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COGSA or Carmack? Challenges for Insurers and Subrogation Recoveries Post-Kirby and Regal-Beloit

June 1, 2013

By Lori J. Quinn, Esq.*

Key Points:

  • Ocean carrier,s "Himalaya Clause" extends to railroad as intended beneficiary and liability limitations under the ocean carrier's bill of lading extends to railroad.
  • Import ocean shipments carried under through bills of lading by inland rail carriage are subject to COGSA and not the Carmack Amendment.

 

In 2004, the Supreme Court issued its decision in Norfolk Southern Railway Company v. Kirby, 543 U.S. 14 (2004). This decision paved the way for parties to ocean and subsequent inland transportation (rail or truck) to argue that the limitation of liability in through ocean bills of lading extended to inland carriers.

Kirby involved a shipment of ten containers of machinery from Australia to Alabama. The machinery manufacturer hired a freight forwarder to arrange for the transportation. The freight forwarder issued a bill of lading providing for both the ocean and inland transport to its final destination. The bill of lading for the ocean carriage incorporated a limitation of liability under the Carriage of Goods by Sea Act ("COGSA"), 46 U.S.C.S. Sec. 1304(5), which provides for a limitation of $500 per package. The bill of lading for inland transport had a higher limitation, and it also had a "Himalaya Clause," which extended the limited liability to its servants, agents or other persons, including independent contractors, whose services would be used to perform the contract.

The freight forwarder also hired a shipper to transport the containers, and the shipper issued a bill of lading that also incorporated the limited liability under COGSA and extended the limitation to the inland transportation by virtue of a "Himalaya Clause" to the shipper's agents and subcontractors. The shipper hired the railroad for the inland transport of the machinery to its final destination. Ultimately, the cargo was damaged when the train derailed, resulting in an alleged $1.5 million in damages.

The Supreme Court in Kirby found that the matter was governed by federal maritime law and that the freight forwarder's limitation of liability extended to protect the railroad because the manufacturer and freight forwarder anticipated that an inland transport would be necessary to perform the contract. Further, the Supreme Court held that the railroad was an intended beneficiary by virtue of the bill of lading's "Himalaya Clause" because the clause expressly extended its benefits to independent contractors. Thus, the limitation in the shipper's bill of lading extended to the railroad.

In 2010, the Supreme Court was faced with a similar case, Kawasaki Kisen Kaisha v. Regal-Beloit, 130 S.Ct. 2433 (2010), where goods were transported from overseas by ocean and on carriage to their final destination by rail. In that case, the issue the Supreme Court focused on was whether the through ocean bill of lading would apply to the rail carriage despite the Carmack Amendment, 49 U.S.C. Sec. 11706(a)—a federal statute governing domestic rail carriers.

The Supreme Court held that the ocean carrier's through bill of lading covered the ocean and inland portions of the transit. In its analysis of the applicable federal statutes, COGSA and the Carmack Amendment, the Supreme Court found that the railroad was not a receiving rail carrier under Carmack and that Carmack did not apply to imports from a foreign country. Additionally, the Court analyzed the Carmack Amendment language and found that applying Carmack in the case was contrary to its jurisdictional requirements. Carmack required that suit be brought in a district court of the United States or in a state court, that it may only be brought against the originating rail carrier in the jurisdiction at point of origin, against the delivering rail carrier in a jurisdiction where the party bringing the action is located, if the delivering carrier operates a railroad or route through that judicial district or in the judicial district at the point of destination, and against the carrier alleged to have caused the loss in the judicial district where the loss occurred.

Further, the Supreme Court held that the Carmack Amendment did not apply to shipments originating overseas under a through bill of lading because the point of origin of the cargo was a foreign country. It found that the import shipments from a foreign country covered by through bills of lading were governed by COGSA, as neither the ocean carrier nor the railroad were a receiving carrier as required under Carmack. As such, the Supreme Court held that the terms of the ocean carrier's bill of lading governed the rights of the parties, and that the ocean carrier's jurisdiction clause, mandating suits in Tokyo, was binding.

Both the Supreme Court's decisions in Kirby and Regal-Beloit can have detrimental effects on subrogation recoveries. Analysis of recoveries by insurers, with the assistance of maritime counsel, that are carried under through bills of lading to the United States and that incorporate inland (whether rail or truck) on carriage is imperative in order to determine what the provisions of the ocean bills of lading (limitations of liability, Himalaya Clauses and jurisdictional provisions) control. It is imperative that insurers, during the claims handling process, obtain all transportation documents for shipments. In light of these Supreme Court decisions, insurers may be faced with large payments for loss or damage under insurance policies, with a potential for a severely limited recovery during subrogation or costly litigation in a foreign country.

 *Lori is an associate in our New York City office. She can be reached at 212-376-6426 or ljquinn@mdwcg.com.

Defense Digest, Vol. 19, No. 2, June 2013

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