DOD Household Goods: Increased Carrier Liability for Loss and Damage Warranted
Released: 1995-05-08T00:00:00

Letter

Introduction

The Department of Defense (DOD) spends more than $700 million each year to move military servicemembers’ and civilian employees’ household goods and personal effects. It pays servicemembers and civilian employees an additional $50 million or more each year in claims for shipment loss and damage. DOD shares liability with carriers for this loss and damage. Both government and carrier costs are significantly affected by the cost of claims.

Determining Carrier Liability for Losses and Damage

Servicemembers with loss or damage to their household goods and personal effects may file claims against the government for the amount of loss. The military services’ Judge Advocates General have primary responsibility for operating claims offices, adjudicating claims, and for authorizing payment to servicemembers. Payment to members is generally based on the full depreciated value of the damaged or lost items or the cost of repairs, whichever is less. The maximum amount allowed per shipment is $40,000. Claims offices then attempt recovery from the carrier to the extent of the carrier’s liability.

From 1967 to 1987, carriers handling military household goods shipments were liable for loss and damage at the rate of $0.60 per pound per article for both domestic and overseas shipments. For example, if a carrier lost or damaged a 70-pound television worth $400, it was liable for the depreciated value or for repairs, whichever was less—up to a maximum of $42 (70 pounds times $0.60).

Carrier Liability for Domestic Shipments Increased in 1987

In mid-1987, the Military Traffic Management Command (MTMC)—DOD’s traffic manager—increased carrier liability for DOD domestic household goods shipments. Under the new system, the carrier is liable for the full depreciated value of damaged or lost articles up to a maximum amount (valuation) per shipment based on the shipment weight multiplied by $1.25 per pound. For example, if a shipment weighs 4,000 pounds, the carrier is liable for a maximum of $5,000 (4,000 pounds times $1.25). If only one article in the shipment is lost, and its depreciated value is established at $5,000, the carrier is liable for this amount. In the case of the $400 television, the carrier would be liable for the full depreciated value ($400) or the cost of repairs, whichever is less, and for all other lost or damaged articles in the shipment until the total amount of loss and damage reached $5,000. Carrier liability under this system is generally increased.

MTMC increased carrier liability in 1987 based on the results of an Air Force test—Project REVAL. Project REVAL reported that the average amount of household goods claim paid to the servicemember would be reduced by 34 percent on shipments moved at the $1.25 liability rate (purchased for a separate charge of $0.50 per $100 valuation). The Air Force concluded that (1) the increased liability gave the carriers incentive to reduce shipment damage and (2) the combination of reduced average claim amounts and added liability compensation would reduce claims costs for both the government and the carriers.

Other major factors in MTMC’s decision to increase carrier liability included (1) the high frequency and cost of damage and loss to military servicemembers’ household goods, (2) the inadequacy of the former liability rate in covering a reasonable share of the liability for losses, (3) the need to provide increased carrier incentive for reducing claims, and (4) increases in government costs associated with military servicemembers’ household goods claims.

Carriers Compensated for Increased Liability

When DOD increased carrier liability on DOD domestic shipments to the $1.25 rate in 1987, MTMC began paying carriers a separate charge (in addition to transportation charges) for the additional liability. MTMC set this separate charge at $0.64 per $100 of shipment valuation, plus 10 percent of temporary storage charges.

The increased liability system adopted by MTMC was similar to that available for commercial shipments in 1987. Carrier transportation rates then automatically provided for carrier liability of $0.60 per pound per article. Increased liability could be purchased for a separate charge. At the time, carrier liability up to $1.25 times the shipment weight was available for $0.50 for every $100 of shipment valuation (shipment weight multiplied by $1.25 divided by $100 multiplied by $0.50). Rates for additional liability on commercial shipments are approved by the Interstate Commerce Commission. However, DOD household goods shipments are governed generally by provisions in DOD rate solicitations, and may differ from commercial practices.

The carrier industry objected to moving DOD household goods at the commercial $1.25 rate primarily because military servicemember claims for loss and/or damage are settled by the military services. In commercial practice, the carrier usually settles such claims directly with the owner. The carrier industry generally believed that military claims settlement was too generous and resulted in excessive claims costs to the carrier. At one time, DOD allowed carriers to settle claims directly with the servicemember. This practice was changed, according to DOD, because carrier resolution of claims was found to be unacceptable.

MTMC agreed to pay a separate charge of $0.64 per $100 valuation plus 10 percent of temporary storage charges instead of the commercial separate charge of $0.50 per $100 valuation plus 10 percent of temporary storage charges because the military services wanted to retain claims settlement authority for DOD household goods shipments. At the time, carrier industry associations contended that the separate charge for this level of carrier liability should have been $1.13 per $100 valuation, plus 10 percent of temporary storage charges.

We Evaluated Proposed Increase in Liability

Shortly before MTMC increased carrier liability on DOD domestic shipments in 1987, the Chairman, House Committee on Armed Services, asked us to review MTMC’s proposed changes and to determine a fair and adequate rate to compensate carriers for the increased liability. We subsequently reported that such a rate could not then be determined because (1) at the time of our review it was too early to determine the impact that increased liability would have on carrier performance and (2) determining a fair and adequate compensation level required a policy judgment about the appropriate performance level to be expected from carriers.

We also reported that the $0.64 rate proposed by MTMC would compensate only the better-performing carriers if carriers performed as they did in fiscal year 1985, the most recent year for which adequate claims data was available. We estimated that at the 1985 performance level, approximately $3 million to $4 million in government costs would be transferred to the carriers under the increased liability, and that this should provide increased incentive for carriers to improve their performance. Carriers with liability costs greater than added revenues could (1) improve performance so less damage and loss occurred, (2) increase transportation rates, or (3) absorb the loss.

We consequently supported MTMC’s 1987 policies for increasing carrier liability on domestic household goods shipments and concluded that the rate of carrier compensation for the increased liability established by MTMC in 1987 should remain unchanged until carrier performance data or additional cost information indicated that changes were needed.

MTMC Proposes Extending Increased Liability to International Shipments

In March 1993, MTMC proposed that carrier liability also be increased from the $0.60 per pound per article rate to the $1.25 rate for international household goods shipments. However, MTMC’s proposal did not include a provision for any separate compensation to carriers for the increased liability. The carrier industry objected to the proposed changes, stating that international shipments were vastly different in nature from domestic shipments, and that no determination had been made of whether MTMC’s 1987 increase in domestic shipment liability had achieved its objectives of reducing the number and amount of damage claims and reducing government costs.

During October 1993, MTMC increased carrier liability on international household goods shipments on an interim basis to $1.80 per pound per article, pending the completion of our review.

Objectives, Scope, and Methodology

At the request of the former Chairman, Subcommittee on Readiness, House Committee on Armed Services, we evaluated DOD household goods shipment programs to (1) determine the impact of the 1987 increase in carrier liability on domestic shipments and (2) suggest the level and type of carrier liability DOD should adopt for international shipments.

During this review, we interviewed officials and reviewed documents associated with programs for the movement of household goods at MTMC, the Department of State, the offices of the Army, Navy, and Air Force Judge Advocates General, and Headquarters, U.S. Marine Corps. We also interviewed and obtained documents from carrier association officials and representatives of selected carriers.

To facilitate our analysis, we obtained computerized records on almost 2.5 million DOD household goods shipments moved during fiscal years 1986 through 1991. We obtained computerized shipment and claims data from MTMC on all DOD domestic household goods shipments (MTMC shipment codes 1 and 2) and most international shipments (MTMC shipment codes 4, 7, 8, and J) initiated during fiscal years 1986 through 1991. We analyzed shipment and claims data for each of these codes. However, unless otherwise indicated, the data presented in this report for domestic shipments refers to uncontainerized van shipments (code 1) and to containerized international shipments (code 4). These two major types of shipments comprise the vast majority of DOD household goods shipments by both number and weight.

MTMC data was not available for shipments occurring prior to fiscal year 1986. Also, we did not evaluate data for fiscal years after 1991 because considering the 2-year statute of limitations for servicemembers to file household goods claims against the government, inadequate time has passed to obtain sufficient claims data for analysis on these shipments.

To verify the accuracy of claims data in the MTMC shipment records, we obtained from the offices of the service Judge Advocates General all computerized claims payment and recovery data available as of August 1993 for fiscal years 1986 through 1991. Only the Air Force could provide complete claims data for all years requested. The Army and the Marine Corps data was complete only for fiscal years 1988 through 1991 because claims data records for these services were not computerized prior to fiscal year 1988. We did not obtain data from the Navy because this service has not computerized its claims records. We did not attempt to manually review claims payment and recovery records because of the time and resources such analyses would require.

We then did a computer matching of MTMC shipment data with the available military service claims data by Government Bill of Lading number. We associated all recorded claims data with the shipments involved, regardless of when the claims were filed, adjudicated, paid, and recovered. We used this method rather than rely on summarized military service claims payment and recovery records because the services summarize this information according to the fiscal year in which payment and recovery occurred. Service claims payment and recovery on a shipment often occurs in a different fiscal year than the one in which the shipment was moved.

