DOD Household Goods: Increased Carrier Liability for Loss and Damage
Warranted (Chapter Report, 05/08/95, GAO/NSIAD-95-48).
Pursuant to a congressional request, GAO reviewed changes proposed by
the Military Traffic Management Command (MTMC) regarding carrier
liability for loss and damage on Department of Defense (DOD) domestic
shipments.
GAO found that: (1) carrier performance has improved since DOD increased
carrier liability on domestic household goods shipments; (2) although
DOD claims costs declined by an estimated $18.9 million between fiscal
years 1987 and 1991, only the Air Force achieved the expected level of
cost recovery from carriers; (3) DOD needs to increase carrier liability
on DOD international shipments so that DOD can recover the cost of
damages and improve carrier performance; (4) industry officials believe
that changes in carrier liability on international shipments could cause
major industry disruptions unless carriers are compensated in exchange
for the increased liability; and (5) MTMC does not have adequate claims
information to assess individual carrier performance or the costs
associated with increased carrier liability.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-95-48
TITLE: DOD Household Goods: Increased Carrier Liability for Loss
and Damage Warranted
DATE: 05/08/95
SUBJECT: Department of Defense contractors
Damages (legal)
Liability (legal)
Property damages
Household goods
Freight transportation rates
Freight damage claims
Liability insurance
Claims settlement
Freight transportation operations
IDENTIFIER: MTMC Total Quality Assurance Program
High Risk Protection Program
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Military Readiness, Committee
on National Security, House of Representatives
May 1995
DOD HOUSEHOLD GOODS - INCREASED
CARRIER LIABILITY FOR LOSS AND
DAMAGE WARRANTED
GAO/NSIAD-95-48
DOD Household Goods
Abbreviations
=============================================================== ABBREV
AMC - American Movers Conference
DOD - Department of Defense
HHGFAA - Household Goods Forwarders Association of America
MTMC - Military Traffic Management Command
Letter
=============================================================== LETTER
B-259309
May 8, 1995
The Honorable Herbert H. Bateman
Chairman, Subcommittee on Military Readiness
Committee on National Security
House of Representatives
Dear Mr. Chairman:
This report responds to a request by the former Subcommittee Chairman
that we review changes proposed by the Military Traffic Management
Command regarding carrier liability for loss and damage on DOD
household goods shipments.
We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Commandant of the Marine
Corps; the Senate Committee on Armed Services; the House Committee on
National Security; the House and Senate Committees on Appropriations;
the Director, Office of Management and Budget; and to other
interested parties.
This report was prepared under the direction of Mark E. Gebicke,
Director, Military Operations and Capabilities Issues, who may be
reached at (202)512-5140 if you or your staff have any questions.
GAO staff members who made major contributions to this report are
listed in appendix V.
Sincerely yours,
Henry L. Hinton, Jr.
Assistant Comptroller General
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The Department of Defense (DOD) spends more than $700 million each
year to move military servicemembers' and DOD civilian employees'
household goods. DOD shares liability with carriers for loss and
damage affecting these shipments. During mid-1987, DOD, through the
Military Traffic Management Command (MTMC), increased carrier
liability for domestic household goods shipments, a change that the
carrier industry opposed. In March 1993, MTMC proposed that carrier
liability be similarly increased for international household goods
shipments, a change also objected to by carriers.
At the request of the former Chairman, Subcommittee on Readiness,
House Committee on Armed Services, GAO evaluated DOD household goods
shipment programs to determine (1) the impact of the 1987 increase in
carrier liability on domestic shipments and (2) what level and type
of carrier liability DOD should adopt for international shipments.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
DOD settles servicemember claims for household goods shipment loss or
damage directly with the servicemember. Servicemembers generally
receive the full depreciated value or repair cost, whichever is less,
for all approved claims up to a maximum of $40,000 per shipment for
both domestic and international shipments. DOD then attempts
recovery from the carrier up to the extent of the carrier's
liability.
From 1967 to early 1987, carriers handling military household goods
movements were liable for damage or loss at the rate of $0.60 per
pound per article for both domestic and international 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--up to a
maximum of $42
(70 pounds times $0.60).
Under the valuation system MTMC adopted in 1987 for domestic
shipments, the carrier is liable for the full depreciated value of
damaged or lost articles up to a maximum amount per shipment; the
maximum amount is no more than 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).
