Know the Value of Your Shipments or Risk Catastrophe

Kevin Anderson Cargo Liability, Transportation

Not knowing the value of your shipments and protecting yourself against their loss can be catastrophic to your operation, regardless whether you are a shipper, carrier or broker.

The Carmack Amendment, 49 U.S.C. 14706, makes a motor carrier liable for the “actual loss or injury to the property” shipped. There is no limitation on this liability unless steps are taken by the motor carrier to limit its liability.  Although this measure of damages legally applies to motor carriers only, it also directly affects a broker’s liability and the potential loss to a shipper.

Motor Carriers.  Too many motor carriers incorrectly believe that their liability for loss and damage is limited to their cargo insurance.  Since the FMCSA no longer requires a motor carrier to maintain any cargo insurance, the marketplace appears to have set the “standard” amount of cargo insurance at $100,000 per shipment/per occurrence. However, unless steps are taken, a motor carrier’s liability for loss and damage is not limited to that $100,000.

Not realizing they face unlimited liability, many motor carriers accept all shipments they are tendered without even knowing or asking to know their value. In a recent lawsuit where we represented the broker (assignee of the shipper’s claim) the motor carrier claimed that its liability was limited to its $100,000 cargo insurance limit, that it could not ask either the broker or the shipper the value of a shipment and that the broker had duties to know the value of the shipment, to tell the carrier the value of the shipment, to make sure that the carrier had full coverage, and to ensure that shipment was not underinsured. The motor carrier was oblivious to the fact it could be held liable for the value of the shipment regardless of its cargo insurance limit.

Frequently the dire consequence of this ignorance is that the motor carrier does not have the financial assets or ability to pay its full liability and may be forced out of business.

Brokers.  Although not subject to the Carmack Amendment, brokers can and frequently are held by their shipper customers to be fully liable.  Most shippers care no wit about the Carmack Amendment and claim they did business with the broker and, as far as they are concerned, the broker is responsible to make them whole. The dominant shipper clarifies it to the broker that if the broker does not make it whole that the broker will no longer get any business from it. The problem also exists because many shippers require their brokers to contractually assume Carmack Amendment liability either expressly or by defining the broker as a motor carrier in their contracts. Even assuming the motor carrier has the “standard” $100,000 in coverage, the shipper likely will look to the broker for the excess liability over and above the $100,000.  Shippers may sue brokers for negligent hiring an underinsured motor carrier and, although we know of no case that yet has imposed that duty on a broker, the argument will continue to be made and some court eventually will impose that duty on a broker.

The consequences to a broker squeezed by a demanding dominant shipper can be as dire as the consequence to the uninsured motor carrier. The broker can easily have to pay a shipper for freight loss and damage and having no recourse against the judgment-proof motor carrier.

Shippers.  Shippers must be willing to openly discuss the value of their shipments with the motor carrier and brokers they use. If they do not do that and tender a shipment worth more than $100,000, they face the likelihood of being unable to collect from either the motor carrier or broker.

In a recent case a shipper tendered a shipment to a broker where the value of the shipment was not discussed. Also not discussed was that the broker (our client) had $100,000 in contingent cargo insurance. The broker hired a carrier with the standard $100,000 in cargo coverage. The carrier was involved in an accident that destroyed the shipment. The shipper filed a claim for over $400,000. The motor carrier’s cargo insurer paid $100,000 even though the motor carrier was out of business.

The shipper then filed a claim against the broker, which the broker tendered to its contingent cargo insurer. However, the contingent cargo policy “followed” the limits of the motor carrier’s cargo insurance and valued the shipment at the coverage maintained by the motor carrier, $100,000. The contingent cargo insurer then denied coverage because under their policy the value of the shipment was $100,000 and that amount had been paid by the motor carrier’s cargo insurer, so there was no uninsured loss.  The broker has insufficient assets to justify the shipper suing the broker for the deficiency, assuming a legal theory applied. The shipper will suffer a net $300,000 loss.

Avoiding the Problem.

Communication.  Motor carriers and brokers must know the value of a shipment, and shippers should voluntarily provide that information. A shipper’s unwillingness to provide that information likely is based on the fear that disclosure will increase cargo theft.  However, I am sure that cargo loss and damage is more common than cargo theft. If shippers are unwilling to disclose the value of a shipment, then they should limit the liability of the carriers’ legal liability and the brokers’ contractual or threatened marketplace liability.

Carmack Limitations of Liability. The Carmack Amendment, 49 USC 14706(c)(1), allows a motor carrier to limit its liability, but the courts have held that to do so the motor carrier must:  (1) maintain a “tariff” (no longer required to be filed, but the carrier must provide  a written or electronic copy of the basis for the limitation to the shipper upon request); (2) obtain the shipper’s written declaration of its choice of liability; (3) give the shipper a reasonable opportunity to choose between two or more levels of liability; and (4) issue a receipt or bill of lading prior to moving the shipment. One of the most litigated issues in transportation law is the validity of a motor carrier’s limitation of liability based on the Carmack Amendment. It is not foolproof.

Bill of Lading Notation.  Preprinted notations on a motor carrier or broker prepared bill of lading specifically stating that the shipper’s liability is limited to a specified amount unless an offered option (which itself may be limited) is chosen may be valid to limit liability. However, if challenged in court, the shipper likely will argue that a bill of lading notation did not give it a reasonable opportunity to choose between two or more levels of liability. This option may not be viable given that most shipments these days move on shipper-prepared bills of lading.

Transportation Contracts.  A comprehensive transportation contract is the best option for all parties. 49 USC 14101(b)(1) allows motor carriers and shippers to contract to provide specified services under specified rates and conditions and allows all or some provisions of the Interstate Commerce Act to be expressly waived. Although this statute does not mention contracts between shippers and brokers, nothing prevents that, and they are common. Shipper-Broker Contracts can be written to limit liability of both the broker and the motor carriers utilized.  Mostly, Congress gave the transportation industry the freedom to contract and to compete in the normal course of commerce. Too many motor carriers and brokers fail to take the action to protect themselves from unlimited liability and are one unfortunate accident away from catastrophe. Transportation contracts allow all parties, motor carriers, brokers and shippers, to know exactly their duties, obligations and liabilities.