Have you ever heard the saying, "insurance covers you for everything except what happens"? Well, it's true! Unfortunately, most transportation and logistics professionals fail to understand that this maxim applies not only to life insurance but to cargo insurance, too.

Many shippers misunderstand cargo insurance in particular and the insurance industry in general. Some people even have the impression that insurance companies are in the business of paying insurance claims. On the contrary: Insurance companies are profit-oriented businesses that report to their shareholders just as any other publicly held business must. Payouts to policy holders, therefore, are not the insurers' top priority.

That's why purchasers of cargo insurance must be diligent in their reading of the terms and conditions of their current policies as well as those of future purchases. If they don't pay close enough attention, they are likely to be surprised by provisions in their policies that will result in denial of coverage or only partial payment for their losses.

What follows is a look at some cargo insurance provisions and pitfalls that commonly cause problems for shippers, and how to avoid them.

There are many "traps for the unwary" in cargo insurance policies today. One common problem is that shippers and carriers alike often wrongly assume that they are covered for specific losses under certain types of policies. Shippers, for example, assume that their shipments are covered because their carriers have furnished them with a "certificate of insurance." Likewise, motor carriers and freight forwarders assume that because they have filed a cargo insurance policy with the Federal Motor Carrier Safety Administration (FMCSA), they are covered for everything that may happen in transit. Brokers assume that because they purchased a "contingency cargo liability" policy, they will be compensated for all loss-and-damage claims. Package-express shippers, meanwhile, assume that because they paid an "excess value charge" for a "shippers interest insurance" policy, they will be reimbursed for any damaged packages.

These expectations often turn out to be unfounded. When a loss, damage, or significant delay occurs, parties to a transportation arrangement may be surprised to receive a "no coverage" letter from their insurers informing them that they will not be fully reimbursed for their losses.

Had they taken the time to read the exclusions from coverage in those policies, they wouldn't have been taken by surprise. Exclusions, which are found in the "endorsements" section of insurance policies, modify those policies to exclude the most frequent causes of transit claims. They also may exclude whatever recent catastrophe has led to a large number of claims payments. For example, soon after the first nuclear explosion, a "nuclear exclusion" endorsement was attached to existing policies. Nowadays, an exclusion for terrorist acts is starting to appear.

Exclusions are common in the "inland marine" policies many shippers carry for domestic shipments by all transportation modes, and in the "ocean marine" policies they carry for international transportation. Shippers purchase such insurance to obtain coverage for catastrophic losses and losses that would be excluded from carriers' liability. Beware, though: These policies cover "all risks of direct physical loss of or damage to the insured's property from any external cause whatsoever ... except as otherwise provided" (emphasis supplied).

It's that last phrase that bears watching. Some policies cover only the period that the goods are in the custody of a "common carrier." Shippers, therefore, must be certain that every form of transportation they use is covered, including contract carriage and private carriage, and that the policy covers the entire period from the time a shipment leaves the shipping dock until it is delivered to a customer.

Another common exclusion in an "all risk" policy is "infidelity of the insured's employees or persons to whom the insured property may be entrusted (carriers for hire excepted)." Accordingly, thefts of cargo by the shipper's own employees would not be covered. Other usual exclusions include "latent defect, inherent vice, deterioration, delay, and loss of use or market." To obtain coverage for these normal exclusions, a shipper must negotiate to add them through an endorsement to its policy.

Making sure that carriers and freight forwarders (which are considered to be carriers under U.S. law) have the right insurance policies presents a challenge because their policies are not very accessible to shippers. It's important, though, that shippers make the effort to get that information.

Here's one reason why: Carriers generally offer "Certificates of Insurance" to shippers as proof of coverage. Yet these certificates, in my opinion, are virtually worthless. For one thing, they contain a disclaimer of liability that applies if the issuer fails to notify the certificate holder of the cancellation or modification of the insurance coverage.

More importantly, these certificates do not reveal the exclusions in the underlying policy. This can be a serious problem for shippers, since without knowing the nature of the exclusions in the carriers' policies, shippers cannot be certain of the extent of coverage that carriers have arranged for their goods.

Such ignorance of carriers' exclusions can come back to haunt shippers later. Shippers often are unaware of three exclusions that we have frequently seen. The first is "theft from an unattended vehicle, unless parked overnight in a public garage or locked private garage, and at all times, unless the loss is the direct result of visible, forcible entry." Coverage also been denied because the loss was from a vehicle that was not listed in a "named vehicle" policy. The third is a loss from delivery of the property "to someone who obtains it by trick, false pretense, or other fraudulent schemes."

In addition to these common exclusions, motor carrier cargo policies contain a standard exclusion for "employee infidelity." For that reason, shippers should insist that all parties with whom they do business obtain a separate fidelity bond.

Another frequent cause of disappointment to shippers stems from their confusion of "insurance coverage" with "carrier liability." It matters not if a carrier has a $1 million cargo policy if the carrier also publishes a $100,000 liability limit in its tariff! Don't expect carriers to tell you that without being asked, however. Under the I.C.C. Termination Act of 1995, shippers are responsible for obtaining a copy of carriers' tariffs to determine the extent of their liability.

Since brokers do not have direct liability for the loss of or damage to goods in the possession of the carriers they hire, many shippers are reluctant to deal with them. To overcome this objection, many brokers have purchased a "contingency cargo liability" policy. These policies, in essence, provide that if the motor carrier or its cargo insurer fail to pay a lawful claim, the contingency insurer will pay it. Be forewarned, though: One such policy only covers the "excess of the limits of the land carrier transporting the covered property when those limits are not adequate to cover the damaged property" (emphasis supplied). This is not a true "contingency" policy as it only covers the excess over the carrier's policy and not the full amount.