In the case of the $400 television, the carrier would be liable for
the full depreciated value ($400) or for the cost of repairs,
whichever is less, and for all other lost or damaged items in the
shipment until the total amount of loss and damage reached $5,000.
Carrier liability under this system is generally increased because it
is no longer computed on a weight per article basis. In return, DOD
agreed to pay a compensatory fee to carriers (in addition to
transportation charges). In a 1988 report,\1 GAO determined that the
separate charge would provide sufficient revenue to compensate only
the better performing carriers for their increased liability costs.
GAO concluded that the increased liability program should remain in
effect until carrier performance data or additional cost information
indicated that changes were needed.
In March 1993, MTMC informed the carrier industry that in October
1993 it intended to implement similarly increased carrier liability
for DOD international household goods shipments. Adoption of the
$1.25 rate for these shipments was deferred because of carrier
resistance. However, in 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 GAO's
review.
--------------------
\1 Household Goods: Implications of Increasing Moving Companies'
Liability for DOD Shipments (GAO/NSIAD-88-103, Mar. 24, 1988).
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Household goods claims costs have declined and carrier performance
has improved since DOD increased carrier liability on domestic
household goods shipments in 1987. Claims costs declined by an
estimated cumulative total of $18.9 million during fiscal years 1987
to 1991. However, these savings were $3.2 million less than
projected because only the Air Force achieved the expected level of
cost recovery from carriers.
Carrier liability for DOD international household goods shipments
needs to be increased. Carrier liability of $0.60 per pound per
article for these shipments severely restricts DOD's ability to
recover the cost of loss and damage inflicted during shipment,
increases government costs, and limits carrier incentive to improve
performance.
GAO concurs with DOD's proposal to change carrier liability on
international shipments from a per pound, per article basis to one
based on shipment valuation. However, such a change could cause
major industry disruption unless carriers initially receive
compensatory payments in exchange for the increased liability.
The household goods program also has management and administrative
problems that need to be addressed concurrently with any increase in
carrier liability. Some of these, such as the unnecessarily long
2-year statutory period for filing personal property claims, are
problems GAO identified in its previous report.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
DOMESTIC PROGRAM COST AND
DAMAGE LEVELS HAVE DECLINED
-------------------------------------------------------- Chapter 0:4.1
DOD appears to be achieving its objectives of reducing shipment loss,
damage, and overall program cost by increasing carrier liability.
The percentage of domestic shipments experiencing loss and damage
remained constant at about 20 percent after the implementation of
increased carrier liability in 1987. However, an $18.9 million
decline in claims costs during fiscal years 1987 through 1991
suggests that poorly performing domestic household goods carriers
have improved their performance, withdrawn from DOD domestic
household goods shipment programs, or absorbed losses. Competition
among carriers for DOD business also appears to have helped reduce
damage and loss. GAO believes that carriers now have the claims
experience needed under increased liability to adjust their rates to
compensate for any increased liability costs, thus making further
compensatory payments unjustified.
CARRIER LIABILITY FOR DOD
INTERNATIONAL SHIPMENTS
NEEDS TO BE INCREASED
-------------------------------------------------------- Chapter 0:4.2
Claims frequency and claims costs for international shipments
increased during fiscal years 1988 through 1991. Claims frequency
increased from 20 percent to almost 24 percent of total shipments
moved. Claims costs, after adjusting for inflation, increased from
$6.22 per 100 pounds shipped to a high of $6.65 per 100 pounds. At
maximum carrier liability of $0.60 per pound per article, recovery
was less than 20 percent of the amount of claims paid for all the
military services reviewed.
COMPENSATORY PAYMENTS SHOULD
ACCOMPANY NEW LIABILITY
FORMULA FOR INTERNATIONAL
CARRIERS
-------------------------------------------------------- Chapter 0:4.3
GAO's analysis of DOD household goods shipment and claims data
established that a rate of from $1.50 to $2.04 for each $100 of
shipment valuation should adequately compensate the better-performing
carriers for increased liability costs associated with adopting the
$1.25 rate on international shipments. These payments should remain
in effect for at least a 3-year period or until such time carriers
can adjust their transportation rates to compensate for increased
liability costs.
Such payments would reduce the potentially disruptive aspects of
changing the method traditionally used by carriers to estimate claims
costs and determine their transportation rates. Carriers with
liability costs greater than the added revenues could (1) improve
performance so less loss and damage occur, (2) increase
transportation rates, or (3) absorb the loss.
