Cargo and Captive Insurance: Reducing the Impact of Carmack Amendment Risks

Shipping companies and cargo owners have followed a well-established set of regulations governing losses since 1906. But today's transportation economics—and the rise of organized cargo theft—are prompting motor carriers to explore new risk mitigation strategies, including the use of captive insurance.

The Carmack Amendment, added by Congress to the Interstate Commerce Act in 1906, was intended to clarify the regulatory relationship between interstate carriers and cargo owners. Under Carmack, the carrier is strictly liable for actual damage to cargo it transports—regardless of cause and without requiring proof of negligence.

Of course, the shipper must document that the shipment was in good condition when the carrier took possession. Damage occurring between pickup and delivery is generally presumed to be the carrier's legal liability—except in certain circumstances, such as the following.

• Acts of God. Goods damaged by an unavoidable natural cause, such as a tornado or an earthquake.
• Shipper's default. The shipper's failure to provide the cargo in good condition for safe transport.
• Public enemy. Carriers are not responsible for damage occurring because of war, terrorism, and similar activities.
• Public authority. Damages from actions taken by government agencies. 
• Inherent vice. Damage is caused by issues related to the nature of what is being shipped, such as food that spoiled naturally and not because of carrier delays.

Shippers can—and often do—contest Carmack claims. However, because many standard cargo policies exclude coverage for losses caused by negligence, carriers may be unprepared for the resulting liability.

Theft of cargo is as old as commerce itself, but today's thieves are more sophisticated in how they exploit carriers' security vulnerabilities. For example, criminals may pose as a legitimate motor carrier on a load board or within the carrier's system. The imposter shows up, collects the load, and disappears. When the shipment fails to arrive, the shipper contacts the carrier, who has no knowledge or record of the transaction. Fraudulent motor carriers like these are often excluded from standard cargo policies. In another common scenario, a driver leaves the truck unattended in an open lot, and the load is stolen. Most insurance policies exclude this type of loss as well.

The American Trucking Association reports that cargo theft has grown to $35 billion annually. Strategic theft has increased by 1,500 percent since early 2021, with an average loss of more than $200,000 per incident. This places significant strain on company operations and contributes to supply chain disruptions, financial losses, eroded customer trust, and lasting reputational harm.

Shipper's interest insurance is another option that protects the cargo owner against hazards like fire and theft for individual shipments. It's often a more affordable alternative to purchasing an annual cargo policy.

As shipment values rise, cargo insurance policies are increasing their coverage limits. Still, carriers may need to address shipments that exceed those limits. For example, one motor carrier was asked to transport helicopters worth $30 million. Some insurers now offer special policies for individual high-value shipments, typically costing between 10 and 12 cents per $100 of value.

A growing number of shipping carriers are exploring how captives can improve coverage and reduce insurance purchasing costs. Unlike traditional cargo insurance, where premiums are paid as an expense for a set period, funds paid into a captive are treated as an investment. Money not paid out in claims contributes to the captive's surplus, strengthening its ability to cover higher-value losses in the future while generating investment income. Carriers may use accumulated surplus for risk management initiatives, such as theft-prevention technology, or distribute it to the owner(s), subject to regulatory approval. 

Some programs use a deductible reimbursement structure within a captive to better control inland marine claims in the high-deductible or self-insured retention layer. Larger carriers may use captives to take a quota share of their insurance programs in partnership with commercial insurers. Carriers that need higher limits than the market is willing to provide can also use a captive to fund excess insurance layers. In some cases, carriers incorporate additional coverages—such as errors and omissions, workers compensation, and medical stop loss—into the same captive.

For some organizations, an alternative risk transfer vehicle such as a risk retention group, which is commonly used to address automotive liability, may offer significant advantages alongside or in place of a traditional captive arrangement. 

Whether or not a captive proves to be the right solution, carriers should conduct and regularly update risk assessments and evaluate the total cost of risk across their organization to better identify and address vulnerabilities. They should also consider strengthening security measures, enhancing risk management initiatives, and educating employees on cargo theft and prevention strategies.

Working with an experienced captive consultant can help evaluate the carrier's specific risks and determine whether a captive structure offers a more strategic approach than continuing to absorb rising premiums.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.