INLAND MARINE INSURANCE LESSON 1: INTRODUCTION Introduction Inland marine (IM) insurance protects against the financial consequences of loss of or damage to specified types of property. The types of property covered include property in transit, property of a movable (‘floatable’) nature and property instrumental to transportation or communication. Inland Marine insurance evolved in three stages: 1. Inland marine first appeared in the 1920s to describe policies developed by marine insurers to meet new insurance needs. In the early 1900s, states practiced a monoline approach to insurance regulation, limiting insurers to one line of business: life, fire, marine or casualty. Marine insurers could write policies covering property anywhere in the world against any peril, using nonstandard forms and rates. Marine insurers developed IM policies as a result of the increased use of the rail system during World War I and the growth of the trucking industry after that war. The increased use of rail and truck transportation increased the need for insurance covering goods in transit. Marine insurers provided that coverage.
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INLAND MARINE INSURANCE
LESSON 1: INTRODUCTION
Introduction
Inland marine (IM) insurance protects against the financial consequences of loss
of or damage to specified types of property. The types of property covered
include property in transit, property of a movable (‘floatable’) nature and property
instrumental to transportation or communication.
Inland Marine insurance evolved in three stages:
1. Inland marine first appeared in the 1920s to describe policies developed
by marine insurers to meet new insurance needs. In the early 1900s,
states practiced a monoline approach to insurance regulation, limiting
insurers to one line of business: life, fire, marine or casualty. Marine
insurers could write policies covering property anywhere in the world
against any peril, using nonstandard forms and rates. Marine insurers
developed IM policies as a result of the increased use of the rail system
during World War I and the growth of the trucking industry after that war.
The increased use of rail and truck transportation increased the need for
insurance covering goods in transit. Marine insurers provided that
coverage.
2. IM expanded into other classes of property as a result of the general
increase in personal wealth after WWI. That increase in wealth prompted
an increased need for insurance to cover jewelry, furs and other precious
items. IM insurers developed the floater (policy that covers property that
does not always remain in a fixed location) for jewelry, fine art, cameras,
furs and other items in response to that need. IM insurers also developed
floaters for commercial loss exposures, such as bridges and tunnels,
property sold under installment plans, building materials while in transport
and mobile equipment.
3. The Inland Marine Underwriters Association (IMUA) was formed in 1931 to
stabilize the growing IM industry by controlling unfair business practices,
developing uniform forms and clauses and establishing rating methods
where possible. Today, the IMUA provides a forum for the discussion of
general IM problems, acts as an advisor regarding legislation that could
affect IM insurance and cooperates with state insurance departments.
The Purpose and Intent of the Nationwide Marine Definition
The Nationwide Marine Definition, adopted in 1933 by the National Convention of
Insurance Commissioners (NCIC, later replaced by the National Association of
Insurance Commissioners, the NAIC,) specified what could and could not be
covered by marine insurance. The drafters of the definition restricted covered
property to property in transit or property bearing some relation to transportation
or communication.
The definition’s purpose was to limit the insuring powers of marine insurers and
to prevent them from taking business from fire and casualty insurers. The
application of antitrust laws to the insurance industry in 1944 and the
development of multi-line insurance around 1950 made the Nationwide Marine
Definition obsolete.
The Nationwide Marine Definition was revised in 1953 to classify, rather than
restrict, ocean marine business. It was revised again in 1976 to include inland
marine business, including difference in conditions (DIC) policies, builders’ risk
policies and electronic data processing (EDP) equipment policies.
The effect of the current, 1976 Nationwide Marine Definition is to help insurers
properly classify IM premium and loss data and comply with rate and form filing
regulations. Simply, the definition prevents inland and ocean marine insurers
from providing unregulated coverage for items or situations that should be subject
to regulatory requirements.
The opening paragraphs of the 1976 Nationwide Marine Definition state that the
definition does not:
• List every coverage that can be classified as marine
• Guarantee that listed risks and coverages are always marine risks and
coverages
• Restrict or limit the exercise of insuring powers
The six property categories listed in the 1976 Definition include:
• Imports
• Exports
• Domestic shipments
• Bridges, tunnels and other instrumentalities of transportation and
communication
• Personal property floater risk
• Commercial property floater risk
Filed versus Non-filed Classes
Filed (controlled) classes must be written according to filed forms, rules and rates.
Some states let insurers modify their rates through consent-to-rate procedures.
The underwriter gets the insured’s written consent to a rate or form change and
files the consent with the state insurance department.
Nonfiled (noncontrolled) classes allow underwriters more flexibility to determine
policy provisions and rates, and let them respond better to customers’ needs.
Underwriters can use judgment rating on nonfiled classes to rate each risk
individually, relying on the underwriter’s experience and expertise. Nonfiled
classes often require skilled adjusters to handle losses.
Principal Classes of Commercial IM Business
Contractors’ risk coverage is the largest class of commercial IM insurance. Other
important classes include builders’ risk, transit, motor truck cargo, difference in
conditions and electronic data processing equipment coverages.
Principal Classes of Personal IM Business
Personal jewelry coverage is the largest class of personal IM insurance.
Other classes include bicycles, cameras, coin collections, farm equipment, fine
arts, furs, golf equipment, livestock, musical instruments, personal effects,
personal property and stamp collections.