Carrier industry officials were generally opposed to the $1.25 rate
proposed by DOD. They said this rate would be inappropriate for
international shipments because (1) no determination had 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.
MANAGEMENT AND
ADMINISTRATIVE IMPROVEMENTS
NEEDED
-------------------------------------------------------- Chapter 0:4.4
DOD needs to address several management and administrative problems
affecting its household goods programs if increased liability is to
work properly. First, MTMC does not have adequate household goods
shipment and claims information with which to evaluate individual
carrier performance or to determine program costs associated with
increased carrier liability. Second, varied recovery effectiveness
by the military services resulted in savings being reduced from an
expected total of $22 million to an actual total of $18.9 million
during fiscal years 1987 through 1991. Only the Air Force attained
the expected recovery levels. Third, past government actions to
recover the cost of losses associated with household goods carrier
bankruptcies have been inadequate. Since the level of government
funds at risk is increased under increased carrier liability, carrier
bonding and insurance requirements need to be reviewed and increased
emphasis placed on bond and insurance collection.
In 1989, GAO concluded that the 2-year period allowed by statute for
federal employees to file household goods claims is needlessly
long.\2 The 2-year period continues to contribute to claims
management and adjudication problems, limits carrier ability to make
timely adjustments to transportation rates, and increases government
costs.
--------------------
\2 Household Goods: Evaluation of DOD Claims Payment and Recovery
Activities (GAO/NSIAD-89-67, Feb. 24, 1989), p.16.
RECOMMENDATIONS TO THE
SECRETARY OF DEFENSE
---------------------------------------------------------- Chapter 0:5
GAO recommends that the Secretary of Defense take the following
actions:
Direct the Commander of MTMC to eliminate the separate charge now
paid carriers to compensate them for increased risk on domestic
shipments.
Direct the Commander of MTMC to increase carrier liability to the
$1.25 rate on international household goods shipments after providing
adequate notice to carriers through the Federal Register. However,
GAO also recommends that this rate be accompanied by a compensatory
payment for 3 years, or until adequate claims data permits carriers
to file transportation rates that will adequately compensate them for
the increased risk they would assume.
Other recommendations to the Secretary of Defense regarding
management and administrative problems affecting DOD household goods
programs are contained in chapter 4 of this report.
MATTER FOR CONGRESSIONAL
CONSIDERATION
---------------------------------------------------------- Chapter 0:6
A 1989 GAO report recommended shortening the statutory period for
filing household goods claims. Making timely adjustments to
transportation rates will be even more important to carriers under
increased carrier liability. GAO therefore again recommends 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.
AGENCY AND INDUSTRY COMMENTS
AND GAO'S EVALUATION
---------------------------------------------------------- Chapter 0:7
GAO asked DOD and the carrier industry to comment on this report.
Carrier industry comments were consolidated and submitted by the
American Movers Conference and the Household Goods Forwarders
Association of America, Inc. DOD and industry comments are addressed
in more detail in the report chapters to which they pertain.
Complete DOD and industry comments are included as appendixes I, II,
and III.
DOD COMMENTS
---------------------------------------------------------- Chapter 0:8
DOD concurred with all the findings and recommendations in this
report except the recommendation that Congress consider shortening
the statute of limitations for filing household goods claims. In
commenting on this report, DOD stated the statutory period should
remain unchanged so as to retain consistency with other claims
statutes and because some servicemembers on operational deployments
or overseas assignments might be precluded from filing a claim within
a 1-year period. It believes shortening the time allowed for filing
claims would be perceived as an erosion of benefits by
servicemembers. GAO believes a 1-year statute of limitations would
be adequate, and that the implementing regulations allow for
exceptions where warranted. Specific actions taken by DOD in
response to GAO's other recommendations are discussed in each report
chapter.
CARRIER INDUSTRY COMMENTS
---------------------------------------------------------- Chapter 0:9
The carrier industry generally disagreed with GAO's findings and
recommendations regarding increased carrier liability. It believes
increased carrier liability has had little impact on domestic
household goods shipments beyond transferring the cost of claims from
DOD to the carrier industry, and that the inflation index GAO used to
calculate DOD's savings causes the amount of these savings to be
overstated. The carrier industry also believes that experience with
increased liability on domestic shipments cannot be appropriately
used as the basis for expanding increased carrier liability to
international shipments, and that the industry cannot compensate for
its increased liability costs by adjusting transportation rates. The
industry therefore favors retention of the traditional per pound per
article basis for calculating carrier liability on international
shipments. The carrier industry agreed with GAO's recommendation
that Congress consider shortening the statutory period allowed for
filing household goods claims.
