Freight Insurance vs Freight Liability: Knowing the Difference For Freight Claims
This post begins our series on all things freight claims. We will first start with our education on the difference on freight insurance vs freight liability or limit of liability. We will then cover the basics of freight claims, followed by subsequent posts on how to best work with freight claims without spending too much time, and finally how good services and technology can help you take the burden off of your freight department and avoid a drain of resources.
Knowing the Difference Between Freight Insurance and Freight Liability is the First Step in Freight Claims Insurance Know How
If you are involved in logistics or related fields, or in an industry that depends upon logistics in order to be successful, you are well-served by knowing as much as you can about the basics of freight claims. In the event that items in transit are lost or damaged, freight claims are the means of recovering some of that lost value. However, just as in any insurance situation, it is very important that you take all of the proper and appropriate steps. The first part in knowing how to better manage freight claims starts before you start shipping: choosing the right amount of freight insurance and freight liability. But, do you know the difference?
Freight Insurance and Freight Liability Explained
In the unfortunate situation that your shipment is lost or damaged, it’s important to know what is covered by liability and what is covered by freight insurance insurance and what is the difference between the two.
Freight insurance does not provide protection against all losses a motor carrier may be liable for under the Carmack Amendment or common law. There is no single standard form of freight insurance that a carrier can go out and buy and be fully protected. Similarly, a certificate of insurance stating that a motor carrier has a specified amount of freight insurance does not mean that the shipper’s or broker’s valid claim will be covered by that freight insurance.
It therefore is extremely important that all motor carriers, shippers, brokers, consignees and others that have an interest in a shipment be aware of the extent of the motor carrier’s liability for freight loss under the applicable law and the extent that the motor carrier’s freight insurance provides protection for that liability. Unless the motor carrier is fairly large and financially strong, an uninsured judgment against it may be worthless.
Freight Liability or Carrier Liability
A regulated motor carrier operating in interstate commerce is liable for freight loss, damage and delay pursuant to the Carmack Amendment, 49 USC 14706. The Carmack Amendment was adopted in order to establish a uniform nationwide standard of liability for freight loss and damage, originally for rail and water carriers in 1906 and subsequently for motor carriers in 1935. To establish a prima facie case, a shipper need only show the following three elements:
- delivery of the shipment to the carrier in good condition;
- delivery of the shipment to the consignee short, in damaged condition, or unreasonably late; and
- the amount of damages incurred.
Once the shipper establishes a prima facie case, the burden is on the carrier to establish that-
- it was not negligent to any extent; and that
- the loss was due to one of the five recognized carrier defenses, to-wit:
(a) an act of God,
(b) an act of the public enemy,
(c) an act of the shipper,
(d) an act of the public authority, or
(e) the inherent nature or vice of the goods themselves.
If the carrier fails to meet its burden, the shipper is entitled to recover the”actual loss or injury” to the shipment.
The Carmack Amendment constitutes the statutory enactment of the common law, which is the law that developed from the judgments and decrees of the courts recognizing, affirming and enforcing the usages and customs of society over the years, particularly the unwritten law of England. As a result, the common law standard for a carrier’s liability for freight loss and damage generally is the same for exempt motor carriers and the carriage of exempt commodities.
The Carmack Amendment and the common law both impose a high standard of liability on a motor carrier. Indeed, although it is incorrect, it is often stated that a motor carrier is an insurer of the goods.
What is Freight Insurance?
Freight insurance does not provide coverage coextensive with Carmack Amendment and common law liability. Motor carriers and other claimants frequently tender claims to the carrier’s freight insurance company only to be told that their policy does not provide coverage for the loss. Indeed, a broker was recently quoted as saying that at least 30% of the claims it submits to freight insurance companies are rejected because the policy does not provide coverage for some reason.
It is worth noting that prior to March 21, 2011 the FMCSA required motor carriers to maintain and file proof of freight insurance that did in fact provide freight insurance that was coextensive with Carmack Amendment liability. Although the required coverage was only $5000 per vehicle, $10,000 aggregate, the BMC-32 endorsement made void any policy exclusions or limitations. This is as it should be, but the FMCSA eliminated the requirement regardless. This makes understanding the coverage afforded by a freight insurance policy all the more important.
There are different types of freight insurance policies, some going by names such as “all risks,” “broad form,” “legal liability,” and “motor truck freight.” Regardless what the name might imply, none of these policies provides complete protection against Carmack Amendment and common law liability. Policies exclude coverage in many different ways, for example, certain types of freight are excluded, only specific equipment and terminals are covered, losses caused by certain events are not covered, coverage applies only if service is performed in a certain way, etc.
We recently have been involved in freight loss cases where coverage was denied or challenged for the following reasons: failure of the insured to report the loss to the insurance company in a timely manner; the carrier’s “drop yard” was not listed as a terminal in the policy; the theft of a trailer was not covered because it was being pulled by a “non-scheduled” tractor; the theft of a trailer was not covered because it was left unattended; perishable commodity spoilage claims were denied because the carrier in one instance did not perform the required reefer maintenance and in another performed the maintenance but did not provide the records; and the carrier was acting as a broker even though it had a subcontractor with which it had a written contract to transport the shipment.
The only way to actually know what is covered by a freight insurance policy is to actually look at and read the policy. A motor carrier needs to work with an experienced insurance agent who knows trucking, and the motor carrier must take care to fully describe its operations and make sure its application is complete and correct. Shippers and brokers need to do the same.
So How Do I know if I should Get Freight Insurance or Freight Liability? They are not the Same?
Every booked freight shipment comes with limited liability coverage. The amount of coverage is determined by the carrier and based upon the commodity type. It covers a certain dollar amount per pound of freight. In some situations, the included liability coverage may be less than the value of the shipped goods.
To make a liability claim, the carrier must be at fault for the damaged or lost freight. However, if the damage is from inadequate packaging, loading errors or weather-related causes, the carrier is not at fault. Additionally, if the damage is not noted on the delivery receipt, many carriers will deny any liability.
In some cases, your freight shipment might have a higher value than what is covered under the included liability.
If so, this is where additional freight insurance may be purchased.
This extra freight insurance covers the shipped items and the cost of freight shipping. It is redeemable under all types of loss with no proof of fault required. Unlike the limited liability coverage, with added insurance, there are no exclusions for packaging errors or severe weather.
How do these two types of insurances differ in the claims process?
If your shipment is only covered by liability:
- Your claim must be filed within 9 months of delivery, or within a reasonable time frame if lost
- If the deliver receipt is not noted as damaged some carriers require immediate notification
- You must provide proof of value and proof of loss
- The carrier has 30 days to acknowledge a claim and must respond within 120 days
- You must prove carrier negligence
- This means the freight was picked up in good order, packaged properly but delivered in a damaged condition
If your shipment is covered by additional insurance:
- You will be required to provide proof of value and proof of loss
- Claims are typically paid within 30 days
- You are not required to prove carrier negligence
The world of freight claims, freight insurance, and freight liability can be daunting and confusing. Dealing with freight claims is never a fun exercise for a shipper. Many companies employ software or hire a third party logistics company to handle freight claims for the shipper. Either way, knowing the difference between freight insurance and freight liability BEFORE you ship can save you from costly mistakes when it comes to freight claims. Stay tuned for more on freight claims next week!