Cargo Insurance & Liability: Two Cautionary Tales

Two of the most critical areas of the law relating to transportation and logistics are insurance and a shipper’s, carrier’s, or intermediary’s exposure to liability. In this installment of our ongoing series that we call “Logistics and the Law,” we’ll take a look at one particular aspect of each of these two broad topics.

With respect to insurance, we will focus on cargo insurance. With regard to the exposure for liability, we will look at what lawyers call “vicarious liability” for accidents on the highway. To set the stage for this, I will relate two stories: The first one is fictional and light-hearted, while the second one is very real and very serious.

Tale One: So, You Think Your Freight is Insured?

Chapter One: Once upon a time there was a traffic manager named Joe who worked for Acme Widget Corporation. The corporate office was located in Chicago.

One day Joe received a telephone call from the corporate office letting him know that the company had decided to move its headquarters to Atlanta, Ga. As part of this move, Joe was to make arrangements for the transportation of the company’s mainframe computer. Joe was also told that the computer was worth $800,000, so he had better be careful.

Joe got right on the project and called Trusty Trucking who he had dealt with for years shipping widgets. He gave the dispatcher the origin of Chicago, the destination of Atlanta, and the weight of the computer—1,000 pounds—to get a rate. After quoting a rate that Joe approved, he remembered to tell the dispatcher that the computer was worth $800,000, to which the dispatcher responded: “Don’t worry! We have $1,000,000 in cargo insurance.”

On the appointed day the truck arrived, loaded the computer, and headed off down the highway to Atlanta. While driving through southern Illinois, the driver entered a turn at too high a speed. The truck and trailer left the road and rolled down an embankment. Fortunately, the driver was not hurt, but the computer was totally destroyed.

As soon as he heard of the loss, Joe filed a claim with the trucking company for $800,000 for the total loss of the computer and anxiously awaited a reply. A few weeks later, Joe received a letter from the trucking company stating, “Please find attached our check in full payment of your claim.” When Joe looked at the check he was dismayed to see that the check was only in the amount of $100.

Joe immediately called the claims department and demanded to know why the check was for $100 rather than $800,000. To this the claims person replied: “That’s because we have a limitation in our tariff of 10 cents a pound for used machinery.” Joe replied, “But the dispatcher told me you had $1,000,000 in cargo insurance.” The claims person then said, “Well, that’s true, we do have a $1,000,000 cargo liability insurance policy, but that only applies if we are liable; and, since we have a valid limit of liability in our tariff, we are only liable to you for $100. Sorry.”

Chapter Two : A year later, Joe is sitting in his new office in Atlanta (yes, he did manage to keep his job) when he received a telephone call from the corporate office: “Joe, we’ve had some focus group meetings and we have decided to move our headquarters to sunny California. As part of this, we would like you to make arrangements to move our new mainframe computer and, by the way, this time, don’t screw up!”

Joe again called Trusty Trucking to make arrangements for the movement. This time Joe said, “We need $1,000,000 in insurance and I don’t want any of that tariff limitation garbage either.” The dispatcher replied, “Don’t worry, we will write you a special tariff provision so that you have full Carmack liability.”

Joe said fine, and on the appointed day the truck arrived to haul the computer to California. Moving day was beautiful, with a clear blue sky and not a cloud to be seen as the truck was making its way along I-40. Suddenly, out of nowhere, and totally unforeseeable, a bolt of lightning struck the trailer. Every circuit in the computer was “fried,” resulting in a total loss.

When Joe heard about this he first had a very strong cup of coffee. He then proceeded to file a claim with the trucking company. Sometime later he received another letter from the trucking company, but when he opened the envelope there was only the letter, no check. The letter read: “We are denying your claim as this loss was occasioned by an act of God.”

Again, Joe called the claims department and demanded an explanation: “I thought you told me I was getting full Carmack liability.”

