INSIGHTSMarch 2018Transportation Insuranceon Contract Liability andBrokers LiabilityThe good news is that because the semihas advanced autopilot there is a 99.9%chance that it is not going to hitus. However, unless we acknowledgeand grapple with the changes that aretaking place, the transportationinsurance industry will miss theopportunity to respond to the evolvingneeds of both existing and new clientsthat the semi represents.This paper addresses current insurance market challengesrelated to existing and emerging risks in the transportationindustry, including contractual liability, brokers’ liability and theimpact of emerging technology such as artificial intelligence,blockchain and smart contracts.To say that the insurance industry, and in particular the transportation insurance industry,is at a crossroads would be an understatement. The truth of the matter is that thetransportation insurance industry is at the edge of a cliff and an autonomous electricsemi-trailer truck, loaded with 80,000 lbs. of cargo, is driving straight at us, acceleratingto 60 mph in less than 20 seconds.1Looking at the insurance industry asa whole, the financial fundamentalsremain weak, with an over-supply ofcapacity that is being poorly deployedand not generating adequate returnsto address the changing risk patterns.Rather than responding to changes inrisk by addressing the underlying ratingstructure, insurers have been movingaway from challenging exposures.Meanwhile, emerging technologyand the shifting risk profiles thatautonomous vehicles bring createadditional underwriting uncertaintywith the backdrop of the reptileplaintiff philosophy.In addition to weak financials,the insurance industry’s productdelivery process is highly inefficient,documentation issuance is antiquatedand ineffective, and our valueproposition is not well understood byour clients. The barriers to entry into
INSIGHTSour industry have been created throughoutdated legislation, originally intendedto protect the consumer, but currentlyonly serving to make it more challengingfor others in the financial servicesindustry or in the technology space todisrupt the way insurance business iscurrently done. Already penetrating thepersonal lines space, insurance directwriters and the banks have found asignificant opportunity to improve uponthe traditional delivery model andcapture a growing share of the market,and there is very little to suggest thatthis will not migrate into thecommercial space as well.Looking specifically at the transportationspace, three important areas of focus thatwill impact transportation clients over thenext five years are:1. Contractual liabilityHow shippers’ attitudes towardscarriers’ liability for the transportationof cargo is changing.2. Brokers’ liabilityThe impact that the growth ofasset-light and non-asset logisticsoperations is having on automobileliability cases, along with how theinsurance industry is respondingto this.3. Changing technologyThe introduction of newtechnologies to both theinsurance and the transportationindustry will have a significantimpact on the fundamentals ofthe insurance industry.2March 2018CONTRACTUAL LIABILITYLiability for the carriage of cargo is governed by the bill of lading. The bill of lading ensuresthere is clarity as to liability for loss or damage to cargo, and generally allows the carrier tolimit their liability for certain types of perils and to certain maximum dollar amounts. Theconcept of limitation of liability of the carrier is one of the foundations of traditional cargoand stems back to when the movement of cargo was considered to be an “adventure”as opposed to an expectation. Over the years, aspects of carriers’ limitation of liability,including the concept of General Average, have been challenged. Shippers are no longeraligned with seeing the carrier’s transportation of their cargo as an “adventure” and,as such, are not as willing to accept and, in many cases, even bother to understandlimitations of liability.This is being addressed through a dramatic increase in shipper designed contractsgoverning the movement of cargo. Although shipper contracts started out as somethingthat were primarily coming from the large box store retailers, it is now fairly common evenamong smaller shippers.There are a variety of challenges with these custom shipper/carrier or shipper/brokercontracts. Outside of just the basic construction of these contracts, which are often basedon supply contracts rather than shipping agreements, from an insurance perspectivethere are a number of issues of which carriers and brokers need to be aware – and thatwould be beneficial for the lawyers assisting shippers with the construction of theseagreements to consider.First, open-ended liability provisions are difficult to insure. While underwriters arebecoming more accustomed to seeing challenging shipper/carrier or shipper/brokercontracts, the most difficult issue to address in an open ended contract is the financialimpact of the contract on the carrier or broker. It should be remembered that a cargoliability policy has its foundation in standard limitation of liability, without anunderstanding of the potential financial impact of the contract, pricing insurancecoverage for an open-ended contract is almost impossible.With this in mind, carriers and brokers need to focus on the following clauses whenconsidering whether a contract will be accepted by their cargo liability underwriters:a. Cargo Loss or DamageThe expectation that the carrier be liable for “all risks” of loss or damage is actuallyfairly manageable and even establishing that the carrier is liable for the full value of thecargo (be it wholesale, retail, replacement or however they want it structured) is alsomanageable. However, the expectation that the carrier has to be liable for damageto cargo without the value of the cargo being declared in advance of the shipment isunreasonable. The ideal of course is to have the shipper declare values on the bill oflading, subject to an agreed maximum value, as this will allow the carrier to establish aninsurance solution for the transfer of risk that is priced directly against the value of thegoods. If the shipper, at a minimum, is able to provide an average value and a maximumvalue it will allow the carrier to present a risk profile to underwriters so that a pricingmodel can be developed.
