Avoiding the liability trap
Changes in the law make LTL shippers more vulnerable when trying to collect full value for cargo loss or damage. Here's what you need to know to make sure you're not caught unawares.
By William J. Augello, Esq. -- Logistics Management, 10/1/2004
Shippers rarely understand the true cost to their companies of freight loss and damage. This is no small matter: For every $1,000 of loss, a company that operates on a 1 percent profit margin must sell $100,000 of its product or services to make up for that loss. (See table on Page 39.)
Court decisions involving unrecoverable losses of less-than-truckload (LTL) shipments indicate a trend that should sound alarm bells for shippers and receivers. They reveal how protections regarding motor carrier liability have eroded since the Trucking Industry Regulatory Reform Act of 1994 (TIRRA) and the demise of the Interstate Commerce Commission (ICC) under the Interstate Commerce Commission Termination Act (ICCTA) in 1996.
Years later, motor carrier liability remains an unsettled area that is filled with pitfalls for the unwary. Court decisions are not only documenting shippers' lack of sophistication in regard to carriers' liability under the new laws, but they also generally are upholding carriers' limitations, to the detriment of the shipping community.
TIRRA Trouble
TIRRA eliminated the requirement that motor carriers file their tariffs with the ICC. The law further provided that a motor carrier need not provide copies of tariffs containing its rates, classifications, rules, and practices unless requested by the shipper. Thereafter, shippers often did not request a copy of carriers' tariffs before shipping due to the mistaken belief that tariffs had been eliminated. Many "unsophisticated" shippers therefore learned about the maximum-liability provisions in those unfiled tariffs only after they incurred a loss in transit.
When ICCTA went into effect two years later, it led to more problems in regard to liability limits. One of the ICC's duties was to judge the reasonableness of motor carriers' released rates. Generally, shipments are assessed standard rates that take into account the carrier's liability for the full value of those shipments, in accordance with the Carmack Amendment. (See "What is the Carmack Amendment?" on Page 40.) But a motor carrier can also offer a shipper a "released rate;" that is, a reduced rate in return for limiting the carrier's liability to a specified, lower amount.
The ICC granted released rates for few commodities. The commission also judged the reasonableness of the differential between the full-value rate and the limited-value rate, and it rejected carriers' attempts to include in their tariffs a provision that commodities valued at $50 per pound or more were "articles of extraordinary value," for which the maximum liability would be $50 per pound.
But in the post-ICCTA era, LTL carriers claim that they are free to publish whatever liability limits they wish, and virtually every carrier has done so. About half of the LTL carriers have established a maximum liability limit of $25 per pound and the other half has instituted varying limits below $25 per pound. Some are as low as 50 cents per pound, some include further "per piece" limitations, and some are published without an alternation with a full-value rate.
Four limitation Criteria
Prior to TIRRA and ICCTA, LTL carriers had to meet four criteria for limiting liability. They had to (1) maintain approved tariff rates with the ICC; (2) give the shipper a fair opportunity to choose between two or more levels of liability; (3) obtain the shipper's written agreement as to its choice of liability; and (4) issue a receipt or bill of lading prior to moving the shipment. Over the last decade, some of those requirements—in other words, protections for shippers—have either been eliminated or weakened by the courts. Let's look at these criteria and where they stand today.
(1) Maintain approved tariff rates with the ICC: The requirement for carriers to maintain filed tariffs was rendered obsolete by the repeal of the tariff-filing statute in 1994. However, there is no longer a presumption that shippers know what is in unfiled tariffs. (See Dean Foods Co. v. Consolidated Freightways.)
(2) Give the shipper a fair opportunity to choose between two or more levels of liability: Under the fundamental common-law rule that has been codified in the Carmack Amendment, a motor carrier is liable for the full value of a loss in transit, unless that carrier elects to limit its liability, in which case it must offer the shipper a "fair opportunity" to choose between the limited-value rate and the full-value rate. The majority of the courts have held that this rule remained in effect after TIRRA.
A fair opportunity to choose means that the shipper had both reasonable notice of the liability limitation and the opportunity to obtain information necessary for making a deliberate, well-informed choice. In many cases, however, shippers involved in liability disputes had neither.
The most ludicrous illustration of this situation may be found in the court case Hollingsworth & Vose v. A-P-A Transport. In this case, the shipper routed a shipment via A-P-A, but it was picked up by Wilson Trucking because A-P-A did not serve the origin point. The driver issued a bill of lading marked "Wilson via Lexington, Va." Wilson had a limitation of 10 cents per pound in its tariff, but A-P-A had no limit. The shipment was damaged en route to Lexington, and the court upheld Wilson's limitation, saying that the shipper had a "fair opportunity" to check the carrier's tariff and fill in a value on the bill of lading. Yet clearly that shipper did not have a "fair opportunity" to check an unexpected carrier's tariff without interrupting its shipping schedule.
As noted earlier, to provide a "fair opportunity" for the shipper to choose between levels of liability, a carrier must offer an alternative rate. Some courts have failed to take this into account.
