E&O Insights: Know the Details When Insuring Cargo

It’s important to know all of the details when looking to insure risks with a cargo exposure. Because no two risks are the same, the underwriter will look to the agency to provide those details to fully understand and underwrite the exposure. What is the best way to do that?

A great starting point is determining whether the risk actually has a cargo exposure. One of the leading exposure analysis checklists can help you to understand the overall type of risk and supply the details by line of business within that class.

The carrier’s cargo application and the questionnaires provided by these checklists should give you and the carrier’s underwriter the details to assess and price the exposure.

Things to Consider

The following questions, plus a host of additional questions and issues, will be covered by a carrier’s application.

• Is the risk shipping the cargo using their own trucks (owners form)?
• Are they using another firm to deliver the product (legal form)? Is it a combination of the two (combined form)?
• Do the vehicles transporting the material need to be scheduled or is coverage provided for any vehicles leased or operated by the insured?
• If the material has been sold and is being delivered, who actually owns the material in transit?
• Does the cargo need to be refrigerated in transit?
• Is there coverage if the refrigerated unit malfunctions?
• What perils are to be insured against?
• Is coverage for loading/unloading included?
• What if the material is not accepted and needs to be returned?
• Is there a backhauling exposure where the insured (hauling their own material) engages in any for-hire shipping?
• If your risk is contracting with a carrier to deliver the material, is that carrier assuming responsibility for the full invoiced value of the goods or is the carrier’s liability limited to a fixed amount?
• Are multiple shipments in route where there could be a catastrophic exposure where more than one shipment is damaged?

It is best to meet directly with the risk and ask these questions exactly as they appear on the application. The producer should accurately document the responses, then require the risk/prospect to review it for accuracy and completeness, and sign it. This could be significant if a problem develops and the application’s accuracy is called into question.

More Than $200,000 … Each

Requiring the risk/prospect to review the application could have helped the final outcome in an errors and omissions claim.

A producer in an agency took an $8,500 premium from a client for a truck cargo policy. Several days later, the producer left the agency and went to another agency, taking the business with him. Before he left the first agency, he issued a certificate of insurance stating a cargo policy was in existence. While at the new agency, over the course of nine months, 15 additional certificates of insurance confirming coverage were issued. However, no cargo policy was ever issued.

Nine months later, the client was contracted to transport cargo for a customer and instructed to pick up the cargo from a specific terminal. Before the transport took place, the truck was loaded at a warehouse and parked overnight in the yard. The cargo was stolen while the truck was in the yard, with the value of the cargo loss close to $400,000. The total loss claimed was around $800,000, including attorney fees and interest.

The E&O carrier believed the case was defensible from the perspective of the first agency, and that it was the fault of the new agency for not ensuring there was coverage. An expert opined a cargo policy would not pay for the loss without the yard being added to the policy. Because the client never informed either agent to add the yard to the locations on the policy, it was believed that the policy would not have paid the loss, because at the time of the loss the cargo was not in transit; it was at the point of origin.

Counsel was concerned that the jury might have difficulty understanding the argument regarding coverage because the agent basically accepted the premium without securing a policy. Due to the quirky joint liability law in the state, liability would be split 50/50 with the other agency if the first agency was found even 1 percent at fault. The case was settled, with each agency paying $208,000.

Do Your Homework

In all likelihood, your agency will not have any binding authority for this type of coverage, so it is best to secure the necessary information and get the application to the carrier’s underwriter far in advance of the desired effective date.

It is possible that the underwriter will have some follow-up questions. Contact the risk to get the “correct” answers. If the information is provided over the phone, send written communication to the risk memorializing the conversation. This extra level of documentation could be vital to the agency’s defense if an uninsured loss occurs.

Conduct the necessary follow-up to ensure everything is in order and that a premium quotation is provided. There may be limitations/exclusions on the premium proposal, so review it with the risk for acceptability.

Insuring cargo is probably not an everyday occurrence at your agency, so take the time to understand the coverage and your risk. With cargo insurance, it’s all about the details.