Load Broking and How Best to Manage the Inherent Risks
BBM, CAAC, CRM, Client Executive
Email : firstname.lastname@example.org
Cargo policies can be confusing for companies who broker loads. Today I’ll explain why it is more advantageous for them not to buy a Follow-Form Cargo policy, but rather to opt for a Non-Follow Form Cargo policy, including Contingent Cargo coverage.
While Follow-Form contingent cargo policies provide insurance coverage, they follow the exclusions, deductible(s) and limits of the underlying motor carrier’s insurance policy. This represents a real problem since many motor carriers’ policies include exclusions and high deductibles to control the insurance premium cost.
Common exclusions include losses due to “mysterious disappearance” of a vehicle (unexplained stolen truck), “unattended vehicle” (i.e. driver leaves truck for bathroom break or to eat), “overturned vehicle”, product that becomes wet in the trailer, product that is “upset” or shifts in the trailer, refrigeration unit breakdown, “driver negligence”, etc.
In fact, there are many reasons why you may not be made “whole” when brokering a load to another carrier and a claim occurs. These can include:
- The motor carrier goes out of business.
- The insurance company becomes insolvent.
- The policy is cancelled, but you are not notified.
- There is a high deductible.
- The motor carrier refuses to accept responsibility.
- The carrier refuses to cooperate with their insurer.
- The motor carrier’s insurer will not respond at all.
- The motor carrier and their insurer delay everything.
- The cause of loss or damage is not covered by the third party carrier’s insurance policy.
Keep in mind that obtaining a certificate of insurance is good practice, but it normally does not tell you about exclusions, what type of policy you purchased (All Risk or not), what commodities are not covered, if the tractor should be hooked to the trailer, if there is a radius restriction, if the tractor and trailer must be locked, if there are restrictions regarding where the truck must be parked overnight, if it is a named vehicle coverage only, etc. So without actually reading the third party carriers’ policy – how can you know?
An easy solution for transport companies may be to buy a stand-alone Contingent Cargo policy. But practically speaking, there are four main reasons why it would be difficult to move the load brokering activity and resultant contingent cargo risk to an individual policy:
- The majority of transportation insurers in Canada write their policies on a package basis – which in turn means you cannot just pull the Cargo and/or Contingent Cargo portion out of the wording and simply write it elsewhere.
- It will be difficult to convince a different insurer to write only the Contingent Cargo at a competitive rate as the insured carrier no longer has control over the load. We would essentially be asking the new insurer to be selected against to take on a higher risk activity. In that instance, what amount of premium would suffice to cover this risk? If the insurer agreed to it, that premium would be very high indeed. Moreover, he would need to see the prior loss experience and if other issues exist.
- The best insurers provide the broadest wording which is, in fact, a Non-follow form wording.
- If there could be a separation between two policies – one for Cargo and one for Contingent Cargo – both insurers would need to agree with the other’s wording, covered perils, exclusions, etc. as there cannot be double coverage in the policy. A very complicated goal to achieve indeed.
Therefore a good Cargo policy that incudes Contingent Cargo protection is designed to cover property in vehicles for which the insured (load broker) and the motor carrier in question are legally liable. Here, the word “contingent” means that it is contingent on the motor carrier’s insurance policy not paying off. In other word, it does not stand as primary coverage.
The inability to collect from the motor carrier and its insurer is generally based on three main reasons below:
- The motor carrier’s insurance policy was cancelled or not renewed.
- The motor carrier’s insurance policy limits were insufficient.
- The loss or damage is excluded under the terms of the motor carrier’s insurance policy.
In theory, a Follow-Form Contingent Cargo policy is to provide additional cargo coverage loss payments when necessary. The big question is: Will it cover a loss that is important to you?
To keep premiums down, many carriers maintain a very high deductible ($25,000 or $50,000). Keep in mind that any claim below this deductible amount is not going to be covered by the insurance policy. The insured is then relying on the good faith and financial ability of the carrier to pay the claim. In effect, it is just like giving the carrier a line of credit equal to the value of the shipment. If they cannot or will not pay a claim, the Follow-Form contingent policy may not protect you.
Non-Follow Form Contingent Cargo policies conversely do not follow the exclusions, deductible and terms of the underlying motor carrier’s insurance. If the carrier and its insurer refuse to pay a valid cargo loss or damage claim, the Contingent policy will pay the amount and the insurance company will pursue the motor carrier and its insurance company for reimbursement. In the end, Non-Follow Form Contingent Cargo policies, including Contingent Cargo coverage, greatly reduce the chances of you getting stuck with a big claim and no insurance!