Sam Tucker is the founder and CEO of Carrier Risk Solutions, Inc., an Atlanta, Georgia based transportation risk management startup. Prior to this venture, Sam spent 13 years underwriting trucking and logistics accounts at some of the most well known insurance companies. He holds degrees in Business Economics and Finance/Risk Management as well as multiple professional insurance designations. Carrier Risk Solutions' innovative safety management platform can be found online at www.MySafetyManager.com. Reach Sam by email at STucker@CarrierRiskSolutions.com.
Just having a box checked “reefer breakdown” with a limit and a deductible on a certificate of insurance doesn’t really mean everything that you think that it does. When I think of “reefer breakdown”, I define it like this: A mechanical or electrical breakdown of the refrigeration unit that is attached to a trailer. That, by industry terms, is probably going to cover a majority of definitions out there.
But here is where the fun and excitement really begins:
Most cargo insurance policies exclude or greatly limit losses that arise from the perils mentioned in today’s Cargo Risk Tip. Changes or extremes in temperature are one of the main offenders in the class, but the driver error issue abounds in the industry today.
There is a laundry list of potential pitfalls in a cargo insurance policy, but especially when it comes to the perils of theft and temperature change.
Now, for a bit of history. Around 2009 and 2010, the Federal Government started to become really pissed off that our nation’s citizens continued to be harmed by our food supply. Apart from the tremendous national security implications, they were growing weary of taking it on the chin for continued lackluster responses to food poisoning outbreaks across the country.
Congress took action and President Obama signed the Food Safety Modernization Act into law in early 2011. At that point, the FDA was charged with totally revamping how we handle food safety in the country.
Fast forward to early 2014. The draft regulations regarding the safe transport of human and animal food were introduced by the FDA. The FDA is currently on schedule to finalize these rules by the end of March 2016.
After the rules are finalized, carriers will have 1 to 2 years to bring their operations into full compliance with these new regulations. Whether or not the FDA will actually secure enough funding to actually enforce this new mandate is still yet to be seen.
You can read more about my thoughts on the regulations and what they entail here.
That one takes a little time to get through, but I promise that it’s totally worth it.
The Reader’s Digest version is that every carrier (with above $500,000 in gross annual revenue) who hauls perishable or “non-shelf stable” goods will be required to keep very good track of the most recent load of those goods that they carried and they will have to be able to produce that information promptly if asked.
Motor Carriers will also have to keep track of things like their pest control practices, when they wash their trailers out and other types of record keeping and documentation. Did I forget to mention that this has to be done down to the serial number level for each product?
The overarching idea is to have a food safety system that literally tracks from farm to grocery shelf and everywhere in between.
Since the transportation and logistics community handles a great part of that task, a good portion of the regulatory oversight will now fall to us to handle. Along with the extra added expense of record-keeping, carriers and others who handle perishable freight (think warehousemen, freight-forwarders, 3PL’s, etc.) will have a new hidden cost to contend with: their cargo liability insurance.
Two little words in the entire proposed regulations stuck out to me (and many other cargo insurance and transportation safety professionals) like a sore thumb…
The basic thought is that the FDA can now, because of these new regulations, condemn an entire load if the inspector even suspects that the load or parts of a load could be potentially adulterated (see Contaminated, Messed With or Screwed With…).
Why this really matters:
Say that a motor carrier has a load that goes out of temp (and it wasn’t due to a mechanical or electrical issue with the reefer unit) during transit. The consignee refuses to accept the load. The FDA (or an appointed inspector from another agency) decides that there is actual damage to part of the load (because they can see the wilted greens or whatever).
Since the inspector can’t be sure that every other carton on the trailer was kept in good temperature, and they have now been appointed as a Food Safety Sheriff, the inspector feels that it is their civic duty to protect all of the innocent consumers from this “potentially adulterated” load of greens. They condemn the entire load and the motor carrier is now on the hook for the entire load. With the FDA contamination seal of approval on the load, salvage will be $0.
Now the fun begins! Time to play “Who’s Gonna Pay?!?”
You dutifully report the loss promptly to your cargo insurance carrier.
Under almost every cargo insurance policy, there has to be a DIRECT PHYSICAL LOSS OR DAMAGE to goods in order to gain coverage under the policy. In addition, the loss has to involve a COVERED CAUSE of LOSS to COVERED PROPERTY. (The goods in question have to be listed as COVERED PROPERTY or not on the list of PROPERTY NOT COVERED…and not listed under the EXCLUSIONS section of the policy.
You have to love insurance coverages….
You made it past the Covered Property…but that darn Covered Cause of Loss grabbed the motor carrier and threw them to the ground.
After the documents and details have been collected, the adjuster kindly informs the insurance agent that there is no coverage for the loss because the loss was caused by a “change in temperature” rather than a mechanical or electrical breakdown of the temperature control unit.
Strip that insurance language out of the mix and read between the lines: “The motor carrier is screwed!”
Who is the motor carrier going to go after to help pay for this loss?
The Insurance Agent?
They could take a baseball bat and drive down to the insurance agent’s office intent on extracting the money from them in one form or another…since the policyholder probably don’t look good in orange, they may want to forego that option. Plus, it usually isn’t the agent’s fault anyway.
Purchasing a policy to cover these perils is more expensive (as it should be) and the motor carrier was probably pretty upset when they found out how much that they had to pay for what the agent was able to secure for them. (Plus, it’s hard to find a insurance carrier that will even write this exposure).
Besides, the motor carrier probably even skipped over all of the words in the proposal that the agent sent over and went to the numbers at the end. IF the insurance agent could find the coverage AND they mentioned it to the motor carrier AND the carrier wasn’t tuning out the boring insurance language that the agent was speaking, then they probably wouldn’t have bought it anyway.
