The motor truck cargo market in the United States is alive and well and ready to respond to coverage issues but the agent must understand that not all coverage forms are created equal. When asked which coverage every motor truck cargo insured should purchase, Bill McLeckie, CEO of McLeckie Insurance Group cautioned, “First and foremost, a full understanding of the exposure is required before embarking on this question.” The marketplace includes both admitted and nonadmitted paper and, while the Insurance Services Office (ISO) has developed a standardized form, according to Steve Silverman, AVP and product line manager for inland marine and special property at Lexington Insurance Company, it is seldom used. Smaller mutual insurance companies may use the American Association of of Insurance Services (AAIS) form but most motor truck cargo markets utilize their own forms.
Non-admitted markets tend to dominate the marketplace, according to both Janner and Clyde Holliday of International Brokerage and Surplus Lines, because of the potentially restrictive nature of the coverage. Underwriters provide coverage based on the risks associated with the particular insured and this approach individualizes pricing and coverage, especially on larger risks. The pricing this year appears to be static or lower but does not exhibit the pricing fluctuations regularly seen in other lines because of this individualized handling of coverage. As Janner points out, “We have only adjusted our cargo rates twice since 1993 and the market (at large) has behaved in a similar fashion.” David Pohle, transportation broker for Jimcor Agencies, agrees and says that “while other coverage lines are used to seeing companies come and go and capacity change dramatically due to catastrophic losses, the market for motor truck cargo coverage tends to be constant.”
Coverage limits of $100,000 are fairly common but limits of as much as $250,000 or $500,000 are not unusual, based on the insurance company and the cargo. Some larger companies provide limits of as much as $1million. Alek Turko, motor truck cargo underwriter with BISYS Specialty Programs, provides a cautionary note by stating that “Insufficient limits can cause a major problem to motor carriers if a loss occurs where commodity values are higher than the limits, since coinsurance penalties apply.” Part of the process of determining the correct limit is knowing what is covered. Steve points out that “It is important that brokers understand the particular policy definition for 'goods in transit,' especially when some transport is provided by a connecting carrier.”
This leads to a key point emphasized by each of our experts, which is the importance of coverage comparisons. Since forms are not standardized, looking only at price could result in substantial gaps in coverage. Structuring the motor truck cargo policy properly is important. This means arranging coverage to meet the exposures presented by the operations conducted by the insured. Important coverage endorsements, such as refrigeration breakdown, trailer interchange, terminal coverage, contingent cargo coverage for cargo brokerage operations, earned freight, and debris removal coverage are appropriate in some cases and should be offered to a risk. Keep in mind that exclusions and restrictions should be expected and not all of them can always be negotiated away. Examples of some of the more common ones include territorial restrictions, theft limitations on target commodities, protective safeguards and mechanical breakdown. Bill emphasizes that “A comprehensive comparison of complete policy forms offered is the only acceptable option in choosing cargo coverage.”
According to David, the definition of territory in most motor truck cargo polices and coverage forms “…generally restrict coverage to the United States, its territories or possessions, Puerto Rico and Canada.” Since Mexico and the commercial zone are not mentioned, coverage ends at the border. According to Steve, some markets are writing coverage in Mexico today. However, one of his concerns is a potential increase in the number of theft losses. This is because the frequency of cargo theft as a percentage of shipments made is thought to be significantly higher in Mexico than in the United States. He points out that Lexington provides coverage for some risks in Mexico but only on larger ones with demonstrated loss prevention measures.
Clyde emphasizes that security must always be one of the foremost concerns, since both moral risk and crime risk are constant threats to the security of goods shipped in the United States as well as across the border. He says, “Once NAFTA is fully implemented, these risks will be handled as they are today, through solid underwriting, and possibly risk management techniques such as satellite tracking devices, two man driver teams, local governmental security awareness and training.”
Motor carriers are not standing on the sidelines waiting for a decision to be made. While some of them are working through their lobbying organizations to stop implementation of the NAFTA, others are getting to know their Mexican counterparts and are entering into partnerships with them. Deane Sager from Northland Insurance explains, “U.S. carriers can purchase up to a 49% interest in a Mexican carrier. This arrangement allows the motor carrier to provide a seamless through-service by allowing the entities to simply exchange trailers, rather than unload and reload onto another truck.” Deane believes that many of these carriers self-insure the Mexican exposure.
Once NAFTA is fully implemented, everyone interviewed agreed that the industry would respond appropriately. Steve says that Lexington wants to work with Mexican trucking firms coming in, provided they incorporate proper loss prevention safeguards. He states that currently, “Most Mexican risks don’t purchase motor truck cargo coverage since it is typically not required in Mexico but that they would have to buy the coverage to comply with U.S. cargo filing requirements and shippers/consignees expectations for coverage if they were to transport into the U.S.” Janner says that “Mexican drivers allowed onto U.S. roadways will have an impact on traffic safety because of language and cultural driving habits but the intention of the pilot program is to make sure that only well qualified drivers are entering the country.” However, Bill points out that “Without safeguards at entry points to require the same standards we do of U.S. carriers, the entire idea would be a disaster.”
Several groups oppose full implementation of NAFTA because of fears that carriers will lose their current lucrative contracts in the free trade zone to their Mexican counterparts. Another fear is that roads will be less safe, especially the I-35 corridor to Canada, because of the perception of lower standards for Mexican drivers and fleet maintenance issues. While not disagreeing with some of these concerns, Deane believes that, “Mexican carriers who will enter the US are far more sophisticated than we give them credit for. There are several large scale Mexican motor carriers with top notch facilities and equipment.”
It doesn't appear that United States motor carriers have a corresponding interest in operating in Mexico because of road conditions and less regulation there. Deane doesn’t think that U.S. drivers will even want to enter Mexico because of the lack of infrastructure and regulation. For example, motor carriers in Mexico are allowed to run tandem full size 48-foot trailers on two lane roads.
How will the motor truck cargo insurance industry react to changes in the market when NAFTA implementation is complete? According to the experts, it will react as always, by reviewing each risk, evaluating the exposures presented and pricing each risk in the appropriate manner.