or aphrodisiacs; sexual aids; dietetic or weight reduction equipment and supplies; tanning equipment and supplies.

For all other merchandise subject to FDA regulation, if importation is for merchandise not previously cleared by FDA, or if importer is new to your firm or has had pervious problems with FDA, call for underwriting instructions.

$20,000 $50,000

6

CHAP 98

(Sub I-III)

Apply this authority if documents substantiating duty free status, country of origin and value are physically in hand at the time of entry. You Must call your Surety Representative at Integro for approval, if documents are not in hand at time of entry.

$50,000 NONE

7

FTA

Apply this authority if documents substantiating duty free status, country of origin and value are physically in hand at the time of entry. You Must call your Surety Representative at Integro for approval, if documents are not in hand at time of entry.

$50,000 NONE

8

GEN MERCH

Although you may issue General Merchandise single entry bonds up to $500,000, your Single Bond Authority is capped “per principal” at $1,000,000 in aggregate exposure. Please call your Surety Representative for additional bond approval on any principal who should reach $1,000,000 in Unliquidated, Single Entry Bond Exposure.

$500,000 $100,000

1A DRAWBACK No Authority – You Must call your Surety Representative at Integro for approval

NONE NONE

2-17 VARIOUS No Authority – You Must call your Surety Representative at Integro for approval

NONE NONE

16 ISF Although you may issue this single entry form at $10,000, your single Bond Authority is Capped “Per Principal” at $50,000, in aggregate exposure.

You Must call your Surety Representative at Integro for additional bond approval on any principal who should reach $50,000 in Unliquidated, ISF Bond Exposure.

$10,000 NONE

Follow these guidelines carefully as you may be held responsible in the event of a loss to the surety company if a bond is written that exceeds the

authority extended to your firm. The surety has the right to impose additional restrictions as needed should circumstances require.


Search optimization Google Search: Customs Bond


Protecting your business from direct solicitation

No other fees “Guarantee” (with your good credit Score)


Protect your business – marketing

Benefits of Using Customs House Brokers (CHB)

Having the expertise relative to classification, entry filing and understanding of the nuances of local Customs offices. This ensures your Customs bond is filed accurately and timely.

Providing Importer Entry Status reports to monitor import activity by entry type, port, and liquidation status.

Through Importer Entry Status reports, the ability to identify Customs trends and/or violations, such as increased duty bills, liquidated damage claims, fines and penalties.

Assistance with Customs bond claims through successful protests and petitions. We work together with our surety company to successfully mitigate Customs claims.

An understanding of the changing environment and the monitoring of your import activity to ensure compliance with complex Customs regulations.

Customs bonds are continuous in nature, but subject to renewal each year. We manage the entire renewal process and handle all necessary amendments to the bond and updates with Customs.


Protect your business

Customs does not recognize a two or three-year bond

Someone selling a two or three-year bond does not “lock in” the bond amount or guarantee issuance of a bond for three years. The surety has the right to cancel at any time upon 30 days written notice. Once cancelled an importer would have to hope for a return premium.

Bond sufficiency is a primary goal of National Finance Center (NFC) with the filing of bonds centralizing. NFC will review bond sufficiency at anytime based on analysis of various entry reports. A two or three-year bond will not stay in force if the NFC requests that the bond amount be increased.


Managing various reports - ABI Vendors

- ACE

- Surety Reports

Surety Principal IRS Number Principal Name Bond Type Filer Code Entry Number Entry Date Release Date Entry Type OGA Indicator Liquidation Date Entered Value Estimated Duty Estimated Bonded ADD Amount Estimated Bonded CVD Amount Estimated Tax Amount Estimated Fee Amount Estimated ADD Amount Estimated CVD Amount TIB Close/Liquidation Date Port Of Entry Bill Date Claim Date Collection Date Cancel Date

440 12-123456700 ABC IMPORTER, INC 8 ABC 123456 6/28/2012 6/28/2012 1 N 5/11/2013 0 0 0 0 0 0 0 0 4701 7/11/2011



440 12-123456700 ABC IMPORTER, INC 8 CED 123456 7/1/2012 7/1/2012 1 N 5/14/2013 0 0 0 0 0 0 0 0 4701 7/8/2011
















Protect your business- expertise

- Direct importer has a bad address

- Direct importer gets a late file penalty. Surety pay vs. Importer pay

CLAIMS ADVISE

- Working with a surety that understands mitigation guidelines

- Bond Liability Guidelines- Over-bonding


NEI Workshop

4/10/14 ESSENTIAL TRANSPORTATION RELATED INSURANCE PRODUCTS JASON ODGERS SENIOR ACCOUNT EXECUTIVE, ROANOKE TRADE SERVICES


