Who Owns Damaged Goods?

Who Owns Damaged Goods?

Copyright 2004, Traffic World, Inc.

Q:

When a carrier pays a shipper''s damage claim, isn''t it true that the carrier has "purchased" the goods and/or salvage, and is entitled to keep, sell, or otherwise dispose of the property to which it now holds title? This is how most casualty insurance policies work.

A:

Yours is a popular misconception, but it is a misconception nevertheless.

Start with the most obvious case: when the carrier has only limited liability by agreement. Surely it''s patent that a carrier can''t "purchase" damaged goods for but a fraction of their original value, perhaps even less than they are worth as salvage.

Also consider another obvious case. Claims for damaged goods are based on the lesser of (a) the reduction in value resulting from the damage, or (b) the cost of repairing the damage (plus, again, any reduction in value resulting from the fact that repaired goods may not be worth as much as goods in original condition). If the lowest-cost option is (b), it''s likewise patent that the carrier doesn''t gain ownership of goods by merely paying for their repair.

But let''s move on to cases where (a) above is the lowest-cost choice; that is, the goods are "totaled," as it were. Let''s also assume the carrier is liable for full actual value. I might note that "full actual value" may be the goods'' sale price if they had been pre-sold, but otherwise will be only the claimant''s production/procurement cost - an amount for which it obviously wouldn''t willingly sell them. However, the situation is the same in either instance.

To be sure, a common "shorthand" approach is for the consignee to turn the goods over to the carrier for disposition, by salvage or otherwise. Per Item 300150 of the National Motor Freight Classification, motor carriers at least undertake to accommodate their consignees in this way only "if [the] record conclusively reflects carrier liability." But in the real world carriers often will handle salvage sales even when they decline claims, either because consignees refuse delivery and shippers won''t accept returns or by agreement with the goods'' owner.

Even when they pay claims in full, however, carriers don''t have "title" to the goods thus in their possession. That is, they can''t treat the goods as their own chattels, disposing of them at their sole discretion. For example, regulations of the Federal Motor Carrier Safety Administration require that they "shall only dispose of the property in a manner that will fairly and equally protect the best interests of all persons having an interest therein"; 49 CFR ? 370.11(a). And other provisions of the regulations require carriers to keep records of the salvage sale.

These records are important because, notwithstanding the ordinary commercial "shorthand," the way the process works in law is that the carrier is supposed to remit the net salvage proceeds to the goods'' owner, who in turn deducts that sum from his claim. Provided the claim is paid for full value, the bottom line is of course the same; but other factors may come into play.

One admittedly unlikely scenario is that the goods'' owner has so severely overestimated the economic consequences of the damage (or underestimated the value of the undamaged goods) that the salvage sale actually nets more than the claim amount. This might happen with antiques, collectibles, objets d''art or other goods of a unique nature. In such a case the carrier''s payment of the claim in full does not entitle it to the "overage," which it must remit to the owner.

A situation that arises with a good deal more frequency is that the owner of the goods chooses not to allow salvage sale. The owner may fear product-liability litigation; he may feel his prized brand name will be compromised in the marketplace if damaged goods bearing that imprimatur are offered for sale; he may consider that salvaging the damaged goods will impinge on his market for their undamaged counterparts; or he may have other reasons. Further - especially as to foodstuffs, medications, etc., and also goods deemed of national security interest - there may be restrictions of law or government regulation that make salvage sale of damaged goods a chancy or even illegal action.

In such a case, provided that sale of the damaged goods would be legal, the carrier is entitled to a reasonable "salvage allowance" against the claim; that is, he pays only what he would have owed if the salvage sale had proceeded. It is, nevertheless, the owner''s right to so restrict salvage sale, and the carrier is not entitled to overrule that decision simply by not claiming the allowance. The same holds true if the goods'' owner does permit salvage but chooses to accomplish that task himself; the claim may only be for the owner''s net loss after salvage, but the carrier has no right to insist on salvaging the goods itself.

The point here is that the carrier does not "purchase" damaged goods by paying the claim, it merely discharges its responsibility as their "virtual insurer" under the common law and the Carmack Amendment (to the Interstate Commerce Act; 49 U.S.C. ?? 11706 and 14706). Its payment does not compel the goods'' owner to relinquish title or possession. And notwithstanding your final statement, I think you''ll find that this is precisely the same with casualty insurance policies as the law sees it.



-- Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at P. O. Box 76, Morganton, Ga. 30560; phone, (706) 374-7201; fax, (706) 374-7202; 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.