Over, Short and Damage Claims or Loss and Damage Claims
Freight claims occur
for various reasons, some are real, some are contrived, some can
be prevented, but they all can be controlled, understood and kept
to acceptable, understandable and reconcilable levels.
Accepting loss and
damage claims (L&D claims) as a cost and part of doing business,
demands that we must be very careful when establishing standards;
because the established standards will become the metrics by which
we measure this aspect of carrier performance, packaging, consignee
receipt of freight and the ability of the freight to withstand
the normal hazards of transportation.
Of equal importance is the ability to measure the success
of the process model that manages claims.
There are several
areas of concern and sets of decision criteria that must also
be established in order to identify and distinguish between real
and contrived claims. Once achieved, claims evaluation can be
addressed effectively and efficiently.
Understanding these issues is critical as the need to
effectively articulate them across the supply an
demand chain should become more apparent throughout this paper.
Many companies have
established departments to manage their claims.
Unfortunately, many of these departments have been relegated
to processing centers that are essentially the “butt end of someone
else’s foul-up”. In
addition, as a “processing center” they function at the task level
only and fail to develop an appreciation and understanding of
claims…how they relate to shipping, sales, packaging, carrier
performance, customers and attitudes throughout the chain.
Lastly, unless there
is an understanding of the claims issues, it is impossible to
handle L&D claims efficiently and effectively.
The traditional claims
process model is ineffective; its perspective is based upon yesterday’s
practices and its tools are herds of people on the shipper, carrier
and consignee sides. Their purposes are” get the claim paid,
deny the claim or to negotiate away as much of the claim as possible. The amount of time consumed in this posture
is, for the most part, counterproductive especially when more
useful and automated process models are available.
What is most interesting
is that many of the claims departments were set up to believe
that the Interstate Commerce Commission and the various state
regulatory agencies were the forum.
This of course is not true as the claims law has its base in the
common law. So, it is time to change the process
model and to adopt and embrace new technologies, especially those
information in the transaction stream, establish the rules of
engagement, define the relationship and work within the agreed
to and acceptable methods.
As this occurs, claims get resolved in a timely fashion,
the volume gets reduced, and contrived claims disappear and problems
are identified rapidly. The
inherent cost savings and rapid settlement, when the process is
automated, is significant and dramatic.
Legal Antecedents of L&D Claims
Loss and damage claims
are the result of an alleged failure of one or more of the terms
and conditions of the Bill of Lading Contract.
The operative word being, “contract”, consequently, claims
are handled under common law as opposed to statutory law.
Essentially, there are two, high level, categories of L&D
claims: regular damages and special damages. Regular damages are typically those for
shortage or damage to the freight and may also address late delivery. Special damages are those that have been
reasonably contemplated and occur as a result of regular damages
and are consequential thereto.
L&D claims for
regular damages appeared, perhaps with the first freight shipment
made via a common carrier.
Formalization of the entire claims process has its roots
in the creation of the legal instrument known as the Bill of Lading
Contract. This instrument
is both a contract for carriage and a receipt for the merchandise.
The landmark case
for special damages was decided in 1854 and is still cited today. The doctrine of Hadley v. Baxendale established
the rules under which compensatory damages, direct or consequential,
are paid. The
fact pattern of this landmark case concerned itself with a shipment
of equipment that was to be refurbished and returned; the absence
of the equipment caused downtime and loss of revenue.
Because the equipment was mission critical, the consignor
included a condition on the Bill of Lading Contract essentially stating that, “time is of the
essence” and therefore the shipment must be delivered with due
dispatch. Because of this condition, mutually agreed
upon, by and between the shipper and the carrier, both parties
were deemed to reasonably have known that failure to meet this
condition could result in consequential damages.
Simpson on Contracts states, “They (the rules)
have since been uniformly adopted by our courts”.
Continuing, “Where a party has broken his contract, the
damages (either consequential or direct) that the other party
may recover under are:
such as may fairly and reasonably be considered to arise
if the damages arose out of
special circumstances, communicated and so known to both parties
when the contract was made, the damages that the parties would
reasonably contemplate would be the amount of injury…
if the special circumstances were wholly unknown to
the party breaking the contract, he at the most could only be
supposed to have had in his contemplation the amount of injury
which would arise generally”…(regular damages)
Formula of Damages
The method through
which the claimant establishes the damages sustained because of
the failed contract provision(s).
The basis in establishing the damages is that, “the claimant
must be rendered whole, that is, put in as good a position as
he would have been in had the Bill of Lading Contract been fully
complied with. Additionally,
there is a rebuttable presumption that the claimant will replace
and reship the damaged freight, securing his profit from the replacement
and therefore including profit in the claim against the carrier
is unacceptable. The premise is that if the claim includes
profit a double profit would occur, because of the replacement
and that the carrier would be unreasonably burdened.