Shifting more of the burden of claims costs from DOD to the carrier
industry was a primary objective of DOD's implementation of increased
carrier liability. DOD has historically borne a disproportionately
large share of claims costs. Increasing carrier liability transfers
a greater portion of claims costs to the industry responsible for
causing them. Even under increased liability, DOD still pays at
least 20 percent of claims costs. Increased liability also provides
increased incentive for carriers to find ways to reduce shipment
damage and loss. If carrier transportation rate increases are needed
to pay for increased carrier costs, the only real restraint is
competition among the carriers themselves.
Differences do exist with regard to the amount of carrier risk
associated with domestic as opposed to international shipments, but
the process for adjudicating claims for loss and damage is
essentially the same. The issue is what liability rate should be
applied. The per pound per article basis for determining maximum
carrier liability should be abandoned because it bases liability on a
lost or damaged item's weight rather than its value.
When designing the methodology for this review, GAO reached agreement
with the carrier industry that the Consumer Price Index would be used
to enable cross-year dollar comparisons and to adjust for inflation.
Carrier industry officials suggested an alternate index only after
seeing the results of GAO's analysis. Nevertheless, GAO acknowledges
general controversy over whether the Consumer Price Index overstates
inflation. Regardless of which index is used, increased carrier
liability still results in reduced DOD claims costs.
INTRODUCTION
============================================================ Chapter 1
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
---------------------------------------------------------- Chapter 1:1
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
---------------------------------------------------------- Chapter 1:2
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
---------------------------------------------------------- Chapter 1:3
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
---------------------------------------------------------- Chapter 1:4
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.\1
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.
--------------------
\1 Household Goods: Implications of Increasing Moving Companies'
Liability for DOD Shipments (GAO/NSIAD-88-103, Mar. 24, 1988).
MTMC PROPOSES EXTENDING
INCREASED LIABILITY TO
INTERNATIONAL SHIPMENTS
---------------------------------------------------------- Chapter 1:5
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
---------------------------------------------------------- Chapter 1:6
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
============================================================ Chapter 2
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
---------------------------------------------------------- Chapter 2:1
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
-------------------------------------------------------- Chapter 2:1.1
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 [cwt]\1 to minimize the
skewing effect of yearly fluctuations in shipment numbers, claims,
and weights.
Table 2.1
Air Force Claims Costs, Domestic
Household Goods Shipments
(Costs in constant fiscal year 1993
dollars)
1986 1987 1988 1989 1990 1991
-------- ---------- ---------- ---------- ---------- ---------- ----------
Number 72,930 65,474 68,647 62,591 41,046\f 53,088
of
shipmen
ts
Shipment 3,654,125 3,315,087 3,298,684 3,200,404 2,184,620 2,776,982
hundred
weight
(cwt)\a
Total $8,665,342 $7,228,765 $6,220,856 $5,543,828 $4,085,774 $4,818,759
claims
cost\ b
Claims $2.37 $2.20 $1.89 $1.73 $1.87 $1.74
cost
per
cwt\c
Cost $0.00 $(0.17) $(0.48) $(0.64) $(0.50) $(0.63)
differe
nce
(cwt)
compare
d to FY
1986\d
Percent 7.2 20.3 27.0 21.1 26.6
cost
reducti
on
compare
d to FY
1986\e
--------------------------------------------------------------------------------
\a Total weight of shipments divided by 100.
\b Amount of claims paid less recoveries for fiscal year 1986; amount
of claims paid less recoveries plus separate charges for fiscal year
1987 and after.
\c Total claims cost divided by shipment hundredweight.
\d Fiscal year 1986 cwt cost ($2.37) less current year cwt cost.
\e Cost difference (cwt) divided by fiscal year 1986 cwt claims cost
($2.37).
\f Air Force officials told us that the reduced number of shipments
in fiscal year 1990 was probably at least partially caused by
Operation Desert Storm.
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.
