April 2005 | Commentary | Risks and Rewards

Plugging Cargo Liability Leaks

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Q: I own a fleet of tank containers. A customer recently used one of my tanks for a shipment of concentrated juice. During transit, the tank developed a leak and a significant amount of concentrate was lost. The customer filed a claim against me, but my insurance company—which covers my cargo liability—says I may not be responsible. They are investigating whether the leak resulted from a mishandling of the tank.

The customer, meanwhile, withheld payment on another shipment, threatened to file a lawsuit, and warns he will take his business to my competitor if his claim is not paid. My insurance company will defend me if the customer files a lawsuit, but shouldn't they instead pay this claim? What can I do?

A: Your situation presents a common dilemma for transportation intermediaries facing claims from their customers. On one hand, you, the operator, want to provide customers the best possible claims service, but at the same time, must satisfy your insurance company's requirements for processing a claim.

A liability insurance policy protects the operator against claims asserted by third parties. It is not intended to protect the person making the claim against you. These policies will pay your "legal liability"—an amount based either on cargo transportation statutes, or the terms of your transportation agreement. Liability insurance policies do not apply to commercial settlements.

Although your customer's decision to withhold payment on another shipment is common, it is unfounded. The customer should not offset his claim against a payment he owes you for an unrelated transaction. This is actually illegal in some jurisdictions.

It also compounds the problem, as it may take significant time to resolve the claim for his loss, as well as your claim for the unremitted payment. In the interim, your relationship with the customer is damaged, perhaps irreparably.

A few options exist for paying the claim. If your customer has cargo insurance for his goods, his insurer can reimburse him for his loss and proceed separately to recover against your insurer.Or, assuming you'll be reimbursed by your insurer, you can pay the customer yourself. The payment, however, could be construed as an admission of fault—which may vitiate your insurance coverage. Be sure to speak with your insurer before making any payments to your customer.

If your insurer does agree to reimburse you, however, you are not guaranteed to receive the full amount. Your insurer will only pay for what you are legally liable for, which may be less than the full value of the loss.

To avoid this problem in the future, obtain an "open cargo" or "shipper's interest" policy. Rather than insuring your liability, an open cargo policy pays your customers for any loss their goods suffer during transit.

Be aware, however, that a claim covered by an open cargo policy must arise out of an insured peril. The company then takes over the customer's rights to make a claim against the responsible party.The cost for this coverage is based on the nature and value of the goods, and the mode of transport used. You can offer open cargo coverage to customers on a per-shipment basis—where they cover the cost—or you can provide it automatically and include the cost in your rates.

This insurance does increase the overall cost of shipping, but given the alternatives, it is definitely an option worth considering.

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