Logistics & the Law 2011: Unintended consequences
The elimination of required cargo liability insurance by the FMCSA now forces shippers to independently verify the existence of the policy and nature of the coverage held by their carriers. Sound time-consuming? Our transportation law expert offers some practical advice.
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In the 2009 installment of our ongoing series that we call “Logistics & the Law,” we explored two critical areas of law in an article entitled “Cargo Insurance & Vicarious Liability: Two cautionary tales.”. This year we focus on cargo liability insurance and the fact that as of March 21, 2011, motor carriers and surface freight forwarders (other than household goods carriers and household goods freight forwarders) are no longer required to have any cargo liability insurance at all.
In particular we will examine the unintended consequences for shippers of these changes in the government’s regulatory scheme for motor carriers. As stated by Rob Norton, former economics editor of Fortune magazine: “The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.”1
In other words, while readers of Logistics Management may be generally aware that there is no longer a requirement for cargo liability insurance, they will overlook the unintended consequences at their economic peril. In this article we will explain these consequences and explore ways for shippers to minimize or avoid the resulting new perils.
Elimination of the requirEment for cargo liability insurance
Since 1937, motor common carriers, but not contract carriers, have been required by federal law to maintain at least $5,000 in cargo liability insurance and to file proof thereof with the Interstate Commerce Commission (ICC) and subsequently the Federal Motor Carrier Safety Administration (FMCSA). The requirement was extended to surface freight forwarders in 1944.
The purpose of cargo liability insurance is to provide insurance coverage to a trucking company to insure its obligations under another federal law—colloquially known as the “Carmack Amendment”—for liability to the owner of property damaged or delayed while being transported by the trucking company.
To make sure that this coverage was not illusory, the federal regulation also required the policy to have something known as the BMC-32 endorsement. The purpose of this endorsement was to ensure that there would indeed be at least $5,000 in coverage regardless of any otherwise applicable exclusion or deductible amount.
In June 2005, the FMCSA solicited comments to its proposal to eliminate the cargo liability insurance requirement. Thirty-two individuals and organizations submitted comments. Industry groups such as the Transportation and Logistics Council (T&LC), the Transportation Intermediaries Association (TIA), the Freight Transportation Consultants Association (FTCA), and The National Industrial Transportation League (NITL) opposed the repeal.
Of particular concern for these commentators was the collateral result of the end of the BMC-32 endorsement and the termination of the requirement for filing proof of cargo liability insurance. With respect to the BMC-32 endorsement, the FMCSA summarized the position of these commentators as follows:
• The BMC-32 endorsement is the only protection against deductibles and other exclusions from liability found in cargo liability policies.
• In many cases the carriers’ deductibles can be very high and the exclusions may eliminate most sources of loss or damage recovery.
• The BMC-32 endorsement permits the shipper to proceed directly against the insurer, providing relief to shippers in the event the carrier becomes insolvent or bankrupt.
Three groups supported the elimination of the requirement for cargo liability insurance—the American Trucking Associations (ATA), the Owner-Operator Independent Drivers Association (OOIDA), and the Property Casualty Insurers Association of America. The FMCSA agreed with the views of these three groups in its final decision issued in June 2010.
The full text of the decision makes for very interesting reading as it outlines the positions of all of the commentators and the FMCSA’s views with regard to the comments. The decision may be found here.
Regardless of whether or not one agrees with the FMCSA or its reasoning, the fact of the matter is that its decision is final and has not been challenged in court. Thus, to use a phrase, the “new normal” is that carriers do not have to have cargo liability insurance and shippers will have to adjust their practices and procedures accordingly.
What’s a shipper to do?
So, what should a shipper be doing after March 21, 2011, with respect to cargo liability insurance? To cut to the chase: A shipper must now independently verify the existence of the policy and nature of the coverage.
The position of the FMCSA, as stated in its decision, is that “Shippers are like any other party in a transaction where one party will be providing services to another party…Shippers should ask carriers for copies of their policies, including all endorsements, exclusions, and declarations, to see whether the shippers’ property or interests will be served by a particular motor carrier.” Put another way: In the view of the FMCSA all a shipper needs to do now is to read the carrier’s policy.
As part of my law practice I represent many shippers and brokers. To help formulate a recommendation for these clients, as well as research for this article, I contacted Mark Yunker, vice president of RJ Ahmann Co., an independent insurance agency that provides insurance and risk management solutions to the transportation industry. On a daily basis Yunker deals with calls regarding, as he puts it, “problems that cannot be handled through normal channels or that have been mishandled through normal channels.”
When asked for his comments with regard to this observation of the FMCSA, Yunker simply says that the suggestion to read a carrier’s policy is highly impractical. “The shortest cargo liability policy I’ve seen is 57 pages long,” says Yunker. “If the cargo liability policy is combined with an automobile liability policy, then it will often be 130 pages or more.”
This means that if a shipper is dealing with just a few carriers, it may be possible to review the policies. However, if a shipper is dealing with hundreds of carriers, this is going to be a very time consuming task. For truck brokers and other intermediaries who may be using literally thousands of carriers, it is an impossible task.
Keeping in mind that only by reviewing all of a policy will one know all of its terms and conditions, there are three possible alternatives. One is to obtain a certificate of insurance. This will let a shipper know that the insurance is in place as of the date of issuance of the certificate. However, certificates of insurance commonly do not disclose deductibles and will not show exclusions to coverage.
Another possibility is to ask the motor carrier to provide a copy of the declaration page of its policy. Setting aside the fact that many motor carriers are reluctant to, or won’t, provide a copy of their declaration page, the declaration page will show the deductibles, but will not show any exclusions to coverage.
To compound the problem, most cargo liability policies will have “endorsements”—the term the insurance industry uses for amendments or addenda to an insurance policy. As an example, “unattended vehicles” are typically covered by a cargo liability insurance policy, but often this coverage is then removed in an endorsement.
Conversely, cargo liability insurance policies do not typically cover losses resulting from a “change of temperature,” however an endorsement can add coverage for “breakdown or mechanical failure of a refrigeration unit.”
This leads to the third alternative: A telephone call to the agent who issued the policy for the trucker. The telephone call to the insurance agent will often lead, albeit informally, to a verification that there is, indeed, a policy and of the policy limits.
Yunker’s advice for shippers when making the call to the agent is to “ask about what you are shipping.” For example, if you are shipping only lumber, you probably don’t need to worry about an exclusion for damage from rust. Another area of inquiry is the policy definition of “covered property.” For example, coverage for cell phones may not appear in an exclusion, but if it is not included in the definition of “covered property” then indeed it will not be covered.
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