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March 7, 2011 6:00 AM, EST

FMCSA Drops Cargo Insurance Requirement for Freight Forwarders and For-Hire Carriers

By Daniel P. Bearth, Staff Writer

This story appears in the March 7 print edition of Transport Topics.

The Federal Motor Carrier Safety Administration said it no longer will be necessary after March 21 for freight forwarders and for-hire carriers to maintain a minimum level of insurance for cargo that is lost or damaged in transit.

The agency said it is removing the insurance requirement, which provides coverage up to $5,000 per vehicle or $10,000 per incident, because it is no longer necessary to protect the interests of most shippers.

The rule remains in effect, however, for carriers and forwarders of household goods.

“FMCSA does not believe it is necessary to mandate cargo insurance requirements for the benefit of most commercial shippers,” the agency said in a notice published in the Federal Register last year.

The cargo insurance requirement applies to less than half of regulated for-hire carriers, the agency noted.

Robert Pitcher, vice president of state laws for American Trucking Associations, said most carriers will provide cargo insurance to shippers that request it.

“It will eliminate some paperwork,” he said. “But we couldn’t find anybody who thought it was a big deal.”

However, in comments filed with the agency, ATA argued that the cargo insurance requirement should apply to all carriers or none.

“ATA does not support extension of the cargo insurance requirement to all motor carriers and thus believes FMCSA’s proposal to eliminate the cargo insurance requirement is the right approach,” the organization said in its comments to the agency.

The proposal drew opposition from shipper groups and freight brokerage firms. They argued that eliminating the cargo insurance requirement removes a key tenet of financial responsibility for freight carriers and will make it harder for small-volume shippers to recover losses if a carrier goes out of business or is unable to pay claims.

“A lot of small trucking companies are not going to buy cargo insurance if they don’t have to,” said Ira Lipsius, a partner in Schindel, Farman, Lipsius, Gardiner & Rabinovich, a New York law firm.

Kal Schindel, a co-founder of the firm, helped to craft the original regulation for the Bureau of Motor Carriers, known as Form 32, in 1937. The rule was extended to freight forwarders in 1944.

Lipsius said insurers have paid “tens of millions of dollars” in BMC-32 claims over the years and that it is unclear how the rule change will affect market demand for cargo insurance.

Officials at the Inland Marine Underwriters Association, a New York-based trade association representing cargo insurers, termed the demise of BMC-32 “an end of an era” and warned that mass cancellation of policies could overload the system.

Sam Rizzitelli, national transportation director at Travelers Insurance in Hartford, Conn., said shippers will have to consider insurance risk in choosing the carriers they want to do business with.

“A lot of shippers have in their contracts a requirement to have this kind of insurance in place,” he said.

Most standard cargo insurance policies carry between $1,000 and $5,000 deductible, which means that shippers will have no choice but to collect directly from the carrier for small losses.

Announcing the final rule last year, FMCSA said the transportation industry has changed significantly since the original rule was put in place, and “the ability of commercial shippers to negotiate the terms of their transportation arrangements has been significantly enhanced.”

The cargo insurance requirement, in fact, may have allowed commercial shippers and for-hire motor carriers to conduct business in economically inefficient ways, according to FMCSA.

“Shippers and motor carriers may have been taking risks they probably would not have taken, absent the BMC-32 endorsement,” FMCSA said. “Carriers also may not have been spending adequately on cargo anti-theft/anti-damage systems, including training carrier personnel.”

With the change, FMCSA said, it believes that the market “will improve itself.”

A survey of insurers found that the typical cargo policy provides $50,000 to $100,000 in liability coverage, the agency said.

Regardless of whether a carrier has insurance, for-hire carriers can be held liable for any loss or damage to cargo under existing statutes, FMCSA said. The law also allows carriers and shippers to negotiate a limit on the value of a load for insurance purposes. And shippers can purchase insurance directly, rather than rely on motor carriers or forwarders to provide such coverage.

“The only shippers that FMCSA considered in need of the protection provided by the cargo insurance requirement are individuals who arrange to move their own household goods,” the agency said. “Such individuals are less knowledgeable about carrier liability requirements and need the protection afforded by the existing regulations.”