Some, but not all: In a case involving a dispute between Emerson Electric Supply Co. and Estes Express Lines, a Pennsylvania Federal District Court ruled that a flat rate does not constitute offering shippers a choice of rates. It follows that when a tariff provides only one rate at a limited liability amount, such a limitation would be unenforceable. This would typically apply to the courier services, cartage agents, and container terminal operators that charge flat rates and whose bills of lading state, "Our liability is limited to $50 per shipment." These single-value limitations are appearing in LTL carriers' tariffs more frequently.
A related issue arises when "airfreight truckers" and "airfreight forwarders" use trucks to haul freight over the road but issue "air waybills" with such statements as: "Unless otherwise noted as insured or declared value, our liability on freight will not exceed $.50 per pound." Once again, the validity of such clauses depends on whether the carrier has offered in its tariff an alternate rate for a declared value. On investigation, shippers will find that some of them have not published alternative rates, or have no published tariff whatsoever.
Further complicating the "fair opportunity" issue is the fact that the courts have generally held that the combination of a rate and the premium for "shipper's interest" insurance is equivalent to a rate. Some courts have therefore concluded that the carrier has provided the shipper with a "fair opportunity" to choose between a full-value and a limited-liability rate because it offered the shipper the opportunity to buy insurance! In arriving at this erroneous conclusion, the courts ignore the fundamental difference between a carrier's legal liability as a bailee entrusted with the delivery of a load and the liability of the carrier's insurer.
(3) Obtain the shipper's written agreement as to choice of liability: TIRRA obliged shippers to request a copy of carriers' tariffs before they shipped rather than require carriers to inform their customers of liability limitations before accepting a shipment. However, TIRRA did not repeal the requirement that the shipper's written consent be obtained for any limitation of liability.
Congress created a controversy by amending Carmack under questionable circumstances involving a trucking industry lobbyist who later was charged with influence peddling. (See the sidebar on Page 42.)
Since then, the courts generally have held that a shipper is bound by the carrier's tariff if it has been incorporated by reference in the bill of lading—even if the shipper did not request a copy before shipping. They also have uniformly concluded that by leaving blank the space for declaring a shipment's value on a bill of lading, the shipper has consciously elected the lower rate and lower liability limitation in the carrier's unfiled tariff.
At the same time, the courts have completely ignored the terms of the "Note" that contains that blank space on the Uniform Straight Bill of Lading, which is used by LTL carriers. It reads: "Note (1): Where the rate is dependent on value, shippers are required to state specifically in writing the agreed or declared value of the property as follows: 'The agreed or declared value of the property is specifically stated by the shipper to be not exceeding ___ per ___.'"
This clause was inserted into the Uniform Straight Bill of Lading to be used only when the ICC issued a Released Rate Order authorizing an option of two or more released rates. It requires an affirmative act by the shipper: i.e., inserting the dollar amount of the released value. As we have seen, if the carrier
does not have alternative rates in its tariff that are dependent on value, then leaving the space blank has no legal meaning. But the courts have missed this point and hold that by leaving it blank, the shipper chooses whatever liability limitation the carrier has placed in its tariff.
That was the ruling in Rational Software v. Sterling Corp. In that case, a limitation of 60 cents per pound was noted on a "delivery acknowledgement," but the space provided for filling in the shipment's value was left blank by the shipper. Holding that the shipper was "sophisticated" because it had used this particular carrier more than 200 times, the court said "it may be presumed that when [the shipper] left blank the space for declaring a value, it did so deliberately and with full knowledge of the consequences of its action."
Only one court has disagreed. In the case of Toledo Ticket Co. v. Roadway Express, Inc., the Sixth Circuit held that the carrier had incorrectly taken it on itself to elect coverage, rather than leaving it up to the shipper. In its decision, the court wrote: "Roadway has the option reversed. Under the statutory scheme, the carrier is liable for the full value of lost goods unless the shipper agrees to a lower value. The option to limit recovery for loss belongs to the shipper, not the carrier. Toledo Ticket's failure to fill in the blanks cannot be held to be an affirmative act or agreement to abide by lower valuation." Unfortunately for shippers, the Sixth Circuit is regarded as being a minority view, and is not generally being followed in other jurisdictions.
(4) Issue a receipt or bill of lading prior to moving the shipment: Since bills of lading invariably incorporate carriers' tariffs by reference, it is critical to determine whether a bill of lading has actually been issued. Surprisingly, in several court cases no bill of lading existed, therefore the alleged liability limitation was not enforced. Apparently all parties to transportation arrangements have become careless in issuing contracts of carriage in the deregulated environment.
Bone up on the Law
Knowledge is power, yet few shippers today appear to have even a basic knowledge of transportation law. Yet that knowledge is vital because every transportation transaction is governed by a contract of carriage, which sets forth the terms and conditions of carriage as well as the parties' legal rights and responsibilities. In addition, there still are many federal laws and regulations that govern all parties to these arrangements, and they impose fines, penalties, and jail time for violations.
Interstate and foreign commerce is serious business, and it is becoming even more serious in light of the government's new laws and regulations affecting cargo security, highway safety, importing and exporting, and protection of food products from terrorists' activities. It behooves every party to transportation contracts to learn about the current laws and regulations that govern their rights and obligations.
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