Contingent cargo policies issued to brokers often have a much more limited scope of coverage than brokers or shippers expect. Some brokers believe that if the primary cargo insurer denies coverage or refuses to cover the value of the lost or damaged cargo, its contingent cargo policy will step into fill the void. In reality, the coverage may be much more nuanced and limited. Case in point is a recent decision in the case of MGN Logistics, Inc. v. Travelers Property Casualty Company, et al, No. 16 CV 4301, (N.D. Ill. Aug. 31, 2017). The District Court for the Northern District of Illinois held that the language of a contingent cargo policy validly limited coverage to the “actual limits” of the primary policy. Thus, where a provision in primary cargo policy limited certain thefts to $5,000, the contingent policy also limited the coverage for those thefts to $5,000 even though the policy’s declarations page listed $200,000 in coverage.

In that case, MGN brokered a load of copper wire worth more than $130,000 to a motor carrier insured under a primary cargo policy with a general limit of $250,000. However, the carrier’s cargo policy reduced coverage to $5,000 for certain high value cargo, including copper, if certain security precautions were not taken by the carrier. Those security precautions were allegedly not taken by the carrier, and the copper wire was stolen. MGN paid the shipper for the loss and received an assignment of the claim. It then sought recovery under both the primary and contingent policies.

MGN first submitted a claim to the primary insurer, who offered only $5,000 on the claim in light of the high value theft provisions. MGN rejected the offer and turned to its contingent carrier, Travelers, for full payment under the contingent cargo policy. Travelers rejected the claim citing language in the contingent policy that it only covers a loss when the primary insurer declines to cover a loss and that policy pays no more than the “actual limits” of the primary policy. Travelers contended that the “actual limit” of the primary cargo policy was $5,000 because the carrier failed to take the necessary security precautions.

MGN subsequently brought suit to recover the full value of the cargo from Travelers arguing that the “actual limit” referenced in the contingent policy was the primary policy’s general limit of $250,000. The court took a detailed look at the policy language and applied general principles of policy interpretation. The court held that there was nothing in the policy language to indicate that the phrase “actual limits” was intended to mean the general limit rather than the limit payable under the terms of the primary policy for a given loss. Thus, if the coverage limit was $5,000 under the primary cargo policy based on the facts of the loss, then the coverage limit for that loss was $5,000 under the contingent policy.

The MGN Logistics case shows the need for a broker to understand what is and is not covered under its contingent cargo policy. This will prevent a potentially expensive surprise when the time comes to submit a claim under the contingent policy. The case also illustrates the broad leeway given to cargo underwriters who add exclusions and limit coverage.