Fix – don’t kill – cargo filing

A federal appeals court upheld the awarding of attorney’s fees to shippers that successfully sued household goods carriers under the Carmack Amendment. The moving companies had argued that there is no statutory basis to support the district court’s award of an attorney’s fee to shippers who brought a court action without first engaging in available arbitration. (Campbell vs. Allied Van Lines; U.S. Court of Appeals for the Ninth Circuit; Case No. 04-15969)

Federal officials recently arrested 36 people on charges of illegally obtaining Florida commercial driver’s licenses, certifications to haul hazardous materials and access to South Florida ports. The arrests were part of a five-month investigation led by Immigration and Customs Enforcement that led to 52 people being taken into custody, including several Florida driver’s license examiners.

A former vice president with Lorton, Va.-based Covitta Inc. pled guilty to identification fraud in connection with misuse of a Social Security number to obtain a Virginia commercial driver’s license. Henry Delgadillo, an alien illegally present in the United States, was sentenced to two months in jail and four months home confinement. Delgadillo also was identified as a participant in a scheme to obtain counterfeit New Jersey CDLs for several Covitta truck drivers.

Five individuals from G&C Farms, LLC, a family-owned trucking firm in Bridgeport, Neb., pled guilty in U.S. district court in Omaha to a number of criminal violations associated with their joint operation of the trucking company, which is no longer in business.

The BMC-32 endorsement is an important federal requirement, but it’s under attack. Today, all common carriers must file the BMC-32 with the Federal Motor Carrier Safety Administration as financial surety for shippers and brokers that the first $5,000 of any cargo claim for which a common carrier is adjudged liable ultimately will be paid by the insurer in the event of carrier default or bankruptcy.

As I wrote in May 2005, all industry constituents – shippers, brokers and carriers – have filed amicus briefs in the Fortunoff case, arguing that the BMC-32 endorsement is important and should be extended to contract carriers as well as common carriers.

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But now, hidden within the 72 pages of a notice of proposed rulemaking (NPRM) dealing with a Unified Registration System, FMCSA proposes to kill the entire BMC-32 program and leave non-household goods shippers and brokers without the benefit of any endorsement. See page 28989 of the Federal Register. Information on obtaining the Unified Registration System NPRM follows this article.

FMCSA’s proposal should be rejected soundly with strong response from all segments of the industry. The agency’s rationale is not to save money. Rather, it’s based on a gross misapprehension of the needs of the industry. FMCSA believes that “there does not appear to be a need to require nonexempt for-hire carriers of property to maintain cargo insurance since these carriers typically have cargo insurance well above the FMCSA limits because the shipper clients generally require it as a condition of doing business.” See page 28998.

Obviously, the agency does not realize that the best a sophisticated shipper or broker can hope to obtain is a certificate of insurance on an Accord Form – a wholly inadequate substitute for a BMC-32 that in no way guarantees effective coverage. Unlike other types of policies, cargo insurance is not written on standard ISO forms. Each policy is unique to its insurer and contains coverage exclusions for losses for which insured motor carriers are liable under the Carmack Amendment.

I studied at random 10 cargo policies issued by major insurers. Only one was reasonably comprehensive and co-extensive with a motor carrier’s legal liability for cargo loss and damage. The rest were materially defective. For example, cargo theft is a multibillion dollar enterprise, and motor carriers are strictly liable for the theft of shipments in their dominion and control. Yet, all but one of the policies that I examined contained exclusions that severely limited a shipper’s recovery against policy proceeds. The exclusions are called a number of different things – theft from an unguarded lot, theft from an unattended vehicle, a locked truck exclusion, etc. But at the end of the day, a shipper has no guarantee under a certificate of insurance that a theft loss will be paid by the motor carrier’s insurer.

Similarly, most of the policies I examined exclude target commodities such as garments and electronics. Although they typically do not cover losses resulting from temperature damage, wetness or moisture, they are sold to flatbed haulers and refrigerated carriers without the exclusions ever appearing on the certificates of insurance given to the shipper or broker.

Several policies contained co-insurance provisions that can have a draconian effect on a large claim. If the certificate of insurance shows $100,000 in coverage but the claim is for $500,000 under a hidden co-insurance provision, the shipper receives only one-fifth of the face amount or $20,000 from the insurer – even if coverage exists.