The Scheduled Personal Property Endorsement
The scheduled personal property endorsement avoids three limitations found
under Coverage C (personal property) of the homeowners’ policy:
• Low monetary limits on recovery
• IM coverage for named perils only
• Application of a deductible
The Scheduled Personal Property Endorsement
The scheduled personal property endorsement is identical to the monoline IM
policy called the personal articles floater. Both the endorsement and the floater
cover specifically described jewelry, furs, cameras, musical instruments,
silverware, golf equipment, fine arts, stamp collections and coin collections for
their full value, often without a deductible, on a special-form basis.
How IM Remedies Restrictions in Commercial Property Forms
The ISO Building and Personal Property (BPP) Coverage Form excludes five
types of property that can be covered under inland marine policies:
• Bridges
• Personal property while airborne or waterborne
• Docks, piers and wharves
• Vehicles and self-propelled machines operated away from the described
premises
• Radio and television antennas
The BPP does, however, cover some IM exposures, but for low sublimits.
The Scheduled Personal Property Endorsement
Commercial property causes-of-loss forms exclude perils that can be covered
under IM. Even the special causes-of-loss form, which offers the broadest
coverage, imposes theft-related restrictions, like a $2,500 limits on furs, jewelry,
and patterns, dies, molds and forms. It also fails to cover contractors’ equipment
against theft and limits coverage for property in transit.
IM coverage may be attached to commercial package policies and
businessowners’ policies as coverage extensions. (Businessowners’ policies
combine commercial property and liability coverages with a limited number of
coverage options.) IM coverage is also included in output policies, which
combine most of the property and IM coverages organizations need.
LESSON 2: COMPONENTS OF INLAND MARINE
Components of Inland Marine Policies
Policy provisions for IM and other policies are either of the following:
• Boilerplate (standard provisions that address issues common to most IM
policies)
• Specific to the loss exposure being insured
Underwriters should know their company’s boilerplate provisions well to evaluate
individual policies more efficiently, and they should be aware that boilerplate
provisions vary from insurer to insurer.
Four Ways to Provide IM Coverage
There are four ways to provide Inland Marine coverage. They are:
• Use American Association of Insurance Services (AAIS) or Insurance
Services Office (ISO) forms without altering them. The insurer avoids
development costs at the risk of failing to meet each insured’s special
needs.
• Use an independently developed form. The insurer meets each insured’s
special needs, but incurs high development costs.
• Combine AAIS or ISO provisions with insurer-drafted provisions. The
insurer meets some of its insureds’ special needs while keeping
development costs low
• Use a form drafted by the insured’s broker. The insurer avoids
development costs, but incurs the costs of analyzing the form and
negotiating any changes.
There are four components of an AAIS or ISO IM coverage part. They are:
• Declarations page, which states the premium, limit of insurance,
deductible and other relevant information
• IM insuring agreement or coverage form, which contains the provisions
applicable to the property class covered. There may be multiple coverage
forms in one policy.
• Commercial inland marine conditions form, which contains provisions
common to all inland marine coverage forms
• Endorsements, which provide optional coverages or otherwise modify the
policy. Endorsements may benefit either the insured or the insurer (or,
usually, both.)
Named Perils versus Special Form Coverage
Named perils coverage covers only those perils specifically named in the policy.
Special form coverage covers all risks of direct physical loss except those
specifically excluded. Special form coverage is more advantageous to the
insured because:
• It is broader than named-perils coverage
• It covers unusual (and sometimes unanticipated) causes of loss
• It places the burden of proof on the insurer
Inland Marine Policy Provisions
Coverage Extensions (Additional Coverage)
Coverage extensions cover incidental loss exposures not covered by the basic
insuring agreement. There are five common IM policy extensions:
• Debris removal extension that pays to remove the debris of covered
property destroyed by a covered cause of loss. Most policies limit
coverage to 25% of the amount payable for the direct physical loss.
• Pollutant cleanup and removal extension that pays to remove pollutants
from land or water if the release of pollutants resulted from a covered
cause of loss. In most cases, the limit is low, such as $10,000.
• Newly acquired property extension that provides temporary coverage for
newly acquired property. This extension closes coverage gaps caused
when the policy covers only specifically described premises or real
property, or only scheduled items.
• Fire department service charge extension that pays the charge levied by a
fire department for saving or attempting to save covered property.
• Removal extension (preservation of property extension) that covers
property against all perils, even war, while it is being removed from the
insured’s premises and for a specified number of days after it has been
removed, if the removal was designed to prevent damage by a covered
cause of loss.
Inland Marine Policy Provisions
Exclusions
Exclusions state which perils are not covered and under what circumstances
normally covered perils will not be covered. Insurers use exclusions to remove
coverage for loss exposures that are too severe to insure, are customarily
insured under another policy, require special underwriting and/or can be treated
effectively through loss control. Exclusions exist in three tiers:
1. First tier exclusions preclude coverage for catastrophes (such as
earthquakes, floods and war) that could result in losses suffered by many
insureds at one time. These exclusions state that coverage is not provided
for losses caused either directly or indirectly by excluded perils. Most
inland marine policies exclude war and nuclear reaction. Many inland
marine policies cover earthquakes, floods and hurricanes. Five first-tier
exclusions are:
• Governmental authority exclusion, which excludes loss caused by
seizure or destruction of property by order of governmental authority.
There is partial coverage for property destruction by police and fire
services to prevent the further spread of insured destruction, which is
most commonly fire.
