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What are Bills of Lading?

Updated on December 13, 2015
Randi Glazer profile image

Randi Glazer is a Sr. Insurance Professional with experience underwriting, marketing, organizational leadership & managing large staff

General Background

The growth of Transportation Insurance stems from the existence of the commercial transaction. There are three parties to each commercial transaction:

  1. the buyer,
  2. the seller, and
  3. the carrier

Each party plays a distinct role and usually has a certain amount of insurable interest in the goods being shipped.

The Uniform Commercial Code (UCC) governs and clarifies the legal handling of commercial transactions. The Code permits the buyer and seller to stipulate by agreement when title will pass between them. If they make no stipulation, the Code provides that title passes to the buyer at the time and place at which the seller completes physical delivery of the goods. The wording of the contract will stipulate the time and place of the physical delivery.

Underwriting the 'Commercial Transaction'

The three official documents that are part of the commercial transaction are the

  1. Purchase Order,
  2. the Sales Contract, and
  3. the Bill of Lading

These documents help establish who has title to the goods, who is responsible for the goods while in transit, and the degree of liability assumed for the losses.

To underwrite transportation coverage, the extent of the insured's interest in the shipped property must be determined by developing the following information:

1. Released liability, if any, on shipments by rail, air transport, common carriers, and contract carriers. The relationship of released value to insured value while goods are in the custody of others should be determined.

2. The value of shipments at risk in custody of each type of carrier for which a limit of insurance will be provided and which of those are made subject to released value Bill of Lading.

3. Amount of gross annual shipments by each mode of transportation.

4. Maximum and average value of cargo on trucks used by private carriers.

5. Contracts or agreements between the insured and any other shipper for "back-haul" of goods. The intent of these questions is to gather information on exposures where recovery possibilities are limited after a loss and to determine that the proper coverage is provided. This is so an individual risk or shipment may be reinsured, adequately rated, or limited by a separate endorsement.

Bills of Lading

The Bill of Lading is a contract of carriage between carrier and shipper serving three functions:

  1. to state terms and conditions of carriage,
  2. to serve as receipt for the goods,
  3. to provide evidence of ownership or title

The Bill of Lading shows where the property was received and from whom, the date of receipt, a description of the goods, the number of packages. weight, and any special markings or description. The goods are presumed to be in good condition when the carrier receives them unless otherwise noted with a "bad order" notation. If the carrier fails to make a "bad order" notation, it becomes extremely difficult to prove when the damage occurred.

The liability of the carrier starts upon the execution of the contract (signature of the carrier) and custody and control of the goods. Liability ends with fulfillment of the contract acceptance of delivery). A Motor Truck Cargo policy is needed to cover the legal liability of the carrier.

Standard Bills of Lading

Under standard Bills of Lading, the carrier is not liable for loss caused by:

  1. acts of God,
  2. the public enemy,
  3. the authority of law,
  4. act or default of owner or shipper,
  5. inherent vice or defect

Note: however, in some cases the carrier could be held liable if the loss could have been prevented by the exercise of reasonable diligence by the carrier.

Types of Bills of Lading

1. Uniform Straight Bill of Lading

2. Short Form Bill of Lading

3. Uniform Order Bill of Lading

4. Special Commodity and Carrier Contracts:

  • Uniform Household Goods Bill of Lading
  • Bulk Carrier Conference's Contract Terms and Conditions
  • Heavy and Specialized Carriers' Combined Straight Bill of Lading

5. Exempt Commodity Contracts

Common Carrier Bills of Lading

The Bills of Lading most often used by Common Carriers are the Uniform Straight Bill of Lading and the Uniform Order Bill of Lading:

1. Uniform Straight Bill of Lading - With a Straight Bill of Lading (printed on white paper), the carrier must deliver the goods to the consignee who is presumed to have title or at least the right to possession. Goods are shipped under a Straight Bill when the shipper wants the carrier to make delivery directly to the consignee named in the Bill. If a Straight Bill falls into the hands of others who are not the consignor or the consignee, they are still not entitled to the goods. The Straight Bill is non-negotiable; it cannot be endorsed to convey title or possession to a third party.

2. Uniform Order Bill of Lading - The Order Bill of Lading (printed on yellow paper) is also a contract for shipment, but it serves an additional function: the Uniform Order Bill of Lading acts as a negotiable instrument that can be assigned to another party.

The Bill of Lading states the basis of valuation for determining a carrier's liability to the shipper or consignee in the event of loss or damage.

Risk of Loss

The Transportation Policy only covers shipments that are at the insured's "risk of loss".

The term "risk of loss" is used to identify who in the commercial transaction bears the financial responsibility, should a loss occur. Both buyers and sellers have an insurable interest in cargo being shipped and both qualify for protection under the Transportation Policy since the insured may have both incoming and outgoing shipments.

An essential aspect of the loss exposure during transit is the question of when title to the property being sold passes from the seller to the buyer. The party having title to the goods is usually the one who purchases insurance.

The terms of the sale will determine who has title.

In theory, the party holding title to property in a sale bears the risk of loss in transit. In practice, however, a seller may be exposed to loss after title has passed to a buyer; and a buyer may be exposed to loss before title has passed from the seller to the buyer.

A seller's insurable interest in the property does not necessarily end when title in the property passes to the buyer. If the goods are destroyed in transit, the buyer may not make payments on the property if his insurance company won't pay. Therefore, there will be no property of any value for the seller to repossess.

Buyers have an insurable interest in property before actually acquiring title to the property, since they are depending upon receipt of the goods.

If property is sold FOB point of shipment (the usual basis), the buyer has title once transit commences.

If sold FOB destination, title does not pass to the buyer until delivery and the goods are at the seller's risk during transit.

[FOB is an abbreviation of “Free on Board”]

FOB – Point of Shipment

FOB – Point of Shipment – [FOB is an abbreviation of “Free on Board”]. These terms obligate the seller to assume the responsibility for loss or damage until the property is in the possession of the carrier and a clean Bill of Lading has been issued. Thereafter, the buyer has title and assumes the responsibility for any loss or damage.

When a sale is made 'FOB point of shipment', the seller is responsible for following the buyer's specific shipping instructions. These instructions may regard the carrier, route, amount to be declared, and so on. Failure to follow these instructions can negate the terms of sale, making the seller responsible for any loss or damage in transit.

In the absence of specific shipping instructions, the seller must exercise reasonable care in the selection of a carrier and must otherwise do all that is expected of a prudent shipper.

FOB Point of Shipment

Free on Board - Point of Shipment, sketch drawn by Randi Glazer
Free on Board - Point of Shipment, sketch drawn by Randi Glazer | Source

FOB - Destination

FOB - Destination - [FOB is an abbreviation of “Free on Board”] These terms obligate the seller to transport the goods to the destination stated and tender proper delivery upon arrival. The seller assumes the responsibility for loss or damage until proper delivery has been made.

Since the policy only covers shipments at the risk of the insured, It is important to know if the insured intends to include the interest of customers or consignees in 'FOB shipments' under this policy. Arranging insurance for only shipments that the insured has the risk of loss will develop the lowest premium.

FOB - Destination

Free on Board - Destination, sketch drawn by Randi Glazer
Free on Board - Destination, sketch drawn by Randi Glazer | Source

© 2015 Randi Glazer

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