Insider Blog

Navigating Compliance in the Modern Supply Chain

Part 2: Contracts and insurance

Contracts are the heart of supplier/carrier relationships. They spell out in clear terms what is expected of both parties and therefore serve as an expression of trust that holds a given job together. Contracts can also be a source of major headaches if they are not properly negotiated or if they fail to address key provisions.

SMC3 recently hosted a webinar with Fred Marcinak and Rocky Rogers of the Moseley Marcinak Law Group during which they shared their expertise on transportation contracts and insurance. This article provides an overview of the topics they covered, namely: the most common types of transportation insurance and how carriers can work to make sure they are effectively covered.

The essentials of contracts

Contracts between shippers and carriers consist of three primary parts: the contract itself, a bill of lading describing the goods being transported, and tariffs that add unique specifications to the contract. It is of the utmost importance that both sides are on the same page at the outset of the agreement, and it is therefore crucial to have a clearly defined scope of the agreement, including a set term or period over which the contract is valid.

When building out any scope of agreement, there are six primary components that should be considered: requirements contract, authority, safety rating, performing standard, reasonable dispatch, and unique needs. The scope of the agreement should also clearly define whether you are operating as a common carrier or a contract carrier.

Insufficient, late, or complete lack of payment is one of the most troubling issues that carriers encounter, which makes explicitly defining payment terms in the initial shipper/carrier contract highly important. Carriers have options in these scenarios and should consult legal counsel in the event of nonpayment, but it’s critical to note that the statute of limitations for taking action can sometimes be as short as 18 months. This adds extra incentive to resolve the issue in a timely manner.

Seeking the right insurance

As you draft and review contracts with suppliers, it’s crucial to ensure you are protecting your company with the correct type(s) of insurance.

Commercial auto liability (CAL)

This type of insurance covers damages and injuries caused by CMVs. This is the most common type of insurance required of carriers putting trucks on the road. The minimum insured amount at the federal level is $750,000 for interstate loads. Many contracts require commercial auto liability coverage more than that, sometimes to the tune of >$1,000,000. It’s important to note that this type of coverage is typically linked to a vehicle (not a person), which means carriers need to be very deliberate about covering each CMV involved in a particular contract.

Commercial general liability (CGL)

Unlike commercial auto liability, commercial general liability coverage frequently excludes accidents that arise out of the use of a vehicle—a distinction that carriers should be aware of when seeking insurance for a given contract. CGL frequently covers premises, operations, employees, and other forms of negligence—for instance, broker-related negligence. It’s important to note that CGL sometimes excludes worker compensation and employer liability, which carriers should consider when building their coverage plan.

Endorsements are a good way to make sure you are being properly covered within the bounds of a certain contract. The following endorsements are often included in transportation contracts, and carriers are encouraged to be specific in contract negotiations about the endorsements they demand:

  • Designated insured endorsement – restricts insured status to only those qualifying as insured under policy terms
  • True additional insured endorsement – expands a policy to include a person or organization not named in the original policy
  • Primary and non-contributory endorsement – shipper can require carrier’s policy to not demand shipper’s policy provide primary coverage
  • Waiver of subrogation endorsement – limits the insurer’s ability to recover money paid out on a claim from a negligent third party
  • Notice of cancellation endorsement – modifies a policy to provide notice of cancellation beyond that which is stipulated in the policy

The bottom line? Carriers and suppliers both bear a responsibility to protect their interests through hyper-specific insurance policies that cater to the unique needs of a given contract. Furthermore, carriers need to consider how much necessary insurance they can afford before signing on to a new contract.

Emerging concerns

As the way our industry does business becomes increasingly digital, and as the tide of cybercrime continues to rise, it is becoming more and more important for carriers to include cybersecurity in their broader liability picture.

Carriers and transportation intermediaries possess a massive amount of private and sensitive information about their clients and their clients’ customers. Sharing this information is key to delivering high-quality service, but it can also create a vulnerability for all parties if not properly protected by robust security measures. Carriers need to have internal discussions on whether their business warrants seeking this type of coverage within certain contracts and making sure that their liability coverage effectively accounts for this new type of threat.

Looking for more information on contracts and insurance? Check out our online learning center and increase your skillset!

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Categories: 3PL, Education, Freight, Logistics, LTL, Supply Chain, Transportation