To this the claims person replied: “Yes, we do have full Carmack liability, however, the law is very clear that there are five exceptions to a carrier’s liability under Carmack (the federal statute codifying the common law of a carrier’s liability—49 USC 14706 for motor carriers and 49 USC 11706 for rail carriers). These are (i) act of the public authority, (ii) act of the public enemy, (iii) act of the shipper, (iv) inherent vice or nature of the goods, and (v) an act of God, which certainly includes a bolt of lightning. The carrier also has to be free of negligence, which we are because this was totally unforeseeable. And yes, we still have a $1,000,000 cargo liability insurance policy, but, again, we are not liable. Sorry.”

Analysis : So what can a transportation professional learn from this story? First, it’s critical to know and understand the difference between a shipper’s interest cargo insurance policy purchased by a shipper and a cargo liability insurance policy held by a carrier.

The cargo liability insurance will only pay out to the shipper if the carrier is liable for the loss or damage to the cargo. This means that if the carrier is not liable due to a common law defense such as an “act of God” or a valid limit of liability in a carrier’s tariff, there is no coverage that will pay the shipper. Conversely, a shipper’s interest cargo insurance policy, while subject to the exclusions and deductibles of the policy itself, will pay regardless of the carrier’s liability.

What this means on a day-to-day basis is that when negotiating rates with a motor carrier, a shipper must also negotiate a limit of liability that will cover all or most of the products regularly shipped. Since a carrier will charge a higher rate for a higher limit of liability, an analysis needs to be done to see if it may be more economical to purchase a shipper’s interest cargo insurance policy than to pay a carrier a higher rate for a higher limit of liability.

It must also be kept in mind that while “acts of God” may not occur every day, they certainly do occur. Accordingly, for high value products it may not be prudent to rely upon a carrier’s liability. Further, carriers do go out of business from time to time or, even if still in business, may be financially unable to pay a loss in excess of the carrier’s cargo liability insurance coverage.

The above discussion applies to motor carriers and, to a certain extent, rail carriers. However, in the world of ocean shipping it has long been the practice of knowledgeable commercial shippers to obtain their own cargo insurance. This is because the Carriage of Goods by Sea Act (COGSA) provides for 17 exceptions to an ocean carrier’s liability including my colleague Bill Augello’s favorite, “errors of navigation.” Further, COGSA has a liability limit of $500 per package or “customary freight unit.”

Tale Two: $24 Million Award in Fatal Truck Crash

The story : The following appeared in the Chicago Tribune on March 24, 2009: “A Will County jury has awarded nearly $24 million to families of two people killed and another seriously injured when a truck crashed into a line of cars on Interstate Highway 55 near Plainfield in April 2004. Jurors on Friday issued the judgment—the highest verdict amount in a civil case in Will County in at least 50 years—against C.H. Robinson Worldwide, a Minnesota freight broker that had contracted with the truck driver, De An Henry of Utah.”

Analysis : This short news blurb tells the tale of the latest case, Sperl v. Henry, in a recent series of cases beginning with the decision of the U.S. District Court in Schramm v. Foster in 2004. At that time, Bill Augello wrote an article for the trade press entitled “Maryland Judge Drops Bombshell!” Indeed, it was a bombshell.

Shippers and intermediaries have long had exposure to liability for accidents on the highway. Examples are improper loading resulting in a vehicle overturning or requiring a delivery time which could not be met within the legal speed limits.

However, the Schramm Court expanded this exposure exponentially when it denied the Defendant C.H. Robinson’s Motion for Summary Judgment and said that he would allow the case to go to the jury. The case then settled.

In Schramm, the Judge did not hold that C.H. Robinson was negligent, but rather held that there were some facts present in the case upon which a jury could permissibly find that C.H. Robinson had been negligent in selecting the carrier. These facts included the SafeStat scores of the trucking company and the fact that it did not have a “satisfactory” U.S. DOT safety rating.

Shortly after Schramm, another court found in the case of Puckrein v. BFI, Inc. that a shipper was liable for a highway accident, once more based on its choice of carrier. In that case, the trucking company did not have either an operating permit or the required highway liability insurance and the shipper had made no inquiries as to the status of either.

Other similar cases have followed since then. A detailed discussion of the facts in these cases or an analysis of the various principles of vicarious liability involved is far beyond the scope of this article. However, there are three important points to be learned.