• Nuclear hazard exclusion, which excludes loss caused by nuclear
weapons, nuclear reaction and radiation and radioactive
contamination.
• War exclusion, which excludes loss caused by offensive or defensive
action by government forces and by military action taken against
government forces.
• Earthquake exclusion, which excludes loss caused by earthquake to
property while it is located at the insured’s premises. The insured
often may delete this exclusion for an additional premium. Fire
caused by an earthquake is covered.
• Flood exclusion, which excludes loss caused by flood, surface water,
waves, overflow of any body of water or their spray, all whether driven
by wind or not. This exclusion applies only to property while it is
located at the insured’s premises. Direct loss caused by fire, explosion
or theft caused by flood is covered. Alternative sources of flood
coverage include the National Flood Insurance Program and an IM
difference in conditions (DIC) policy.
2. Second tier exclusions vary greatly among the different coverage forms.
They target risks that do not usually involve concurrent causation. Seven
common second tier exclusions are:
• Voluntary parting exclusion, which excludes losses when the insured
(or the insured’s entrusted property holder) is tricked into voluntarily
turning over covered property, such as when a prospective car buyer
takes a car for a solo test drive and never returns with it.
• Unauthorized instructions exclusion, which excludes losses from
unauthorized instructions to transfer property to any person or any
place.
• Dishonest acts exclusion, which excludes losses from dishonest acts
by the insured or anyone entrusted with the property by the insured.
This exclusion does not apply to dishonest acts by hired carriers or to
employees’ acts of destruction.
• Unexplained disappearance exclusion, which excludes losses without
explanation (because such losses may have been caused by
dishonesty.)
• Inventory shortage exclusion, which excludes losses from shortage
discovered when taking inventory, unless it can be proven that the
shortage resulted from a covered cause of loss. This exclusion exists
because inventory shortages can result from accounting errors as well
as covered causes of loss.
• Delay, loss of use exclusion, which excludes coverage for all but direct
physical losses.
• Other exclusions include electronic disturbance, processing work, theft
from unattended or unlocked vehicles, marring and scratching,
exposure to light, breakage and other causes of loss unique to certain
types of property.
3. Third tier exclusions exclude coverage for losses directly resulting from
third-tier causes, but cover losses caused by ensuing covered causes of
loss. Five common third tier exclusions are:
• Weather conditions exclusion, which excludes losses caused by a
combination of weather conditions and a cause of loss excluded in the
first tier of exclusions.
• Acts or decisions exclusion, which excludes losses caused by “acts or
decisions, including failure to act or decide, by any person, group,
organization or governmental body.”
• Faulty planning, design, materials or maintenance exclusion, which
excludes losses caused by poor workmanship during or after
construction and installation.
• Collapse exclusion, which excludes coverage caused by collapse,
except as specified in the additional coverage collapse provision.
The additional coverage collapse provision covers building collapse
only if caused by a specified cause of loss. That provision was
designed to prevent state courts from applying the doctrine of
concurrent causation, which allows an insured to collect for a loss that
is caused jointly by an excluded peril and a peril not specifically
excluded. In an actual case, flood was the excluded peril and
government incompetence in dam design was the peril not specifically
excluded.
• Nonfortuitous losses exclusion, which excludes losses that are not
accidental, but rather are certain or expected to occur over time.
Nonfortuitous losses include wear and tear, gradual deterioration,
depreciation, mechanical breakdown and inherent vice (such as milk
souring, jewelry thinning, pipes corroding, iron rusting and people
aging.)
Inland Marine Policy Provisions
Conditions
Conditions are specific to and contained in each particular coverage form. They
are as follows:
• Coverage territory: This states the geographical boundaries within which
coverage applies.
• Valuation: Most IM policies value property at actual cash value (ACV,)
which is defined as replacement cost minus accumulated depreciation.
Insurers use valuation guidebooks, sales advertisements, local market
surveys and internet services to determine ACVs.
• Coinsurance clause: This requires insureds to insure property to its full
value or some stipulated percentage of its value (often 80%.) Under the
coinsurance clause, if the property is underinsured, the insurer will
penalize the insured at the time of loss by limiting the loss payment to (the
amount of coverage) divided by (the coinsurance percentage times the
value subject to loss), then minus the deductible, if any. Coinsurance is an
especially difficult requirement for bailees because bailees often find it
difficult to judge the value of others’ property.
• Reporting-form conditions: Some forms allow the insured to report
property values on hand to the insurer at set intervals and to have the
premium adjusted to the reported values. Insureds with widely fluctuating
inventories can pay lower premiums when inventory is low, yet still
maintain proper coverage. Coverage is provided only to the applicable
limit of insurance, even if a report lists a higher value. Most forms contain
a full value reporting clause (honesty clause,) which states that if the
reports were not made for the full value and on time, the amount of any
loss payment will be limited to (the amount declared) divided by (the
actual amount at risk when the report was made.) The separate, late
reporting clause usually limits coverage to the lowest of the amount of the
last report, ¾ of the initial amount of insurance (if the first report was late)
or the amount otherwise payable.
You can determine whether, and for how much, a loss would be covered by
an inland marine insurance policy by applying what you learned in this lesson.
LESSON 3: TRANSIT INSURANCE
Property in transit (cargo) is property being moved from one place to another.
Businesses with a financial interest in property in transit have transit loss
exposures.
The Five Components of Transit Loss Exposures
There are five components of transit loss exposures. They are:
• Property subject to loss: Some types of property are more susceptible to
loss.
