Beware of Co-insurance Loopholes
By Henry E. Seaton

July 2004
Reprinted from

Q Our company is a small over-the-road carrier that transports expensive shipments in truckload quantities. About half of a truckload worth $500,000 was damaged beyond repair, and the shipper filed a claim for $250,000. Although we have cargo limits of $200,000 per occurrence, our insurer has stated that it will only pay $100,000 of the claim less the deductible because of some co-insurance provision in the cargo policy that we knew nothing about. Can this be right?

A Co-insurance provisions often show up in casualty policies. Insurers use them to keep policyholders from under-insuring property on first-dollar coverage. A typical co-insurance provision reads something like this:

“In the event of a loss to which the limit of liability applies, the insurer shall in no event be liable for a greater proportion of such loss than the limit of liability involved bears to 100 percent of the evaluation of contents of the vehicle at the time such loss occurred.”

Co-insurance provisions can have surprising and devastating effects. In your case, your coverage of $200,000 per occurrence is 40 percent of the $500,000 worth of goods on the truck. So your insurer will pay only 40 percent of the loss, or $100,000.

You obviously assumed that all losses were covered at least up to the limit of $200,000 per occurrence, and surely the shipper did as well when it received your certificate of insurance. Co-insurance provisions, like other exclusions and policy loopholes, are not disclosed on the typical certificates of insurance used in the industry.

Ironically, co-insurance provisions limit recovery on partially damaged loads but have no effect in the case of a total loss. So if the shipment had been a total loss, the insurer would have paid the full $200,000 policy limit.

Address the co-insurance problem at the outset. Check your policy to ensure there is no co-insurance provision so you won’t have to deal with a nasty surprise. If you are forced to accept a co-insurance provision in your cargo policy, negotiate a released evaluation with your shipper that includes an alternate maximum, such as “$2.50 per pound per article” or “$100,000 per truckload, whichever is less.” This step will avoid this gap problem on partial losses where the total value of the cargo exceeds your policy limits.
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