Inland Marine Insurance
Carrying a Heavy Load
Cargo risks, such as food safety and identity theft, are testing the resourcefulness of inland marine carriers.
- Meg Green
- December 2019
Cargo carriers are assuming a broader range of exposures but are dealing with a narrowing base of clients, according to a panel of experts that spoke with AMBestTV at the 89th Annual Meeting of the Inland Marine Underwriters Association in Leesburg, Va. Participating in the panel were Ben Tuttle, senior vice president commercial marine, Tokio Marine America; Ronald Wallace, vice president inland marine, Sompo International Insurance; and Jean Gardner, chief executive officer, Central Analysis Bureau.
Following is an edited transcript of the interview.
Can we start with an overview of the cargo liability market?
Gardner: Cargo liability over the last five years has evolved. The policies are still very historical, providing what was normally expected to be the carriers' exposure for cargo loss. What we're seeing in the last five years is that motor carriers are accepting much greater risk. The measure of damages and the exposures that they face are critical.
They have less of a client base. Where years ago you had a motor carrier and they did work with everybody throughout the country, they now have their 10 select customers. The motor carriers are taking on greater exposures under the contracts. We're seeing those types of exposures that were never anticipated in the past. Product liability exposures are creating more of a risk for the clientele.
Tuttle: Carriers are accepting more risk, in many cases not understanding the risk that they're accepting and assuming that their insurance will cover it.
When the incident occurs and there's a loss, and then it's not covered, they're out financially, individually, as opposed to having the insurance company protect them for that.
Wallace: Logistics plays a big part in a lot of the contractual changes. Now they're making the motor carrier basically their transportation arm for the manufacturers and the wholesalers.
That's part of the reason why we have this shift in contractual liability in the transportation industry.
Gardner: I do think that there's a disconnect sometimes where the motor carrier and their customer assume that as long as they've paid for cargo liability insurance, if anything happens, that the insurance company will respond.
The insurance companies have policies that respond to certain liabilities but not all liabilities. Therefore, when the loss occurs and something isn't covered, they're very surprised at that.
Could you give us an example of one of those risks that may not be covered?
Gardner: One of the common ones today relates to food safety. We now have a lot of cargo losses where there's nothing wrong with the product but it's been rejected because there are good manufacturing practices, there are other terms and conditions that those parties have agreed to which make the motor carrier liable for that loss. That is probably one of the biggest exposures that we see.
Wallace: A lot of food products have to be hauled under temperature-condition controls. If those conditions are not met in any form or fashion, then even without seeing damage to the product—if the temperature was supposed to be 32 degrees and they hauled it at 29— because of the FDA laws about food, a lot of times the grocery store chain will not accept that food. They're afraid of the liability, so they will reject the load.
Also, what's happened is that load has been deemed now by the FDA that it has to be destroyed. Where it used to be a long time ago, if the load was rejected, the trucker could take the load and dispose of it in ways of reselling it, or selling it to another customer. That's not the case these days. That's created more of a total-loss situation when you have these types of loads.
What's the value of load like that?
Wallace: It varies. If you are talking general commodities, you're basically talking about $100,000 to $200,000. If you're talking about seafood or things of that nature, you could be talking $500,000 to a $1 million.
Tuttle: A lot of insurance companies would be able to mitigate those claims with the food by either reselling it, shipping it overseas to other places, but the Food Safety Modernization Act has made it so that it's not legal to ship it overseas or to sell it. It must be destroyed per the FDA.
That has also affected the insurance companies' recoveries on their claims and being able to mitigate that loss.
Gardner: Frequency and severity have changed. Years ago, you might have a lot of losses but you would be able to reduce those claims so they weren't as severe. Now policy limits are exhausted more often than not.
There's more exposure out there because things are rejected for any number of reasons that didn't exist before. That has really changed the focus.