INSIGHTSb. Liability for Consequential LossWhile the concept of consequentialloss, or business interruption, is wellunderstood by cargo underwriters,having a shipper hold a carrier liablefor an undefined and/or unlimitedconsequential loss exposure isunrealistic from an insuranceperspective. The classic example of“unreasonable” consequential lossliability comes from the 1980’s Just-intime manufacturing revolution, wherecarriers supplying the automotiveindustry were allegedly to be heldliable for 1 million per minute ofplant shutdown caused by a latedelivery, which is a contractual liabilitythat few carriers at the time wouldhave actually been able to insure.Today, an undefined or unreasonableexpectation around liability forconsequential loss, without theestablishment of a limitation ofliability, combined with the removal ofthe force majeure provision, is almostimpossible to quantify and, as such,very challenging to insure.c. Force Majeure provisionsThe removal of the Force Majeureprovision which would allowavoidance of liability under contract inextreme situations creates a challengefor underwriters, who cannot acceptliability for every type of loss. TheForce Majeure provision shouldbe maintained to allow at least anexception for loss/damage/liabilitythat is well outside of the carrier’scontrol – examples would includeWar and Strikes risks that would alsorepresent coverage limitations for theaverage shipper.d. Liquidated DamagesThe inclusion of liquidated damagesor penalties around the performanceof the work was traditionallydifficult to insure as these were3clearly excluded from a standardbill of lading. Underwriters willstill resist providing coverage forliquidated damages and penaltiesrelated to performance but there is awillingness to give consideration tocoverage if the exposure is quantifiedand limited. However, as withconsequential loss, an undefinedor unlimited penalty provision, or apenalty provision that is not alignedto the value of the goods themselves,is not easily insured.e. Indemnity ProvisionsThere have been plenty of articleson the legality and applicability ofindemnity provisions in transportationagreements, in particular wereference an article written severalyears ago by Rui Fernandes to helpdefine what is and is not reasonable/legal under an indemnity provision.While past indemnity provisions mayhave been deemed unreasonable,the need for indemnity provisions inthe transportation space may actuallybe increasing, particularly as morebrokers base their network aroundsmaller fleets of Contract Carriersrather than working with largernational carriers. As the automobileliability insurance market tightens,both in the working and buffer layers,smaller carriers may not be able tocost effectively arrange the higherinsurance limits they might have donein the past, so to save cost, many willtry to carry minimum insurance levels.Recognizing that securing carrierswith higher automobile liabilitylimits is becoming problematic,brokers have also been reducing theirminimum insurance expectations ofthe underlying carrier down from 2million to 1 million. When this iscombined with some of the nucleardecisions being made by the UScourts around automobile accidents,the low limits of the actual carrierMarch 2018are being rapidly eroded, and theplaintiff’s lawyers are looking to drawin as many deep pockets as possible.This generally will include the brokerand the shipper.For the shipper to insulatethemselves from the potentialliability exposure they have to what isotherwise a third party carrier relatedaccident, these indemnity provisionsplace a clear expectation on thebroker to respond in defense of theshipper in the event the shipper isdrawn into an action arising out of thebroker’s selection of the underlyingcarrier. This is actually not anunreasonable expectation, althoughat some point it also needs to berecognized that there is the potentialthat the action being brought is alsogoing to erode the limits purchasedby the broker. As with the otherclauses, having a completely openended indemnity provision is difficultto insure. If the shipper wants betterprotection against being drawn intoan action being brought againstthe carrier, they should either seta higher than standard minimumexpectation of carrier automobileliability insurance (which will reducethe number and cost effectivenessof the carriers available to a broker)or contract directly with a carrierwho has higher automobile liabilitylimits. Also, regardless of underlyinglimits, when a retailer branded traileris involved in an accident, there isautomatically an expectation of alarge settlement, even if the retailerhad no involvement in the carrierselection process. To expect thebroker or carrier to have the types ofliability limits that the large retailercarries is perhaps unrealistic and, ifrequired, would carry an insurancecost that could potentially make thecarrier or broker uncompetitive forthe services contemplated.
