Q&A: Gambling on Errors and Omissions

Q: We are simply “truck brokers.” We currently aren’t providing customers with supply chain strategies, freight auditing, complete freight management, freight forwarding or any of the larger menu items of the third-party logistics industry.

For those reasons, and because of the great expense, we haven’t seen a reason to buy “errors and omissions” insurance. I have thought the chances of me or one of my employees making some kind of mistake that would lead to some real loss or injury were minimal. We do carry contingent cargo and auto liability insurance.

Recently, a manufacturer we were interested in doing business with us sent us a contract demanding we carry errors and omissions insurance. I asked for some scenarios where such insurance would come into play. The answer was breach of contract. The manufacturer believes that if for some reason I don’t pay the truckers, and the truckers then go after the manufacturer for the money, they can collect on such a policy.

The other scenario given was if I were to bid on and was awarded some big project, and then had to change my price because of market conditions, the manufacturer could collect on the difference between what I originally quoted and what it ended up having to pay.

My insurance agent’s first reaction was one of disagreement, but he’s looking into it further. However, he did say the requirement is becoming more common.

I would be grateful for your thoughts.

 

A: Huh?

Now, I suppose there may be somebody out there who offers insurance against such things as your prospective client discusses. It’s like gambling, and what is insurance but a legal form of gambling? You can probably find somebody willing to bet you on anything, including whether the sun will rise tomorrow morning (though good luck in collecting if it doesn’t).

But the ordinary garden-variety form of errors and omissions insurance wouldn’t protect your client against either of the contingencies he mentioned to you.

Errors and omissions insurance is intended to protect your client against adverse economic consequences if you screw up, as you seem to be aware. If he tells you a shipment is headed for Chicago and you mistakenly dispatch it to Timbuktu, for example, that would be such a situation; if, as a result, your client lost a sale, had a production line shut down, etc., he’d have a claim.

Neither of the situations he describes qualify. If you fail to pay a trucker, it’s on purpose. Either you don’t have the money or something else, but the bottom line is that you chose not to pay. If you abruptly raise your price in the middle of a contract, you may have acted under duress or because you underbid or out of sheer bloody-mindedness, but it wasn’t any accident.

So when would errors and omissions insurance likely come into play in the real world? Well, one possibility is the following:

Say you erroneously select a carrier for your client’s load that has a horrible safety record. The carrier has an accident in which some poor soul is injured or killed. Said poor soul (or his or her surviving relatives) sues the pants off everybody involved, including your client. Your errors and omissions insurance might protect your client because you’d chosen a bad carrier.

Other scenarios would be, again, if you sent a shipment to the wrong destination, or if you’d picked a carrier lacking cargo insurance or adequate resources and there was in-transit loss or damage, or if in some other way you’d made a mistake that cost the client money it would have had if you’d done your job properly.

In other words, errors and omissions insurance is intended to cover just what it says: an “error” or “omission” committed by you that redounds economically on your client — something inadvertent, that is, something you didn’t mean to do or which constituted a breach of the ordinary duty you owed your client to perform your obligation to it professionally.

Moreover, because it’s your insurance, that “something” also must be a failing for which otherwise you might be held legally liable. It protects your client only to the extent that you might yourself be unable to pay a judgment against you.

Whether you need such insurance is up to you. But your client has completely the wrong idea about its coverage.

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

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