• Number of parties involved: Loss exposures get more complicated if more
parties are involved. The three typical parties involved in the transit
exposure are:
o The consignor or shipper (who sells and ships the goods)
o The consignee (who buys and receives the goods)
o The carrier (who transports the goods)
• Mode of transportation: This is the shipping method. Intermodal
transportation ships cargo using two or more modes of transportation. An
intermodal cargo container is designed to fit aboard a truck trailer chassis,
railcar, barge and oceangoing cargo vessel. Intermodal cargo containers
decrease the possibility of damage by some perils (like water damage) but
increase the possibility of loss by other perils (like theft.)
• Terms of sale: This dictates when title (ownership) passes from shipper to
buyer and who pays the freight (shipping charges.) Shipper or consignee
may pay freight charges outright or charge them to the other party through
an increased or discounted sale price.
o FOB (Free On Board) Origin has the buyer assume the loss exposure
once the property is in the custody of the carrier and the bill of lading
has been issued.
o FOB Destination has the seller transport the property and assume the
loss exposure until delivery has been made to the buyer.
• Carrier liability: The circumstances of loss and the contract between the
shipper and the carrier determine if the carrier is liable for a transit loss.
The bill of lading is the carrier’s receipt for property being shipped. The bill
of lading may also contain the contract of carriage between shipper and
carrier. Many shippers and consignees buy transit insurance to cover
losses for which the carrier may not be liable or able to pay. Some
shippers and consignees retain transit losses because the values exposed
to loss are often small and the losses are predictable.
Annual Transit Insurance
Annual transit insurance covers the owner’s property while the property is being
transported by another. Coverage extends to all shipments made during the
policy period (usually one year.) Annual transit coverage is a nonfiled class.
The insured need not own the covered property. Coverage applies only to
property shipped by conveyances or carriers described in the policy. Annual
transit insurance excludes property targeted by thieves (like furs, jewelry and fine
art) or more appropriately covered under another form (like mail and securities.)
Property is only covered while it is in transit. Transit begins when the goods leave
their starting point (if the shipper is the carrier) or when the carrier takes custody
of the goods (if the shipper uses a carrier for hire.) Transit ends when the goods
have been delivered to their destination. Most policies cover property while it’s in
temporary storage, but not while it’s being temporarily processed at another
location. Some policies contain a provision that specifies when coverage begins
and ends. Property in transit is at the insured’s risk if the insured agrees to
provide insurance and/or the insured has title to the property.
Coverage Extensions
Coverage extensions are as follows:
• FOB shipments extension pays for the shipper’s interest in property
shipped FOB when the consignee refuses to pay for the loss.
• Rejected shipments extension pays for damages to rejected shipments
while the property is being returned to the shipper.
• Packing or consolidating companies extension extends coverage to
property in the custody of a packing or consolidating company being used
by named insured or consignee.
• Fraud or deceit extension pays for losses that occur when the insured or
the insured’s agent, messenger, customer or consignee gives covered
property to someone who falsely presents him/herself as the person to
receive goods for shipment or delivery.
• Other extensions include relocation to prevent loss, debris removal and
pollutant removal.
Coverage may be on an “all-risks” or on a named perils basis. Both types of
policies include all first-tier exclusions except for earth movement and flood.
Theft coverage may exclude dishonest acts, voluntary parting, unauthorized
instructions, unexplained disappearance and inventory shortages. Some policies
exclude breakdown of refrigeration equipment. Virtually every policy excludes a
list of specific perils, such as insects, vermin, inherent vice, contamination, war
and nuclear damage, rough handling, breakage, marring, scratching, chipping
and denting.
In the absence of a valuation clause, the insurer is liable for the actual amount of
loss at the time and place of occurrence. The most common valuation clause
sets the property value at its invoice price (the price of the goods shown on the
invoice,) including advanced freight and cost or charges incurred from the time of
shipment. Invoice price is advantageous to the seller because it is easily
determined and it includes the seller’s profit on the sale.
Coverage applies wherever the property is, within the policy’s stated territorial
limits. Land coverage includes imports and exports if they are not covered by
ocean marine coverage. Air and water coverage does not include imports and
exports.
The insurer preserves its right of subrogation against the property carrier or
bailee, which gives an insurer that has already paid a loss the chance to recover
some of that payment. The principal source of subrogation recovery is the
negligent carrier. Many policies include a clause that invalidates the policy if the
insured does anything to impair the insurer’s recovery rights. That clause
sometimes does not apply to ordinary bills of lading. The policy may allow the
insured to accept a released bill of lading, which limits, but does not eliminate,
the carrier’s liability for cargo loss. A released bill of lading may limit coverage to
$0.60 per pound, or some other unreasonably low amount in consideration of a
lower shipping charge.
The ISO mail coverage form insures:
• First class mail
• Certified mail
• USPS express mail
• Registered mail sent by banks, bankers, trust companies, insurers,
security brokers, investment corporations, fiduciary businesses and
corporations acting as security transfer agents or registrars for their own
security issues.
Transit Insurance Extensions in Standard Policies
There are two coverage forms. The first one is ISO Business Owners’ Special
Property Coverage Form. Special form coverage provides a $5,000 extension for
property in transit in motor vehicles owned, leased or operated by the named
insured.
