Cargo and captives: reducing the impact of Carmack Amendment risks

Chris Denman (pictured left), managing director – transportation and Claire Richardson (pictured right), senior captive consultant at Hylant, look at how motor companies are increasingly looking to captives for their risk management needs.

Shipping companies and cargo owners have operated under a familiar set of regulations regarding losses since 1906. Yet today’s transportation economics and increasingly more sophisticated actions by criminals are leading motor carriers to seek new ways to mitigate risks that can carry higher price tags. Many use captive insurers as a key element in their risk management strategies.

The Carmack Amendment

Congress added what’s known as the Carmack Amendment to the Interstate Commerce Act in 1906. Its purpose was to clarify the regulatory relationship between interstate carriers and owners. Carmack limited carriers’ liability to the actual loss or damage of the owners’ property. Under its provisions, the carrier is liable for actual damage, regardless of the cause and without any evidence of negligence. 

That’s echoed in the standard language on bills of lading, which assigns responsibility for any loss, damage, delay or liability to the carrier. Of course, the shipper must ensure (and be able to document) that whatever is being shipped is in good condition when the carrier arrives to pick it up. Any damage that occurs between pick-up and delivery is automatically assumed to be the carrier’s legal liability. However, the carrier can refuse to be held liable in certain circumstances, including:

• Acts of God. If the goods are damaged by an unavoidable natural cause, such as a tornado or an earthquake, the motor carrier’s insurance company can refuse to pay the claim.

• Shipper’s default. When damage is primarily the result of the shipper’s failure to provide the cargo in good condition for safe transport, the carrier may refuse liability.

• Public enemy. Carriers are not responsible for damage occurring because of acts of war, terrorism and similar activities.

• Public authority. Damages resulting from government agencies' actions should not result in liability on the carrier’s part.

• Inherent vice. If the damage is caused by issues related to the nature of what is being shipped, such as food that spoiled naturally and not because of delays caused by the carrier, the carrier and its insurance company don’t have to accept liability.

Shippers can and do contest Carmack claims, so the existence of the exclusions is not enough to keep a carrier from being forced to cover the cost of damages. That’s particularly true if the load is a high-value shipment. Because many standard cargo policies won’t cover damages caused by negligence, carriers might not have adequately prepared for the potential loss.

Today’s growing risks

Theft of cargo is as old as commerce itself, but today’s thieves are more sophisticated than ever, especially when it comes to exploiting carriers’ security weaknesses. A common example is the type of cybertheft in which a criminal poses as a legitimate motor carrier. They might pose as a driver for the carrier on a load board, or it might involve hacking into the carrier’s system through an email. 

Either way, the fake carrier shows up at the agreed-upon location and drives off with the load. When the shipment fails to arrive, the shipper contacts the carrier, who has no knowledge or record of it. Whether the loss is the responsibility of the shipper or the freight broker behind the load board, someone will have to pay. Often described as bad actors, these fraudulent motor carriers are usually excluded from standard cargo policies, making it critical that the shipper performs due diligence.

Another common situation involves a carrier’s driver leaving the truck unattended in an open lot. That driver might leave the truck in a shopping centre lot while they walk to a nearby restaurant for dinner. When they return, the truck – and the $250,000-worth of technology in the trailer – have vanished. Most insurance policies exclude this type of loss as well.

Cargo theft can significantly strain affected companies’ operations, contributing to major supply chain disruptions, financial losses, eroded customer trust and lasting reputational damage.

Strategic theft programmes

According to the American Trucking Association, theft has grown to $35 billion annually, and its impact on the supply chain contributes to price increases that worsen inflation. What’s considered to be strategic theft has grown by 1,500% since early 2021, to an average per-theft loss of more than $200,000.

Some insurance carriers have created primary or contingent cargo programmes to provide coverage for strategic theft. Most carry significantly higher deductibles than standard cargo policies. Of course, the difference between a $10,000 and $20,000 deductible is less meaningful when a carrier faces a $250,000 claim.