Agenda

1.Intangible Benefits of Cargo Insurance

2.Errors & Omissions

3.Bill of Lading Legal Liability

4.Contingent Domestic Liabilities

5.Warehouse Liabilities

6.Contractual Liability


Intangible Benefits of Cargo Insurance

Avoid Professional Liability (E&O) Claims

• Client relies on intermediary for expertise. • Failure to advise re. exposures and provide insurance options

could be a basis for an E&O claim

Avoid Cargo Legal Liability Claims • Client files cargo claim instead of legal liability claim against

NVOCC • Subrogation unlikely when cargo & legal liability insurance

provided by the same underwriter

Avoid Accounts Receivable Challenges • If credit terms are extended and a loss causes insolvency, the

intermediary is an unsecured creditor.


Errors & Omissions

• Addresses client’s claims that the insured’s Error/Omission/Negligence caused them financial injury

• First Dollar Defense

• Indemnity Provisions

• Common Forms

• Primary Rating Factors


Common E&O Claims

Documentation Error13%

Failure to Follow Instructions

9%

Negligent Selection of Underlying Provider

6%

Improper Classification of Merchandise

2%

Quota Problem5%

Failure to Obtain Duty Drawback

1%Release of Cargo w/o

Original Documentation23%

Cargo Released to Wrong Party

2%

Loss or Damage to Cargo

24%

Misdirected Freight7%

Delay/Late Delivery8%



Bill of Lading Legal Liability

• Addresses liability for cargo while transported under a HBL

• Defined by International Convention and US Legislation

• Common Exclusions

• Declared values

• Rated on gross receipts or per unit

• NCBFFA provides recommended B/L Terms & Conditions to members


Domestic Contingent Liabilities

• Contingent Auto – Addresses 3rd party BIPD claims on brokered loads

– Emotional claims involving personal loss & injury

– Claims are not constrained by value of cargo

– Hired & Non-Owned Auto

• Contingent Cargo – Primary liability borne by underlying common carrier

– Contingent upon failure of carrier’s MTC to answer a valid claim

– Coverage is usually warranted


Warehouse Liability

• Warehouse Legal Liability Insurance

– Addresses claims of cargo loss/damage when liability is limited by standard terms/conditions, a warehouse receipt or contract.

– Premiums are modest because the insurer’s exposure is limited

• Bailee Liability – Full value liability / premiums are more substantial – Common in consol/de-consol shipments where temporary warehouse

services are provided prior or subsequent to main carriage

• Packer’s Liability – Addresses claims of cargo loss/damage in transit due to improper

packing


Contractual Liability

• Transfer of exposure to service providers more common.

• Contracts extending liability must be submitted to the insurer for review, approval and endorsement

• Failure to notify your insurer could result in claim denial – Common Exclusion: Claims arising out of any liability assumed under

contract or agreement to hold harmless or indemnify another unless such liability would have arisen even in the absence of such agreement.

• Authority to sign contracts should be maintained at the executive level after review by corporate counsel.


EXECUTIVE RISKS INSURANCE FOR THE TRANSPORATION INDUSTRY KEITH SANCHEZ DIVISIONAL VICE PRESIDENT, AVALON RISK MANAGEMENT


How would your company survive?

• If an embezzlement scheme was carried out for multiple years?

• If employees were involved in a workplace violence incident?

• If there was an allegation of pension/retirement plan mismanagement from an employee?

• If it was sued for invasion of privacy from an Internet customer?


What is Executive Risk coverage?

• Executive Risk options include:

– Directors and Officers Liability

– Crime Insurance

– Employment Practices Liability

– Fiduciary Liability

– Internet Liability


What is Executive Risk coverage?

• Corporate executives and

corporation faces

numerous risks.

• Provides coverage for

threats of litigation,

extortion and other

employee crimes.

Insurance today so you’ll be in

business tomorrow.


