Errors and omissions (E&O) insurance is a type of professional liability insurance that covers the negligence, errors, or omissions of a transportation carrier and pays the financial damages awarded in lawsuits filed by a third party. It exists for those times when financial damages suffered by a customer as a result of a carrier’s negligence do not fit the definition of “covered damages” typically found in a general liability policy. Examples of errors and omissions claims could include recordkeeping errors that would result in funds being lost or misappropriated, a carrier selecting a trucker who absconds with a shipment, or an error by a carrier shipping a load of cargo to the wrong location.
If a carrier is navigating the transportation industry without E&O coverage, then the financial injuries its customers allege that the carrier caused are going to be the financial injuries the carrier will reap. Transportation carriers risk financial exposures and liability as a result of failing to perform duties related to professional services as well as activities as a customs broker, property broker, domestic freight forwarder, international freight forwarder, nonvessel operating common carrier, or warehouseman. With constantly changing rules and regulations mixed together with today’s litigious environment in which settlements and awards are increasingly on the rise, a transportation carrier cannot afford to go without the proper E&O protection. Also known as professional liability coverage, E&O coverage provides transportation carriers with legal defense and resolution based on the terms of the policy. In the event that someone files a claim against the carrier alleging damages as result of the services the carrier provided, an E&O policy would respond.
Some of the most common types of claims include failure to follow instructions; shipping delay caused by the negligence of an employee; improper quotation of charges; incorrect document preparation; unauthorized release of goods; misdirection; failure to collect documents; failure to properly clear goods upon entry; incorrect classification of goods; failure to insure cargo when instructed to do so; negligent selection of a trucker or other carriers; as well as other activities.
Many of the daily operations performed by a transportation carrier involve the services requested by its customers, and are driven by extensive documentation that requires attention to detail. Without the necessary protection, even a small oversight or alleged error can have a devastating effect on the carrier’s business. A solid E&O policy can help protect the carrier against costly claims or lawsuits.
Transportation professionals should be concerned about protecting their business when, at any time, a lawsuit can be brought against them for actual or alleged mistakes that could cause their customers to suffer a monetary loss. Even when these suits are groundless, a carrier can and will incur legal costs to defend itself. Defense for these claims can create substantial and unexpected expenses. Carriers need an E&O insurance program that responds to the unique professional liability exposures that impact transportation intermediaries and customs brokers. The program it selects should be backed by a team of transportation insurance specialists who provide the support and resources it needs to help reduce exposures and guide it through the claim process, if needed.
Some features of an effective E&O program can include first-dollar defense, importer of record, claims made, and an optional worldwide coverage. Under the first-dollar defense coverage, all legal expenses are paid from the very first dollar, and the carrier pays no deductible on the legal expenses, which includes attorney’s fees. Importer of record coverage broadens coverage to cover the carrier’s liability to customs and border protection when the carrier acts as an importer of record. Claims-made policy forms are the preferred and most common format for E&O and similar professional liability policies. The claims-made policy provides today’s limits for today’s claims. For those carriers that ship in and around the world, optional worldwide coverage can be added to an E&O policy to protect the carrier against claims filed against it anywhere in the world.
Most people are not aware that professional liability or E&O claims are excluded from standard general liability insurance policies, so transportation carriers need to secure a separate policy to ensure protection. So we ask, is E&O Insurance necessary for transportation carriers? The answer is a resounding “Yes!”
The instances in which transportation carriers are exposed to significant financial liability, which is not covered by standard general liability insurance policies, are on the rise. In a relatively recent decision from the U.S. District Court for the Northern District of Illinois in Artisan & Truckers Cas. Co. v. Hanover Ins. Co., a commercial general liability insurer was granted summary judgment on its declaratory judgment action against its insured, a transportation carrier. Ultimately, the court in Artisan concluded that the commercial general liability (CGL) insurer did not have a duty to defend or indemnify the insured transportation carrier in an underlying action for damages arising out of the theft of cargo that the carrier was transporting.
Court documents illustrate that, in the underlying action, a broker entered into an agreement with the insured carrier to transport two CASE backhoes that belonged to the broker’s customer. While in the custody and control of the carrier, the backhoes were stolen before they could be delivered. The broker’s insurer paid its customer for the loss of the backhoes, and in exchange for the payment, the customer assigned its claims arising out of the loss to the broker’s insurer. The broker’s insurer then filed a lawsuit against the transportation carrier for the value of the backhoes. The transportation carrier was insured under a CGL policy, but its insurer filed a declaratory judgment arguing that it did not have a duty to defend the transportation carrier in the underlying action.
Ultimately, the court granted the CGL insurer’s motion for summary judgment, concluding that it did not have a duty to indemnify or defend the transportation carrier in the underlying action arising out of the theft of the backhoes. The court found that the damages caused by the theft of the backhoes did not constitute “property damage” for purposes of the CGL policy, and that, in any event, those damages fell under the CGL policy’s exclusion for property damage arising out of the insured transportation carrier’s “work.” Notably, the court concluded, on its own, that the theft of the backhoes did not constitute “property damage” under the CGL policy, despite the fact that both parties “believe[d] it is obvious” that the theft was included under the definition of property damage. With respect to the “work” issue, the court applied the “plain, ordinary, and popular meaning” of the term, and concluded that the theft of the backhoes “arose out of [the transportation carrier]’s activity directed toward accomplishing the delivery of the backhoes,” therefore constituting “work.”
The practical impact of the decision in Artisan, of course, is that the transportation carrier was left without coverage under its CGL policy for the underlying action for damages arising out of the theft of the cargo that the carrier was transporting. In the underlying suit, the broker’s insurer sought damages of more than $180,000, plus interest and costs. Without a separate policy, such as an E&O policy previously discussed, this transportation carrier would be left on its own to defend the claim and satisfy any judgments against it.
Although not in the transportation context specifically, the U.S. Court of Appeals for the 5th Circuit also concluded in Adams v. Unione Mediterranea Di Sicurta that damages caused by an insured’s negligent conversion were not covered under the insured’s general liability insurance policy. In this case, the insured was a salvage company that initially had a contract to salvage steel beams from the Mississippi River as a result of a barge collapse. The salvage contract was canceled before the work was performed, but the salvage company nevertheless voluntarily undertook the task of salvaging the steel beams, believing the property to have been abandoned. After retrieving the steel beams, the salvage company then sold the property to a third party. Through litigation, the courts concluded that the property was not, in fact, abandoned, and held that the salvage company was liable for its negligent conversion of the property. An issue on appeal was whether the salvage company’s negligent conversion was covered under its general liability policy.
The 5th Circuit first noted that, to have coverage, “the conversion of the steel must be an occurrence, and to be an occurrence under the policy it must be an accident.” Because the salvage company retrieved the property and subsequently sold it to a third party “without regard for the true owner’s interest,” the court held that the case involved neither an accident nor a fortuitous event. Therefore, the salvage company’s error in salvaging and selling the property that it mistakenly believed to be abandoned was not covered under its general liability policy.
The lesson from the Artisan and Adams decisions—as well as many more like them—is that businesses, and particularly transportation carriers, should not rest on a standard general liability policy to fully protect their financial interests. As these cases illustrate, there are instances in which claims may not be covered, particularly those claims that arise out of actual or alleged mistakes of the carrier or broker, which could be covered by an appropriate E&O policy.