We evaluated carrier performance and claims costs by computer sorting the available shipment and claims data by carrier identification codes. In some cases, we also sorted carrier data by a specific traffic route.

Carrier industry representatives (the American Movers Conference and the Household Goods Forwarders’ Association of America, as well as selected carriers) and DOD reviewed and concurred with our methodology for analyzing household goods shipment and claims data before we did this analysis. MTMC and each of the military services providing shipment and claims data concurred with the accuracy of the results of our data analysis.

To perform this analysis, we combined data using different computer languages and formats into a single, common database. We provided our computer programs and analysis results to MTMC at the conclusion of our review because this information has many potential applications for the improved management of household goods activities, particularly those associated with evaluating individual carrier performance and military claims office adjudication and recovery efforts. To adjust our cost data for the effect of inflation, we used the Consumer Price Index to convert actual dollars to constant fiscal year 1993 dollars.

We conducted our review from May 1993 to November 1994 in accordance with generally accepted government auditing standards.

Domestic Claims Costs Reduced and Carrier Performance Improved

DOD claims costs declined after DOD increased carrier liability on domestic household goods shipments in 1987. Our analysis of DOD shipment and claims data for fiscal years 1987 through 1991 showed that DOD saved about $18.9 million in claims costs during this period. DOD would have saved an additional $3.2 million if all the military services had pursued claims recovery from carriers as effectively as the Air Force.

Carrier performance on domestic shipments also improved. Although the claims frequency rate remained unchanged at about 20 percent of all shipments, the average amount of claim DOD paid to servicemembers declined under the increased liability from over $800 in fiscal year 1986 to $728 in fiscal year 1991. This represents an overall reduction of about 9 percent.

The carrier industry generally opposed increased carrier liability, citing concerns that higher military service recovery levels would result in almost all claims being paid by the carriers. The industry questioned whether increased liability would reduce overall government household goods program costs. Our analysis showed that these concerns did not materialize.

DOD Claims Costs Declined

DOD claims costs for domestic household goods shipments declined after maximum carrier liability on these shipments was increased in 1987 from $0.60 per pound per article to the $1.25 valuation rate. For example, our analysis of Air Force computerized household goods shipment and claims data showed that the Air Force reduced annual domestic shipment claims costs during fiscal years 1988 through 1991 by 20 to 27 percent compared to the fiscal year 1986 level. This resulted in savings on Air Force shipments totaling about $7 million for the period.

We could not determine overall DOD savings with the same accuracy as we could for the Air Force because Army and Marine Corps claims records were not computerized until 1988, and Navy claims records had not been computerized at the time of our review. However, our review of the available data showed that claims costs for the other services also declined. We estimate that increased carrier liability resulted in overall DOD savings totaling about $18.9 million during fiscal years 1987 through 1991.

Air Force Claims Data Demonstrates the Impact of Increased Carrier Liability

We analyzed claims costs for 363,776 Air Force domestic household goods shipments moved during fiscal years 1986 through 1991. The Air Force paid servicemember claims for loss and/or damage on 75,198, or about 21 percent, of these shipments.

Annual Air Force claims costs after implementing the $1.25 rate (fiscal years 1988 through 1991) ranged from 20.3 percent to 27 percent less (an average of almost 24 percent less) than what they were in fiscal year 1986. Table 2.1 compares claims costs at the $1.25 rate after fiscal year 1987 with those at the $0.60 per pound per article rate in fiscal year 1986. The decrease for fiscal year 1987 is much less than for the other fiscal years because the $1.25 rate was implemented in mid-year. Claims costs are expressed in terms of claims cost per hundredweight to minimize the skewing effect of yearly fluctuations in shipment numbers, claims, and weights.

We estimate that these claims cost reductions resulted in total savings of $7 million on Air Force domestic household goods shipments during fiscal years 1987 through 1991, or an average savings of about $1.6 million per year for fiscal years 1988 through 1991. We calculated the amount of savings by multiplying the hundredweight cost differences from fiscal year 1986 levels in table 2.1 by total shipment hundredweight for each fiscal year, as shown by table 2.2.

Figure 2.1 illustrates the amount saved by comparing claims costs for fiscal years 1986 through 1991 with those that would have occurred in these fiscal years if claims cost per hundredweight levels had remained the same as occurred under the $0.60 rate in fiscal year 1986. For example, the figure shows that fiscal year 1989 claims costs at the $0.60 rate would have been $7.6 million in constant fiscal year 1993 dollars. However, at the $1.25 rate, these costs were actually $5.5 million during fiscal year 1989, resulting in constant dollar savings of over $2 million during that fiscal year.

Air Force overall claims costs for these shipments declined beginning in 1987 even though DOD paid carriers a separate charge in addition to transportation charges for the increased liability. In other words, the Air Force recovered more from carriers than the separate charge paid them for the increased liability.

Table 2.3 illustrates the impact of increased recovery on Air Force constant dollar claims costs and shows (1) how overall Air Force costs for domestic shipments declined from about $8.7 million in fiscal year 1986 to between $4 million and $5 million in fiscal years 1990 and 1991, (2) how much the Air Force paid carriers for the increased liability, and (3) how the increased liability adjusted the percentage of overall claims costs paid by the Air Force and household goods carriers. Total Air Force claims costs declined by more than the 24-percent average reduction attributable to increased carrier liability because the total number of shipments, and consequently claims, also declined during this period.

Increased Carrier Liability Offers Potential DOD Savings of $22 Million

Based on the complete Air Force data, and Army and Marine Corps data that was available, we estimate that DOD would have saved $22 million during fiscal years 1987 through 1991 as the result of increased carrier liability on domestic household goods shipments if all the military services had performed as effectively as the Air Force. As previously mentioned, we could not determine the impact of increased carrier liability on DOD’s overall costs as accurately as we could for the Air Force because claims data for the other services was less complete.

However, both DOD and carrier industry officials told us, and MTMC shipment data confirmed, that the physical characteristics of household goods shipments vary little between the military services. Air Force shipments averaged almost 32 percent of total DOD domestic household goods shipments by weight during fiscal years 1986 through 1991. We therefore estimated that if all the services had performed at the Air Force level, then total DOD savings at the $1.25 rate would have been slightly over $22 million (known Air Force savings of $7,037,001 divided by 0.3193).

Varying Recovery Effectiveness Limited DOD Savings

The amount of savings that can be realized from increased carrier liability depends on how effectively DOD recovers claims costs from carriers. Project REVAL estimated that under the increased liability, DOD recovery from carriers would average 78 percent of the amount of claims paid to servicemembers.

We found, however, that DOD did not realize its full savings potential of $22 million during fiscal years 1987 through 1991 because the other military services were not as effective as the Air Force in recovering from carriers. Only the Air Force met REVAL expectations. Our analysis of Army and Marine Corps data for fiscal years 1988 through 1991 showed that these services did not meet this recovery standard, which brought the overall average DOD recovery rate down to about 65 percent of the amount of claims paid during this period. Table 2.4 illustrates these variations in military recovery effectiveness in actual dollars.

To determine actual savings, we adjusted the $22 million downward to reflect the differences between the Air Force recovery rate and those actually achieved by the other services. We estimated that actual DOD savings attributable to increased carrier liability for domestic shipments during fiscal years 1987 through 1991 was $18.9 million, or almost $3.2 million less than it would have been if all the services had recovered as effectively as the Air Force. The impact of variances in military service recovery effectiveness is discussed further in chapter 4.

Carrier Industry Concerns Did Not Materialize

In commenting on our 1988 report, carrier industry officials objected to DOD’s implementation of the increased liability program in part because they believed the DOD recovery rate would increase to as much as 95 percent. At this rate, almost all claims costs would be passed to carriers. As shown in table 2.4, this did not occur. Instead, because of varying service recovery effectiveness, actual carrier claims costs were lower than predicted by REVAL, and far lower than carrier estimates.

Increased carrier liability does transfer a greater portion of claims costs to carriers, but DOD still pays more than half of household goods claims costs. For example, under the $0.60 rate in fiscal year 1986, the Air Force recovered from carriers about 30 percent of the amount of claims paid to servicemembers. Under the $1.25 rate after fiscal year 1987, Air Force recovery from carriers on domestic shipments increased to an average of almost 78 percent of the amount of claims paid, but carriers also received payments for the additional liability through separate charges. Consequently, under increased liability during fiscal years 1988 through 1991, the carriers actually paid a maximum of 46 percent of Air Force claims costs (see table 2.3).

Carrier industry representatives also told us they believed that even if DOD claims costs declined under the $1.25 rate, overall DOD costs might still have increased over the levels experienced under the $0.60 per pound per article rate if carriers had increased their transportation rates to compensate for the increased liability. However, we found that DOD household goods program net costs for domestic shipments (transportation costs plus claims costs less recoveries) also declined after the $1.25 rate was adopted in 1987. Table 2.5 illustrates how program costs declined from the level experienced before increased carrier liability was implemented in 1987.

