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Co-insurance: Your cargo policy&rsuqo;s dirty little secret

By Donna Ryun
OOIDA Information Services

While the title I chose for this issue's topic may have caught your attention, I admit that it is a bit deceiving. There's really no secret.

The co-insurance clause in your cargo insurance is written in black and white right there within your policy. However, if you haven't actually read your policy, it remains a "dirty little secret" that could cost you your business if you have an accident that damages your valuable cargo.

Recently, an OOIDA truck insurance agent asked me to address this issue in my column. She told me that a member had advised her that he and many of his fellow truckers were totally unaware of how the cargo co-insurance clause could affect them if they had an accident involving cargo damages. He believed this was something that all truckers need to know. He's right.

It's been my experience for several years now that most truck owners carry a "standard" $100,000 limit of cargo coverage. It appears to be very common in the industry for broker contracts to specify that the owner-operator is only required to maintain $100,000 in cargo coverage. So, many believe that as long as they carry $100,000 they are good to go. What most don't understand, however, is that their broker contract doesn't affect how their cargo policy works.

The fact is, that $100,000 just doesn't buy as much as it once did. Commodities are getting more and more expensive. This point should be considered when determining insurance requirements, particularly when the cargo policy contains a co-insurance clause.

If you do not buy enough cargo insurance to cover the entire value of the load, claims will only be paid on a percentage basis, not dollar-for-dollar, because of the co-insurance clause.

The end result being, you will pay significantly more out-of-pocket than just your deductible on sizable claims - even if the claim amount is lower than the amount of cargo coverage you have on the load.

The co-insurance penalty is calculated by dividing the amount of insurance that you carry by the amount of insurance that would actually be required in order to cover the loss. You would then multiply that percentage by the dollar amount of the loss in order to establish the amount of the settlement.

Let me give you an example:

If you have a load that's valued at $250,000, and you have the standard $100,000 limit on cargo coverage, you are not insured for the first $100,000 of cargo damages, as many truckers actually believe.

Because of the co-insurance clause in your policy, you're really only purchasing insurance for a percentage of the risk - in this case 40 percent. The remaining 60 percent of the risk is on you.

Let's say you're transporting a load of electronics and while in transit, you're involved in an accident. A $2,500 flat-screen TV is damaged beyond repair. Because 60 percent of the risk is on you, your share of the damage is $1,500. Your $100,000 cargo policy with the co-insurance clause covers 40 percent, so that's $1,000.

Subtract your deductible of $1,000 from that, and this leaves your insurance company paying - ummmm, well, nothing. The "dirty little secret" is out, and you end up paying for the TV because $1,500 for your share of the damages plus a $1,000 deductible equals $2,500.

So why does the insurance company include a co-insurance clause in the policy? It's for the same reason that you insured a $250,000 load for only $100,000. Aside from the fact that the broker only required $100,000, you took a gamble believing that the odds are greater if an accident occurs, the damages surely wouldn't be over $100,000, so why pay the premium to insure for $250,000?

The truth is that you're right.

The risk is greater that you'll have more losses involving damages under $100,000, than you will involving the entire $250,000. Insurers know it's much easier to do $100,000 damage to a $250,000 load than it is to do $100,000 damage to a $100,000 load.

Consequently, the insurance company doesn't want to accept the additional risk without charging an additional premium, so they include a co-insurance penalty within the policy. Doing so enables them to share, with the insured, the additional risk incurred because most damages will be in the first $100,000.

In this example, you chose to buy insurance to protect only 40 percent of the value of your load; therefore you accepted the other 60 percent of the risk in addition to your deductible.

Although the loss in the example resulted in you having an unexpected $2,500 out-of-pocket expense, it could have been much worse. Imagine if the cargo was a total loss. Your share of those damages could throw you into bankruptcy.

Remember: If you don't want to pay a co-insurance penalty, you will need to insure for 100 percent of the value of the load.

When you purchase insurance, you expect protection from damages or losses that you might otherwise have to pay out of your own pocket. However, your cargo policy probably contains specific provisions that likely include a co-insurance clause. You can avoid any unwanted surprises if you take the time to read your policy, and contact an agent if you have any questions.

If you have questions about doing business, please e-mail them to donna_ryun@ooida.com or send them to PO Box 1000, Grain Valley, MO 64029. We can't publish all of your questions in Land Line, but you will receive a response, even if your letter is not published.

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