Directors & Officers Liability

• D&O liability coverage protects the personal

assets of a company’s directors and officers as

well as the financial well-being of the

company. It also pays legal defense costs for

directors, officers and the company.

• Directors & Officers could be liable for:

• Breach of legal duty

• Mixing of personal & business assets

• Failing to disclose conflict of interests


Directors & Officers Liability

• In the past 10 years:

• 69% of publicly traded companies had claims from

shareholders

• 21% of private companies had claims

• Attracts and retains directors

• Allows competent professionals to serve as supervisors

of a company without fear of personal financial loss

• Exclusions for intentional illegal acts.


D&O Claim #1

• Your company’s CEO tells a reporter during an interview that a merger is not under consideration. Relying on this information, many shareholders sell their stock.

• A few months later, your company decides on a merger and shareholders sue claiming that they sold their shares based on your CEO’s comments


D&O Claim #2

• Three employees of a competing CHB quit and join your company.

• Your competitors alleged that the three employees were still employed when they began sharing proprietary information with you.

• In its suit, the customs broker charged your company with theft of trade secrets.

• You file a claim against your D&O insurance policy, and after more than a year of legal negotiations, the case settled. Both legal fees and settlement amounts were covered up to policy limits.


Crime Insurance

• Crime insurance provides protection against employee theft, forgery, counterfeit checks and other white-collar crimes.

• Transportation specialists are particularly vulnerable to crime claims because they handle duty and freight as well as property of others that is susceptible to employee theft.


Crime Insurance Claim #1

• Your company accountant has full access to all company

accounts.

• Over the past 5 years, she had been paying full salaries

and bonuses to 3 employees that did not exist.

• Total payout was of over $1,000,000.

• The fraud is discovered during your company’s annual

audit and the accountant was arrested and jailed.

• This company did not have Crime Insurance and will

probably never recoup this money.


Crime Insurance Claim #2

• A long time employee of 21 years and good friend of the owner of a local warehouse operation, colluded with another Freight Forwarder by setting up fictitious trucking companies and created bogus shipments. This employee was able to hide this from the warehouse owner for 3 years.

• Freight charges of over $1,500,00 were paid out to these companies before the owner discovered what was going on.

• The owner of the warehouse did have crime overage.

• All legal fees and $1,500,000 were covered.


Employment Practices Liability

• EPLI is coverage for allegations of discrimination, sexual harassment, wrongful termination, retaliatory treatment, unfair hiring practices and other workplace torts by employees.

• EPLI also includes defense costs for the company regardless of fault.

• Include Wage and Hour Coverage.


EPLI Claim #1

• Your company terminates a long-time manager for

alienating employees and also for disinterest in his job. The manager is 59 years old and your company accidentally checks off “other” instead of “poor performance” on his termination form

• The former manager files a charge of discrimination with

the EEOC, alleging he was terminated because of his age. He claims that he is being replaced by a worker in his 30s and heard senior management making comments about “getting rid of the old guys.” The former employee sues for wages, benefits and emotional distress.


EPLI Claim #2

• A secretary in a customs broker’s (CHB) office requested her hours be adjusted so she could care for her sick father during morning hours. Her supervisor denied the request.

• The secretary quit and sued the CHB under the Americans with Disabilities Act, alleging failure to accommodate and discrimination on the basis of being associated with a disabled person.

• The CHB filed a claim against its EPLI policy, and both legal fees of $75,000 and the settlement cost of $100,000 were covered.


Fiduciary Liability

• Covers the fiduciary liability of a company for misadministration and/or mismanagement of the companies pension, health and other plans for employees.

© Avalon Risk Management


Fiduciary Liability Claim #1

• One of your employees submits her medical insurance plan enrollment forms to your company’s HR manager. The HR manager fails to forward the enrollment forms to the insurance company and receipt of the forms is a prerequisite to coverage.

• A few months later the same employee needs surgery, but coverage is denied because she was never enrolled in the medical plan. The employee sues your company for the cost of the medical fees, surgery and post-operative care.


Fiduciary Liability Claim #2

• An employee of a property broker, earning a $50,000 annual salary, died in an automobile accident. The employee’s widow claimed that the life insurance benefit paid to her under the benefit plan should have been five times her deceased husband’s salary, not two times his salary.

