The Sale of Cargo Insurance by Carriers and Transportation Intermediaries--Is it Legal?
by John M. Daley, Esq.
As a general proposition, the offering and selling cargo insurance, whether denominated as "cargo insurance" or "marine insurance," by transportation providers is a good thing, since it gives shippers the option of protecting themselves against loss at an economical price, while at the same time giving the transportation provider the opportunity to add a stream of income. as a general matter, however, the sale of insurance by non-licensed persons is prohibited under State law. Moreover, at least in the State of California, engaging in activity which is "unlawful" subjects businesses to potential liability under Business and Professions Code Section 17200, a California "consumer protection" statute which gives private plaintiffs the right to seek various remedies, including an award of restitution to all persons affected by the unlawful activity.
I believe there are several good arguments which can be made in support of the proposition that transportation providers’ sale of cargo insurance to shippers is lawful, including the argument that the sale of insurance by a transportation provider is an incidental part of a larger transaction which is not subject to regulation. Unfortunately, however, the decision of the Second District Court of Appeals for the State of California in Wayne v. Staples, 135 Cal. App. 4th 466 (2006), which is not directly on point because it did not involve a transportation provider, will make it more difficult to advance these arguments.
In Wayne v. Staples, the Second District Court of Appeal held that the sale of so-called "declared value" or "excess value" insurance by Staples, Inc. for goods which were transported by UPS constituted the unlawful sale of insurance even though the sale of insurance was incidental to the transaction for the sale of the merchandise, and that the plaintiff was therefore entitled to pursue a claim against Staples under California Business and Professions Code Section 17200.
In Wayne v. Staples, 135 Cal. App. 4th a p. 471-473 and 476, the majority analyzed this issue as follows:
The fundamental facts underlying Wayne’s complaint are essentially undisputed. Staples, a nationwide retailer of office supplies and services, offers package shipping services to its customers through its agreement to serve as an authorized shipping outlet for United Parcel Service (UPS). Staples expressly disclaims any liability for loss or damage to parcels shipped through its stores. The face page of its parcel shipping order form states, "We assume no liability for the delivery of the parcels accepted for shipment nor for loss or damage by any cause to the parcels or their contents while in transit. In the event of loss or damage to any parcels, we will assist you in filing and processing of claims only."
Staples’s shipping customers may protect themselves from the risk of loss or damage to their packages by purchasing insurance through UPS--what Staples calls "declared value coverage" and what is elsewhere identified as "excess value coverage" or "excess value insurance." UPS charges Staples $0.35 per $100 of declared value over $100 for this coverage; however, prior to May 2002 Staples charged its customers $0.70 per $100 of declared value over $100 for the coverage. Customers are advised of the total cost for the coverage either orally by a Staples sales associate or in writing through a printed receipt given to customers before they pay for the shipping or the coverage. Although Staples notified its customers it may place a surcharge on the coverage, it did not inform them its standard charge for the coverage included a 100 percent markup or margin.
The back page of Staples’s parcel shipping order form refers customers to the UPS service guide for a description of the terms and conditions of the insurance coverage: "You may purchase declared value coverage through the carrier designated on this PSO [(parcel shipping order)] or from an independent company, if available. The declared value terms and conditions for the various carriers can be found in the carriers’ service guide. The declared value terms and conditions for the various carriers and any applicable independent company selected by you are available for review at this Staples Center. Upon request, you may receive a photocopy of such terms and conditions. Please note that we may surcharge the cost of this product as an administrative expense, for services such as processing of potential claims and other related services."
UPS’s excess value coverage or excess value insurance is provided through an inland marine basic policy from the National Union Fire Insurance Company of Pittsburgh, Pa. (National Union). Customers who purchase the coverage at Staples or at other UPS shipping sites are additional insureds under the policy. In general, offering insurance coverage is an activity requiring a license and regulated by the Insurance Code. (See, e.g., Ins. Code, § § 1631 ["Unless exempt by the provisions of this article, a person shall not solicit, negotiate, or effect contracts of insurance . . . unless the person holds a valid license from the commissioner authorizing the person to act in that capacity."], 1861.05 [requiring approval of insurance rates and prohibiting excessive or inadequate rates].)
