The Cost of Risk: The illusion of coverage

Suppose your driver picks up a load of dog food. The person loading your trailer, who is an employee of the shipper, is seriously injured when part of the load topples over on top of him. Your company did nothing wrong – the trailer was just sitting there. Even so, you end up paying tens of thousands in medical expenses.

This nightmare scenario actually played out for a real trucking company several years ago. What gives? The motor carrier unwisely had signed a broadly worded indemnity clause with a shipper that basically transferred to the trucking company liability for anything that happened in connection with that load – including negligence on the part of the shipper! So the shipper sent the workers’ comp bill to the trucking company, which was stuck with it. The motor carrier’s insurer, understandably, refused to cover a loss for which its insured was totally blameless – except for the poor judgment it exercised in signing a bad shipper contract.

Cases like this may become more common in the future as shippers increasingly seek to avoid high-dollar jury verdicts in litigation, says Henry Seaton, a partner in the Vienna, Va.-based law firm Seaton & Husk. Last month, Seaton conducted a workshop on avoiding coverage gaps on behalf of Commercial Carrier University at last month’s Truckload Carrier Association annual meeting. A copy of Seaton’s presentation can be found at this site.

Plaintiffs often try to bring all the deep pockets they can into a lawsuit. While it’s reasonable for shippers to protect themselves against lawsuits when they are not at fault, carriers shouldn’t assume responsibility for the actions and negligence of shippers and third parties, Seaton says. He recommends the adoption of reasonable indemnity language as follows:

“Except with respect to cargo damage claims as set forth herein, each party will indemnify and hold harmless the other from all loss, liability or claims to the extent same is caused by a negligent or willful act or omission of their respective employees, agents or subcontractors in the performance of this contract.”

Broad indemnity is just one pitfall in bodily injury and physical damage policies. Two other big worries are the twin terrors of vicarious liability and negligent entrustment, Seaton says. Both can come into play when you allow other carriers and brokers to take control over loads on which you are the carrier of record. Again, plaintiffs want deep pockets, and subcontractors often are owner-operators or small trucking companies that have no net worth beyond $1 million in coverage. So like indemnity, vicarious liability and negligent entrustment can – without proper precautions – penalize you for losses that aren’t really your fault.

Vicarious liability is dangerous, but it’s fairly easy to guard against, Seaton says. If you are subcontracting a load, ensure that the subcontracting carrier – not your company – is the carrier of record on the bill of lading. Plus, conduct any subcontracting through a broker affiliate that’s operated, as much as is possible, as a completely separate company.

Negligent entrustment is a similar issue. Some courts have held motor carriers accountable for the safety record of subcontracted carriers. Seaton recommends that carriers make no representations about subcontractors other than to say that the selected carrier has authority from the Federal Motor Carrier Safety Administration to operate in interstate commerce.

For many small trucking companies, another trap may lie in BI and PD policies, which often are written on a specific vehicle basis. If a loss occurs involving a vehicle not named in the policy, the insurer would pay the claim and then sue the trucking company. It sounds simple enough to keep policies up to date, but carriers also must remember to add and delete owner-operator units – not an easy task given today’s turnover.

These are just a few of the pitfalls and mistakes that can plague motor carriers and turn their insurance policies into worthless paper. And we haven’t even mentioned cargo insurance. That’s a treat for next month.