Declining program costs cannot be attributed solely to increased carrier liability. Transportation rates are influenced by many factors other than claims costs, such as insurance, competition, and individual carrier costs related to personnel, equipment, and facilities.

Our analysis of DOD claims data by individual carrier confirmed that many carriers, especially those with high rates of loss and damage, were encountering claims costs higher than the compensatory revenues they received for the increased liability. These carriers could have compensated by raising their transportation rates. However, carrier industry officials told us that carriers had instead chosen to absorb these costs. They said the carrier industry was overbuilt, and that carriers in general were reluctant to increase transportation rates for fear of losing DOD business to other carriers with unchanged or lower rates. Both intense carrier competition and increased carrier liability therefore appear to have contributed to lowered DOD net program costs.

We could not determine to what extent lowered net program cost was due to reduced claims costs versus other factors. These other factors vary between carriers and are difficult to measure. It is clear, however, that net domestic program costs declined after DOD implemented increased carrier liability, and that reduced claims costs contributed to this decline.

Claims Frequency Unchanged but Average Amount of Claims Declined

One of DOD’s objectives in increasing carrier liability was to increase carrier incentive to prevent loss and damage to household goods. We found that while the percentage of domestic household goods shipments incurring servicemember claims changed very little under increased carrier liability, the average amount of claim paid declined.

Our analysis of Air Force shipment and claims data showed that claims were paid on 20.7 percent of this service’s domestic shipments under the $0.60 rate in fiscal year 1986. After the $1.25 rate was implemented in 1987, the Air Force claims frequency rate showed little change, ranging from 19.3 to 22.7 percent between fiscal years 1987 and 1991. The combined Army, Air Force, and Marine Corps claims frequency rate was similar, ranging from 18.3 percent to 21.8 percent during fiscal years 1988 through 1991.

However, the average amount of claim paid the servicemember declined under increased liability. Expressed in constant fiscal year 1993 dollars in order to adjust for the effects of inflation, the average amount of claim paid by the Air Force dropped from $821 in fiscal year 1986 to $637 by fiscal year 1991, and similar trends appear to have occurred for the Army and Marine Corps claims. Table 2.6 illustrates the declines in average amount of claim paid for the services we reviewed.

Increased liability appears to have provided carriers with increased incentive to improve performance. Carrier industry officials cited a variety of actions they had recently taken to reduce their claims costs. These included holding drivers more responsible for any damage, improving packing and inventory techniques and materials, and providing training and offering incentives designed to improve performance and reduce shipment damage and loss.

Although such improvements do not appear to have had an appreciable impact on claims frequency, they are likely to have been a significant factor in reducing the extent of the damage occurring on shipments with claims. This in turn has contributed to reductions in claims costs to both carriers and DOD.

Separate Charge Could Be Eliminated

MTMC should now eliminate the separate charge paid carriers for the increased liability on domestic shipments. Carriers have had 7 years of claims cost experience under increased liability, and should therefore now be able to compensate for the loss of the separate charge by adjusting their transportation rates. Because none of the military services recovered more than an average of 80 percent of the amount of claims paid in any of the fiscal years we reviewed (see table 2.4), DOD would still absorb at least 20 percent of household goods claims costs. DOD should bear some responsibility for claims costs since DOD, rather than carriers, settles servicemember claims.

Conclusions

The expectations for increased liability set by DOD have in part been achieved. DOD domestic household goods claims costs have declined, carrier performance is somewhat improved, and overall program costs are down. However, claims costs have not declined as much as expected because of varying military service effectiveness in recovering these costs from carriers.

We believe the increased carrier liability at the $1.25 rate was fair and equitable to both DOD and the carrier industry for the period we reviewed. Under the $0.60 per pound per article rate, DOD bore more than 70 percent of claims costs, and carriers had little incentive to improve their performance. Under the increased liability, DOD still paid more than half the cost of servicemember claims for shipment loss and damage while reducing overall government costs and encouraging improved carrier performance. Carriers also received financial compensation for additional costs incurred as a result of increased liability.

Carriers have now gained experience with increased liability claims costs, and should be able to build these costs into their transportation rates. Therefore, MTMC should eliminate the separate charge paid carriers for the increased liability on domestic shipments.

Recommendation to the Secretary of Defense

We recommend that the Secretary of Defense direct the Commander of MTMC to eliminate the separate charge now paid to carriers to compensate them for increased risk on domestic shipments.

Comments From the Department of Defense

DOD concurred with our findings and recommendation. DOD’s comments indicated that by March 31, 1995, the Office of the Secretary of Defense will direct the Commander, MTMC, to eliminate the separate charge now paid carriers to compensate them for increased risk on domestic shipments. This change is scheduled to take effect on domestic shipments beginning November 1, 1995.

Comments From the Carrier Industry

In commenting on this report, the American Movers Conference (AMC) and the Household Goods Forwarders Association of America, Inc., disagreed with our findings and recommendation. They said that the inflation index we used—the Consumer Price Index—overstated the actual amount of inflation and resulted in an overstatement of the amount of savings accruing to DOD as the result of increased carrier liability on domestic household goods shipments after fiscal year 1987. The AMC further noted that since there was no decrease in the frequency of household goods claims on domestic shipments after 1987, the primary impact of the increase in carrier liability was to transfer the cost of these claims from DOD to the household goods industry.

We used the Consumer Price Index to adjust for inflation and enable dollar comparisons over fiscal years 1986 through 1991 for two primary reasons. First, in order to avoid just such methodology disputes, during the design phase of this assignment, we sought and obtained carrier industry review and concurrence with our analysis methodology, including the use of the Consumer Price Index as the appropriate index for such comparisons. Carrier industry officials suggested changing this index only after seeing the results of our analysis.

After reviewing the alternate index proposed by the AMC, we are not convinced that AMC’s index provides a more accurate estimate than the index we used. The AMC maintained that the Consumer Price Index should not be used because it contains many components that have no direct bearing on claims costs, and instead proposed a combination of Consumer Price Index components that it claimed were more directly related to claims costs. However, while the overall Consumer Price Index does not match the specific makeup of household goods claims, neither does the index proposed by the AMC. It still excludes certain items and costs frequently found in household goods claims such as bicycles, music equipment, and photographic equipment. Also, the weighted values used by AMC’s index are based on the pattern of consumer expenditures rather than claims. It is therefore unclear whether or to what degree AMC’s index, or any similar index, might be more appropriate for tracking household goods claims costs. Furthermore, the overall Consumer Price Index is readily available in published form and is widely accepted as the appropriate standard for establishing constant dollar comparisons.

However, while the overall Consumer Price Index remains a generally accepted standard for constant dollar comparisons, we acknowledge the existence of controversy over whether this index overstates inflation. AMC acknowledged in its comments that even using their index, increased carrier liability resulted in DOD claims costs reductions of 5.2 percent instead of the 9 percent we reported. Regardless of which index is used, increased carrier liability still resulted in reduced DOD claims costs.

AMC’s comments provided numerous additional reasons and data analyses to support further disagreement with the results of our analysis. The AMC cited analyses from our previous reports as the source of some of this data. In fact, the source of the preponderance of this data was AMC comments to our prior report, not work performed by us. Also, this data was based on MTMC data shown to be inaccurate by our current analysis. Furthermore, we disagree with the appropriateness of various technical aspects of the methodology AMC uses in reaching many of its conclusions.

The AMC also suggested that fiscal year 1991 data be removed from our analysis because of differences in certain claims data for this fiscal year compared with similar data for other fiscal years. AMC’s comments cited lower claims cost recovery ratios for the Air Force and the Marines in fiscal year 1991 than in any of the prior fiscal years we evaluated, and suggested that some claims data might not have been included for fiscal year 1991 due to late claims filing times.

We believe these fluctuations are within normally expected ranges and that they do not warrant exclusion of the fiscal year 1991 data. For example, while Air Force officials told us that Operation Desert Storm affected claims personnel priorities, they also told us that claims personnel shortages and conflicting priorities were generally likely to affect their ability to consistently maintain an 80-percent recovery rate. All the services confirmed that our analysis accurately reflected their shipment and claims data for the period reviewed. We also previously investigated the drop in Marine recovery effectiveness from 63 percent in fiscal year 1990 to 46 percent in fiscal year 1991 that AMC cited in its comments. We found that due to a Marine Corps claims processing backlog, some Marine data had not been included in our initial analysis and we modified our report accordingly. However, our review of the missing data revealed it was little different from other Marine claims data and that it was of insufficient volume to affect our analysis results.