The second one is ISO Building and Personal Property Coverage Form. The
personal property off-premises extension provides $5,000 coverage for personal
property in transit or temporarily at premises not owned, leased or operated by
the named insured. Property must be within the regular coverage territory, not
traveling between territories.
Underwriting Factors for Annual Transit Insurance
There are nine underwriting factors for annual transit insurance. They are:
• Type of property shipped: Many insurers assign a commodity classification
to the property that reflects the property’s damageability and
attractiveness to thieves. Target commodities (like cigarettes, jewelry, blue
jeans and over-the-counter medications) are especially attractive to
thieves. Some commodities require the removal of standard policy
exclusions. For example, museums wouldn’t want to have the fine arts
exclusion in place.
• Value of shipments: Insurers ask for the value of all shipments made at
the insured’s risk annually, categorized by mode of transportation.
Insurers charge different rates for different modes of transportation and
set limits at or near the insured’s usual maximum value per shipment.
• Use of own vehicles: Insurers want to know how many and what types of
vehicles the insured operates, details of the vehicle maintenance program,
how the insured recruits and trains its drivers, whether the insured
backhauls others’ property (or returns with an empty load) and the safety
procedures associated with shipping activities.
• Subrogation potential: Insurers want to know if the insured uses full or
released bills of lading.
• Distance and geographical scope of shipments: Long-haul shipping (trips
longer than 200 miles) is riskier than short-haul shipping. Shipping to and
from high crime areas increases the risk of theft.
• Loss history: A three-year to five-year loss history can indicate potential
loss problems. High-frequency losses indicate the need to establish and/or
improve loss control activities.
• Packing methods: Inadequate packing increases the risk of loss.
• Gross sales: Gross sales indicate the size of the insured’s business and
can be used as the rating basis when the insured would have difficulty
keeping track of shipment values.
• Terms of coverage: Policy details can eliminate coverage for high-risk
activities.
Trip Transit Policy
A trip transit policy covers a single, specified trip. The policy may cover the
owner’s interest or the carrier’s liability. Businesses that ship property
infrequently use trip transit policies.
Businesses with annual transit policies sometimes use trip transit policies to
insure high-value or one-of-a-kind shipments that exceed the limits of the annual
transit policy. Underwriting considerations are the same as for annual transit
policies.
How to Adjust Transit Insurance Claims
There are seven steps to adjust transit insurance claims. They are:
1. Check for unique coverages that may have been added to the policy.
2. For reporting-basis policies, make sure the insured’s reports were up-to-
date as of the date of loss.
3. Verify the facts of loss and ownership of lost property.
4. Get copies of key shipping documents; the bill of lading, shipping invoice,
purchase documents, shipping instructions, inspection records and master
contracts.
5. Inspect the goods to make sure damage has been minimized and
salvageability maximized.
6. Select a salvage firm.
7. Retain and use subrogation rights.
LESSON 4: MOTOR TRUCK CARGO LIABILITY
INSURANCE
Motor Carrier Cargo Liability Exposures
Motor truck cargo (MTC) liability insurance covers motor carriers against cargo
liability claims of shippers and/or consignees for property damaged or lost in
transit. A motor carrier uses automobiles to transport property or persons. A
motor carrier’s cargo liability exposure is the possibility that the carrier will be
legally obligated to pay for loss of or damage to others’ property in its care,
custody or control for purposes of transportation.
Underwriters must understand cargo liability exposures to evaluate MTC and
transit policy applicants.
The History of MTC Liability Insurance
The following is a history of MTC legislation:
• Carmack Amendment, 1906: This made common carriers strictly liable for
cargo losses. Strict liability is liability without regard to fault. Carriers could
limit their liability through released rates, reduced shipping rates in return
for limiting the carrier’s liability for cargo losses.
• Cummins Amendments, 1915 and 1916: These abolished and then
reinstated the use of released rates.
• Motor Carrier Act of 1935: This brought motor carriage and freight
forwarders under Interstate Commerce Commission (ICC) jurisdiction and
Carmack liability rules. A freight forwarder assembles and consolidates
shipments and hires carriers to do the hauling. (Consolidators and packing
houses assemble and consolidate shipments, but do not arrange for their
transport.)
• Motor Carrier Act of 1980: This partly deregulated motor carriage of cargo.
• Trucking Industry Regulatory Reform Act of 1994: This eliminated ICC
tariff-filing requirements.
• ICC Termination Act of 1995: This eliminated much of the Interstate
Commerce Act and gave the ICC’s remaining responsibilities to the US
Department of Transportation (DOT). The DOT further deregulated motor
carriage of cargo, reducing the Carmack Amendment to Section 14706 of
Title 49, which codifies common-law principles that traditionally applied
only to common carriers and applied them to both common and contract
carriers, with some exceptions (such as agricultural carriage and
emergency towing.)
Carrier Liability Defenses
Carriers are not liable for cargo losses caused by:
• Acts of God: Events that occur without human intervention or that cannot
be humanly prevented.
• Acts of the public enemy: Acts of nations or governments at war with the
nation in which the carrier is domiciled.
• Acts of a public authority: Acts taken by public officials acting with
governmental authority.
• Shipper’s fault or neglect: The shipper’s act is the sole cause of loss or
damage.
• Inherent vice: A property condition that tends to make the property slowly
self-destruct, as milk sours, iron rusts and your boss ages.
The carrier may still be held liable for a loss attributable to one of the above
causes if the carrier could have foreseen and/or avoided the loss.