INSIGHTSOther contractual requirements thatare common but are not as much of aninsurance issue include: Freight off-set provisions and claimspayment terms that are not alignedwith industry standardsInsurance companies are not goingto settle claims until they have beenprovided adequate opportunity toinvestigate the loss. An expeditedclaim payment term or a freight offset term in a carrier or broker contractis not going to expedite how anunderwriter assesses a loss. This canbe frustrating for the carrier if theyare required to settle an alleged claimfrom the shipper, while their insureris not willing to expedite or evenconfirm payment to them within thesame timeframe. For liability claimsthe period between the contractedpayment terms and when an insurermay agree to settle a claim to thecarrier can be months apart, andon a larger claim this can have animpact on the carrier or broker. Thereis also the risk that a claim settledby the carrier or broker may not fallwithin the coverage of the policyand may ultimately be declined byunderwriters, leaving the carrier orbroker to absorb the loss.The physical damage portionof an expedited claim paymentrequirement may potentially beaddressed through a shippers’interest or cargo insurance solution,as this first party cover can respond toclaims far more quickly than a cargoliability policy would. Broker being contracted as the carrierWhile many shippers may understandthat there are differences betweena broker and a carrier, it is notuncommon for the shipper to requestthat a broker sign a contract holding4the broker liable as if they are acarrier. Although the broker maypoint out that they will endeavorto ensure that the underlyingcarrier meets the expectations ofthe shipper and that an alternativecontract form may be more suitable,often the shippers will be unwillingto change their position. In thesesituations what might otherwisebecome a contingent liability on thebroker becomes a primary liability– and they will need to responddirectly to the shipper and thensubrogate back against the carrier.From an insurance perspective, theliabilities that the broker are takingon when contracting as a carrier aremanageable, so long as the abovenoted limitations are addressed andthe broker has a tight back-to-backagreement with their underlyingcarriers. However, problems willoccur when the broker agreementswith the carrier are not aligned withthe shipper’s expectations – e.g. if thebroker agrees to having 10 millionin automobile liability coverage butonly has evidence of 1 million ofcoverage from their carrier network,that gap in automobile liabilityinsurance is problematic as the actualcarrier moving the cargo does nothave the contractually requestedinsurance outlined by the shipper.The broker would be in breach ofcontract and, while a Brokers’ Liabilitycoverage may respond to claimsmade by third parties against thebroker for the negligent actions ofthe carrier, the broker will not havemet their contractual obligations tothe shipper, which may open them upto a breach of contract concern. Inthese situations, the broker may askif we can help them arrange excessautomobile liability on behalf of theircarriers – although the insurancemarket is not generally open toMarch 2018providing blanket excessautomobile liability insurance overan unknown group of carriers.If the broker works with a verysmall number of carriers this mightwork – but where the broker hasthousands of carriers this is likelynot a feasible insurance solution. Request for evidence of AutomobileLiability insurance to a brokerIt stands to reason that if you don’thave automobile insurance then it isvery difficult to provide evidence ofautomobile insurance. For non-assetbrokers, when the contract calls forevidence of automobile insurance,this can be a challenge to respondto, particularly if the customer takesa narrow view and does not accepta non-owned auto endorsementas an alternative. There was a timewhen load brokers would purchase acheap commercial truck that wouldsit unused in the parking lot just sothey had a vehicle to insure. Thecost of arranging insurance on anunused vehicle to meet a certificateof insurance requirement was actuallymore cost-effective than investing thetime necessary to correct the shippercontract to properly recognize thebroker’s role in the transaction.Finally, as it relates to ContractualLiability, the traditional documentrequested by shippers as evidence of theinsurance coverage that they have eitherspecifically requested or expect to beavailable to respond to the contractualobligations agreed to by the carrier orbroker, is often of limited value.First, the parties issuing the certificateof insurance often have not reviewed thecontract or confirmed that the coverageactually meets the expectations of theshipper under the contract agreement.
