Covering Your Assets? Don’t Skimp

Covering Your Assets? Don’t Skimp

Q: We’re a third party (broker/3PL) and have a customer who is the receiver of goods from a high-end shipper.

Load values frequently exceed $500,000 and at times exceed $1 million. Notice that a shipment is available usually occurs at the last minute, and the shipment must be moved promptly.

The value of such a shipment exceeds 90 percent of all carrier cargo policies, and we’ve experienced rejection of loads by carriers with inadequate insurance, resulting in delays picking up the shipment.

As a remedy, and to expedite service, our customer has purchased its own policy to cover the difference between the carrier’s insurance limits and the shipment value. When a carrier accepts the load, our customer notifies the shipper to add a released valuation statement to the bill of lading. An example: “Shipment released valuation not to exceed $200,000” (for this example, the carrier policy limit is $200,000).

When the customer initially chose this path, we stressed that it inform its insurance company that the intent is to utilize carriers that do not have adequate cargo insurance, and that the insurance our customer is purchasing would cover the amounts exceeding carrier limits.

Do you have any issues with the above procedure?

A: Other than that I don’t think this arrangement is likely to have a long shelf life, no, I guess not.

Strictly speaking, the released value declaration falls a little short of traditional requirements, in that there is no choice of rates (full value vs. declared value) involved. But there seems to be adequate support for the reality that this is a true shipper-carrier agreement, which I expect most courts would buy.

This is important because I expect that, in the event of a major loss, the first move of your receiver’s insurer would be to try to subrogate against the carrier. The bill of lading declaration, supported by the shipper’s testimony that the receiver — the insurer’s policyholder — instructed it to so declare, should put that to rest.

The insurer’s second move, of course, would be to cancel the policy or raise premiums to truly astronomical levels, which would put an abrupt end to this tidy little arrangement.

Indeed, I’m pretty surprised any insurer would issue such a policy, and I think your receiver had best look closely at the fine print before considering itself protected. For the insurer, an unrestricted policy such as you describe strikes me as an economic calamity waiting to happen.

I’ll use the example you offered, a million-dollar shipment released to a value of $200,000 to meet the carrier’s cargo insurance ceiling. That puts the exposure of your receiver’s insurer at $800,000 for this single load.

Now, consider that a load of this value is to a hijacker as a marrow bone is to a dog. And please don’t hand me a song and dance about how much security is used to protect these loads; the carrier is mostly in charge of security, and it has no more incentive than it does with the ordinary $200,000 loads it hauls more often.

So there’s an increased risk of theft — and even unsuccessful theft attempts might seriously damage or destroy the load. This isn’t a TV show in which all crimes are resolved and victims recompensed within a commercial-truncated hour.

And that doesn’t even consider, of course, the possibility of a catastrophic wreck. Again, from the carrier’s perspective, it’s dragging only the usual $200,000 load behind the tractor, to which it will assign no better or more skillful drivers; and with all the morons who drive the highways, even the most skillful might not prevent such an accident.

Considering all this, don’t you think you might be better off making arrangements with carriers who specialize in high-value loads and offer security arrangements compatible with actual — not “declared” — cargo values and drivers with the highest safety ratings, and who have cargo insurance (or can afford self-insurance) to match?

Sure, the rates will be higher. But if you add in the premiums your receiver must be paying for that insurance (not to mention that affordable coverage isn’t likely to last beyond a single big loss), are those higher rates necessarily prohibitive?

Will you and your customer’s arrangement stand up legally? I think so. Does it make economic or (from your point of view) competitive sense? I leave that up to you. But would I handle things this way were I in your shoes? Plainly put, no.

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 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.