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Insurance Code section 22 defines insurance as "a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event." Section 22 has been interpreted as requiring two elements: shifting one party's risk of loss to another party and distributing that risk among similarly situated persons. (AFG, supra, 114 Cal.App.4th at p. 851; Truta, supra, 193 Cal. App. 3d at p. 812.) The mere fact a contract involves shifting and distributing risk of loss, however, "‘does not necessarily mean that the agreement constitutes an insurance contract for purposes of statutory regulation.’" (Title Ins. Co. v. State Bd. of Equalization (1992) 4 Cal.4th 715, 726 [14 Cal. Rptr. 2d 822, 842 P.2d 121]; Sweatman v. Department of Veterans Affairs (2001) 25 Cal.4th 62, 74 [104 Cal. Rptr. 2d 602, 18 P.3d 29].) Thus, the Court of Appeal in Truta held the collision damage waivers offered by car rental companies were not insurance because "[t]he principal object and purpose of the transaction before us, the elements which gives the transaction its distinctive character, is the rental of an automobile. Peripheral to that primary object is an option, available to the lessee, for additional consideration, to reallocate the risk of loss (up to the sum of $ 1,000) to the lessor in the event the vehicle sustains damage during the rental term. Thus, . . . after reviewing the entire contract we are satisfied that this tangential risk allocation provision should not have the effect of converting the defendants as contracting lessors into insurers subject to statutory regulation." (Truta, at p. 814; accord, AFG, at pp. 855-856 [debt cancellation program offered by used car lender is not insurance; primary objective of transactions is to finance used car purchases].)
The test in Truta, supra, 193 Cal. App. 3d 802, and AFG, supra, 114 Cal.App.4th 846, is whether the principal purpose of the transaction is risk allocation and indemnification or something else. An incidental contract provision that, for a fee, shifts risk of loss from the consumer to the provider of the goods or services does not make the agreement an insurance contract subject to regulation under the Insurance Code. (See, e.g., Truta, at p. 811 [the collision damage waiver transaction "‘is not a spreading of risk within insurance concepts, but is rather an allocation of risk by contractual agreement’"].)
Neither Truta, supra, 193 Cal. App. 3d 802, nor AFG, supra, 114 Cal.App.4th 846 holds, however, that the sale of insurance coverage as an incidental part of a more extensive transaction is not subject to regulation under the Insurance Code. (See, e.g., Grand Rent A Car Corp. v. 20th Century Ins. Co. (1994) 25 Cal.App.4th 1242, 1251-1252 [31 Cal. Rptr. 2d 88] [car rental agreement that contains provision indemnifying renter from liability to third persons resulting from accidents occurring while the rented car is in use constitutes insurance even when the liability insurance/car rental agreement is effectuated by a certificate of self-insurance]; Hertz Corp. v. Home Ins. Co. (1993) 14 Cal.App.4th 1071, 1077 & fn. 5 [18 Cal. Rptr. 2d 267] [same, distinguishing Truta].) In other words, while it is true not all contracts allocating risk are insurance contracts subject to statutory regulation, all insurance contracts, even if sold as a secondary or incidental facet of a transaction with another, primary commercial purpose, are regulated by the Insurance Code and the Department of Insurance unless they fall within a specific regulatory exemption. Followed to its logical extreme, the contrary rule, as adopted by the trial court in this case, would permit a car dealership to obtain commissions for the sale of automobile insurance or a real estate broker to sell homeowners insurance without being subject to regulation by the Insurance Code or the Insurance Commissioner because in each instance the sale of insurance was incidental to the purchase of a car or a house.
Thus, under the reasoning of Wayne v. Staples, the sale of cargo insurance by a transportation provider clearly would constitute the sale of "insurance," which requires a license. Consequently, this case has now opened the door to lawsuits for injunctive relief and the restitution of all proceeds to the transportation provider from the sale of such insurance under California Business and Professions Code Section 17200.
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