Cargo Insurance: Business Opportunity or E&O Risk?

The transportation industry is the lifeblood of America. Almost every product sees the inside of a truck at some point en route to the consumer. Our American supply chain is so dependent on trucking that products in stores run out after a few days if trucks stop hauling freight.

Insuring the freight transported by America’s motor carriers can be an exceptional opportunity for independent agents—but it can also lead to errors & omissions claims.

A cargo claim can be the most important claim you’ll ever have because it has the most potential to upset the motor carrier/shipper relationship, which will cause immediate financial damage to your motor carrier. Commodities are as different as the motor cargo insurance policies used to protect the goods in transit. Many products have unique characteristics, which require close attention to detail when matching coverage to the commodity.

It’s important to understand what causes of loss are insured under common motor cargo policies, and it’s critically important to make sure you don’t create a “cargo gap.”

What’s in a Cargo Policy?

Motor truck cargo policies are legal liability policies, designed to protect a motor carrier’s liability from damage to property of others. Motor carriers assume liabilities above and beyond traditional liabilities because shippers have figured out how to make their transportation providers responsible for damages caused by flood, earthquake, hurricane and a host of consequential or indirect damages—usually caused by government regulations or the shipper’s risk management practices, which are designed to avoid product liability or protect their brand.

Some cargo policies contain exclusions for theft of cargo from an “unattended vehicle,” or restrictions and warranties that require the cargo to be in a secured facility, protected by a fence, locked gate and a 24-hour guard. Others require evidence of forced entry to trigger theft coverage. Since cargo theft continues to be one of the largest single causes of loss, insurers may restrict coverage to commodities listed on the declaration page, or add restrictive endorsements to specifically exclude risky commodities.

Shippers expect to be indemnified for cargo theft—an E&O claim waiting to happen if you ignore the cargo gap created by many cargo policies. Thinking outside the box to protect your motor carrier client in this area is also an exceptional opportunity to protect their relationship with a valued customer.

Spoilage, temperature change and contamination exclusions are also common on motor cargo policies. Refrigeration and mechanical breakdown endorsements come in many forms, and wording varies from policy to policy. Make sure you understand the coverage triggers in this area—cargo can be damaged by slight temperature variations, and many shippers reject loads when temperature tolerances are off by as little as two degrees. Some shippers use their own temperature recording devices, packed within the product, which are notoriously inaccurate.

Contamination claims, meanwhile, are becoming more prevalent as shippers become increasingly aware about food safety and safe handling practices. Policies with contamination exclusions or restrictions are problematic and often give rise to E&O claims. Many commodities are subject to spoilage, so it is common for underwriters to craft coverage restrictions in this area or include total spoilage exclusions on the cargo policy. Pay close attention to the coverage wording to make sure the policy doesn’t create a cargo gap.

Educating the Client

Unlike the auto, general liability and property markets, there are no “standard” cargo forms—every insurance carrier could, and usually does, have its own unique form. That’s why it’s so important to always obtain a copy of the coverage form you are offering. Remember: In this market especially, coverage is far more important than price.

Once you have a copy of the policy, review it to determine the coverage trigger, what cargo is covered, and what type of cargo is not covered or has limitations, as well as what causes of loss are excluded. Then, visit with the insured to see if they have any concerns about the policy, making sure you address all of their operations.

Here’s a simple example: How far away from the carrying unit is the cargo covered while being loaded and unloaded? One policy may provide coverage “to curb, dock or platform adjacent to the covered auto.” Another may say coverage “for loading and unloading within 1,000 feet of the covered auto”; another may be 5,000 feet.

There is no right policy—the right policy for your insured depends on their operation. Are they drop and hook or unloading with a forklift? You won’t know something like this unless you have a copy of the policy and a complete understanding of the insured’s operation.

Motor carriers rely on professional agents to protect their shipper relationships. A well-designed cargo insurance policy will accomplish that while also preventing E&O claims.

If you’re an insurance professional who works with motor carriers, visit the Motor Carrier Insurance Education Foundation online for web-based education and other resources.

Scott Light is CEO of Transportation Insurance Advisors.