We see that underwriters are more concerned. They always cared about understanding the commodities that the motor carrier was hauling, but it was always a focus on target commodities—the high-theft risks. Obviously, a load of cell phones or a shipment of electronics was expensive.
We see more underwriters at Central Analysis Bureau really wanting to drill down into the type of commodities that the motor carrier's hauling. If they do a large amount of product that is potentially subject to product liability exposures, or adulteration issues, that's going to change the exposure—make it more frequent and more severe.
How is the industry responding to that emerging risk?
Wallace: The industry is responding by placing endorsements on the policies and restrictions on limits, deductibles to help to mitigate the loss, also being very specific on what is a rejected load, and how it's going to be treated. We're dealing with it through endorsements and deductibles.
Tuttle: And education as well, informing our brokers who we work with about what the effects of that are and what the changes to the laws have been through seminars at the IMUA and other organizations. The brokers can then educate the insureds when they're hauling this type of a commodity that they've got to have some stepped-up regulations, or stepped-up training, so that it's not just the insurance company is going to pay for it.
The trucker themselves, the carrier, needs to make sure that they're following the rules as well, so that it then helps everybody in the supply chain.
Let's discuss the risk of identity theft.
Tuttle: A trucker will get contracted to haul a load and someone else will assume the identity of that trucker and show up an hour before. [They] have the documentation that looks like they're the person who's supposed to be picking it up, have the paperwork. They sign it. They drive away. An hour or two later, the correct driver shows up and the goods are already gone.
In some cases, the trucking company has been held responsible for those goods because the shipper gave it to who they thought it was. All the documentation appeared to be correct.
Some ways that people have used to get around that is they require the driver's picture, a copy of a driver's license, be transmitted prior to the pickup.
They're making efforts—again, hopefully, using the internet and communications—to mitigate it or lessen the severity, but there can be some significant losses through that.
Who's behind that, a common street criminal?
Wallace: It can be, but sometimes it's even internal jobs by the dispatchers for the company. They know what's on a certain load. They will arrange with one of their friends or some organization to get that particular load.
Gardner: It's very easy to become a motor carrier initially. You can just simply go online, you can apply to become a motor carrier. You pay the fee. You have to get an auto liability filing in place. You no longer need a cargo filing. There's a period of time where you are considered a new entrant and you don't have to comply.
We saw this in the last couple of years that somebody would go on—this is clearly an organized scheme—create a trucking company and then get insurance. They would get a cargo policy. They would have a certificate of insurance that showed that they're insured with a reputable company for auto liability and cargo, and they would go on the load board and they would bid.
It takes 90 days before they're ever going to be shut down. You can steal a lot of cargo in 90 days. I'm not dealing with you as my customer every day. I'm going on a load board, and I'm bidding on a different load every day with a different truck broker. Nobody knows what's going on. The product disappears.
What types of cargo are the most likely targets for that kind of scam?
Tuttle: It tends to be food products and beverages where there is no serial number. There's no necessarily identifiable, individual product number. It's something that's easily salable, easily consumable, and able to be moved quickly.
Gardner: There tends to be less security on those type of loads. If you have a truckload of drugs and medical devices, there's a higher tendency for them to pay attention to what motor carrier they're picking.
Wallace: Around the holidays, a lot of electronics, a lot of toys even, are stolen, when people know there's going to be a lot of a popular toy on a truck.
We require sometimes on high-end products to have two drivers, so they can continue driving and they can meet the laws for how long they can move the vehicle, just to keep it moving.
One of the biggest things about theft is what we call drop trailers, or unattended vehicles. They go to a truck stop, and the guy says, “I need to go to the doctor,” or “Something happened.” He disconnects the trailer. He comes back. It's not there anymore.
Tuttle: Or goes home for the weekend. They'll park in a parking lot and go home. They come back Monday morning, the trailer's gone.
Wallace: Another big problem is you have a lot of young drivers, or first-time drivers, or people who are not quite as experienced. So the industry has a void in qualified drivers.