The fine print on the certificates of insurance states: “This certificate is issued as a matter of information only and confers no rights.” A disclaimer on the back makes clear that undisclosed gaps in the underlying coverage are not altered or removed.

Sophisticated shippers and brokers understand the problem in validating insurance because of these hidden loopholes and support retention of the BMC-32 endorsement, if not increasing its limits. The federal endorsement makes the shipping public a third-party beneficiary of the policy, eliminating all gaps in coverage to the extent of the statutory amount. Its advantages over a certificate of insurance readily become apparent when a motor carrier files bankruptcy.

Importantly, the federal website gives the shipping public a way to verify that cargo insurance remains valid and in effect. While large shippers that deal with only a few core carriers may be able to verify coverage and police cancellation, shippers and brokers on the whole cannot rely on certificates of insurance alone to verify cargo coverage. Three of our firm’s larger broker clients have more than 5,000 motor carriers under contract and are inundated with certificates of insurance that, as explained above, standing alone are ineffective in guaranteeing coverage.

All too often, the problem of inadequate cargo insurance coverage leads to the insistence by shippers and brokers in written contracts that they reserve the right to offset claims against freight charges. Shippers and brokers understandably become frustrated in adjusting cargo claims when they encounter insurance denials based not on the merits of the claim, but on hidden coverage exclusions in the carrier’s policy. The unilateral right of offset, in turn, undermines a motor carrier’s financial stability. For small motor carriers that must factor their receivables, one disputed cargo claim or one coverage issue that is subject to offset can interrupt the carrier’s cash flow and put it out of business.

The cargo filing requirements benefit small carriers and encourage efficient operation, two of the goals of the national transportation policy that the FMCSA must consider. The filing of the BMC-32 legitimizes small carriers and increases shipper and broker willingness to entrust freight into their care. Unlike anti-competitive entry barriers, cargo filings that establish minimal credentials can legitimize and encourage small businesses – and protect the marketplace.

And it is clear that the FMCSA does not understand the importance of the spot market in the truckload industry or the use of carriers by shippers and brokers to handle only one or two backhauled shipments. Thousands of loads are posted and moved every day on load boards and over the Internet between parties that have no long-term relationship. The parties cannot rely on a detailed cargo policy examination as a precondition to moving waiting freight with available empty equipment. A continuation and maintenance of the federal cargo filing system only facilitates the effectiveness of this important market segment.

The system should be improved, not killed. The district court’s holding in Fortunoff should be affirmed, and the filing requirements should be extended to all for-hire carriers. The TCPC proposed several years ago that the per-occurrence limit be increased from the $5,000 minimum to a more adequate amount. That petition has gone nowhere.

Although this goal is laudable, I am not confident that the insurance industry can be forced to raise the current minimum per-occurrence filing above $5,000 without impacting premiums. A reasonable proposal, however, would be to allow an insurer to post a BMC-32 endorsement for an agreed-upon amount with its insured, subject to a minimum requirement of not less than $5,000 per occurrence.

Clearly, this minor tweaking of the current regulations would allow willing insurers and their clients to bypass the flawed certificates of insurance system discussed above, and if they chose to do so, file a BMC endorsement with increased limits.

Comments on FMCSA’s proposal are due Aug. 15. There are other issues involved in the Unified Registration System, but none are so important as this. Urge FMCSA to fix its cargo insurance filing system. By the agency’s own estimate, little real administrative savings would be realized by killing the current system. The database is in place and will continue to be maintained for bodily injury and physical damage insurance and designation of agents for service of process. The current regulations need only be extended to all regulated for-hire carriers with the option for voluntary increased filing limits.

For a copy of FMCSA’s Unified Registration System proposal, visit this site and search Docket No. 2349.

Carrier, president plead guilty to HOS violations
Action Carrier Inc. and its president, Michael L. Walsh, pled guilty in U.S. District Court in Sioux Falls, S.D. – the corporation to a felony charge of causing a truck driver to falsify logbook entries in order to conceal violations of Federal Motor Carrier Safety Administration hours-of-service regulations, and Walsh to a misdemeanor charge of obstruction of justice for refusing to allow an FMCSA inspector possession of a file during a compliance review inspection. Sentencing is scheduled for Sept. 6.