Cargo Liability Insurance Coverage Examples

How a Carrier's Cargo insurance is structured is not something you can locate on an FMCSA website. In fact, recently the FMCSA had intended to drop the BMC-34/BMC-83 as a required insurance filing. Further, the FMCSA will only report it's own minimum required coverage of $5000, regardless of the carrier's true coverage limit. Therefore, the only way you will know anything about the coverage is to maintain Certificates of Liability Insurance for all carriers working for your company. The examples below are from a rather simplistic point of view and are intended only to provide a concept of how the limits can interact with the actual payout of covered losses. To get a much broader understanding QIS suggests you discuss this topic with your insurance producer. (Disclaimer)

Cargo liability coverage:

Inland Marine Insurance/Ocean Marine Insurance — A general term for a marine insurance policy that covers goods being transported by ship, truck, railroad, or airplane. This coverage insures against most perils to which the property may be subject. (NILS INSource^TM)

Critical: The laws/rules/guidelines that limit cargo damage payments to $1.50/lb are only valid in the absence of specified terms. This statement on the carrier's bill of lading is yours to either accept or reject. NEVER allow the carrier to stipulate the cargo coverage. ALWAYS specify the value of the load(s) on the Bill(s) of Lading or Shipper's Letter of Instruction that you have generated. Be sure that your contracts properly state how the cargo coverage must apply to the load(s) being hauled. Verify that the carrier's cargo coverage is in compliance with your load requirements for every shipment. This can only be done through use of Certificates of Liability Insurance.

Limit issues: pay very close attention to how the limits are structured. You will often see limits shown as:

Per Vehicle $100,000
Per Occurrence $150,000
Aggregate Limit $300,000
Per Catastrophe $500,000

All loads are being transported by one motor carrier, entire Cargo stated value is $150,000 and is being transported on two vehicles. For simplicity, the senarios below assume $0 for deductibles and the coverage has been defined as "All Risk" or "Broad Form".

Under this structure the insurance company's liability is as follows for the loads described:

Senario 1. Vehicle A's stated cargo value is $95,000 and vehicle B's is valued at $55,000. Vehicle A and B are involved in unrelated accidents and the Cargo on both vehicles are determined to be a total loss. The insurance company will pay the entire loss of $150,000. (Aggregate limit is reduced to $150,000)

Senario 2. Vehicle A's stated cargo value is $125,000 and vehicle B's is valued at $35,000. Vehicle A is involved in an accident and it's Cargo is determined to be a total loss. The insurance company is only liable for $100,000. The carrier is responsible to pay the shortfall of $25,000. However, your company is at risk as you could have been found negligent. Your company should have been aware of the insurance shortfall and taken action to prevent this condition from occurring. (Aggregate limit is reduced to $200,000)

Senario 3. Vehicle A's stated cargo value is $100,000 and vehicle B's is valued at $100,000. Vehicle A and B are involved in the same accident and the Cargo on both vehicles are determined to be a total loss. Because this is the same occurrence, the insurance company's liability is limited to the first $150,000. The motor carrier will be responsible to pay the shortfall of $50,000. Under these conditions, it is best to select unrelated companies to haul these types of loads as once again your company is at risk. (Aggregate limit is reduced to $150,000)

Senario 4. Four vehicle from Company A are each carrying a stated cargo value of $90,000. All vehicles are involved in unrelated cargo damage claims which reach full value for each load. The insurance company's liability is limited to the first $300,000. The motor carrier will be responsible to pay the shortfall of $60,000. Under these conditions, it is again best to select unrelated companies to haul these types of loads as yet again your company is at risk. (Aggregate limit is reduced to $0, the Cargo policy is cancelled)

Catastrophe
A sudden event causing an extraordinary level of loss; most often associated with natural disasters such as tornados, hurricanes, floods or earthquakes. In insurance, it is applied to an incident or series of related incidents involving an insured loss in excess of $25 million.

Catastrophe Senario. Vehicle A's stated cargo value is $145,000 and vehicle B's is valued at $5,000. Vehicle A is overturned as a result of high winds caused by a tornado. The Cargo on vehicle A is determined to be a total loss. Although the per vehicle limit is $120,000 the cause of the accident is considered a catastrophe due to the wide spread damage. The insurance company is now liable for up to $500,000. The insurance will pay the total loss value of $145,000.

Suggestion: To best protect your clients when using a carrier with this type of coverage, pay very close attention to how a load is separated, it should not simply be governed by weight, size, or usage, but also by value. Doing this is the best option to protect your client's interests. If this is not possible, consider requiring contingent cargo insurance.

COINSURANCE: (an under-insured partial loss limit) If a carrier's cargo coverage is $100,000 and is transporting a load with a stated value of $105,000 and there is a 50% loss ($52,500) the insurance company is only liable for $50,000 of that loss, leaving a $2,500 shortfall.

Coinsurnace payment calculation: (cargo insurance/load value) x partial loss $

in this example: ($100k/$105k) x $52.5k = $50k

This example is only to show how Coinsurance effects the coverage. Usually a carrier will need to be underinsured by more than the policies specified percentage before Coinsurance becomes a factor.