Cargo insurance does not provide protection against all losses a motor carrier may be liable for under the Carmack Amendment or common law. There is no single standard form of cargo insurance that a carrier can go out and buy and be fully protected. Similarly, a certificate of insurance stating that a motor carrier has a specified amount of cargo insurance does not mean that the shipper’s or broker’s valid claim will be covered by that insurance.
It therefore is extremely important that all motor carriers, shippers, brokers, consignees and others that have an interest in a shipment be aware of the extent of the motor carrier’s liability for freight loss under the applicable law and the extent that the motor carrier’s cargo insurance provides protection for that liability. Unless the motor carrier is fairly large and financially strong, an uninsured judgment against it may be worthless.
Carrier Liability. A regulated motor carrier operating in interstate commerce is liable for freight loss, damage and delay pursuant to the Carmack Amendment, 49 USC 14706. The Carmack Amendment was adopted in order to establish a uniform nationwide standard of liability for freight loss and damage, originally for rail and water carriers in 1906 and subsequently for motor carriers in 1935. To establish a prima facie case, a shipper need only show the following three elements:
- delivery of the shipment to the carrier in good condition;
- delivery of the shipment to the consignee short, in damaged condition, or unreasonably late; and
- the amount of damages incurred.
Once the shipper establishes a prima facie case, the burden is on the carrier to establish that-
- it was not negligent to any extent; and
- that the loss was due to one of the five recognized carrier defenses, to-wit:
(a) an act of God,
(b) an act of the public enemy,
(c) an act of the shipper,
(d) an act of the public authority, or
(e) the inherent nature or vice of the goods themselves.
If the carrier fails to meet its burden, the shipper is entitled to recover the “actual loss or injury” to the shipment.
The Carmack Amendment constitutes the statutory enactment of the common law, which is the law that developed from the judgments and decrees of the courts recognizing, affirming and enforcing the usages and customs of society over the years, particularly the unwritten law of England. As a result, the common law standard for a carrier’s liability for freight loss and damage generally is the same for exempt motor carriers and the carriage of exempt commodities.
The Carmack Amendment and the common law both impose a high standard of liability on a motor carrier. Indeed, although it is incorrect, it is often stated that a motor carrier is an insurer of the goods.
Cargo Insurance. Cargo insurance does not provide coverage coextensive with Carmack Amendment and common law liability. Motor carriers and other claimants frequently tender claims to the carrier’s cargo insurance company only to be told that their policy does not provide coverage for the loss. Indeed, a broker was recently quoted as saying that at least 30% of the claims it submits to cargo insurance companies are rejected because the policy does not provide coverage for some reason.
It is worth noting that prior to March 21, 2011 the FMCSA required motor carriers to maintain and file proof of cargo insurance that did in fact provide cargo insurance that was coextensive with Carmack Amendment liability. Although the required coverage was only $5000 per vehicle, $10,000 aggregate, the BMC-32 endorsement made void any policy exclusions or limitations. This is as it should be, but the FMCSA eliminated the requirement regardless. This makes understanding the coverage afforded by a cargo insurance policy all the more important.
There are different types of cargo insurance policies, some going by names such as “all risks,” “broad form,” “legal liability,” and “motor truck cargo.” Regardless what the name might imply, none of these policies provides complete protection against Carmack Amendment and common law liability. Policies exclude coverage in many different ways, for example, certain types of freight are excluded, only specific equipment and terminals are covered, losses caused by certain events are not covered, coverage applies only if service is performed in a certain way, etc.
We recently have been involved in cargo loss cases where coverage was denied or challenged for the following reasons: failure of the insured to report the loss to the insurance company in a timely manner; the carrier’s “drop yard” was not listed as a terminal in the policy; the theft of a trailer was not covered because it was being pulled by a “non-scheduled” tractor; the theft of a trailer was not covered because it was left unattended; perishable commodity spoilage claims were denied because the carrier in one instance did not perform the required reefer maintenance and in another performed the maintenance but did not provide the records; and the carrier was acting as a broker even though it had a subcontractor with which it had a written contract to transport the shipment.
The only way to actually know what is covered by a cargo insurance policy is to actually look at and read the policy. A motor carrier needs to work with an experienced insurance agent who knows trucking, and the motor carrier must take care to fully describe its operations and make sure its application is complete and correct. Shippers and brokers need to do the same.
Further discussion of this topic will be presented in our next several issues.