PERISHABLES? Sorry, spoilage is not usually covered.

When the claims adjuster told All Points Distributing that the spoilage of the blood plasma shipped to Mexico City wasn't covered, the owner had a $35,000 panic attack. He called his insurance agent and they went over the policy together, but couldn't find an exclusion for spoilage!

What All Points Distributing and the insurance agent didn't know, was how to read the fine print. There are a few ways customers can get caught in the insurance "spoilage trap."

Insurance policies describe what's "covered" in the Insuring Agreement and take certain things away in the Exclusions. The All Points Distributing policy didn't have an exclusion for spoilage; it didn't need one because it didn't provide the coverage to begin with. The Insuring Agreement provided coverage for loss or damage to goods from "external causes." Spoilage arises from "internal causes," usually bacteria, when the temperature rises above required limits. So All Points Distributing was out of luck even before they got to the Exclusions.

Some cargo insurance policies use a different approach to limit or exclude coverage for spoilage. Instead of using the term "external causes" in the Insuring Agreement, they will have an Exclusion for "inherent vice" which takes us back to bacteria again. All organic materials contain bacteria, (which means the enemy is within) and spoilage will occur when the temperature rises. Since this is considered inherent vice, the spoilage loss would not be covered.

Cargo policies can be modified to provide a form of spoilage protection, by including a "Refrigeration Breakdown" provision in the policy. This will provide coverage for spoilage of perishables, but only when caused by the "breakdown" of refrigeration equipment on the truck, container, etc. The Refrigeration Breakdown provision requires that the breakdown last more than a specified time period (usually 12 or 24 hours) for coverage to apply.

The time period is intended to give the underwriter assurance that the breakdown of the refrigeration equipment caused the spoilage, rather than being caught with a claim for goods that were on the way to deterioration, even before the journey began.

The Refrigeration Breakdown provision would not have helped in the case of the blood plasma, because that product is normally shipped in special cartons with dry ice that cannot "breakdown" so the insured could not rely on the refrigeration provision.

Policyholders who are shipping perishables need to have specific spoilage protection added to their policy. Such additional insurance protection is not easy to get and it will cost more money, but it is available.

Commercial fishing fleets are one of the best examples of unique spoilage insurance requirements. It is customary for them to have coverage "from net to customer" which includes coverage while it is on the fishing vessel, including transport by the ocean tender, followed by the processing facility and then air or land transport to the customer. That is a lot of spoilage risk, but if you know your exposure and are dealing with experienced insurance people, you can get the protection you need to help you sleep at night.

One more thing, if you have special spoilage wording and the USDA rejects an incoming shipment of perishable foods, don't get too comfortable -that probably would not be covered either. For USDA rejection, you should consider "Rejection Insurance." The only way to collect under cargo insurance for a USDA rejection is to have full spoilage wording included in your policy and be able to document that the merchandise was in good condition at the time of loading.