When Does the Carrier’s Loss Exposure Begin?
The carrier’s loss exposure begins when the carrier receives and accepts
property for immediate delivery and the shipper has performed all necessary
actions. The carrier receives and accepts property when it picks up property at
the shipper’s address or when the shipper delivers its own property to the
carrier’s terminal.
When Ddoes the Carrier’s Loss Exposure End?
The carrier’s loss exposure ends when the carrier tenders the goods for delivery
at a reasonable time, place and manner. The consignee’s receipt is evidence of
property delivery. If the consignee does not provide delivery instructions by a
certain date, the carrier’s liability is reduced to that of a warehouse operator and
as such is only responsible for losses resulting from negligence. Negligence is
the failure to exercise the standard of care a reasonably prudent person would
have shown in a similar situation. Negligence requires a breached duty causing
damage.
The Major Types of Bills of Lading and Their Uses
A bill of lading is issued by a common carrier and serves as both a receipt for
goods placed in the custody of the carrier and as a contract between the shipper
and carrier. When the shipper seals the cargo container before delivering it to the
carrier, the carrier stamps the bill of lading with the shipper’s weight, load and
count to signify that the carrier will not be held liable for any loss resulting from
short load or count unless the shipper can prove the container was opened in
transit. The major types of bills of lading and their uses are:
• Released bill of lading: This releases the carrier from liability beyond the
value of the goods stated in the bill. That value may be stated as a
declared dollar amount for the whole load or as a dollar amount per pound
or per 100 pounds. Under such an arrangement, the carrier usually
charges a lower rate, called a released rate.
• Straight bill of lading: This does not include any limitations on value. The
straight bill states if the carrier’s services are to be paid for by the shipper
or by the consignee upon delivery.
• Order bill of lading: This is used for cash-on-delivery arrangements in
which the consignee does not receive the goods until they have been paid
for. An order bill of lading may or may not include liability limits as in a
released bill of lading. Order bills of lading are most common in ocean
commerce.
• Through bill of lading: This covers an interline shipment (a shipment
made by more than one transportation company) from its point of origin to
its destination with one charge for the entire service.
Loss Determination
The amount of loss is the market value of the lost or damaged property. The
claimant may also claim freight charges, but not expenses connected to filing the
claim.
Cargo Liabilities of Different Types of Carriers
There are five different types of carriers for cargo liabilities. They are:
• Rail carriers: These are liable for losses as stipulated in their bills of
lading.
• Domestic water carriers: These have relatively limited liability. In
addition to the usual exemptions from common carrier liability, domestic
water carriers are exempt from losses due to perils of the waters, errors in
navigation, rescue efforts and fire. Domestic water carrier liability is
governed by the Harter Act, unless the shipper and carrier agree to be
governed by the Carriage of Goods by Sea Act (COGSA).
• Domestic air carriers: These are liable for cargo in their custody unless
they can prove the loss or damage was caused by one of the five
defensible causes of loss or the domestic carrier was not negligent.
• Freight forwarders: These have the same liability as motor carriers. Their
liabilities are determined by the terms of each individual bill of lading.
• Freight consolidators: These are liable for their customers’ property as
bailees.
Motor Truck Cargo Insurance
Motor truck cargo insurance, like annual transit insurance, pays for loss or
damage to covered property resulting from a covered loss. Unlike annual transit
insurance, MTC insurance insures the carrier and only pays for losses for which
the carrier was liable. The carriers’ form covers the carrier’s legal liability for the
goods it transports. The owners’ form covers the property owner’s risk of loss to
property being transported.
Common Provisions for the Carriers Form
Here are the common provisions for the carriers’ form:
• Covered property is listed in the policy. Property is not covered unless it
has been accepted for transportation under the insured’s tariff and bill of
lading or shipping receipt. Coverage is restricted to lawful goods and
merchandise. Many insurers impose a lower limit for property at
unspecified terminal locations due to the increased risk of theft. Property
exclusions typically include accounts, bills, currency, deeds, evidences of
debt, notes, securities, jewelry, precious stones, paintings, fine arts and
property carried gratuitously or as an accommodation. Most policies
exclude coverage for loss or damage to the transporting vehicle and/or the
intermodal container. (Damage to vehicles being transported is covered.)
• Coverage extensions include debris removal and pollutant cleanup,
reloading expenses, losses at newly acquired terminals and earned freight
charges (freight that the insured has earned but is unable to collect, often
with a separate limit of coverage.)
• Covered causes of loss: The bill of lading form functions like an “all-risks”
policy, covering all causes of loss except named exclusions. The named
perils form covers all listed perils. Losses from flood, earth movement and
employee theft are usually covered. Losses from breakdown of
refrigeration equipment or violations of law are excluded from coverage.
• Coverage limits: There are separate limits for property losses per vehicle,
per listed terminal, per unlisted and/or new terminal and sometimes per
occurrence.
• Valuation is consistent with or tied to the insured’s legal obligation to pay
for losses.
• Coverage territory is limited to the US, its territories and possessions,
Puerto Rico and Canada.
• Coinsurance is rarely used.
• Gross-receipts reporting clause bases the insurance rate on the insured’s
periodic reports of gross receipts.