We agree with AMC’s comment that increased carrier liability has transferred a greater portion of DOD household goods claims costs to the carrier industry. Even after carrier liability was increased for domestic shipments in 1987, DOD paid the majority of these costs—the percentage of claims costs actually paid by carriers ranged from only 29 percent to a high of 46 percent annually. Removing the compensatory payment as we recommended would transfer more, but not in excess of 80 percent, of household goods claims costs to the carrier industry. We believe the carrier industry, not DOD, should be responsible for damage and loss occurring while the shipments are under the control of carriers. Furthermore, increased carrier liability provides carriers with increased incentive to find new ways to prevent or reduce shipment damage and loss. Poorly performing carriers would probably be forced to increase their transportation rates, thus becoming less competitive for DOD business.

In summary, we believe DOD should reasonably expect carriers to deliver shipments in the same condition as when they were submitted for shipment. Costs associated with any damage should be borne by the party causing the damage. Carriers should include costs for loss or damage inherent in moving household goods in their transportation rate bids just like they include other costs, such as packing, unpacking, linehaul, and insurance. Also, we want to make it clear that MTMC does not establish a ceiling on carrier transportation rate bids as implied in AMC’s comments. It does establish a standardized baseline rate against which carriers are expected to bid. Carriers can and do bid both above and below this baseline rate. The only restraint to any rate increases is competition among the carriers themselves.

Carrier Liability for International Shipments Needs to Be Increased

At the $0.60 per pound per article carrier liability rate, DOD absorbed a disproportionate share of the claims costs resulting from loss and damage to international household goods shipments, and carriers had only limited incentive to improve their performance. Our evaluation of DOD shipment and claims data indicates that adoption of the $1.25 valuation rate for international shipments would be an effective way to lower program costs and reduce the level of loss and damage to servicemembers’ household goods.

However, adoption of DOD’s proposal to implement the $1.25 liability rate without any type of compensatory payment or premium might cause a major disruption in the carrier industry. Implementation of the $1.25 rate would therefore need to be accompanied by a compensatory payment for a limited period. This would give carriers an opportunity to gain experience under the higher claims liability, enabling them to include claims cost increases in future transportation rates.

DOD Proposes Extending the $1.25 Carrier Liability Rate to International Shipments

DOD officials told us that their proposal to increase carrier liability to the $1.25 rate for international shipments was made for the same reasons it was implemented domestically (see ch. 1). They said that reducing damage to household goods shipments was important because it affected servicemember morale, quality of life, and retention rates. In addition, they said that loss and damage, and consequently, the average amount of claim, was greater for international shipments than for domestic shipments. They cited instances of careless dockside handling of shipments, said that shipment pilferage and theft was a substantial problem in several overseas regions, and stated that the $0.60 per pound per article carrier liability rate in effect since 1967 provided little incentive for carriers to correct these problems or otherwise improve their performance. According to these officials, standardization of carrier liability would also simplify claims adjudication and recovery procedures.

The primary problem with continuing carrier liability on a per pound per article basis is that it limits carrier liability on the basis of an item’s weight rather than its value. DOD officials expressed concern about the costly impact of paying servicemember claims according to an item’s depreciated value or repair cost, while recovering claims costs from carriers on the basis of item weight. For example, under this liability system DOD is unable to recover reasonable repair or replacement costs for low-weight, easily damaged items such as stereos, televisions, compact disks, and other high-value items that are also frequently the targets of shipment pilferage.

Analysis of Shipment and Claims Data Supports the Need to Increase Carrier Liability

We believe that implementing the $1.25 rate on international shipments will improve carrier performance and reduce program costs. Our evaluation of DOD domestic shipment and claims data for household goods moved during fiscal years 1986 through 1991 showed that after implementation of the $1.25 rate, carrier performance improved and DOD’s overall program and claims costs for these shipments declined (see ch. 2).

These patterns contrast with those for international shipments during the same period. At the $0.60 per pound per article rate, international shipments experienced a gradual increase in damage and loss frequency, and incurred relatively high and generally increasing claims costs.

International Shipment Claims Frequency and Costs Are Increasing

Our analysis of DOD claims data for international shipments revealed that both the frequency of loss and/or damage to international shipments and the average amount claimed increased during fiscal years 1988 through 1991. Of the 150,345 overseas containerized household goods shipments moved by the Air Force, the Army, and the Marine Corps at the $0.60 rate in fiscal year 1988, loss and damage claims were filed on 30,657 (20.4 percent). The claims frequency rate then increased to 22.4 percent, 23.5 percent, and 23.7 percent, respectively, during fiscal years 1989 to 1991. While this increase is a relatively moderate 3.3 percentage points for the period, it differs from the domestic claims frequency rate in that it is consistently increasing.

The average amount of claim paid for these shipments also increased overall during this period. After adjusting for inflation (converting to constant fiscal year 1993 dollars), the average amount of claim paid per hundredweight (per 100 pounds shipped) for these shipments was $6.22 in fiscal year 1988, and $6.39, $6.65, and $6.26, respectively, during fiscal years 1989 to 1991.

Low Carrier Liability Limits Recovery

At the $0.60 rate, DOD claims cost recovery from carriers has been limited on both domestic and international shipments. For example, the Air Force paid servicemembers over $9.4 million for claims on fiscal year 1986 domestic shipments, and recovered (at the $0.60 rate) over $2.8 million (29.9 percent) from carriers. Air Force recovery on fiscal year 1986 containerized international shipments at the same $0.60 rate was substantially less—about $1.8 million of the $7.2 million paid for claims, or 24.9 percent. Air Force recovery at the $0.60 rate for unaccompanied baggage shipments, which comprise several additional types of international household goods shipments, was less still—$367,555 of the $1,760,212 paid for claims, or 20.9 percent.

Recovery activities for the other military services were less effective than those of the Air Force for all types of shipments during the period we reviewed. Table 3.1 shows transportation and claims costs for Air Force, Army, and Marine Corps containerized international shipments at the $0.60 rate during fiscal years 1988 through 1991.

As shown by table 3.1, on average only about 15 percent to 21 percent of the amount of claims paid was recovered at the $0.60 rate. Unaccompanied baggage recovery averaged only 14.7 to 17.6 percent of the claims paid during this period. We could not determine recovery rates for the Navy because its claims data is not computerized. However, MTMC officials told us that they believed Navy recovery performance was unlikely to be substantially different from the average of the other military services.

The $0.60 rate usually results in the government bearing more than 80 percent of the costs associated with claims for shipment loss and damage on international shipments. We believe this level of carrier liability is too low to provide the necessary financial incentive to improve carrier performance. During work on a prior report, carrier industry officials told us that before implementation of the $1.25 rate for domestic shipments, carrier liability at the $0.60 rate was so limited that claims recovery attempts were often not contested, and some carriers did not even have claims departments. During our current review, industry officials told us that increased liability levels and other factors have forced carriers to pay much more attention to both avoidance of shipment damage and loss and claims adjudication.

MTMC’s Proposal Would Reduce International Shipment Costs

Changing carrier liability to the $1.25 rate as proposed by MTMC should reduce both DOD claims costs and overall program costs. Recoveries from carriers would likely increase in a fashion similar to that experienced after the adoption of this rate for domestic shipments in 1987. However, MTMC’s proposal to increase carrier liability in this fashion without any type of compensatory payment or premium could unfairly shift increased claims and other costs to carriers and could cause substantial industry disruption. Implementation of this increased liability rate would therefore need to be accompanied by a compensatory payment to carriers. The amount of increased carrier costs and subsequent government savings would vary depending on the compensatory rate used and assumptions regarding the effectiveness of military service recovery activities.

Claims Costs Would Decline

Adoption of the $1.25 rate for DOD international shipments would probably cause claims costs for these shipments to decline in much the same fashion as did domestic shipments. DOD claims officials told us that claims adjudication for international shipments is essentially the same as that for domestic shipments, except for the carrier liability rate. For example, both involve the same types of household goods, the same claims adjudication and payment process for the servicemember, and the same recovery process from carriers. We found the average amount of claim paid is higher for international shipments, but military service recovery activities are less effective on international shipments than they are on domestic shipments. The main difference occurs in the carrier liability rate, or determining how much of the amount paid is to be recovered from the carrier.

Net Program Costs Are Also Likely to Decline

Any increase in carrier liability would reduce DOD claims costs because the overall amount of DOD recoveries from carriers would then increase. However, the carrier industry maintains that low liability rates, such as the $0.60 rate, might result in lower net program cost to the government because low liability rates would allow carriers to charge lower transportation rates, which would more than offset the high DOD claims payment costs associated with this rate. Carrier industry representatives said that increased carrier liability might not reduce net program costs because carriers would be forced to increase transportation rates to cover their increased liability costs.

However, transportation rates did not increase enough to prevent a net decline in program costs after implementation of the $1.25 liability rate for domestic shipments. As discussed in chapter 2, our analysis of household goods shipment and claims data showed that both DOD claims costs and net program costs declined after the implementation of the $1.25 rate for domestic shipments in 1987, resulting in savings totaling about $18.9 million during fiscal years 1987 to 1991.