INSIGHTSThe certificate evidences that the requested policies have been arranged and that therequired limits are available, but give no indication that the coverage is actually suitable forthe contract. To this end, an insurance certificate is at best evidence of coverage in forceat the date of issue but to fully understand how the coverage may respond, policy formswould need to be reviewed including terms and conditions, coverage enhancements/limitations, endorsements and covered/excluded vehicles. Examples of common certificatemisses include: A Symbol 7 reference, which designates “specifically described autos” and withoutreview of the vehicle schedule on the policy, evidences coverage will not apply to anunscheduled vehicle. There are instances where a multiple unit operator will list onevehicle on a policy and use a certificate as evidence for multiple units, i.e.“Multi Exposure.” Hired and Non-Owned coverage may limit coverage to personal vehicles and isgenerally not intended to address commercial vehicles. Policy definitions around ownership of short and long term leased vehicles,temporary and permanent replacement will vary between underwriters and willsignificantly alter coverage.Second, there is very little control over the validity of the certificate itself. While it followsan industry standard format, such as the Acord format, there is little to prevent a certificatefrom being fraudulently issued. Even if using a third party certificate management service,the validation generally focusses on the confirmation of limits and renewal dates but nothow the coverage will respond to specific contractual situations. As such, certificates ofinsurance, while a “standard” requirement for transacting business, are of limited value. Infact, the majority of reputable carriers or brokers will have adequate insurance to addresstheir operational exposures even if a certificate is not requested, while a less reputablecarrier or broker, who does not have adequate insurance, has the potential to produce afraudulent certificate and the shipper is not going to realize this until after a loss has takenplace. Although a controversial suggestion, as an industry perhaps we could effectivelydo away with traditional certificates of insurance and all of the frictional costs related tothe collection and review of these documents, relying instead on the terms of the contractalone and the expectation that the contracting parties will perform and insure theirperformance under the contract as may be suitable. Of course as we move to blockchaintransactions and smart contracts, by taking out more of the coverage variables in contractterms, the need for a paper based evidence of insurance will quickly disappear anyway.Third and finally, from a contractual liability perspective, there is very little benefit to addinga shipper as an additional insured under a cargo liability policy. The shipper should notreasonably expect that the broker or carrier’s insurers will automatically pay a loss underthe policy – just as requiring that the insurers acknowledge sight of a contract will notensure that all aspects of the contract will be covered by the insurance policy. Certainlythe addition of a requirement that an underwriter have sight of a contract which includesunlimited or open ended liability for loss/damage to goods cannot ensure that theunderwriter will pay any and all losses experienced by the shipper.5March 2018BROKERS’ LIABILITYWe now move from Contractual Liabilityand look at the specific liability of atransportation intermediary, whilebuilding on the Indemnity Provisionsexpected by shippers. Freight BrokersLiability is an emerging risk in thebrokerage space that, although nottechnically new, has not been as welladdressed from an insurance perspectiveas it should be.Freight Broker Liability: Freight brokersare in some ways the first disruptorsof the transportation industry. Freightbrokers traditionally worked in anunregulated space simply matching loadsto carriers, actively avoiding liabilityand certainly not accepting contractsor making any warranties around thefitness or suitability of the carriers theywere engaging. In recent years, however,the broker’s role in the transportationindustry has grown. Smaller brokershave developed into massive operations,through-putting billions of dollars infreight receipts, becoming much largerthan many of the carriers that theyconnect with their shipper customers.In addition, the majority of asset-basedcarriers also have a brokerage armto ensure that they can provide theircustomers with a more complete nationaland international service.To battle thin margins, brokers havealso become more willing to partnerwith shippers, delivering morecustomized services, and of courseaccepting greater levels of contractualliability (as discussed already). Thisincrease in size, along with the expansionof role, has put the broker in a challengingposition. When an underlying carrier isinvolved in an incident, it is becomingmore likely that, if there was a brokerinvolved in the transaction, they will bedrawn into the claim.
