Let the buyer beware

Let the buyer beware

Despite our best efforts insisting that policyholders take the time to read and understand various coverages being provided by their insurers, few seem to take the time to do so. It isn't until a claim occurs and insurers deny coverage, that sometimes fatal gaps in coverage are brought to the attention of chief executives. Invariably, that's when gallows construction begins. We had hoped that as insurers broadened the terms and conditions of the coverage they offered the transportation industry, claims problems would ameliorate. Now that the insurance marketplace has tightened dramatically, the coverage being offered is once again replete with exclusions and limitations. Shippers and transporters who purchase insurance without the benefit of an in-house risk management department must rely heavily upon the coverages being secured by their brokers. In too many cases, we review policies that are obviously time bombs waiting for a detonator.

Two almost ageless areas of exposures continue to plague shippers and carriers alike. The first involves dishonesty losses that occur with predictable frequency in trucking. Owner-operators are defined in the typical lease as independent contractors. All of us understand why the industry goes to the length it does to avoid the obvious burdens of employment. In more than a few cases, especially involving high-value target commodities, owner-operators may conspire with warehousemen, consolidators or other third parties to convert goods in transit by fraudulent means. These dishonest acts are likely to occur over relatively long periods of time. When the fraud is finally discovered, the owner of the goods is likely to find that none of the clients' insurance policies will respond with payments.

The vast majority of Motor Cargo and Shippers Transportation coverages contain an exclusion for loss or damage caused by or arising out of dishonest acts by employees, agents or others to whom the goods have been entrusted. It is rare indeed that we review Motor Cargo policies that have this exclusion deleted. This is particularly true for the transporters or shippers who have less than $50,000,000 in annual sales.

But wait. Can't the owner rely upon his own Crime coverage, which typically provides Employee Dishonesty Coverage? Unfortunately no. Employee Dishonesty Coverage would respond if the loss was caused by an employee. But owner-operators are not employees. Remember, we said time and time again that owner-operators are independent contractors. You can be sure that the employee dishonesty insurer won't require more than a few moments to print their declination letter. It won't astonish anyone to realize that litigation will usually follow.

A concentrated effort by the buyer, or the buyer's broker, should be made to secure coverage for the purchase of Owner-Operator Dishonesty Coverage. This is secured by purchasing a broadening endorsement that includes coverage for losses sustained by owner-operators. The additional premium charged for this extension of coverage is minimal. And often it is purchased with relatively modest deductible provisions. If the broker is imaginative, loss or damage to goods in storage at permanent warehouse locations may also be covered.

Have we forgotten the definition of "goods in the due course of transit?"

Recently, we were assigned a case involving a catastrophe loss sustained by the owner-shipper to imported owned goods stored at a large distribution center. The property loss exceeds $4,000,000. The Business Income Loss is perhaps another $1,300,000.

The client's Ocean Cargo policy, issued by a major domestic insurer, did not contain any extensions of coverage for goods stored elsewhere at locations after the "chain of transit" was broken. Coverage was divided between two insurers, and two brokers, neither of whom were experienced transportation insurance specialists. An adequate Ocean Cargo limit vanished like the wind since the stored goods were no longer in transit. There are volumes of case law on transit losses to goods held for temporary storage at warehouse locations. Many Ocean Cargo policies are written to provide coverage for all imported goods held for storage and distribution by the owner. This policy had no extensions. Both brokers denied responsibility, claiming it was the other guy's fault. It always is, isn't it?

In the strongest possible manner we admonish the reader to reacquaint the people responsible for purchasing coverage to understand thoroughly the terms of coverage being offered. Caveat emptor!

Thomas A. Laffey is chairman of Polaris Risk Managers Inc., a transportation insurance consulting firm. He may be reached at (973) 882-3100, or via e-mail at polarisins@aol.com. On Insurance is a monthly column.