Bonded Cargo Could Increase Uninsured Risks

 By Robert Mucci, LIA, AAI CIC, CWCS

 Each year our society relies more heavily on foreign imports, putting truckers and warehousemen in the cross-hairs of ever-increasing risk of liability.       

  According to a November 2012 report issued by the U.S. Dept of Commerce Bureau of Economic Analysis, the U.S. imported a whopping $191 billion of goods for the month of September 2012 and that was $3.9 billion more than was imported the previous month. The August to September imports of goods reflected increases in consumer goods ($2.7 billion); industrial supplies and materials ($1.2 billion); capital goods ($0.6 billion); other goods ($0.1 billion); and foods, feeds, and beverages ($0.1 billion).

     Customs and other import duties are all levies collected on goods that are entering the country or services delivered by nonresidents to residents. These duties totaled more than $25.3 billion for 2010. All these goods must clear customs before their final destination. Three such operations that deal with freight in bond are custom bonded warehouses, central examination stations (CES) and bonded carriers.

     This is not something to be taken lightly. Because under the U.S. Code and it’s regulations, that very same truck driver, central examination station or warehouse, is liable for duty to the United States Customs Service in the event of a shortage, irregular delivery, theft, disappearance or non-delivery of cargo, while held under bond.

     Per Customs and Border Protection (CBP) a custom bonded warehouses is “a building or other secured area in which imported dutiable merchandise may be stored, manipulated, or undergo manufacturing operations without payment of duty for up to five years from the date of importation.” Upon entry of goods into the warehouse, the warehouse proprietor incurs a liability for the merchandise under a warehouse bond. This liability is generally cancelled when the merchandise is exported, withdrawn for supplies to a vessel or aircraft, destroyed under CBP supervisions, or withdrawn for consumption within the United States after payment of duty.

     There are 11 types of bonded warehouses authorized by Federal regulation. The advantage of storing imported goods in a bonded warehouse is that payment of the duty is deferred until they are withdrawn. This gives importers access to the cash that would otherwise be payable upon entry and if the goods are sold outside of the U.S., duty may be eliminated altogether.

     Another facility where bonded freight can be found is a central examination station (CES). A CES is a privately operated facility at which imported merchandise identified by Customs for physical examination is made available to Customs inspectors for that purpose.

     Often, goods designated for examination may be transferred from the importing carrier's point of unlading or from a bonded facility to a CES, but only if the transfer takes place under bond. A bonded carrier is often selected to get these goods to and from the CES.

     Additionally, if goods are exported by bonded carrier to Mexico or Canada, the law requires that the bonded merchandise be delivered to CBP at the port of exportation within 30 days after the date of receipt by the forwarding carrier at the port of origin. Failure to comply is known as irregular delivery.

     Such was the case in the November 7, 2012 decision in United States v. C.H. Robinson Company. In this case, C.H. Robinson’s records were audited by the CBP. During the course of the audit three shipments from China destined for Mexico entered the U.S. but could not be accounted for as either being delivered to Mexico or still in the Port of Laredo, TX. Duties in excess $106,400 plus interest were levied by the CBP and upheld by the court.

     The lesson to be learned is that unless the charred, mangled, or otherwise destroyed remains of the goods are produced, the presumption is that they entered the U.S. stream of commerce and the duty must be paid.

     But didn’t they have a bond to cover them for this?

     Good question. There are three parties to a CBP bond: the principal, the surety and the beneficiary.  The principal on a bond for the purposes of this article would be the carrier, bonded warehouse or CES that seeks to do business with CBP.  The bond is given to CBP (the beneficiary) to insure satisfactory performance of obligations that are assumed by the principal. The surety is normally an insurance company that has issued the bond for a premium paid by the principal. The surety agrees to pay any liability that might arise from the principal's failure to perform its obligations.  Then the insurance company turns to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

     As we have seen, the duty can be quite substantial and depending on the country of origin as well as the goods being imported, duty can exceed the value of the goods, including transportation costs, of the merchandise.

     Often, the companies who handle bonded freight ask me, “Isn’t the duty covered under my Motor Truck Cargo or Warehouse policy?”

     As an example, if property is stolen from a bonded carrier after customs duty has been paid, the carrier’s legal liability is for the owner’s actual loss sustained which includes duty. But generally any settlement for stolen goods held “in bond” would not include duty. The reason is that traditional Motor Truck Cargo Coverage Forms read as follows:

• Coverage: “We cover your legal liability as a motor common or contract carrier for ‘loss’ to property of others that you have accepted for transportation under contract, tariff and bill of lading or shipping receipt.
• Valuation: In the event of ‘loss’ we will not pay more than the amount for which you are liable as a motor carrier.”

     Customs duty is not a party to the contract of transportation and therefore is considered outside the scope of the policy unless an endorsement is added to the policy specifically adding back coverage for duty. In this case the insurer, will often times limit payment of the duty to a percentage owed such as, 50 or 75%. The remaining percentage serves as a duty deductible in the contract.

     Be safe not sorry. If you carry bonded freight, be sure you review your exposures and coverages with a qualified transportation insurance broker. They can help you identify, assess and, most importantly, understand the operational risks with your business. In short, when “duty” calls, make sure you know where you stand.

About the Author

Robert Mucci of Wolpert Insurance Agency, Inc. in Worcester, MA is a Certified Insurance Councilor, Accredited Advisor in Insurance, a MA Licensed Insurance Advisor, a  Certified Master Workers Compensation Advisor and a former Certified Public Accountant with PWc and Bain & Company, Inc. He has more than 25 years experience in the insurance industry specializing in commercial risk strategies. For additional information he can be reached at 508-459-4760 and [email protected]. For more information visit www.wolpert.com.