Three Things Every Shipper Should Know
Shippers who think their shipments are fully insured by the freight carriers who actually transport their goods could be in for a big surprise if those goods are damaged, destroyed or mysteriously disappear while in transit.
The Federal Motor Carrier Safety Administration, (FMCSA), requires that all motor carriers, and freight forwarders carry Public Liability Insurance for bodily injury/property damage/environmental restoration, in an amount not less than $750,000. Freight Brokers on the other hand are merely required to carry a Surety Bond in the amount of $75,000. Neither of these insurance requirements involve cargo insurance coverage.
The FMCSA minimum requirement for cargo insurance still remains at $5,000* per vehicle and $10,000 per occurrence. These minimum requirements certainly would not meet any shipper’s standards for minimum cargo insurance coverage, at least they shouldn’t, and most carriers do maintain cargo insurance policies at much higher levels.
*EDIT: we stated that the Federal Motor Carrier Safety Administration requires every motor carrier to carry a minimum of $5000.00 in cargo insurance. For clarification the $5000.00 minimum requirement is for carriers that haul Household Goods. Thank you to George Pezold of the Transportation and Logistics Council for bringing this to our attention.
But this is not the full story, because freight and parcel carriers while maintaining what would normally be acceptable cargo insurance liability levels have multiple ways of limiting their liability when loss or damage occurs. Here are three areas every shipper should be aware of:
- Insurance Certificates are not Insurance Policies:
Some shippers, when they first start doing business with a new freight or parcel carrier will ask the carrier to validate their cargo insurance coverages. Believe it or not, many shippers fail to even ask this basic question. For those companies that do ask for insurance validation, sometimes will only receive a copy of an insurance certificate. These certificates merely show that a cargo policy is in place, but they do not contain any exceptions or exclusions that may have been written into those policies, so a shipper really isn’t sure if there is an exclusion or limit of liability on the products the company is actually shipping.
The best way to ensure you have a complete understanding of the cargo insurance policy is to request a complete copy of the actual policy from the freight carrier; good luck with that request. However, what would be most valuable is a copy of the policy pages that cover exclusions in those policies.
- Freight Pricing Methodologies Sometimes Limits Liability
Many times shippers and carriers in their pricing negotiations will try to “simplify” freight pricing by consolidating multiple classes of products into a single or multiple groups of freight classifications. This is known as Freight-All-Kinds, (FAK) Ratings. The process is quite popular and does have many advantages, including the simplification of freight audit processes.
However, there is also a down side to it that all shippers should be aware of. When a carrier implements FAK pricing they typically also limit their liability in conjunction with that FAK pricing implementation.
Shippers must maintain a current copy of the carriers’ tariff or service guide to make sure they know exactly what these liability limitations are before just agreeing to them.
- Individual Carrier’s Liability Limitations
Not all freight and parcel carriers are created equal, at least when it comes to liability limitations. Individual carriers can and will place limits on their liability for specific products.
One such limitation published in a freight carrier’s tariff limited their liability to $0.10 per pound for any “used” machinery. In a real life example, a manufacturer of furniture shipped a computerized fabric cutting machine back to the manufacturer for upgrades. Unfortunately, the machine was totally destroyed in transit. The shipper filed a claim for hundreds of thousands of dollars to compensate them for their loss, however they only received a few hundred dollars from the freight carrier.
In another example of limiting liability, a manufacturer of lighting fixtures shipped some samples to a new customer for inspection. The lighting fixtures were lost, or mysteriously disappeared while in transit. The parcel carrier refused to pay the claim because it had a provision in their service guide stating that they were not liable when “prototypes, or one of a kind items” were shipped. In this case a “sample” product became a one of a kind or prototype, at least as far as the carrier was concerned and the entire claim was denied. To truly protect themselves, shippers must always read the fine print.
A final word to all shippers…..Caveat Emptor, “let the buyer beware!”
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