Effective January 1, 1996, the U.S. Department of Transportation (DOT) assumed the Interstate Commerce Commission's (ICC) remaining responsibilities for administering trucking regulations. (The ICC was eliminated in 1994.)
Motor truck cargo (MTC) liability insurance is intended to provide legal liability coverage for truckers (common or contract carriers) while they are transporting property of others (cargo). Under this coverage the insured is the trucker and the covered property is the property of others that is being transported by the insured. The trucker is liable for cargo under the terms of a bill of lading (common carrier) or a contract with the shipper (contract carrier).
A common carrier is one that offers its services to the general public. It may haul cargo intrastate or interstate, depending on its authorized operating scope. A contract carrier is one that hauls for a specific shipper under the terms of a negotiated contract. The service is not available to the general public. Carriers are now permitted to offer their services as both a common and a contract carrier.
The legal liability imposed on these two types of motor carriers differs in extent. Generally, a common carrier is responsible for the safe delivery of the goods it is transporting and thus owes a very high degree of care. This level of legal liability can be referred to as "strict liability" or liability without fault. However, several defenses are available to a common carrier. They are:
1. act of God;
2. public enemy;
3. inherent vice;
4. act or fault of the shipper; and
5. public authority.
The act of God defense may become available to the motor carrier when the loss is caused by a storm or other natural event that could not be anticipated. If, for example, the driver has warning of flooding conditions in a particular area and, in his/her haste to deliver the goods, drives into the area anyway, it is unlikely the defense will be available.
Public enemy refers to warlike actions or political strife against the nation.
Inherent vice refers to loss emanating from within the cargo itself; for example, wine sours in transit without some external cause such as extreme heat or cold.
Act or fault of the shipper is probably the most commonly used defense. Negligent or careless packaging by the shipper is an example.
The public authority defense is rarely available. It could involve a drug bust by U.S. Customs or other police authority in which they confiscate a truckload of goods or place it under quarantine because contaminated cargo is suspected.
With respect to a contract carrier, the contract itself will usually provide details of the liability being assumed by the carrier. If the contract is silent on legal responsibility, the contract carrier is responsible only for loss that results from its own negligence, in contrast to the strict liability imposed on a common carrier. However, the contract often makes the trucker responsible for any loss to cargo, regardless of negligence.
Exempt zones
Certain types of carriage are exempted from the rules that apply to common carriers. Examples are agricultural products (enables farmers to transport their goods to market without traditional regulations), household goods, express carriage, and transportation incidental to air carriage, such as intermodal air-truck carriage.
Bill of lading
A bill of lading serves both as a shipping contract and as a receipt for the goods shipped. (This is an essential document that must be obtained by the adjuster in a claim situation.) It shows the date the goods were shipped, what was shipped, by whom, via what carrier, to an exact destination. It also specifies the motor carrier's liability.
Released bill of lading
Bills of lading frequently state a dollar limitation on the value of the cargo or specify a dollar limit of liability. It is usually established according to some unit of measuring the property shipped, such as a specified dollar amount per pound of cargo. The lower freight rates the carrier charges when these dollar limitations are in effect are called released rates.
When a carrier's liability begins and ends
A carrier's exposure begins when property is delivered to and accepted by the carrier. It ends when the shipment is completed, that is, arrives at the final destination and is delivered to the consignee.
At times, it is not totally clear whether cargo has been accepted by the carrier or actually delivered to the consignee. Delivery by the carrier to the consignee's premises is usually evidenced by a receipt that the carrier takes from the consignee at time of delivery. But what if the consignee's business is closed for the day when the delivery is actually made? Or what if an "impostor" accepts the delivery from the carrier? In short, extenuating circumstances can make the facts unclear.
Liability reduced to that of a warehouse operator
The bill of lading may provide that after the carrier has delivered the property to a terminal in the consignee's locality and notified the consignee that the property is there, the carrier's liability then becomes that of a warehouse operator--after expiration of "free time" (usually 48 to 72 hours). It is viewed as reasonable that the carrier's liability be reduced from strict liability after a reasonable period of time if the consignee neglects to pick up the cargo after being notified of its delivery.
A warehouse operator is generally responsible only for loss that results from its negligence--that is, its failure to exercise the degree of care a reasonably prudent person would have exercised under the same circumstances.
Federal and state insurance and filing requirements
The U.S. Code (49 USC 13906) requires motor carriers of cargo operating within federal jurisdiction to show evidence of cargo liability insurance with minimum limits of $5,000 for loss or damage to the contents of any one vehicle, and $10,000 for aggregate losses or damage at any one time and place. Self-insurance is permitted for carriers that have the appropriate level of financial stability.