• BMC 32 endorsement: Motor carriers operating within federal jurisdiction
must provide evidence of adequate in-force cargo insurance. The
Interstate Commerce Commission (ICC) requires carriers to file form BMC
32 to prove they have their cargo insured. The insurer must file a
corresponding form, BMC 34. Many states require similar state filings from
intrastate and/or interstate carriers. The BMC 32 endorsement requires
the insurer to pay for all losses for which the carrier is legally liable and
which are subject to the jurisdiction of the Interstate Commerce Act,
regardless of policy exclusions. Although the endorsement contains per-
vehicle and per-occurrence limits, there is no limit to the number of claims
the insurer must pay.
Ten Underwriting Factors for MTC Liability Insurance
The ten underwriting factors for MTC liability insurance are:
• Carrier’s financial condition. A weak financial condition may indicate:
o The carrier’s inability to pay premiums and claims
o Poor overall management (which might include poor loss control
efforts)
o Moral hazard (the increased likelihood of intentional losses)
o Morale (also known as attitudinal) hazard (an indifferent attitude toward
preventing losses)
Underwriters assess carriers’ financial conditions by ordering analyses
from the Central Analysis Bureau, Inc. (CAB,) an information service that
rates motor carriers’ financial strengths, and by requesting a copy of the
carrier’s OS&D report, which lists open and unpaid claims against the
carrier for cargo losses.
• Commodities hauled: Target commodities require stringent theft control
measures. Commodities highly susceptible to damage and commodities
with low salvageability require careful handling and underwriting.
• Value of shipments: Underwriters base their coverage limits on the
average and maximum values per truckload.
• Vehicles and drivers: Assess the age and physical condition of the fleet,
vehicle maintenance program, driver hiring and training practices and
driver turnover rate.
• Gross receipts: Underwriters often base the insurance rate on the carrier’s
gross receipts.
• Bill of lading: The terms of the carrier’s bills of lading directly affect the
carrier’s liability.
• Distance and geographic scope of trips: Long-haul trucking and routes
through high-crime areas increase the risk of loss.
• Loss history: Underwriters use loss histories to avoid insuring bad risks
and to develop loss control programs for acceptable risks.
• Terminal exposures: Fire and theft are the main causes of property loss at
terminals. Evaluate the building construction and fire protection and
security features (sprinkler systems, burglar alarms.)
• Owner-operator exposures: An owner-operator owns its own trucks and
hires itself out to carriers to haul loads. Carriers that regularly hire owner-
operators are riskier to insure because the underwriter can’t evaluate
every owner-operator’s financial stability and loss history. Carriers that
regularly hire owner-operators should avoid buying MTC liability insurance
on a scheduled-vehicle basis because it then restricts itself to hiring only
listed owner-operators.
Loss Control Measures for MTC Liability Exposures
The following are control measures for MTC liability exposures:
• Management practices: Document loss control programs and
procedures. Become an active member of national motor carrier
associations. Maintain financial stability.
• Vehicle-related activities: Use equipment appropriate to the goods being
hauled. Have enough extra equipment to allow for regular maintenance.
Assign each driver permanently to a specific vehicle. Make someone
responsible for replacing worn equipment. Have drivers inspect their
vehicles before and after every trip.
• Personnel-related activities: Hire a properly trained person to handle
personnel matters. Develop driver selection standards. Keep a file on
each driver that includes the completed application and a copy of his/her
driver’s license, motor vehicle report and most recent physical exam.
Develop driver disqualification policies. Put new drivers through a driver
orientation program. Periodically put all drivers through refresher training
on the equipment they use.
• Cargo handling practices: Protect cargo from anticipated hazards. Do
not accept poorly packaged and/or damaged cargo for transport. Use
suitable equipment to load cargo onto suitable vehicles. Prevent water
condensation on the cargo. Balance cargo loads. Secure cargo on the
vehicle before beginning transport. Inspect the cargo and its securing
devices before beginning transport and at specified intervals during
transport. Inventory cargo regularly while it sits in the terminal.
• Security measures: Develop security procedures. Never leave cargo
unattended. Keep containers locked. Never drop off a load without having
someone sign for it. Ban unscheduled stops and unauthorized driver
companions.
• Reducing fire and water exposures: To reduce the fire hazard, install
sprinkler systems in terminals, store unused pallets and fuel in a safe
place, develop safe practices for cutting and welding operations in
terminals and install fire doors and firewalls. To reduce the water hazard,
protect cargo from rain before storing it outside, use pallets to keep cargo
off floors, prevent pipes from freezing, fix roof leaks quickly and inspect
sprinklers regularly to prevent malfunctions.
How to Adjust Motor Truck Cargo Liability Claims
There are four steps to adjust motor truck cargo liability claims. They are:
1. Determine coverage: Make sure the claim is actually covered.
2. Determine liability: Don’t pay for covered claims unless the insured is
legally obligated to pay.
3. Inspect damaged property: Determine the cause of loss and make sure
the property has been protected from further loss.
4. Salvage property and subrogate losses: Sell salvageable property and file
liability claims against responsible third parties.
LESSON 5: CONTRACTORS EQUIPMENT INSURANCE
Types of Contractors’ Equipment
Contractors’ equipment includes the tools and machinery used in construction,
renovation, earth moving and other activities typical of contractors.
• Earth-moving equipment: Clears job sites and moves construction
materials within the job site. Earth-moving equipment includes backhoes,
excavators, bulldozers, tractors, power shovels, loaders, scrapers,
graders, rollers, compactors and trenchers. The main hazards are upset
and overturn, fire (from broken hydraulic lines), collision, vandalism,
malicious mischief and theft.