DOD and carrier industry officials told us that domestic shipment transportation rates have not increased substantially since 1987 because the carrier industry is overbuilt and competition for DOD business is fierce. They said this is partially due to recent reductions in both the size of the U.S. military and the number of personnel stationed overseas. Some carrier industry officials told us, and our analysis also indicates, that domestic carriers absorbed a portion of the additional costs associated with increased liability rather than becoming less competitive for DOD business through increased transportation rates.

We could not determine what might happen to international transportation rates under the $1.25 liability rate. Many factors other than liability could have an impact on these rates. For example, carrier industry officials told us that carrier transportation charges did not increase with the implementation of the temporary $1.80 per pound per article rate, due largely to declining steamship transportation rates. We believe it appropriate for DOD to realize financial benefits occurring as the result of intense carrier competition as long as carriers have the opportunity to adjust the rates they charge DOD for transporting household goods shipments.

Compensatory Payments May Be Necessary

Implementation of the $1.25 rate for international shipments could result in carrier industry disruption if it is not accompanied by additional payments to carriers in compensation for the increased liability. MTMC did not make provision for a compensatory rate when it proposed the $1.25 rate for international shipments.

Most of the carriers we interviewed told us they would have difficulty adjusting their international shipment transportation rates to cover the cost of their increased liability. Many of them perform only DOD international shipments, and therefore have no commercial or domestic experience using the $1.25 rate. They said that overestimation of the costs they might experience at the $1.25 rate would cause them to set transportation rates too high, making them noncompetitive for DOD business. Conversely, underestimation would result in transportation rates insufficient to cover claims costs. Either could lead to financial losses or bankruptcy. They also cited other uncertainties, such as how such a change in liability might affect insurance and other costs.

We believe it is a normal business practice for the carrier industry to estimate its costs and determine its transportation charges to provide whatever service is needed by DOD. However, we believe DOD should compensate carriers in exchange for their added risk. Carrier industry and DOD officials told us the financial status of many carriers is weak due, in part, to military reductions in force and intense competition for existing business. Compensatory payments would provide a financial buffer during the period when carriers were adjusting to the new liability rate, thus reducing the potential for carrier bankruptcies and subsequent stranding of en route shipments.

Adequate claims data to evaluate the impact of increased liability on international shipments should be available within 2 to 3 years from the implementation date. By then carriers will have had adequate claims experience under the new rate to accurately estimate their claims and other costs associated with the increased liability, and should be fully capable of adjusting their transportation rates as needed. Also, MTMC could then evaluate the impact of the increased liability and determine whether to continue compensatory payments to carriers.

Determining a Fair and Adequate Separate Charge Is Difficult

We could not, with certainty, determine a fair and adequate separate charge to compensate carriers for their increased liability, for two reasons. First, because carrier performance levels vary, establishing a single separate charge that is fair and adequate for overseas carriers requires policy judgments about the appropriate performance level to be expected from carriers. Second, the impact of this proposed increase on carrier performance, and consequently on the number and amount of claims submitted by servicemembers, cannot be accurately predicted. However, we did develop an expected impact of increased liability on international shipments, based on the available shipment and claims data and certain aspects of increased liability’s impact on domestic shipments.

Carrier Performance Differs

We evaluated carrier performance data for all international household goods shipments moved by the top 50 carriers by total weight shipped during fiscal years 1989, 1990, and 1991. These carriers moved 75.2 percent of all containerized international shipments moved by DOD in fiscal year 1989, 76 percent of those moved in 1990, and 71.9 percent of those moved in 1991. We found that the average level of loss and damage to these shipments varied according to carrier.

For example, the percentage of these shipments incurring claims during these 3 fiscal years ranged from slightly under 9 percent for the best-performing carrier to over 30 percent for the worst, with the average varying between 22 percent and 24 percent for each fiscal year. The average amount of claim paid by DOD to the military servicemember also varied widely by carrier, ranging from $580 for the best-performing carrier to more than $1,200 for the worst, with averages ranging from $779 to $898.

Such variations in carrier performance contributed to our difficulty in determining a separate charge that would be fair and adequate for all carriers. A high separate charge would result in significant revenue increases for the better-performing carriers, while revenue for a low performer would be inadequate to cover costs associated with increased liability.

Expected Impact on Performance

To determine an appropriate separate charge for the $1.25 rate, an evaluation must first be made of the rate’s expected impact on the amount DOD would recover from carriers. We believe that application of the $1.25 rate to international shipments would have a similar impact on the percentage of the amount of claims paid recovered from carriers as it did for domestic shipments. DOD claims officials told us that no differences exist between domestic and international shipments with regard to the procedures used for determining the amount of the claim to be paid to the servicemember—only the method for calculating the carrier’s liability is different.

Our analysis of Air Force, Army, and Marine Corps claims data showed that application of the $1.25 rate to domestic carrier liability caused DOD recovery from these carriers to increase from less than 30 percent of the amount of claim paid to an average of about 65 percent. Among the services, after implementing the $1.25 rate, only the Air Force achieved and maintained the expected recovery level of 78 percent of the amount of claims paid. We assumed a recovery effectiveness rate of 69 percent of the amount of claim paid for developing our compensatory rate estimates for overseas shipments. We chose this recovery rate rather than the 78 percent used by Project REVAL and demonstrated by the Air Force on domestic shipments because (1) it was the highest combined single-year recovery rate achieved by the services on domestic shipments under increased carrier liability during fiscal years 1988 through 1991 (see table 2.4) and (2) military service recovery for overseas shipments is less effective than for domestic shipments.

We determined that, on average, an appropriate compensatory rate could range from $1.50 to $2.04 per $100 of shipment valuation, depending on the criteria used. For example, our computerized analysis of claims data showed that a compensatory rate of $1.50 would result in carriers paying 37 percent of total claims costs and DOD 63 percent for a government savings of $5.7 million per year if carriers performed like they did during fiscal years 1989 through 1991. However, at this rate, almost no carriers would have sufficient compensatory payments to cover their claims costs, and consequently would have to raise their transportation charges, improve their performance, or absorb the loss. At $1.69, about 5 of the 50 carriers we reviewed would have sufficient revenues to cover their claims costs, carriers would pay 32 percent, and DOD 68 percent of claims costs, with DOD savings of $4.4 million per year. At $2.04, at least 28 percent of the carriers we reviewed would have sufficient revenues to cover claims costs, and DOD savings would average almost $2 million per year. Table 3.2 shows the impact of these compensatory rates on DOD costs for international household goods shipments.

Carriers whose claims would not be fully covered by the separate charge would have to improve their performance, absorb the loss, or cover their claims costs through higher transportation rates. Carriers with continued poor performance would probably be forced to increase their transportation rates, thus becoming less competitive in obtaining contracts for the movement of DOD household goods shipments. Carrier selection for DOD business would then be more closely aligned with the cost and quality of the service rendered.

These calculations were not adjusted to give consideration to other carrier costs that could change as the result of the increased liability (such as insurance premiums and administrative costs). These costs vary by carrier and are difficult to substantiate and measure.

Impact of the Temporary $1.80 Per Pound Per Article Rate

DOD did not implement the $1.25 rate for international shipments in October 1993 as proposed. Instead, it increased carrier liability on these shipments on an interim basis to $1.80 per pound per article, pending the completion of our review.

We could not evaluate the impact of the $1.80 rate because insufficient time has passed to accumulate adequate shipment and claims data for such an analysis. The maximum effect of this increase would be to triple recoveries from carriers since the rate itself was tripled (3 X $0.60 = $1.80). However, carrier industry officials told us they expected this rate would result in recoveries being increased by a factor of 2 to 2.5 times current levels rather than tripling them. This would occur largely because the replacement or repair costs of some heavier, relatively low-cost items would be more than $0.60 times the item weight, but less than $1.80 times the item weight.

The $1.80 does represent a substantial increase in carrier liability. If this rate does cause recoveries to increase by a factor of 2 to 2.5, then the amounts recovered from carriers would increase from a high of about 24 percent of the amount claimed on Air Force international shipments during fiscal years 1988 to 1991 at the $0.60 rate, to a maximum of about 48 to 60 percent under the $1.80 rate. By contrast, under increased liability at the $1.25 rate (with a compensatory payment to carriers of $1.69 per $100 shipment valuation) we estimate carriers would be responsible for about 32 percent of shipment loss and damage costs during the 3-year introductory period if the military services improve overall recovery effectiveness to an average of 69 percent of the amount of claim paid. Removing the compensatory payment after 3 years would result in carriers then being responsible for about 69 percent of shipment loss and damage costs.

Whether the $1.80 rate will reduce overall government costs depends on whether and to what degree carriers might increase their transportation rates to obtain additional revenue with which to pay increased claims costs. According to DOD and industry officials, transportation rates bid by the carriers did not increase with the implementation of $1.80 per pound per article liability. However, carrier representatives told us this was due to major decreases in the steamship transportation rates paid by carriers.

Carrier Industry Opposes the Proposed Change

Carrier industry officials are generally opposed to the $1.25 rate proposed by DOD. They believe this rate would be inappropriate for international shipments because (1) no determination has been made that the $1.25 liability rate actually reduces program costs, (2) the international and domestic programs are so different as to prevent meaningful comparison, and (3) changing carrier liability to the $1.25 rate would result in severe industry disruption.

