Last October, a jury awarded Isaac Espinoza $15.5 million after the man suffered catastrophic injuries when he was hit by a truck driven by Ricky L. Hatfield while he was changing a tire.
The jury assigned 60% of the blame on Hatfield, who was charged with two counts of driving under the influence, and 40% of the blame on the brokerage operation of J.B. Hunt, which contracted with Hatfield to move the load. The jury determined that J.B. Hunt did not perform a sufficient check of Hatfield and if it had, it never would have contracted with him to move the load.
The effect of the case rippled through the industry as a jury was now saying that not only was a driver and trucking company responsible, but so was the broker. That same liability threat also carries over to third-party logistics providers as well.
“Legally, the broker carries minimal risk unless they take it on contractually,” explains Suzanne Mullen, general counsel for Arrive Logistics. “In today’s market, shippers often shift risk onto their transportation providers, including brokers. It ultimately is a business decision to take on more risk. Arrive tries to mitigate our risk through insurance. We’ve looked at a lot of different policy options to manage our risk, and to provide the coverage requested by our customers. We believe we have an excellent insurance portfolio to cover whatever situation comes our way.”
Mullen tells FreightWaves that the company always verifies its carriers’ insurance as part of the overall process.
“We look at many aspects of the carrier besides their insurance too,” she says. “We look at their safety rating, their accident history, and even whether they’ve been put out of service. We also have an excellent freight broker auto liability coverage [policy] which provides better protection to Arrive than contingent auto liability which is the standard policy most 3PLs buy.”
Arrive also carries an excess policy over its auto liability and general liability policies, Mullen notes. The company also purchases cargo liability insurance which, “as a primary policy, pays regardless if the carrier’s cargo insurance pays.” This policy is different from a typical contingent cargo policy, she adds. “Also, we have broad form auto liability and general liability policies to cover many more third-party claims than would be covered under a contingent auto liability policy, including vicarious liability.”
According to Ben Armistead, partner with Greenwich Transportation Underwriters (GTU), legally a 3PL only needs obtain a $75,000 broker bond to be in business, and that only covers the cost to pay a carrier should the broker refuse to pay. However, additional coverages are usually necessary cost of doing business.
“Usually, the barrier to entry is to have the broker bond, but if you don’t have contingent coverage, you’re out to lunch,” he says.
At Arrive, one of those additional coverages is a primary cargo policy that exceeds standards.
“Damage claims are absolutely something 3PLs must be concerned with and must insure against to mitigate the potential large out of pocket expense,” Mullen explains. “Arrive chose to manage our cargo damage risk by purchasing a primary cargo policy. And we went a step further and purchased a policy that covers us up for $250,000 for the value of the cargo. This is above and beyond the standard $100,000 of coverage. And more importantly, it pays from the first dollar and doesn’t wait for the carriers’ policy to respond or not. Arrive can immediately pay a customer’s claim, with very little wait time, and then our insurance company will subrogate the carriers. It’s a more expeditious and customer-friendly approach to cargo claims.”
Armistead explained some of the additional coverages a 3PL should consider. These include errors & omissions (E&O) coverage, general liability, broker liability, excess coverage, contingent liability, and negligent hiring. Shippers should also consider contingent cargo and professional liability. Many of these coverages, while not required by law, will be included in any standard shipper-broker/3PL contract.
“These are very lucrative operations and insurance is so important because you have a lot to lose,” he says.
E&O insurance covers a broker/3PL from wrongful acts that lead to a financial loss. Negligent hiring is an interesting coverage that Armistead says can protect 3PLs from the hiring of a bad carrier or driver, something that would have come into play in the J.B. Hunt case mentioned earlier.
From a shipper perspective, Armistead says that professional liability insurance is more important than ever and protects against things like a load being delivered to the wrong location or when food spoilage comes into play.
“The Food Safety Modernization Act was a codification of best practices in our industry, but I believe the entire industry has stepped up its game to ensure compliance,” Mullen says. “Customers are much more inclined to file a claim if they think there is any potential for adulteration in food. We’re thankful to have primary cargo coverage, so we don’t have to worry (or wait) for our carriers to determine if damage has occurred. Our claims are paid without waiting on a carrier’s insurance, which often with food claims, takes a long time.”
Finally, Armistead says 3PLs need to consider Carmack liability. The Carmack Amendment was a federal law originally passed in 1935 that allows for the adjudication of cargo claims to be carried out under common federal rules, rather than state rules. As Armistead explains it, shippers have to prove they gave the carrier the cargo in good condition and the carrier must prove they didn’t harm it in any way. There are a couple of exceptions to this, such as an act of God, and importantly if the broker indemifies the shipper. In this case, he says, there would be a gap in coverage that Carmack liability would cover.
For 3PLs and brokers, the insurance question remains an important one to consider.
“With multiple parties to a transaction, we are always looking at the risk exposures and trying to manage those risks with insurance,” Arrive’s Mullen concludes. “Many insurance plans are proactive in recognizing business risk, such as data security and privacy, and have included coverage for liability that may arise. In addition, we work with an insurance broker who is very familiar with our business and is always on the lookout for new policies or changes to current policies which may add coverage to our operations.”
Original Article Posted On: https://www.freightwaves.com/news/insurance-and-risk/3pl-insurance-coverages