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General maritime law can prevail at all stages of a journey, on land as well as at sea, the Supreme Court has ruled. That means domestic insurers may be limited in what they can recover for goods lost or damaged in transit.

Vincent DeOrchis, a New York-based admiralty law attorney, said there was "some concern" that the decision might mean higher premiums for cargo insurance because of the inability of insurance companies to recover losses when they sue a subcontractor. He said it would take "another year or so" to see the ruling's effect.

In the case at issue, Norfolk Southern Railway Co. v. James N. Kirby Ltd., Kirby Engineering shipped a piece of machinery from Australia to Hunstville, Ala., when the train carrying the cargo derailed, causing an estimated $1.5 million in losses. The cargo, packed into several containers, began the journey on a ship.

Norfolk argued that its liability was $500 per container. Kirby, however, argued that the railroad could not impose liability limits because there was no contract between Kirby and the German ship operator, Hamburg Sud. Kirby had hired freight forwarder International Cargo Control to ship the cargo. I.C.C. hired Hamburg Sud.

A lower court found partially in favor of the railroad, limiting Norfolk's liability to $5,000 for 10 containers. That decision was reversed on appeal.

"The Kirby decision makes it easier to establish admiralty jurisdiction in what had previously been thought of as mixed contracts cases, which is probably a good thing for insurance companies," said Michael Sturley, a University of Texas law professor and maritime law specialist retained by Kirby Engineering. "The bad news is that the court didn't explain why it overruled the mixed contract doctrine in this case, so we can't be sure how broadly the doctrine has been overturned."

But Steve Kinnaird, a partner in the law firm Sidley Austin Brown & Wood LLP in Washington, D.C., which represented Norfolk Southern Railway, said the outcome of the case would complicate life for insurance carriers.

"Insurance companies will need to take a hard look at whether they can realistically continue to expect recoveries against stevedores, railroads, truckers and terminal operators for any injury to the goods that occurs."

Although industry experts don't expect insurance companies to raise their rates as a result of this ruling, insurers may need to more carefully examine with whom they're doing business and look closely at the wording on an ocean carrier's bill of lading.

"Ultimately, the pricing approach for risks being assumed may need to be rethought," said Ronald Thornton, president of the Inland Marine Underwriters Association of America. "Underwriters need to know what they're insuring and under what contractual arrangements the commodity is moving. If the through bill of lading reverts back to the shipping carrier, along with the truck, rail, or air carrier, they may need to think twice about their recovery potential."

April 1, 2005

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