First, carrier industry officials have acknowledged that increasing carrier liability would reduce DOD claims costs. But they questioned whether this would result in a reduction in overall program costs. They said that limiting carrier liability allowed carriers to keep transportation rates low, and that these lower rates might well offset any savings in claims costs. Overall government costs thus might be lower at $0.60 per pound per article than with a higher liability rate. However, our analysis showed that overall government costs on domestic shipments were lower under increased liability (see ch. 2).

Furthermore, as noted in chapter 1, carrier industry officials told us that raising carrier liability for DOD household goods shipments was unfair because military servicemember claims for lost or damaged household goods are settled by the military services. In commercial practice, the carrier usually settles such claims directly with the owner. The carrier industry believes that military claims settlement is too generous, and results in excessive claims payments. Carrier industry officials told us that liability based on per pound per article tended to protect carriers from the high costs associated with military claims settlement, and that increased carrier liability would simply allow DOD to pass these payments on to carriers.

Under increased liability DOD still pays more than half of all claims costs. Therefore, we believe carriers are compensated for any additional claims costs resulting from military claims settlement. Furthermore, our analysis of military service claims data showed that, on average, military claims offices authorize payment for about 66 percent of the amount claimed by servicemembers. Although this may be more than would be allowed under carrier settlement, we do not believe it results in excessive claims costs for carriers.

Second, carrier industry officials told us that the risks associated with international household goods shipments are vastly different than those for domestic shipments. They said international shipments are usually in transit for much longer periods of time than domestic shipments, handled by more parties, and subjected to more loading, unloading, and other movement in transit (such as ship roll) than domestic shipments. They also said that other factors, such as limited control over shipping lines and destination agents, foreign laws and customs, and varying currency exchange rates all cause international carriers to have much less direct control over shipments for which they are liable.

We agree that risks and costs are generally higher for overseas shipments, but these costs vary between carriers and routes. Also, compensatory payments for international shipments could be set higher than those for domestic shipments ($1.50 to $2.04 for international shipments compared to $0.64 plus 10 percent of storage in transit costs for domestic shipments). In any event, carriers continue to have the option to adjust their transportation rates to compensate for such costs.

Third, carrier industry officials told us that many overseas carriers would be unable to develop accurate claims cost estimates under the $1.25 rate. Because carrier liability for overseas DOD shipments has been based on a per pound per article basis, many carriers have had no claims experience with the $1.25 rate. This is particularly the case for carriers we interviewed that handle only DOD international shipments. Overestimation of their claims costs under the new rate might cause carriers to raise their transportation rates too much and consequently lose government traffic to competing carriers. On the other hand, underestimation could result in inadequate revenues to cover costs.

Carrier industry officials also told us that the carrier industry was overbuilt and financially stressed, that the number of DOD overseas shipments was declining, and that making major changes now in the way carrier liability is computed for international shipments could lead to many carrier bankruptcies, which in turn result in disruption of both the industry and DOD operations. They said that any increase in carrier liability for these shipments should be kept on a pound-per-article basis, and that DOD should collect and review claims at the current temporary carrier liability rate of $1.80 per pound per article before making any changes.

We believe the payment of a compensatory rate for at least 3 years would avoid industry disruption and allow carriers adequate time to obtain sufficient claims experience under increased liability to enable adjustment of their transportation rates. After 3 years, MTMC and the military services should also have sufficient claims data to determine what level of carrier liability is desired and whether the compensatory rate should be adjusted or terminated.

Conclusions

The maximum carrier liability rate of $0.60 per pound per article for international household goods shipments is too low. At this rate, carriers have limited incentive to improve performance, and the government bears a disproportionate percentage of household goods claims costs. The $1.25 rate would more fairly allocate claims costs between DOD and the carriers. However, industry disruption may occur unless this rate is accompanied by a temporary compensatory payment.

Recommendation to the Secretary of Defense

We recommend that the Secretary of Defense direct the Commander of MTMC to increase carrier liability to the $1.25 rate on international household goods shipments after providing notice to carriers through the Federal Register. However, we also recommend that this rate be accompanied by a compensatory payment for 3 years, or until sufficient claims data is available to permit carriers to file transportation rates that will adequately compensate them for the increased risk they would assume.

Comments From the Department of Defense

DOD concurred with our findings and recommendation. Its comments indicated that the Secretary of Defense will direct MTMC to increase carrier liability on international household goods shipments made on or after October 1, 1995. MTMC subsequently notified carriers through the Federal Register, dated February 16, 1995, that as of October 1, 1995, it intended to increase carrier liability on international shipments to the $1.25 rate with a compensatory rate of $1.28 per $100 of shipment valuation.

Comments From the Carrier Industry

Both the AMC and the Household Goods Forwarders Association of America, Inc. (HHGFAA), disagreed with our findings and recommendation. In commenting on this report, the AMC said that carrier liability should not be increased to the $1.25 rate on international shipments because nothing was achieved by increasing carrier liability on domestic shipments except that liability for shipment loss and damage was transferred from DOD to the carrier. The AMC said that if the $1.25 rate is implemented for international shipments, MTMC should pay a valuation charge (compensatory rate) of $2.31 per $100 of shipment valuation. It further said that if MTMC is unwilling to pay this level of compensation, then carrier liability should be returned to the $0.60 per pound per article rate.

We believe the $2.31 compensatory rate proposed by the AMC is too high and would provide little incentive for carriers to reduce shipment damage and loss. This rate would cause carriers to pay higher claims costs initially, but would also result in DOD reimbursing them for the added cost. The overall financial impact on both DOD and the carrier industry would thus remain unchanged. The better performing carriers would realize windfall profits, the average carrier would break even, and only the worst performing carriers would have incentive to improve. We believe the compensatory rate should be designed to fully compensate only the better performing carriers. Other carriers would have to improve their performance, increase their transportation rates, or absorb the loss. Changing carrier liability is pointless unless it will have a significant monetary impact on both DOD and the carriers.

Woven throughout carrier industry comments is the theme that increasing carrier liability actually does little more than to transfer claims costs to the moving industry. This is exactly what DOD has attempted to do. DOD has historically borne a disproportionately large share of claims costs. Increasing carrier liability would transfer a greater portion of the costs associated with damaged and lost household goods to the industry responsible for the problem. Even under increased liability, DOD would still be paying at least 20 percent of claims costs.

The carrier industry further stated that carriers should be allowed to settle claims for loss and damage directly with servicemembers. They noted that it is common commercial practice for the carrier to settle claims directly with the shipper, and that DOD claims settlement is too generous. DOD officials told us that carriers had been allowed to settle claims directly with servicemembers in the past, but that this practice had been discontinued because DOD believed many settlements had been unfair. Carriers currently can and often do offer servicemembers cash for losses and damage at the time of shipment delivery in an attempt to avoid the DOD claims settlement and recovery process. Furthermore, adopting commercial claims settlement practices would be much more appropriate if commercial practices were also applied in selecting carriers for DOD shipments. The current process for awarding DOD business to carriers is regulated in such a way as to place more emphasis on low transportation rates and spreading DOD business over a large number of carriers than it is toward awarding more shipments to those carriers providing the best service and value for the cost. In any event, carriers can fully compensate for any increased costs associated with DOD claims settlement practices by increasing their transportation rates.

The HHGFAA objected to any increase in carrier liability for international shipments. It said carrier liability for these shipments should not be increased, primarily because we had not evaluated the impact of (1) the October 1993 increase in carrier liability from $0.60 per pound per article to $1.80 per pound per article, (2) MTMC’s Total Quality Assurance Program, or (3) the High Risk Protection Program implemented by the carrier industry. The HHGFAA also said that domestic and international shipments are so different that experience with the $1.25 rate on domestic shipments should not be used as a basis for applying this liability rate to international shipments. The HHGFAA suggested leaving the liability rate at $1.80 per pound per article until such time that we could perform a statistical evaluation of this rate’s impact on claims costs.

MTMC increased the carrier liability rate on international shipments from $0.60 per pound per article to $1.80 per pound per article as an interim measure pending the outcome of our study. It was intended only to give temporary relief to DOD, which had been bearing a disproportionate share of claims costs for years. As discussed in this chapter, we could not review the impact of the $1.80 per pound per article rate because inadequate time has passed to accumulate shipment and claims data to make a meaningful analysis. We did generally discuss the potential impact of the $1.80 rate. However, we are opposed to the retention of carrier liability based on a per pound per article rate because it results in carrier liability being based on a lost or damaged article’s weight rather than its value. As stated earlier, this has the costly impact of DOD paying servicemember claims on the basis of an item’s value or repair cost, while recovering from carriers on the basis of item weight. Carrier liability for high-value, low-weight items is greatly limited on the very items that tend to be easily damaged or are often the target of shipment pilferage. During this review we did do some audit work regarding MTMC’s Total Quality Assurance Program and the carrier industry’s High Risk Protection Program. In this chapter we acknowledged that these programs had potential for affecting claims costs. However, we could not determine whether or to what degree they actually impact these costs because both were implemented only recently and there has been inadequate time to accumulate the claims data needed for such an evaluation. Furthermore, the work we performed revealed that MTMC’s Total Quality Assurance Program is being affected by several implementation problems, and that its effectiveness and appropriateness as a tool for assuring quality moves is presently unclear.