Form BMC 32
Insurers must endorse the carrier's MTC liability policies with Form BMC 32--Endorsement for Motor Common Carrier Policies of Insurance for Cargo Liability. To prove that this endorsement has been attached, the insurer is required to file Form BMC 34--Certificate of Insurance.
The BMC 32 endorsement requires that the insurer pay the shipper or consignee for all loss or damage for which the motor carrier is held legally liable, up to the limits of $5,000 (per vehicle) and $10,000 (aggregate) as noted previously. It is important to emphasize that the insurer's responsibility under BMC 32 is not limited by the exclusions or limitations contained in the MTC liability policy. Subject to its dollar limits, BMC 32 covers any cargo claim for which the carrier is liable.
Examples of claims that the insurer would be required to pay in the event the trucker goes out of business, which most MTC liability policies would otherwise exclude, are:
* employee theft of cargo;
* loss of property that the policy specifically excludes (such as artwork or animals); and
* a loss that is under the deductible.
The reason for the BMC 32 requirement is that many trucking companies have gotten into financial trouble over the years as a result of intense competition brought on by deregulation. Most of these financially troubled companies carried insurance, but many had substantial deductibles. As financial conditions worsened, some carriers were inclined to stop paying claims to reduce the drain on cash. When this occurred, frustrated shippers and consignees began making claims directly against the insurer, which had guaranteed to pay claims under the terms of BMC 32.
Keep in mind that the cargo carrier must be legally liable before the insurer can be held responsible for paying the carrier's claims. The insurer must conduct an investigation to determine the carrier's liability.
The insurer has the right of reimbursement from the carrier for any payments the insurer would not have been obligated to make except for the BMC 32 requirement. However, if the carrier is facing serious financial difficulties, it is unlikely the insurer will be able to recover.
Aside from federal filing requirements, many states require that truckers operating within the state make similar filings to those required under federal law. The Inland Marine Underwriters Association (IMUA) periodically compiles state filing requirements and makes them available to IMUA member companies.
Central Analysis Bureau (CAB)
The liability assumed by insurers when making cargo filings makes financial strength an important underwriting consideration when writing MTC liability. The Central Analysis Bureau (CAB) was created in response to the need of insurers to have an in-depth evaluation of a motor carrier's financial condition. The CAB is the most comprehensive industry source for financial information on MTC carriers--information that is available to member companies. Based on information obtained from regulatory agencies, insurers, or motor carriers, the CAB assigns a financial rating to a carrier. The ratings are:
Satisfactory A good financial structure
Fair An adequate financial structure
Barely fair A limited financial structure
Poor A weak financial structure
Unsatisfactory An inadequate financial structure
Dangerous A distressed financial structure
When an account is being quoted or considered for renewal, a financial rating can be obtained by calling the CAB directly. Once an account has been written or renewed, a hard copy of the CAB report can be obtained for a company's files.
When the financial strength of a carrier is a concern, the CAB can assist in putting together financial devices that will protect an insurer. These devices can be:
1. A clean and irrevocable letter of credit from a bank
2. The establishment of an adequate escrow account
3. An indemnity agreement with an acceptable parent company or individual
The CAB can be reached at:
Central Analysis Bureau
225 West 34th Street
New York, New York 10122-0056
Phone: (212) 244-6575
Fax: (212) 695-1618
MTC liability insurance provisions
Although there are no filed policy forms for motor truck cargo liability insurance, most insurers that write this coverage maintain a standard form for issuing policies. This form can be modified by endorsement to fit the needs of a particular insured. Advisory non-filed forms for this class of business are available from AAIS and ISO.
AAIS offers three MTC liability forms. Coverage can be on an "open perils" or "named perils" basis, but coverage applies only when the insured is legally liable. The three MTC forms are:
Motor Truck Cargo Liability Coverage. This MTC form is designed to cover all shipments of described cargo during the policy term (i.e., annual), while on any truck, trailer, or semi-trailer or at a scheduled terminal.
Motor Truck Cargo Liability Coverage - Scheduled Vehicle Form. This MTC form is designed to cover all shipments of described cargo during the policy term while on any scheduled truck, trailer, or semitrailer.
Motor Truck Cargo Liability Coverage - Named Perils Form. This MTC form is designed to cover all shipments of described cargo for loss caused by a named peril during the policy term, while on any scheduled truck, trailer, or semi-trailer.
Freight charges due the trucker that become uncollectible because of a loss are also covered. It is often difficult, after a loss, for a trucker to go back to the shipper and ask for payment. Freight charge coverage will reimburse the trucker when it cannot collect these charges.
(AAIS also has an owners form that provides coverage for the trucker's property that it is transporting.) *
The author
Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.
For more information about AAIS insurance programs contact:
Robert Schnoll, Marketing Manager,
(800) 564-AAIS (2247), ext. 222 or by e-mail (bobs@aaisonline.com).