Despite the emergence of contingency policies, brokers do not have what is called an "insurable interest" in the property being insured. State insurance laws generally prohibit the issuance of insurance to a party that lacks an insurable interest. Thus, when an insurer is confronted by a broker with a large claim, it may have a ready-made defense against paying that claim; i.e., the policy should never have been issued because the broker has no insurable interest. There actually was a case where the insurer denounced the contingency policy on the grounds that the broker did not have an insurable interest. It then refunded the premiums it had collected since the policy's inception, leaving all parties uninsured!

If a broker desires to protect its customers' cargo, then it should assume liability for the goods in transit by means of a contract, and then purchase a binding cargo liability policy. The broker would then have a right to pay claims to the shipper and subrogate against the responsible carrier and its insurer.

Brokers also should provide another form of insurance known as an "errors and omissions" (E&O) policy. This policy would provide coverage when a broker is held responsible for the negligent selection of a carrier that results in damages to the shipper. For example, brokers have been sued for selecting a carrier without cargo insurance or with inadequate cargo insurance to cover the value of the shipment as stated by the shipper. A broker would also be held to be negligent if a specific type of coverage was requested by the shipper, but the carrier's insurance policy contained an exclusion for that type of coverage. Other reasons a broker might be held liable for damages include selecting a carrier that has an "unsatisfactory" safety rating, employs unfit drivers, or uses unsafe equipment that results in injury, death, or the destruction of property.

Third-party logistics service providers (3PLs), by the way, could be deemed to have the same responsibilities as brokers if they arrange transportation for compensation. They could, therefore, be exposed to the same types of damages for negligently arranging transportation. Shippers that have delegated transportation and logistics functions to 3PLs should consider requiring that such parties maintain an E&O policy as well as a fidelity bond.

Shippers have the option of purchasing "excess-value insurance" from some parcel-express carriers when their packages are valued at more than $100. They can purchase the "shippers interest insurance" from the carrier that collects the excess-value charge, or they can purchase it from an independent insurer.

Such insurance, however, does not always afford the level of protection the purchaser thinks it has bought. At least one parcel-express carrier handles the investigation and administration of claims itself, and makes its determination of liability independently of the insurer. Shippers report that if this carrier acknowledges liability for the first $100, then the insurer will pay the balance. But if the carrier denies liability for "insufficient packaging," then the insurer will also deny liability!

In one case, the claimant received the carrier's denial of liability before the carrier had even inspected the damaged package. In another, when the shipper responded to a declination for insufficient packaging by noting that its packaging had been tested and approved in the carrier's own laboratory, the carrier claimed that the test was for the LTL environment, not the parcel-express environment, and continued to deny the claim!

If a carrier appears to have a policy of automatically denying liability for packages damaged in transit by blaming it on "insufficient packaging," shippers should question the wisdom of purchasing excess- value insurance from that carrier. At the very least, they should check with other package insurers for coverage that would take into account the type of packaging they use.

Since the cargo insurance industry is not regulated by the federal government, the only remedy for improper, unlawful, or fraudulent insurance practices lies with the various state insurance commissions and with the courts. Shippers can file complaints with these agencies in the state where the plaintiff resides. Such complaints may involve the issuance of fraudulent policies, issuance of policies to entities that lack an insurable interest in the property that is being insured, policy terms that are intended to obfuscate coverage; and so forth.

Nevertheless, when a federal regulation governs a carrier, broker, or freight forwarder, shippers may elect to file complaints with the FMCSA by calling its toll-free hotline at (888) 368-7238.

The most useful regulation in case of insurance fraud is the "BMC-32 Endorsement," which applies to all motor common carriers and freight forwarders. This endorsement must be executed by the motor carrier's and freight forwarder's cargo insurer and filed with the FMCSA. It imposes liability on the insurer for the first $5,000 per vehicle or $10,000 per occurrence, without honoring deductibles or exclusions even if they are in the policy! This endorsement is particularly useful to shippers when a carrier closes its doors or files for bankruptcy, because claims may be filed directly with the insurer. Furthermore, the insurer's liability remains in effect until the FMCSA is given 30 days' advance notice of a cancellation or modification of the policy. Shippers may obtain the policy number and the name and address of the insurer that provided coverage on the date the claim shipment was made by calling the FMCSA at (202) 385-2423 or by visiting this Web site: http://fmcsa-li.volpe.dot.gov, and choosing "Carrier Search."

Be prepared for a declination from the cargo insurer, though, if the shipment moved under contract. The insurer may contend that the BMC-32 Endorsement only governs common carriers, and that it is not required to provide coverage for shipments moving under contract. This position was recently rejected in a decision on the case M. Fortunoff of Westbury Corp. v. Peerless Insurance Co. In that decision, the judge held that Congress intended the BMC-32 Endorsement to apply to all motor carriers when it eliminated the distinction between common and contract carriers under the I.C.C. Termination Act of 1995.

In short, shippers must review the terms and conditions of every cargo insurance policy they rely upon to make certain that those policies provide the type and amount of coverage desired. Every party to transportation arrangements must realize, however, that "there is no free lunch." Specific types of coverage can be bought and exclusions can be negotiated out of policies, but at a price. It is important, therefore, for all parties to fully understand the true scope and cost of coverage being provided to avoid surprises when an insured loss occurs.