We agree with the HHGFAA that risks and costs are generally higher for international shipments than for domestic shipments. However, the carrier, not DOD, is still responsible for loss and damage occurring while household goods are under its control, including handling by destination agents or other subcontractors used by the carrier. The carriers should build the cost of such risks into their transportation rates. Furthermore, while differences may exist with regard to the amount of carrier risk associated with domestic as opposed to international shipments, the process for adjudicating claims for loss and damage is the same. The issue is what liability rate should be applied. If DOD decides that it should assume more liability for loss and damage and the carriers less, then it should do so by lowering the $1.25 rate to $1.10 or some other level rather than retaining a liability system based on the weight of the items shipped instead of their value.

Problems Need to Be Addressed for Increased Liability to Be Fully Effective

Increasing carrier liability should result in reduced DOD costs and improved carrier performance. However, several problems affecting DOD’s household goods programs need to be addressed for increased liability to achieve its intended effectiveness. These include the lack of shipment and claims data necessary for managing the household goods program, variances in cost recovery effectiveness among the military services, questionable performance bond and insurance collection procedures, and an unnecessarily long statutory period for filing household goods claims.

MTMC Data Is Inadequate

MTMC needs accurate household goods shipment and claims cost data to meet its responsibilities for overall household goods program management, determine cost effectiveness, and make program changes as needed. However, MTMC’s household goods program database has major problems that prevent DOD officials from obtaining adequate information to effectively manage many aspects of this program.

MTMC officials do not have adequate information with which to evaluate individual carrier performance. MTMC obtains periodic reports from the military service Judge Advocates General that include data on the number and amount of claims paid for loss and damage to household goods shipments, and stores this information in computerized data banks. We compared computerized household goods claims data we obtained directly from the military service Judge Advocates General with that stored by MTMC for shipments moved during fiscal years 1986 through 1991.

We found that MTMC claims data has major omissions. For example, the MTMC database was always missing at least 28 percent of the claims paid and claims recovered data on Air Force shipments made between fiscal years 1986 and 1991, and at least 40 percent of similar data for the Army between fiscal years 1988 and 1991. MTMC officials told us that most of the similar data from the Navy and the Marine Corps had not been submitted to MTMC in fiscal years 1990 and 1991. Officials from MTMC’s Traffic Management Analysis Division told us they considered MTMC’s household goods claims data so unreliable as to prevent meaningful analysis.

We also found that MTMC does not track some costs essential to evaluating increased liability effectiveness. For example, in exchange for the increased liability on domestic household goods shipments, MTMC has since 1987 paid carriers a separate charge of $0.64 per $100 shipment valuation plus 10 percent of certain storage in transit charges. We found the MTMC database does not capture what costs are paid as a result of the storage in transit calculation, and therefore, MTMC could not determine its total costs for the increased liability. We had to review actual shipment records stored at the General Services Administration to determine these costs. We also found numerous other technical problems with portions of MTMC’s household goods database; these problems greatly limit MTMC’s oversight of the program’s performance characteristics and cost.

More Emphasis Is Needed on Military Service Recovery Activities

After military service claims offices adjudicate and pay servicemember claims for loss and damage on household goods shipments, the military services attempt to recover these costs from carriers up to the extent of the carrier’s liability. Chapter 2 describes how military service recovery effectiveness varied under increased carrier liability on domestic shipments, with only the Air Force attaining the Project REVAL recovery goal of 78 percent of the amount of claims paid. As a result, DOD savings were about $3.2 million less than if all the military services had performed recovery as effectively as the Air Force.

We found that recovery effectiveness varied between the services under other types of liability and shipments as well. Many of the carriers we visited told us that Air Force claims recovery was highly effective, and was attributable to its use of well-trained and knowledgeable personnel. They said the effectiveness of recovery activities performed by the other services was mixed.

Our review of household goods shipment claims data confirmed that the Air Force generally asserted and recovered a higher percentage of the amount of claim paid than did the other military services, regardless of the type of carrier liability. DOD officials told us that the nature of household goods shipments varied little between the military services and that recovery effectiveness should also be very similar. However, military claims officials told us that problems such as personnel shortages, poor coordination between claims offices, claims backlogs, specific office performance problems, and lost or misplaced payments from carriers had affected some services in the past and that these had a negative impact on their recovery effectiveness.

We believe these problems may continue to affect military service recovery activities. For example, one carrier told us that a recent review of their bank records revealed that 34 checks totaling $6,820 sent to DOD as the result of recovery actions between 1990 and 1993 had not been cashed. The same carrier also identified 13 more payments to DOD during 1994 totaling $1,895 that were still outstanding 2 to 4 months after check issuance.

Effective recovery of claims costs by the military services is essential for increased carrier liability to fully meet its goals of reducing claims costs and increasing carrier incentive for preventing shipment loss and damage. This is particularly the case since DOD is paying carriers an additional separate charge in exchange for the increased liability on domestic shipments, and may do so on future overseas shipments. DOD therefore needs to place increased emphasis on recovery activities in order to achieve and maintain levels closer to those demonstrated by the Air Force.

Carrier Bonding and Insurance Needs to Be Reviewed

MTMC requires carriers to purchase cargo insurance before giving them approval to move DOD domestic household goods shipments, and both cargo insurance and performance bonds are required for approval to move DOD international shipments. DOD thus protects itself from losses and costs that might occur if a carrier goes bankrupt and does not complete a move as contracted, or completes the move and receives payment, but leaves claims for damage unresolved. Increased carrier liability and other facets of MTMC’s household goods programs are increasing the level of government funds at risk. However, past government actions to recover the cost of losses associated with carrier bankruptcies have often been inadequate. To ensure that the savings potential of increased liability is fully realized, we believe DOD needs to (1) place increased emphasis on bond and insurance collection from carriers and (2) review carrier bonding and insurance requirements.

Increased Carrier Liability Increases Funds at Risk

In chapter 2, we described how carriers are subject to potentially greater DOD claims costs under increased liability. DOD pays carrier transportation charges after shipment delivery. Most recoveries are made within about 2 years of shipment delivery, but military claims offices sometimes incur claims backlogs. By statute, servicemembers have 2 years in which to file claims against the government, and DOD has 6 years from shipment delivery to initiate recovery from carriers. More government funds are at risk under increased liability because (1) more is potentially recoverable and (2) carriers are also paid a separate charge for the increased liability shortly after shipment delivery.

Past Recoveries of Bankruptcy Losses Have Been Inadequate

Although at least 61 carriers approved to move DOD shipments have declared bankruptcy or ceased to exist since 1980, government actions to recover costs incurred as a result of these bankruptcies and terminations have so far been inadequate. According to MTMC officials, the government sought reimbursement under only one performance bond—collecting $17,215 of the $36,014 owed by a bankrupt carrier in late 1993.

MTMC officials told us that bond collections had never been effective, primarily because MTMC and the General Services Administration, which jointly shared collection responsibility, never established workable collection procedures. We could not determine the extent of funds lost. MTMC officials told us efforts were underway to improve bond collections and that MTMC would be solely responsible for its own bond collections in the future. Two additional bond collection attempts had been initiated, but none completed, by the time we concluded our review in November 1994.

MTMC Insurance and Bonding Requirements Need Review

In addition to the increased liability, other factors arising from the highly competitive nature of the household goods carrier industry are increasing DOD’s financial risk, particularly on international shipments.

First, both MTMC and industry officials told us that there are too many carriers competing for a decreasing amount of DOD household goods movement business. As of 1993, there were 1,227 domestic and 147 overseas carriers approved by MTMC for moving DOD household goods shipments. Declining levels of DOD shipments is increasing carrier competition, and forcing many carriers into a weak financial condition. Carrier industry officials told us that since claims may not be addressed until several years after a shipment is completed, many carriers do not set aside sufficient funding to cover claims, instead expecting to cover these costs out of their cash flow from new shipments. Declining shipment levels increase the likelihood of some carriers being forced into bankruptcy. Furthermore, we noted that many overseas carriers rely on winning DOD shipment contracts since they have no commercial household goods shipment business.

Second, both carrier industry and MTMC officials acknowledged a growing tendency for some carriers to adopt a business strategy of going out of business. Some carriers have bid unusually low rates to win DOD business, received payment for moving a number of shipments, and then declared bankruptcy, leaving a large unpaid claims liability. Some of these carriers then reenter the business under a new carrier name, and apply for new MTMC carrier approval.

