Motor truck carriers and logistics companies are facing a market correction in commercial auto liability insurance, but they shouldn’t overlook the importance of a complementary and highly valuable form of coverage: motor truck cargo insurance.
With a prolonged period of claims inflation prompting steep rate increases on commercial auto policies, many transportation firms might be tempted to forgo or cut back on cargo coverage. That would be a big mistake. Motor carriers really need to maintain commercial auto and cargo coverage. These are not “either/or” kinds of insurance, for the following reasons:
Cargo is excluded from commercial auto coverage. Commercial auto insurance policies are designed to cover personal injury and property damage, but not contractual liability or property that is in the care, custody and control of the motor carrier. These are typically excluded in commercial auto policies, in part because cargo insurance is expressly designed to cover goods transported on behalf of others.
Erosion of liability coverage. If a motor carrier is involved in an accident that damages cargo but has little or no cargo insurance, the cargo owners might sue the trucking company in an attempt to recover their loss. The company’s commercial auto liability policy likely would not pay for the cargo damage – see the above exclusions – but it might respond to the legal expenses of defending the lawsuit. Defense coverage in many cases erodes the policy limits, reducing the overall amount of insurance available for otherwise covered claims.
Uncovered losses. Without adequate insurance, a cargo claim can quickly become a financial burden the motor carrier must pay out of its own pocket. At a time when declining freight demand is squeezing the trucking industry’s already-thin margins, unexpected financial obligations can devastate motor carriers’ profitability – and even threaten their survival.
Uncertain third-party coverage. Some cargo claims might find coverage under the insurance programs of others involved in the shipping transaction, such as freight brokers. However, a motor carrier will find it difficult and time-consuming to attempt to obtain coverage under a freight broker’s contingent cargo insurance. Even if that policy pays out, which isn’t a sure thing, it might not fully cover the cargo loss, leaving the motor carrier financial responsible for the difference.
Loss of revenue. Cargo claims, even more than accidents that result in large liability claims, have the potential to cause long-term damage to a transportation company’s revenue base. One bad experience with a cargo loss can cause shipper customers to cancel their contracts and avoid doing business with the motor carrier. It can take a long time to recover from the reputational impairment and regain the trust of shippers.
Insurance rates are intended to reflect the risks and exposures of policyholders. When claim frequency or severity rise, underwriters tend to increase rates. As in the case of commercial auto, where both frequency and severity are spiking, rates are up sharply. In the fourth quarter of 2019, rates across most lines of business, not just commercial auto, were going up, according to Business Insurance.
The best way to mitigate higher insurance costs is to focus on managing risks and reducing exposures, to the extent possible. Not all losses are preventable. That reality is one of the reasons adequate insurance coverage is vital. Adequacy depends on the motor carriers’ risk. A minimum amount required by law or contract may have little to do with actual risk. Motor carriers therefore should work closely with their agents and brokers to better understand risks and exposures, and to enhance their risk management programs. A key part of that process is seeking insurance partners that have deep expertise in underwriting transportation and logistics risks.
Tokio Marine America can help motor carriers and their risk advisers navigate the complexity of motor truck cargo. We’re a digitally savvy insurer that understands transportation logistics and cargo risks. We help manage conventional and emerging risks through our expertise and proprietary needed coverages. During times of change and stress, we prove our value by focusing on delivering Anshin, the Japanese word for safety, security and peace of mind.
Talk to us about the risks your business faces. To learn how Tokio Marine America can make a difference in your business, visit www.tmamerica.com.
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