Mitigation of Damages
It is a well respected
position in law that damages must be mitigated.
As an example, if a claim occurs because the shipment was
received, “wet and damaged”, the costs of repair and refurbishing
(when acceptable to the claimant) must be compared with replacement
of a new product. The lower cost alternative meets the mitigation
What Constitutes a Valid L&D
Unless a demand for
money is made, supporting documents will not be considered a valid
claim. Having said that, it is necessary and appropriate
to support all claims with the following minimum documentation:
Bill of Lading
Invoice demonstrating the value of the freight
Delivery receipt evidencing the condition of the freight
at the time of receipt
Other supporting particulars
If the originals of
the above documents are unavailable, it is acceptable to certify
the documents to be true and correct copies of the originals,
however, astute claims personnel should require an indemnification.
The purpose is that,
“the best evidence” (the originals) could be used
subsequent to the original claim being paid and thereby causing
the carrier to make payment on an identical claim. The indemnity agreement, indemnifies the
carrier from second identical claims.
Who Should File the L&D Claim
and What are the Damages? Should Freight
Charges Be Included?
The proper party to
file a claim is typically the “beneficial owner” of the freight. You might recall from our
Freight Terms white paper that the beneficial owner
is determined by the passage of title. Clearly the claim could be filed by the
consignor, consignee or a third party.
Each of these parties potentially represents different
claim values. It is also possible for the beneficial
owner to assign all of his right, title and interest in the freight,
transferring same to his party of choice.
In this regard, the “assigned” claimant stands in the
stead of the original claimant.
Given that the claimant must be rendered whole coupled
with the profit constraint, the definition of “whole” is the material
issue. As an example,
if the terms of sale are FOB Origin, Freight Prepaid, and a clear
receipt is issued at the time and place of pickup, the beneficial
owner is the consignee and the claim value would be the invoice
value plus the freight charges. The theory being that the merchandise value
was increased to the extent of the freight charges. On the other hand if the terms of sale
were FOB Destination, and damages were noted at the time of delivery, freight collect,
the value would be cost and freight would not be included. We can all appreciate the fact that each
claim is different and when you factor in multi-modal and broker
freight, the variations grow dramatically.
With the increased
use of transportation brokers or freight brokers, it has become
apparent from our claims practice that appropriate contractual
conditions are missing from many agreements, thereby leaving the
claimants in an intolerable position. The general industrial public is
unaware of the fact that liabilities do not shift when using a
broker. The broker essentially, “arranges for transportation”
and does not assume shippers, claimants or carrier liabilities
Contaminating this deficiency is the fact that many brokers
will co-load multiple shippers’ freight and create a master Bill
of Lading to move the aggregated quantity. Each individual shipper in such co-load
can lose identity with the carrier and as such may lose their
standing as a claimant.
An Efficient L&D Claims Processing Model
From the outset, efficient
and effective data collection and the ability to rapidly convert
such data to information is probably the most significant part
of the process model. The key elements in such an automated process
data and information retrieval
An ASP model that
contains the following applications would be best suited for maximum
efficiency, effectiveness and economy:
Automated Transportation sourcing, contracting and execution
Automated Bill of Lading Generation
Automated pre-rating, audit, payment and reporting
Automated Routing control and compliance
Automated Freight Tracing and Tracking
Such an automated
ASP model easily allows you to create a highly coherent L&D
claims database from which claims can be timely identified through
the automated tracing and tracking function, original documentation
can be retrieved for filing purposes, routings and the rules of
engagement would immediately identify respective issues and coordinate
the filing, Bill of Lading terms and conditions are immediately
made available to facilitate the formula of damages as they relate
to the inclusion of freight costs.
Once the claim is filed it can be automatically traced
through conclusion simultaneously building a “claims report card”
thereby analyzing performance.
Pattern recognition from the database would assist in
identifying real from contrived claims and shed light on misquoted
delivery dates while subsequent analysis would establish recognizable
patterns that could be used to drive fictitious and voidable claims
down to an acceptable level.
Educating Your Partners
One of the results
of the automated process should be the ability to effectively
communicate your shipping requirements,
we call it a “transportation purchasing profile” to all of your
partners including your carriers. This information is best communicated through
an on-line routing guide. These guides, amongst many aspects,
cover the “rules of engagement”.
These business rules alert the parties to their respective
responsibilities, such as how to receive freight, who and how
to notify the proper parties, etc.
In conclusion, knowing
the legal obligations, the contractual obligations and using an
automated system that gathers data in the transaction stream and
utilizes the base information collected at the beginning and throughout
the supply and demand chains will position you to achieve best
Please consider this white paper as a beginning in this subject area, succeeding
white papers will address common issues and address them with
common solutions. We encourage our readers to direct any
specific questions or comments to
The information presented above represents
the opinion of the author and not necessarily the opinion of TransportGistics,
Inc. nor is it presented as a legal position.
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