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Insurance Update
Understanding your cargo coverage
What's the best advice I could give you about your cargo insurance? Read your policy.

Sure, it's boring. Nobody reads his/her insurance policy. It's hard to understand. It takes too much time to read it. All policies are alike, so why read this one? I've heard all of these reasons for not reading the policy. Unfortunately, it's usually after a claim happens and the insured finds out there's no coverage for a specific loss he or she has incurred.

Meanwhile, just in case you haven't had a chance to read your cargo policy, here is some information you may have missed:

Motor truck cargo insurance is coverage that protects against cargo damage or loss, and can include debris removal, unattended truck coverage and refrigeration breakdown. The insuring agreement of OOIDA's cargo policy states that it will "agree to indemnify the insured, named in the policy, for all risks of physical loss or damage from an external cause to lawful cargo in and/or on a truck while in their care, custody or control..."

It's important to point out that the policy says it will cover loss or damage from an external cause - not for loss or damage that happens internally. This means that if the load is damaged due to improper packing or deterioration from within, it won't be covered. The exclusion section of your cargo policy will give you specific information regarding losses that are not covered. That's one good reason to read your policy. It's nice to know what's not covered, so you can make arrangements to reduce your exposure.

Another useful bit of information about cargo insurance is typically the co-insurance clause or penalty. If your policy contains a co-insurance clause (as many do), you'll want to make sure to always maintain a liability limit that covers the full value of your load. Here's why:

If you have a load that's valued at $450,000, and you insure it for only $100,000, you are not insuring for the first $100,000 of cargo damage as many people believe. You're purchasing insurance for a percentage of the risk (in this case, 22 percent), and accepting the remaining 78 percent of the risk on your own.

Let's say you're transporting a load of jet engines, and while in transit, you're involved in an accident. One of the engines sustained $3,500 in damages. Because you've chosen to maintain coverage for only 22 percent of the loss, your insurance company is responsible for $770. The policy deductible is $1,000, so the insurance company pays nothing. This leaves you responsible for the other 78 percent of the loss or $2,730, plus the $1,000 deductible. You end up paying the entire loss out of pocket.

Why does the insurance company include a co-insurance clause in the policy? It's for the same reason that you insured a $450,000 load for only $100,000. You believe the chances are greater than if an accident occurs, the damages surely won't be over $100,000, so why pay premium to insure for $450,000?

The fact is that you're right. The risk is greater that you'll sustain more losses involving damages under $100,000, than you will involving the entire $450,000. The insurance company doesn't want to accept the additional risk without charging additional premium, so they include a co-insurance clause within the policy. Doing so enables them to share (with the insured) the additional risk incurred because most damages will be in the first $100,000. In the example given, you chose to buy insurance to protect only 22 percent of the value of your load; therefore you accepted the other 78 percent of the risk in addition to your deductible. If you don't want to pay a co-insurance penalty, you will need to insure for 100 percent of the value of the load.

If you encounter a situation in which you don't know how much your cargo is worth and can't get information from the shipper, you'll want to protect yourself just in case the load's value exceeds your policy limits. Prior to accepting the load, you should require your shipper to sign a contract stating he has received a certificate of insurance and is aware of the limits on your cargo policy. Make sure that the shipper agrees to be responsible for any damages your insurance won't pay due to the co-insurance clause, if the value of the load is more than your policy limit.

What if the shipper won't sign the contract? Refuse the load unless you can find out its full value so that you can properly insure it. If you let the shipper know that your policy contains a co-insurance clause, he might be more likely to ascertain the load's value so that you can raise your cargo limits accordingly. You'll then have to decide if the premium for raising your limits is justified by the money you'll make for hauling the load. Once you consider all the facts, you'll have the satisfaction of knowing that you're in control and making an informed choice.

Another aspect of cargo insurance that may surprise you involves debris removal. If you have this endorsement you know that it extends the policy to cover the costs of removal of the debris if a loss occurs. However, if you haven't read your policy, you may not be aware that if your cargo happens to be something like trash or garbage (which is not a recoverable loss under the policy), you won't be covered for the debris removal either. In order for the debris removal to be covered, the loss must be otherwise recoverable under the cargo policy. Since there is nothing to recover from the loss of trash or garbage, the debris removal endorsement would not protect you for this expense.

When you purchase insurance, you expect protection from damages or losses that you may otherwise have to pay out of your own pocket. However, the cargo policy (like every policy) contains specific exclusions and conditions. You can avoid any unwanted surprises if you take the time to read your policy wording and contact an agent if you have any questions.

One of the things OOIDA agents do to assist members is to share important information about the insurance coverages that we provide. We want you to ask as many questions as necessary to make sure you are confident that your trucking operation is protected properly.