The Freight Broker?
Forget about the freight broker, if one was used. Their “cargo liability insurance” is most likely worse than the motor carrier’s policy as most of those are “following form”. That’s a fun insurance term for if it’s not covered on one policy, it’s not covered under the other one. Plus, most “contingent cargo” insurance policies aren’t worth much more than the paper that they are printed on.
Also, the Broker/Carrier agreement that the motor carrier signed usually states that the motor carrier is liable as a carrier under the Carmack Amendment and there isn’t a snowball’s chance in hell that the carrier will be able to hold the broker liable for anything.
Back to the history books for a moment: The Carmack Amendment (49 USC 14706) states that a motor carrier has a duty to keep goods in the condition in which they were tendered while in transit. (Not the exact language, but you get the jist). Save for one of the 5 “defenses” (Act of the Shipper, Act of God, Act of a Public Enemy, Act of a Public Authority or Inherent Vice of the Goods) to motor carrier liability, the carrier will be found negligent and strictly liable for damage to the goods while in their possession.
Yeah, the shipper! I just said “Act of the Shipper” in that previous paragraph didn’t I? Their goods, their problem, right? Wrong!
Once the motor carrier’s driver signed a clean Bill of Lading at pickup, they were stating that they received the load in good condition. Unless you have a unique “Shipper’s Load and Count” situation where the load is sealed before the driver has a chance to inspect it, then you are out of gas there too. If it was a SL and C load, I pray that the driver noted that on the BOL at pickup. The motor carrier should have good procedures in place to deal with these situations.
The motor carrier may have some recourse against the shipper in this case….but they have to prove it. With the minimum estimated cost of bringing a lawsuit to trial being around $35,000 these days, that probably won’t make much financial sense.
So, how does the motor carrier handle this loss?
Here are my suggestions:
Identify the exposure that exists. How much perishable goods does the carrier haul at any given time? How many loads in a year?
Once you find the average value exposed to loss, you have a good foundation.
Then one risk reduction and one or more risk financing techniques should be used to address this loss exposure.
All-together avoidance would likely be out of the question, unless it’s a very small part of the carrier’s operation to start. They could reduce the amount they haul overall or reduce the amount of perishable goods on a load, but this isn’t very likely from an operational standpoint. Perhaps the carrier could choose to avoid or reduce hauling for a particular shipper, or in a particular lane (think the Southeast in the summer). They could also only use drivers for temperature sensitive loads that have a track record of working with refrigerated goods. Those techniques might have a good chance of reducing the loss exposure here.
Now, let’s think about the risk financing side of the equation. How are we going to pay for the losses that do happen?
The loss that occurred in the example above was most likely what we like to call “unintended risk retention”…a real fancy way of saying that the motor carrier didn’t intend on paying for that loss themselves. They thought (or perhaps they didn’t) that the risk of loss was transferred to the insurance company by means of a cargo insurance policy…but they were wrong.
In this example, I would recommend that the carrier set up a freight loss and damage retention fund where they could put $5,000 (or whatever number is appropriate) per month into the fund to help pay for these losses that arise. This exposure now becomes “intentional retention”. That fund could be invested or put into a savings account for some principal growth as time goes on. I would have the insurance agent seek quotes to have these exposures covered by an insurance carrier. The folks who see the other side of the risk coin each day generally have a pretty good idea of how much is needed to cover that type of loss.
Take the insurance underwriter’s estimated annual premium and divide it by .70 in order to remove their reasonable expense load for providing the coverage. That remaining amount is the amount of estimated true loss cost dollars needed to fund for that loss exposure. Take that annual amount and divide it by 12 to arrive at the amount that a carrier would need to deposit into an account monthly to fund for these losses.
The motor carrier determines that their average exposure to loss per load is $20,000 and they haul 5 loads per week.
Average weekly exposure is $100,000, or about $5,200,000 per year. Average number of hauls per year of 260.
If, by looking at the prior losses, you determine that the carrier has about 3 of these losses per year.
The carrier’s estimated losses from this operation would be around $60,000 per year.
The insurance carrier is likely to ask for around $85,000 to $90,000 (that’s the $60,000 divided by .70 to cover a 30% expense and profit loading) to handle this additional exposure. This may be higher or lower depending on the insurance market conditions.
The motor carrier could begin depositing $5,000 per month into a money market account to help pay for these losses as they arise.
The motor carrier could save $15,000 or more each period by doing this…as long as they try to keep these losses under the $60,000 threshold during that time.
The motor carrier would lose (and potentially in a big way) if they have 4 or 5 or more losses during that period of time. Purchasing the insurance would probably have been less expensive. They would have been able to pay for the insurance premium on a monthly basis as well. Insurance is the most expensive form of risk transfer, but there is comfort in knowing that the exposure is covered…at least you hope that it will be….
How well this turns out could be a matter of pure luck or it could be affected by the motor carrier changing their operations (in either a good or a bad way). For instance, if the motor carrier knows that this portion of their operation is actually growing rather than shrinking or remaining constant then purchasing the insurance may be the better way to go despite the way the cost savings appear at first blush.
Loss exposure analysis is a highly technical and entirely subjective process. There are many factors that can determine the outcomes studied and every situation is different.
That is why I started Carrier Risk Solutions, Inc. and My Safety Manager. These are really deep and technical issues that are faced by every motor carrier and intermediary in the industry. I’ve spent many years studying and honing my skills and abilities in the real world. I’m bringing that power to bear in order to help companies try to solve these problems before they arise.