• Site-improvement equipment: Prepares and finishes roads and parking
lots. Site-improvement equipment includes batching and mixing plants,
pavers, pavement planers and finishers. The main hazards are upset and
overturn, fire, flood damage, earthquake damage and vandalism.
• Material-handling equipment: Moves building materials and heavy
objects at the work site or into position within a structure. Material-
handling equipment includes lifts and cranes. The main hazards are
collision, fire, vandalism and theft. Cranes are prone to boom collapse,
generally caused by damage during erection, wind damage, metal fatigue,
weakened cables, lifting loads over the boom’s capacity, uncontrolled
crane movement and/or failure to use stabilizers.
• Miscellaneous contractors’ equipment: Supports or supplements other
contractors’ equipment. Miscellaneous contractors’ equipment includes air
compressors, generators and pumps. The main hazards are fire, collision,
flood damage and theft.
Twelve Types of Contractors’ Operations
The types of contractors’ operations include:
• Building contractor: Clears land and performs framing, concrete and
electrical work. Equipment includes pile drivers, tower cranes, mobile
cranes, derricks and excavators. The main hazards are theft and
vandalism. Other hazards include fire, overturn, collision and boom
collapse.
• Road building contractor: Builds new roads and repairs existing roads.
Equipment includes excavators, graders, asphalt and concrete finishers,
ditchers, loaders, rollers, scrapers, earthmovers, batching and mix plants.
The main hazards are fire, theft, vandalism, collision and upset. Work
done in mountainous terrain adds the hazards of landslide and overturn.
Work that includes blasting adds the hazards of flying debris and
accidental explosion. PML is usually low, unless equipment is
concentrated.
• Utility contractor: Installs water and sewage pipes, power lines,
telephone and cable television lines and other public service systems.
Equipment includes trenchers, digging equipment, backhoes, rough terrain
cranes and pipelaying machinery. The main hazards are fire, theft,
vandalism, collision and upset.
• Waste disposal operations: Treat and dispose of trash. Equipment
includes dozers, loaders, backhoes and specialized compaction and
incineration equipment, which is often old. The main hazards are fire and
losses caused by poor maintenance and operator errors.
• Municipal operations: These are funded and organized by state and
local governments. Operations and hazards are similar to those for
general, road building and utility contractors. The main hazards are fire,
vandalism and theft losses at the storage facility.
• Logging operations: Cut down trees for manufacturing and wood
processing operations. Equipment includes tractors, graders, chippers,
feller bunchers (which grab and cut trees and then lift and bunch the logs),
yarders (which reel logs into a consolidation point) and skidders (self-
propelled vehicles that drag logs.) The main hazards are fire, upset,
overturn, theft, vandalism and collapse of towers and spars.
• Mining operations: Gather solid natural resources underground and at
ground level. There are two main types:
o Underground mining uses shaft, slope and drift mines. Equipment
includes roof drills, roof bolters, loaders, conveyor belts, continuous
miners (which bore into the seam) and longwall miners (which move
horizontally across the seam.) The main hazards are roof collapse,
explosion, fire, blasting damage, shaft flooding and time element
losses when shafts are closed to smother fires.
o Surface mining removes natural resources from close to the surface of
the earth. There are two drilling methods:
� Auger drilling drills up to 200 feet into a seam and propels the
material backward.
� Punch-hole drilling drills up to 1,000 feet into a seam and uses a
conveyor belt to bring the material out. The main hazards are
overturn, fire, boom collapse, blasting, squeeze (pressure on the
drill bit) and highwall collapse (collapse of working face during
boring.)
• Quarry operations: Extract stone, sand, minerals and metal ores from
the earth using ground-level cutting or open-pit mining, in which a pit
slowly forms as the resource is extracted. Equipment includes crushers,
conveyors, air compressors, screens, shovels, drills, haulers, loaders and
bulk materials handling equipment. The main hazards are landslide,
flooding, falling rock, collapse of walls and explosion. Conveyor belt
systems are prone to fire. Mobile equipment is prone to upset, overturn
and collision.
• Well-servicing units: Create and maintain oil and natural gas wells.
Exploratory rigs drill wells to or through the pay zone. The servicing unit
then starts the flow of oil or gas by either of the following processes:
o Shooting the well (detonating an explosive charge in the pay zone.)
o Sand fracturing (using a high-pressure mix of oil and sand or water and
sand to access the resource.)
Servicing units also clean and replace machinery on existing wells to
increase production. The main hazards are blowout (drilling fluid, oil, gas
or water escaping uncontrollably from in the well) and cratering (the
formation of a basin-like opening around the rig caused by the erosive
action of oil, gas, air or water). Exploratory rigs tend to overturn. Sand
fracturing units catch fire.
• Shipyard operations: Build, repair and maintain ships. Equipment
includes forklifts, gantry cranes, cherry pickers, mobile cranes, burning
and welding units and locomotive cranes. The main hazards are fire,
windstorm and equipment falling overboard.
• Stevedoring operations: Load and unload goods on and off ships.
Equipment includes forklifts, cherry pickers, gantry cranes, mechanical
lifts,hydraulic lifts and materials handing equipment. The main hazards are
fire, windstorm and equipment falling overboard.
• Marine contractor: Builds structures on or over water, using mobile
equipment on large ships or waterborne structures. The main hazard is