INSIGHTSAlthough negligent hiring and vicariousliability are the common allegations, inmany cases the action against the brokeris unfounded or weak. However, even thebasic defense of an unfounded claim maycost hundreds of thousands of dollarsand, more often, courts are makingunfavorable decisions against thebroker to ensure the plaintiff isadequately compensated.In situations where brokers are usingindependent contractors, the underlyingcarrier’s insurance coverage may belimited. As the automobile liability markethas hardened, smaller carriers havereduced the limits they purchase, andbrokers have accepted these reducedlimits, which puts them at a greater risk ofbeing drawn into a third party claim.From an insurance perspective, there hasbeen some misunderstanding around theappropriate coverages a broker shouldcarry to address the risks related to beingdrawn into a third party action againsta carrier with whom they assisted incoordinating freight.As mentioned earlier under ContractualLiability, to address the automobileliability requirements imposed uponthem under contract, they might arrangeto have an automobile liability policyon a vehicle they may not use. In theUS, that automobile policy would likelyhave a non-owned automobile coverageextension. In Canada the non-ownedautomobile extension is often includedunder the General Liability policy.For a number of years, and likely in anumber of cases, brokers may havecalled upon the non-owned automobilecoverage under either an Auto or GLpolicy to respond to the defense ofactions into which they are drawn – with6the presumed interpretation that theaction was based around the broker’s“use” of the carrier’s vehicle for themovement of cargo.There are challenges with using anon-owned automobile provision tocover these exposures as the primaryintention of the extension of coverageis to address the insured’s use of rentalvehicles, examples of which include theuse of rental vehicles by sales people, orthe short term rental of a replacementcommercial vehicle that is being drivenby the insured’s employee driver, orthe insured’s contracted driver.However, in a properly structuredbrokerage relationship, the driver ofthe vehicle is neither an employee nor acontracted driver.The application of coverage under anon-owned automobile provision is alsoproblematic, as it would be intendedto sit excess of any primary coverage inplace for the actual driver – and, on thisbasis, the coverage is sometimes calledcontingent auto, or contingent nonowned auto. However, when the brokeris not tied or related to the carrier, theaction being made against the broker isnot contingent, nor is it excess. The lastthing that the broker wants to rely on isthe defense being put up by a carrierwho only has 1 million in automobileliability insurance in a situation wherethe plaintiff’s claim could be severalmillion dollars.Freight Broker’s Liability (or Broker’sLiability) coverage is a primary insurancecoverage intended to address situationswhere the broker is drawn into an actionas a result of an incident involving acarrier that handled freight brokeredby the insured. As a primary cover itresponds on behalf of the broker and itspecifically does not provide coverage forMarch 2018the carrier. It is not a contingent cover,nor does it sit excess the carrier’s liability,and it may subrogate back against thecarrier, and so many astute brokers willhave an indemnity provision with thecarriers they use to allow for this.For coverages scheduled up into anexcess or umbrella program, we oftensee the broker’s liability sitting on its ownas many traditional excess markets donot want to sit over the broker’s liabilityexposure. This was highlighted two yearsago as Lexington exited the Broker’sLiability market and Zurich and AIGmoved out of the buffer layer space. Inessence, broker’s liability acts like a bufferlayer coverage where the actual carrier’sprimary is not adequate to respond to theclaim being made against them.Broker’s Liability coverage should bearranged across the entire operation.Because coverage is not “cheap” thereis sometimes a perception that byapplying coverage to only a portion of theoperations the broker can reduce the costof coverage. Keep in mind, however, thata claim can arise from any of the carriersthat the broker may employ – not just the“small” carriers or from a niche part of thebrokerage business.In addition, the coverage form for theBroker’s Liability needs to be broad.Early forms and some current formsplace expectations or warranties on thebroker to ensure that the underlyingcarrier has a certain level of automobileliability coverage, and if this warranty isbreached, may not respond on behalf ofthe broker. This effectively defeats thepurpose of the coverage and, as such,forms that require a certain level of duediligence in the carrier selection processbut do not warrant there be a minimumlevel of coverage with the carrier may bedeemed more attractive.
