Understanding Cargo Insurance Loopholes

Managing a transportation brokerage or motor carrier company is not without its risks.  As transportation managers, we do everything we can to manage that risk to the best of our ability. We buy insurance and we read through our insurance policies.  We have close relationships with our insurance agencies and legal council.  We educate ourselves on the pitfalls of the industry.  Ultimately, it seems that there are hidden risks in our industry that we couldn’t possibly know about until it is too late.

Scheduled Auto Policies – More and more carriers are utilizing scheduled auto insurance policies as a way of saving money by only insuring specific vehicles that are scheduled onto their policy. The problem with that is if the motor carrier signs on a new owner-operator but does not schedule his tractor onto the policy, even if a cargo claim occurs on an insured trailer, the truck that pulled the trailer is not listed on the policy, therefore there is no insurance coverage for the loss. This is also a problem if you tender a load to a motor carrier who secretly re-brokers or interlines the load to a family member or a friend. It doesn’t matter who it is. That person is not listed on the originating carrier’s policy and therefore there may be no coverage for the loss. We are seeing this trend a lot more these days. The hardest part is that often the VIN numbers are not on the motor carrier’s insurance certificate, but rather hidden away in their policy language, which is something not easily accessible by shippers or brokers. Even if it were, what’s to stop a negligent motor carrier from hiring someone else to take the load or simply lie about the equipment they are using? Some motor carriers don’t even realize that operating this way is against the terms of their policy. You cannot police this type of risk and it is a growing problem. As insurance rates increase, people want to cut corners and find the cheapest way to operate their business. What they don’t know is that they are taking on higher risks in order to save some money. It may not pay off in the long run if a cut rate insurance policy leaves you a $100,000 out-of-pocket claim.

Contingency Insurance Loopholes – Many brokers protect themselves with contingency insurance, which means that in the event that a carrier’s insurance does not cover a cargo claim, due to unforeseen circumstances like a policy exclusion (i.e. non-scheduled equipment on a scheduled auto policy), the broker can file a claim with their contingency insurance provider. However, there is a difference between insurance coverage and liability.  Many contingency insurance policies will only cover a broker’s contingency claim to the extent that they are liable; and in the absence of a contract between the shipper and the broker which imposes liability on the broker, there is no liability to the broker under the federal statute known as the Carmack Amendment. In a nutshell: No shipper-broker contract = no broker liability = no broker contingent insurance coverage. From an insurance standpoint, this all makes sense. Why would an insurance company pay for a claim that their client is not legally responsible for? From the shipper’s standpoint, they tendered the load to a broker, who chose a carrier who failed to secure insurance coverage. The carrier’s insurance denies the claim, then the broker’s insurance denies the claim. Sure, technically the carrier still holds liability, but if they are the type of carrier who cuts corners to save a few dollars on their insurance policy, chances are they don’t have any money to pay the claim out-of-pocket. This puts the broker in a tough spot. They must decide to make a business decision to settle a claim with the shipper out-of-pocket, or lose them as a customer forever.

Self-Insurance – More and more, transportation companies combat unforeseen claim losses by setting up self-insurance policies; setting money aside for “the next big one.” As we navigate what appears to be a cargo claim minefield, the best thing we can do to avoid huge losses is to set up those self-insurance policies, get involved with trade organizations, follow the news and try to educate ourselves on these hidden exclusions and increased risks.