Reproduced with the Permission of Miles L. Kavaller

Insurance plays a significant role in transportation activities. Motor carriers are required by law to maintain automobile liability and cargo insurance to cover their transportation operations. Many shippers also have cargo coverage for their shipments in transit. When things go wrong and there is a claim which is not settled and is litigated in court, attorneys must be employed and paid. While shippers cargo policies will pay the loss and pursue the court case against the responsible carrier, a process known as subrogation, the carrier’s cargo insurance policy may not provide for a defense of a shippers claim and may even contain restrictions, limitations or exclusions which result in no coverage at all. This is an issue which should concern both carriers and shippers which is illustrated in a case I recently handled.

Several years ago a Newport Beach charter and excursion company purchased a used 75 foot yacht and hired a trucking firm to transport it from Houston, Texas to San Diego. From the outset things did not go well for both the shipper and the carrier. The trailer which the carrier had placed at the pick-up location, a marina outside Houston, was not quite large enough to accommodate the 75 foot vessel, a problem the carrier attributed to the shippers failure to provide accurate dimensions. Although the carrier had other trailing equipment, it was committed to other jobs and would not be available in time to meet the shipper’s needs and no other carriers capable of providing this service were available. Believing it had the permission of the shipper, the carrier hired the local welder who had removed the pilothouse and other appurtenances from the boat to prepare it for transportation, to cut and remove an 8 foot section of the bow. It was to be reattached along with the pilothouse and other parts when the boat was refurbished in San Diego.

The overdimensional shipment required numerous permits from state and local authorities for its interstate journey and was subject to time restrictions for the use of many routes. In fact a local town newspaper in Arizona even displayed a picture of the vessel in transit illustrating the wide turns required to negotiate corners and the height of the shipment necessitating the temporary removal of street lights, all of which interfered with the smooth flow of traffic. So, when the shipment arrived in El Cajon, California it was required to park until the next day when it would be permitted to transit the city. Early that morning a burglary occurred. Various items were stolen and some damage was done to the interior of the boat. This incident caused further delay in transit and the shipper was not on site when the shipment arrived in San Diego. But when he did arrive and saw that a portion of the bow had been removed, he refused to pay the carrier’s freight charges. The carrier placed the vessel in storage at a nearby location excersizing its lien for the payment of freight charges.

As might be expected, the dispute wound up in litigation, first in Orange County Superior Court and then in U.S. District Court in Santa Ana by a process known as removal. The shipper sued for unauthorized removal of the bow, the stolen property and interior damage resulting from the burglary and other transit damage and also sought loss of profits and punitive damages. The carrier sued for its freight charges. The shipper did not have insurance and had to hire and pay his own lawyer. The carrier reported the incident to its cargo insurance company which hired a local adjusting firm to investigate and evaluate the shipper’s claim. Although the damage resulting from the burglary was clearly covered under the cargo policy, the detachment of the bow, and the loss of profit and punitive damages were not. Despite the carrier’s demand, however, the cargo insurance company refused to provide a defense or to pay the carrier’s attorney. It relied on the provisions of the policy which it contended gave it the right, but not the obligation, to provide a defense.

After a court trial, the shipper was awarded judgment for the damage and loss of property caused by the burglary and loss of profits resulting from unjustified transit delay which occurred when the carrier insisted on payment of a portion of its freight charges in installments during the trip. The carrier was awarded the balance of its freight charges under its tariff less the shipper’s award and because they exceeded the shipper’s damages was determined to be the prevailing party for the purpose of recovering its costs.

The cargo insurance company reimbursed the carrier for the shipper’s damages but refused to pay its attorneys fees. The carrier sued the cargo insurer arguing that the policy provisions coupled with the payment of the undisputed portion of the shipper’s claim obligated it to provide and pay for the defense which benefited both the carrier and the insurer. The same federal district judge who heard the first case ruled in favor of the cargo insurance company and the 9th Circuit Court of Appeals agreed holding that the policy terms gave it the right but did not require it to defend the freight claim case.

The carrier was in a very troubling position. It had to defend the shipper’s claim which sought damages for both covered and uncovered losses and could not threaten to default and thus force the cargo insurer to defend or be subject to payment of a significant judgment. The insurance company was obviously aware of the carrier’s dilemma and was apparently confident that its exposure would be adequately protected by the carrier’s defense.

The lesson from this case is plain: When purchasing insurance first determine what the policy does not cover. There are several critical concerns and one of them is the payment of attorneys fees when a loss covered under the policy is litigated. Insurance brokers should be, but are often uninformed on this point, but in any event should be consulted before a policy is purchased.