Cargo and Captives: Reducing the Impact of Carmack Amendment Risks

This article originally was published in Captive Review and is reprinted here with permission.

Shipping companies and cargo owners have operated under a familiar set of regulations regarding losses since 1906. Yet today’s transportation economics and sophisticated criminals are leading motor carriers to seek new ways to mitigate risks, including using captive insurers in their risk management strategies.

Congress added what’s known as the Carmack Amendment to the Interstate Commerce Act in 1906 to clarify the regulatory relationship between interstate carriers and owners. Under Carmack, the carrier is liable for actual damage to cargo it transports, regardless of the cause, and without any evidence of negligence.

Of course, the shipper must document that a shipment was in good condition when the carrier picked it up. Damage that occurs between then and delivery is assumed to be the carrier’s legal liability, except under certain circumstances, including:

• Acts of God. Goods damaged by an unavoidable natural cause, such as a tornado or an earthquake.
• Shipper’s default. The shipper’s failure to provide the cargo in good condition for safe transport.
• Public enemy. Carriers are not responsible for damage occurring because of war, terrorism, and similar activities.
• Public authority. Damages from actions taken by government agencies.
• Inherent vice. Damage is caused by issues related to the nature of what is being shipped, such as food that spoiled naturally and not because of carrier delays.

Shippers can and do contest Carmack claims. Because many standard cargo policies won’t cover damages caused by negligence, carriers may not have adequately prepared for the potential loss.

Theft of cargo is as old as commerce itself, but today’s thieves are more sophisticated at exploiting carriers’ security weaknesses. For example, criminals may pose as a legitimate motor carrier on a load board or the carrier’s system. The fake carrier shows up 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. Bad actors like these fraudulent motor carriers are often excluded from standard cargo policies. Another common situation involves a carrier’s driver leaving the truck unattended in an open lot, leading to a theft, and most insurance policies exclude this type of loss as well.

The American Trucking Association reports that cargo theft has grown to $35 billion annually. Strategic theft has grown by 1,500% since early 2021, to an average per-theft loss of more than $200,000. This significantly strains companies’ operations and contributes to major supply chain disruptions, financial losses, eroded customer trust, and lasting reputational damage.

Some insurance carriers have created contingent cargo programs to provide coverage for strategic theft. Shipper’s interest is another form of cargo insurance that protects the cargo owner from hazards like fire and theft for individual shipments. That’s often a more affordable option than purchasing annual cargo insurance policies.

As the value of shipments increases, cargo insurance policies are raising coverage limits. Still, a carrier may need to address the value of shipments above those limits, like a motor carrier client that was asked to transport $30 million helicopters. Some insurers can now write special policies for those individual shipments, usually at a cost of between 10 and 12 cents per $100 of value.

A growing number of shipping carriers are asking how captives may be able to improve their coverage and lower insurance purchasing costs. Unlike traditional cargo coverage, in which carriers pay regular premiums as an expense for a set period, the money paid into the captive is essentially 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.

In particular, we’ve seen programs that use a deductible reimbursement structure in their captive on inland marine risk, to better control claims payments 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 programs. Carriers with the need to procure higher limits than the market is willing to produce, can also utilize 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 organizations, an alternative risk transfer vehicle like a risk retention group, a structure that commonly addresses automotive liability, could provide significant benefits.

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 organization, to best 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.

Working with an experienced captive consultant to study the carrier’s risks and determine whether some kind of captive structure is a more prudent approach than simply contending with ever-higher premiums.

Related Reading: Captive Flexibility Proves Ideal for Growing Array of Risks

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