Beware of accepting your customers’ risk

Q We are increasingly seeing requests in shipper and broker contracts to name them as an “additional insured” on our liability and cargo policies. What are they trying to accomplish? We have the BMC-91X endorsement, which assures shippers and brokers that we have $1 million in public liability insurance.

AShippers and brokers are tired of being named as defendants in accident suits just because they have deep pockets. Increasingly they seek additional insured status as a means of getting their cost of defense covered by a motor carrier’s insurer, but much more than this is involved. The concept of “additional insured” status is new to transportation, and none of the parties or their insurers are equipped to handle the concept or its ramifications.

“Additional insured status” involves arcane issues of insurance law and policy interpretation. In my book Protecting Motor Carrier Interests in Contracts, I have noted additional insured language as one of the “dirty dozen” contract provisions carriers should carefully scrutinize. The more I study the issue, the more complex it becomes.

The simplest statement of additional insured provisions is that they are a risk transfer device obviously aimed at procuring insurance protection under someone else’s policy rather than incurring the losses under one’s own insurance program. This means that in some sense, the one asking to be named as an “additional insured” seeks to transfer his risk of operation to you.

Such provisions are typical in the construction industry where a subcontractor undertakes to indemnify and hold the prime contractor harmless and its insurance company agrees to extend the coverage to cover job site injury to a worker who otherwise might sue the prime contractor.

The concept of an “additional insured” is unique to a commercial general liability (CGL) policy, and many carriers do not even buy this type of coverage. (As you know, federal regulations require only a trucker’s BI and PD endorsement and limited cargo coverage.) Moreover, for carriers that have a CGL policy, the standard forms provide that additional liability assumed by contract is not covered under the policy unless “insured contract status” is obtained.

As a practical matter, I fear that most carriers sign shipper and broker contracts agreeing to “additional insured” status and either never properly comply with the “insured contract” provision of their CGL policy or do not even have a policy that allows this coverage.

Leaving an “additional insured” provision in a shipper or broker contract can be an open switch to disaster when a shipper’s tow motor runs over your driver and then your insurer walks away from providing the shipper a defense. (See “Sign at your own risk,” CCJ, August 2001, also available at www. transportationlaw.net under Transportation Articles.)

Likewise, shippers and brokers that have insisted upon “additional insured” language without verifying compliance can be equally frustrated when the carrier’s insurer refuses to indemnify it and then its own liability carrier refuses to provide primary coverage.

In the typical transportation agreement, carriers are transporting freight for customers. They are not building bridges together. Each party can act as an independent contractor, assume the risk for its own negligence and adequately insure for those risks in accordance with the statutory guidelines.

As I have mentioned in other articles, a shipper ultimately needs something other than a certificate of insurance to assure itself that the carrier actually has meaningful cargo insurance. But that and evidence of liability insurance available from the Federal Motor Carrier Safety Administration website should be enough to meet the ordinary needs of your customers.

Trucking is risky enough without assuming and insuring for the undefined risk of your customers.