Table 2.2
Air Force Claims Cost Savings Under
Increased Carrier Liability, Domestic
Household Goods Shipments
(Constant fiscal year 1993 dollars)
1987 1988 1989 1990 1991 Total
-------- ---------- ---------- ---------- ---------- ---------- ==========
Shipment 3,315,087 3,298,684 3,200,404 2,184,620 2,776,982 14,775,777
cwt
Cwt cost $(0.17) $(0.48) $(0.64) $(0.50) $(0.63) -
differe
nce
compare
d to
FY1986
Amount $563,565 $1,583,368 $2,048,259 $1,092,310 $1,749,499 $7,037,001
saved
--------------------------------------------------------------------------------
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.
Figure 2.1: Air Force Claims
Cost Comparison, $0.60 Per
Pound Per Article Versus $1.25
Shipment Valuation Liability,
Fiscal Years 1986-91 (Constant
fiscal year 1993 dollars)
(See figure in printed
edition.)
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.
Table 2.3
Total Air Force Claims Costs, Domestic
Household Goods Shipments
(Constant fiscal year 1993 dollars)
1986\a 1987\ b 1988 1989 1990 1991
-------- ---------- ---------- ---------- ---------- ---------- ----------
Claims $12,369,11 $10,228,04 $9,937,746 $10,310,06 $6,868,076 $7,653,141
paid by 7 0 3
Air
Force
Less 3,703,775 5,396,387 7,763,666 8,264,884 5,379,556 5,584,825
recovery
from
carrier
s
================================================================================
Subtotal 8,665,342 4,831,653 2,174,080 2,045,179 1,488,520 2,068,316
Plus 0 2,457,112 4,046,777 3,498,649 2,597,254 2,750,443
amount
paid
carrier
s for
increas
ed
liabili
ty
(compen
satory
payment
)\c
================================================================================
Total $8,665,342 $7,288,765 $6,220,856 $5,543,828 $4,085,774 $4,818,759
Air
Force
claims
cost
Percent 70 71 63 54 59 63
claims
cost
paid by
Air
Force
Percent 30 29 37 46 41 37
claims
cost
paid by
carrier
s
--------------------------------------------------------------------------------
\a Carrier liability at $0.60 per pound per article.
\b Carrier liability increased (May 1987) to $1.25 shipment
valuation.
\c $0.64 per $100 valuation plus 10 percent of certain storage fees.
--------------------
\1 Per 100 pounds of shipment weight.
INCREASED CARRIER LIABILITY
OFFERS POTENTIAL DOD SAVINGS
OF $22 MILLION
-------------------------------------------------------- Chapter 2:1.2
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
-------------------------------------------------------- Chapter 2:1.3
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.
Table 2.4
DOD Recovery Effectiveness for Domestic
Household Goods Claims, (Fiscal Years
1986-91)
(Actual dollars)
Percent
Fiscal Amount Amount recovere
year claims paid recovered d
---------------- ------ ----------- ----------- --------
Air Force 1986 $9,412,898 $2,818,573 29.94
1987 8,008,555 4,225,371 52.76
1988 8,099,263 6,327,388 78.12
1989 8,804,794 7,058,211 80.16
1990 6,160,664 4,825,462 78.33
1991 7,209,259 5,260,905 72.97
============================================================
Total FY1988-91 30,273,980 23,471,966 77.50
Army 1988 10,582,444 5,613,977 53.05
1989 11,487,650 6,961,575 60.60
1990 9,221,234 5,354,449 58.07
1991 9,482,467 5,143,991 54.25
============================================================
Total FY1988-91 40,773,795 23,073,992 56.59
Marine Corps 1988 1,303,877 900,925 69.10
1989 1,245,811 873,826 70.14
1990 1,020,348 642,618 62.98
1991 515,392 238,334 46.24
============================================================
Total FY1988-91 4,085,428 2,655,703 65.00
Combined 1988 19,985,584 12,842,290 64.26
1989 21,538,255 14,893,612 69.15
1990 16,402,246 10,882,529 65.98
1991 17,207,118 10,643,230 61.85
============================================================
Total FY1988-91 $ 75,133,203 49,261,661 65.57
$
------------------------------------------------------------
Note: The percent recovered by the Marine Corps during fiscal year
1991 was unusually low due largely to claims recovery processing
backlogs.
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
---------------------------------------------------------- Chapter 2:2
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.