• The company denied the widow’s benefit claim. She sued, alleging that her husband requested the amount be changed months prior to his death. After investigation, the property broker learned the employee had requested an increase, but HR did not properly process the request.

• The property broker filed a claim against its Fiduciary Insurance policy which covered the $250,000 settlement cost and the $25,000 defense costs.


Internet Liability

• Offers protection for

legal exposures arising

out of Internet

communications.


Internet Liability Claim #1

• Your company creates a website to promote itself

online. You include industry news and

information compiled from a variety of sources.

• The publisher of a magazine you quoted on your

web site sues your company, alleging copyright

infringement and theft on intellectual property.


Internet Liability Claim #2

• A freight forwarding company opened up a website to promote its services. The company included some photos on the website of cargo.

• Another company sued the freight forwarder, alleging that the photos were taken from their website, and that the forwarder committed copyright infringement.

• The freight forwarder filed a claim against its Internet Liability policy and the $60,000 settlement cost, along with the $35,000 defense costs were covered up to policy limits.


Words of Wisdom

• Executives and corporations have many exposures

• Need to understand your exposures • Talk to your insurance brokers • Be aware of what is available to you. • Get a quote • Make your decision • Reduce your risk • It’s only getting uglier out there


Questions?


Transportation Insurance Examples / Questions


Question #1

• ABC Forwarding operates a small warehouse adjacent to their office.

• They receive LTL freight daily for a weekly European Consol box. • A pallet of 40 lap top computers valued at 20,000usd is received. • No warehouse receipt is issued, no warehouse T&C’s are published

and no contract has been signed. • Someone breaks into the warehouse and steals the pallet of lap

tops. • ABC is held liable for the full value of the laptops stolen.

How could ABC have minimized their $$ exposure?


Question #2

• ABC Forwarding receives instructions from their client to insure a load of cell phones from Charleston to Rotterdam.

• Unaware that their open cargo policy excludes coverage for cell phones, ABC’s employee agrees to insure and invoices client.

• In transit, the cell phones are stolen • A claim is filed with the cargo insurance underwriters;

however, it is denied because the commodity is excluded. • ABC Forwarding is sued by their client for the full value of

the stolen cell phones.

What type of insurance may answer this claim?


Question #3

• An import container is received in the port of Charleston on a CY B/L.

• The importer in Charlotte, NC asks ABC Customs House Broker to deliver to their facility and bill them on a consolidated invoice.

• ABC calls a new trucker who was in their office the week prior, offering aggressive rates and dispatches them the load.

• In transit, the driver crosses the median and collides with an oncoming car resulting in a fatality.

• ABC, along with the driver, the trucking company and the cargo owner are sued by the family of the victim.

T or F: As long as ABC has “Hired & Non-owned” auto coverage in their commercial package policy, they’re covered.


Question #4

• ABC NVOCC issued a HBL for 1 container, said to contain 560 cartons of flat screen televisions.

• The cargo owner declined insurance. • During a winter storm in the North Atlantic, the container fell

overboard. • A claim was filed against ABC NVOCC for the commercial invoice

value of the televisions, 168,000usd. • ABC’s B/L Legal Liability policy underwriters spent ~15,000usd in

legal fees successfully defending the suit and since their policy included First Dollar Defense, ABC had no out of pocket expenses.

What was the likely basis for the successful defense?


Question #5

• A LCB maintains a pure occurrence form E&O policy for 5 years with a 100k policy limit.

• In year 6, the LCB binds E&O coverage with another insurer under a claims made form and coverage is maintained for another 4 years.

• During year 10, an ADD entry from year 2 liquidates and the importer is assessed 150k in additional duties, fines & penalties due to an alleged error made by the LCB during the entry.

• The importer sues the broker for the additional duty assessment.

Which policy will answer the claim?


Optional Question

• ABC’s aggressive salesperson is required to sign a contract by his new client outlining ABC’s duties as an NVOCC.

• In order to secure the business (and commission) he happily signs without extensive review.

• During transit, the client’s container falls overboard and they file a claim for the full value of the load, citing the transportation agreement which stipulates that ABC accepts full liability for any loss/damage in transit.

• The claim is reported to ABC’s B/L legal liability insurer

What is the maximum amount that the insurer is likely to pay?

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