Many of the carrier industry officials we interviewed told us they believed MTMC carrier approval requirements were too lax. MTMC officials acknowledged they rely heavily on bonding and insurance companies to evaluate the financial suitability of carriers before approving them for DOD shipments. Both MTMC and carrier industry officials told us that some disreputable carriers were taking advantage of weak MTMC approval and collection processes to employ business strategies of going out of business. They said that the low rates bid by such companies were making it difficult for reputable carriers to stay in business.

This problem is exacerbated by MTMC’s provision of an incentive to the low-bidding carrier of as much as 30 percent to 50 percent of the traffic on international routes. This incentive is designed to reduce DOD transportation costs through increased carrier competition, and to reward the carrier bidding the lowest rate. However, DOD must ensure that adequate bonding and insurance levels and collection procedures are in place to cover shipment and liability costs in the event of carrier bankruptcy. Otherwise, the government is vulnerable to significant financial losses. For example, one carrier underbid all others on many routes for several years. At one point, this carrier was moving more than a fourth of all DOD overseas household goods shipments. According to DOD officials, this carrier then went bankrupt, leaving about $7 million in outstanding claims liabilities. DOD and insurance companies are presently involved in legal action regarding this matter, and DOD has not yet recovered any of these funds.

Statute of Limitations Appears Needlessly Long

Under the provisions of 31 U.S.C. 3721, federal employees have 2 years to file claims for loss and damage to personal property, including household goods. Prior to 1952, the statutory period was 1 year. The period was extended to 2 years to achieve consistency with other claims statutes.

The 2-year period for filing household goods claims appears needlessly long. As discussed in our 1989 report on DOD household goods claims payment and recovery activities, the 2-year period contributes to claims management and adjudication problems, prevents carriers from making timely adjustments to their transportation rates, and causes increased government costs. Making timely adjustments to transportation rates will be even more important to carriers under increased carrier liability. Nearly all the carriers we visited said the statute needed to be shortened to a year or less. They told us that by contrast, claims on commercial shipments must be filed within 9 months of shipment delivery. DOD claims officials generally acknowledged that claims requiring more than 1 year to file usually involved servicemember procrastination.

We analyzed Army and Air Force claims data for fiscal years 1988 through 1991 to determine the average amount of time required between shipment delivery and the filing of claims. We found that in each fiscal year, more than 60 percent of all claims filed were filed within 6 months of shipment delivery, and over 80 percent within 1 year of shipment delivery. For example, table 4.1 shows the amount of time in months between shipment delivery and claims filing for combined domestic and international household goods claims for the Air Force, Army, and Marine Corps in fiscal year 1991.

DOD officials told us that the 2-year statute of limitations encourages some servicemembers to take longer than necessary to file their claims. This tends to increase the already long gaps between the time household goods shipments occur and the time claims data for evaluating costs and carrier performance is available. Claims processing and recovery by the military services often takes an additional 5 months or longer. Both DOD claims officials and carriers told us that long delays in filing household goods claims can result in claims settlement or recovery problems.

Unnecessary delays in filing claims also exacerbate carriers’ problems in obtaining the claims recovery cost information they need to adjust their rates in a timely fashion. MTMC requires household goods carriers to bid on transportation rates for contracts to transport DOD household goods shipments 6 months prior to the beginning of the 6-month period these rates will be in effect. Increased carrier liability is resulting in increased carrier costs and consequently a greater need for timely adjustment of rates.

As discussed in our 1989 report, delays in filing household goods claims increase government costs. Late-filed claims are generally more difficult to process and consequently increase administrative costs. DOD also cannot conduct recovery activities and reuse the funds thus obtained until servicemember claims are filed and processed. The availability of these funds and the amount of interest cost to the government thus depend largely on the amount of time required for servicemembers to file their claims. We therefore believe that this statute—insofar as it pertains to household goods claims—should now be changed to allow a maximum of 1 year for filing household goods claims. A draft of the proposed statutory changes is included in appendix IV.

Conclusions

Increased carrier liability for loss and damage on household goods shipments increases the amount of money recoverable from carriers and consequently increases the importance of DOD activities and procedures designed to facilitate recoveries from carriers. DOD needs to address problems regarding household goods shipment claims data, reduce variances in military service recovery effectiveness, and review carrier bond and insurance levels and collection procedures in order to fully realize the savings potential offered by increased carrier liability. Increases in the amount of money recoverable from carriers also makes timely recovery of these funds even more essential so as to reduce government costs and enable carriers to adjust transportation rates on a more timely basis.

Recommendations to the Secretary of Defense

We recommend that the Secretary of Defense take the following actions:

Direct the Commander of MTMC to (1) correct inaccuracies in the MTMC household goods program database regarding claims payments and recoveries and (2) develop the procedures required to determine overall household goods program costs.

Direct the military services to periodically report complete household goods claims and recovery data to MTMC.

Direct the Secretaries of the Army and the Navy to increase the emphasis placed on household goods claims recovery so as to increase these military services’ recovery effectiveness to approximately the level demonstrated by the Air Force.

Direct the Commander of MTMC to review household goods program carrier bonding and insurance requirements and collection procedures to ensure that these are adequate to protect government interests under increased carrier liability.

Matter for Congressional Consideration

We continue to believe that shortening the statute of limitations for filing claims for loss and damage to household goods shipments would facilitate claims adjudication, enable more timely carrier adjustments to transportation rates, and reduce government costs without imposing undue hardship on military servicemembers or civilian employees. Therefore, we again recommend that the statute—insofar as it pertains to household goods claims—be changed to limit the time allowable for filing claims to 1 year after the claim accrues.

Comments From the Department of Defense

DOD concurred with our findings and recommendations to them. Subsequent to our fieldwork, MTMC began working with the military services to improve the completeness of its claims database. The Office of the Secretary of Defense will direct the Commander, MTMC, to ensure that all required program data is included in its database, and to review household goods program carrier bonding and insurance requirements and collection procedures. MTMC also began a DOD Personal Property reengineering process designed to develop a program that is simpler to administer, reduces the workload on transportation officers, and provides the servicemember a full-service commercial-quality move. All the issues discussed in our report will be addressed by this effort, which MTMC expects to complete by September 30, 1995. DOD’s comments also stated that the Office of the Secretary of Defense will direct the military services to ensure that all required claims data is provided to MTMC and will address the need for the services to emphasize claims recovery actions.

DOD did not concur with our recommendation that the Congress consider shortening the statute of limitations for filing household goods claims for loss and damage to 1 year. DOD supported this proposal when it was originally recommended in our 1989 report. However, it now believes this statute should not be shortened (1) so as to maintain consistency with other claims statutes with a 2-year statute of limitations and (2) because it believes some servicemembers on long operational deployments or overseas assignments might have difficulty filing claims within a 1-year period, thus negatively impacting quality of life issues that DOD is working to enhance.

Although a 1-year statute for filing household goods claims would create an inconsistency with the 2-year period allowed for other types of claims, we believe several unique factors affecting DOD household goods claims settlement warrant the exception. First, the period allowed for filing claims on DOD shipments is much longer than the 9-months maximum allowed for commercial shipments. Second, DOD currently requires servicemembers to report any damage to shipments within 75 days of delivery. We believe that servicemembers should reasonably be able to complete the process for filing a claim in the remaining 9-1/2 months of the 1 year statutory period. Third, we believe that since increased liability will increase carrier claims costs and thus affect the transportation rates bid by carriers, fairness dictates that claims resolution be performed as quickly as practical.

Regarding claims filing difficulties caused by long deployments and overseas assignments, we believe that military regulations implementing the law permit DOD to provide relief in those rare instances when the servicemember cannot reasonably file a claim in a timely manner. As shown by table 4.1, about 85 percent of DOD claims are presently filed within 1 year of shipment delivery, and DOD officials generally acknowledged that most claims requiring more than 1 year to file involved servicemember procrastination.

Comments From the Carrier Industry

Both the AMC and the HHGFAA concurred that the statute of limitations for filing household goods claims should be shortened. However, the HHGFAA suggested shortening this statute to 9 months instead of 1 year so as to be consistent with industry practices for filing claims on commercial shipments. We believe a period of 1 year for filing claims is more reasonable, considering the operational deployments and overseas assignments cited in DOD’s comments.

The HHGFAA stated that it disagreed with our proposal that performance bonds and cargo insurance for DOD household goods shipments be increased. It also said that performance bonds do not cover the payment of loss and damage claims, only those costs incurred by DOD for the onward movement of shipments stranded as the result of carrier bankruptcy.

Our report did not specifically recommend that cargo insurance and performance bonding levels be increased. It did recommend that MTMC review carrier bonding and insurance requirements to enable the recovery of any losses caused by carrier bankruptcies. We believe MTMC should review both the types and levels of carrier bonding and insurance requirements because of the increased government risk associated with increased carrier liability, the business strategies of going out of business being employed by some carriers, and questions regarding the adequacy of carrier capitalization. We did not make more specific recommendations in this area because MTMC acknowledged these problems and now has actions underway designed to identify and implement the specific changes needed.