Recognising the needs in the market, our team is working with insurers to develop a programme combining cyber and theft in a single policy. Motor carriers have reported situations in which a claim caused by some kind of cybercrime is rejected by the cyber carrier as a cargo claim, and by the cargo carrier as a cyber claim. Allowing carriers to blend these two coverage lines into a single programme will simplify claims.

Other protections

As bad actors increasingly use technology to perpetuate their crimes, legitimate businesses are exploring technology’s role in preventing theft-related losses. For example, at least one of the larger transportation management systems (TMS) is tying into carrier and broker systems to spot fraudulent parties and prevent them from taking possession of cargo. The rapid expansion of artificial intelligence is likely to support the development of these tools.

Shipper’s interest is a form of cargo insurance that protects the cargo owner from hazards such as fire and theft for individual shipments. That’s often a more affordable option than purchasing annual cargo insurance policies. The shipper/owner or an intermediary can purchase this to protect the owner in the case of a loss.  

Higher-value shipments

As the value of shipments has increased, cargo insurance policies are raising coverage limits. Still, a carrier might need to address the value of shipments above those limits. Suppose a trucking company’s policy limits cargo claims to $100,000, but they’re about to transport a load of product valued in millions of dollars, like a motor carrier client that was asked to move $30 million worth of helicopters. Some insurance companies can now write special policies for those individual shipments, usually at a cost of between 10 and 12 cents per $100 of value.

What is a captive?

Captives are licensed, regulated insurance companies established in a domicile in compliance with the laws and rules of that domicile. Carriers typically establish captives when commercial insurance coverage for the specific risks they face is unavailable, constrictive or prohibitively expensive.

Unlike traditional cargo coverage, in which carriers pay regular premiums as an expense for a set period, the premiums paid into a captive become an investment. Dollars not paid out in claims add to the captive’s overall surplus position, enhancing its ability to pay out potentially higher-value claims in the future, while gaining investment income. Carriers can use any accumulated surplus for any number of risk management purposes, such as funding theft-prevention technology or the money can be distributed to the owner(s) subject to regulatory approvals.

How does it work with cargo?

Captives are remarkably flexible and designed to meet the precise needs of their owners. Motor carrier cargo coverage has been a relatively soft market compared to other sectors, but as we watch insurers study deductibles and limits with a wary eye, a growing number of carriers are asking how captives might be able to improve their coverage and lower their insurance spend.

In particular, we’ve seen programmes that use a deductible reimbursement structure in their captive on inland marine risk, to control claims payments better in their high-deductible or self-insured retention layer. Larger carriers use captives to partner with insurance companies to take a quota share of their insurance programmes. They might decide to retain 20% of the risk through a captive – essentially allowing them to pocket a share of the premium – and seed the remainder into the marketplace.

Carriers with the need to procure higher limits than the market is willing to produce, can also utilise a captive to fund excess layer(s) of insurance. Some carriers also incorporate other insurance coverages such as errors and omissions, workers’ compensation and medical stop loss into the same captive.

For other organisations, something like a risk retention group or some kind of group purchasing programme can be instituted through or adjacent to a captive insurer.

Building knowledge

Whether or not a captive proves to be the answer, carriers should conduct and regularly update risk assessments and total cost of risk apparent to their organisation, best to identify and address vulnerabilities. They also need to consider enhancing security measures, risk management initiatives and educating employees about the nature of cargo theft and prevention measures.

Given the industry’s extremely small margins, a single uncovered claim could be catastrophic for a motor carrier. For most, insurance has become one of their three or four largest line items. Working with an experienced captive consultant to study the carrier’s risks and determine whether a captive structure is appropriate is a more prudent approach than simply contending with ever-higher premiums.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions. 

Chris Denman is managing director – transportation at Hylant. He can be contacted at: chris.deman@hylant.com 

Claire Richardson is a senior captive consultant at Hylant. She can be contacted at: claire.richardson@hylant.com

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.