Freight Cargo Insurance Policy Types Explained
There is far more to the decision process of choosing the freight and logistics provider than picking the lowest rate, as there are many components to what makes up the rate the shipper is offered.
We understand the rate itself is important, which is why we covered the importance of negotiating and selecting the best freight rate structure that is most appropriate for the type of service requirement in Freight Contract Rates vs. Spot Rates - Comprehensive Guide and How-to Negotiate & Execute Best Freight Rates, but we also understand there is more to the story than the rate.
The story is insurance. Evaluating the insurance coverage of a freight servicec provider is a crucial step in vetting a service solution and should not be ignored. Too many times we have heard nightmare stories or losses companies have taken because they missed this step in the carrier approval process and did not find out the magnitude of the issue until it was time to file a claim.
Legally, all freight providers must carry a minimum amount of carrier liability insurance coverage, but is very limited in coverage hence the reasoning behind cargo insurance. The Federal Motor Carrier Safety Administration (FMCSA) site is a good place to start in the process of validating whether the motor carrier or freight broker is operating legally, but there is more to be done.
There are various types of cargo insurance policies and the types vary on whether the freight provider is an asset motor carrier, freight forwarder or freight broker / logistics service provider.
Definition of Contingency Cargo Insurance & Shipper Interest Cargo Insurance
Shipper's Interest Cargo Insurance Policy
Cargo insurance is shipper’s interest policy that is also known as “all-risk” coverage.
This type of cargo coverage is fairly comprehensive, with fewer exclusions.
The policy covers the actual cargo, not the the carrier’s liability, which means during the shipment process the damage or loss of the goods is covered, although there are aspects of the coverage that may be denied or excluded. A list of a few of the exclusions include:
- Damage Due to Improper Packaging or Loading
- Employee Negligence
Motor freight carriers and freight forwarders carry shipper interest policies.
Contingency Cargo Insurance
Contingency cargo insurance is insurance held by freight brokers to cover gaps that may present itself in the underlying motor carrier's insurance at the time the damage or loss occurred.
The “contingent” part implies the insurance only comes into effect if and when the motor carrier used on the load fails to cover the damage or loss sustained on the shipment. Factors that may fail in a motor carrier's shipper interest cargo liability coverage include: policy cancellation, loss or damage exclusions, refusal to cover, etc.
Contingency cargo insurance is used for essentially anything from loss to damage to theft that occurs while the motor carrier has legal liability for goods in its possession. Contingent cargo is used by freight brokers to cover every mode of transportation they service.
In summary, contingency cargo insurance has a wide reach when something goes awry in the shipping process. The continegency factor is simetimes a reason why shippers opt to use a freight broker to move thier freight, as it provides one more level of coverage.
Freight brokers and logistics service providers carry contingent cargo.
Specific Cargo Policy
There are times where it makes sense to purchase additional cargo coverage, hence a specific cargo insurance policy.
Reasons to purchase a specific cargo policy inlcude:
- The amount of the underlying insurance a motor carrier has is less than the value of cargo itself.
- When cargo insurance is not available and the customer does not want to risk loss or damage.
- Once specific example of this situation is for shipments that move in or out of Mexico. Both truckload and intermodal freight providers do not offer coverage in these situations, unless requested to obtain a specific cargo liability policy.
Any freight provider can obtain a specific cargo insurance policy.
When talking cargo liability coverage one would be remiss if they did not bring up the Carmack Amendment.
Essentially, the Carmack Amendment gives carriers one path to avoid freight loss, which is they must prove that they were not negligent and one of the five exceptions listed below caused the damage:
- Act of God
- Public Enemy of the USA Government or Act of War
- The Shipper Caused the Damage in Some Way
- Government Caused the Damage
- Inherent Vice of the Product
We would highly recommend reading more on the Carmack Amendment because of its implications in the handling of cargo liability coverage.
While there is the need to understand a carrier's cargo coverage, it is not to say there are not other insurance policies that need to be reviewed before employing a freight provider.
The other insurance coverage freight providers should have include:
- Property & General Liability
- Vicarious Auto Liability & Umbrella
- Workers' Compensation
- Errors & Omissions
Last, but not least on the insurance front. LTL shippers need to pay close attention to the cargo coverage on their shipments because more times than not LTL provides cargo coverage on a price per pound, not the value of the cargo.
Additional Articles of Interest:
- Carmack Amendment Explained in Detail
- Best Intermodal Companies (And How to Choose)
- Top 20 Freight Brokerage Companies in 2019 (& How to Choose The Best)
- Best Truckload Companies (And How to Choose)
- 2019 Best LTL Companies (And How to Choose)