INSIGHTSOnce a broker understands their exposure and the coverage provided by the broker’sliability form, they are faced with the difficult question of how much limit should bepurchased. Since the exposure should primarily be defense, a high limit may not benecessary. At the same time, however, for larger brokers, having higher limits may benecessary to address the decisions they might face as a deep pocket.CHANGING TECHNOLOGY AND THE IMPACT ONAUTOMOBILE INSURANCELooking forward at the potential changes that the insurance industry is likely to face overthe next five to 15 years, technology is clearly going to have a massive impact on the riskprofile of transportation industry and automobile insurance. As noted at the start of thispaper, autonomous vehicles are going to change liability claims; simply put, if vehiclesdon’t crash, a huge part of the insurance industry will become unnecessary. In the US,automobile insurance makes up approximately 40% of the total market premium. From adollar perspective, it is roughly 247 billion dollars out of a total market premium of 611billion, with the next largest individual coverage line being homeowners insurance at 91billion* (NAIC 2016 Key Facts and Market Trends). If vehicles are 99.9% less likely to beinvolved in an accident, the reduction in claims will lead to a massive reduction in premium.With the anticipated reduction in accident frequency and a substantive reduction in losscosts, the insurance industry will be facing even greater challenges around where to deploycapital, and will be forced to significantly reduce the cost structure that is currently in placesupporting the industry – including underwriting, administration, claims management, andof course certificate issuance. There is, of course, the short term possibility that, duringthe transition to autonomous vehicles, there may be an increase in loss severity, includingpunitive jury awards against the manufacturers of autonomous vehicle technology, as wellas challenges around how autonomous and non-autonomous vehicles will interact and beinsured – but this can only last for a short period before fully-autonomous vehicles becomelegislated in the best interest of society.In addition, as artificial intelligence develops in the insurance space, the pricing of riskwill become more efficient, and more accurate, reducing the need for underwriters andensuring there is less variance between insurance markets. With less pricing variances, theselection process of coverage will be less labor intensive, reducing the requirement for abroker to assist with the insurance transaction. Some estimates suggest that the insuranceindustry will be able to shed approximately 60% of current staffing as the business of ratingand delivering insurance becomes more commoditized and automated.On the claims front, which is also currently labor intensive, blockchain will assist increating claims settlement efficiency, with significantly reduced debates with respect tovalidation of the parties to be paid, along with less confusion around expectations underpurchase agreements, including a more specific understanding of liabilities of the partiesunder contract.In addition, smart contracts will ensure clarity of liability, forcing issues such as thefinancial obligations of a carrier in the event of a loss to be pre-defined. These morespecific pre-defined obligations will be tied under contract into the insurance coverage ofthe parties involved in the transaction, eliminating questions around whether or not there isthe correct coverage in place, and thankfully ending the need for certificates of insurance.7March 2018CONCLUSIONAs we see change taking place at an ev
transportation insurance industry is at the edge of a cliff and an autonomous electric semi-trailer truck, loaded with 80,000 lbs. of cargo, is driving straight at us, accelerating to 60 mph in less than 20 seconds.