Table 2.5
Air Force Domestic Household Goods
Shipment Program Net Costs
(Constant fiscal year 1993 dollars)
1986 1987 1988 1989 1990 1991
-------- ---------- ---------- ---------- ---------- ---------- ----------
Carrier $244,360,1 $208,032,3 $210,942,5 $180,923,0 $134,302,1 $149,653,5
transpo 92 31 45 59 74 35
rtation
costs\a
Claims 12,369,117 10,228,040 9,937,746 10,310,063 6,868,076 7,653,141
paid by
Air
Force
================================================================================
Total 256,729,30 218,260,37 220,880,29 191,233,12 141,170,25 157,306,67
9 1 1 2 0 6
Less 3,703,775 5,396,387 7,763,666 8,264,884 5,379,556 5,584,825
recovery
from
carrier
s
================================================================================
Net $253,025,5 $212,863,9 $213,116,6 $182,968,2 $135,790,6 $151,721,8
program 34 84 25 38 93 51
cost
Net $69.24 $64.21 $64.61 $57.17 $62.16 $54.64
program
cost
per
hundred
weight
shipped
--------------------------------------------------------------------------------
\a Includes any compensatory payments for increased liability.
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
---------------------------------------------------------- Chapter 2:3
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.
Table 2.6
Average Amounts of Claims Paid to
Servicemembers
(Constant fiscal year 1993 dollars)
1986 1987 1988 1989 1990 1991
------------ ------ ------ ------ ------ ------ ------
Air Force $821 $788 $750 $766 $738 $687
Army \a \a 831 807 807 765
Marine Corps \a \a 820 706 697 674
Combined \a \a $796 $784 $772 $728
------------------------------------------------------------
\a Data not available.
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
---------------------------------------------------------- Chapter 2:4
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
---------------------------------------------------------- Chapter 2:5
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
---------------------------------------------------------- Chapter 2:6
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
---------------------------------------------------------- Chapter 2:7
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
---------------------------------------------------------- Chapter 2:8
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
============================================================ Chapter 3
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
---------------------------------------------------------- Chapter 3:1
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
---------------------------------------------------------- Chapter 3:2
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
-------------------------------------------------------- Chapter 3:2.1
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
-------------------------------------------------------- Chapter 3:2.2
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.
Table 3.1
Transportation and Claims Costs for
Containerized International Household
Goods Shipments, Army, Air Force, and
Marines
(Millions of actual dollars)
1988 1989 1990 1991
-------------------- -------- -------- -------- --------
DOD transportation $400.0 $368.0 $280.6 $404.3
cost
Claims paid 23.9 25.4 21.2 26.2
Recoveries -4.6 -5.3 -3.3 -5.2
Claims cost 19.3 20.1 17.9 21.0
============================================================
Total cost $419.4 $388.1 $298.6 $425.3
Percent of claim 19.1 20.9 15.3 19.8
amount paid that
was recovered
------------------------------------------------------------
Note: Totals do not add due to rounding.
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,\1
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.\2
--------------------
\1 Household Goods: Evaluation of Department of Defense Claims
Payment and Recovery Activities (GAO/NSIAD-89-67, Feb. 24, 1989).
\2 MTMC initiated the Total Quality Assurance Program in 1992, which
scores carrier performance in several areas, including shipment loss
and damage, and penalizes poorly performing carriers by denying them
future DOD shipments for a specified period of time.
MTMC'S PROPOSAL WOULD REDUCE
INTERNATIONAL SHIPMENT COSTS
---------------------------------------------------------- Chapter 3:3
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
-------------------------------------------------------- Chapter 3:3.1
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
-------------------------------------------------------- Chapter 3:3.2
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
-------------------------------------------------------- Chapter 3:3.3
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
---------------------------------------------------------- Chapter 3:4
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
-------------------------------------------------------- Chapter 3:4.1
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
-------------------------------------------------------- Chapter 3:4.2
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,\3
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.
Table 3.2
Impact of the $1.25 Rate on DOD Costs at
Varying Compensatory Rate Levels
(Constant fiscal year 1993 dollars)
(Dollars in millions)
New $1.25 New $1.25 New $1.25
rate at rate at rate at
Old $1.50 $1.69 $2.04
$0.60 compensato compensato compensato
rate ry rate ry rate ry rate
-------------- -------- ---------- ---------- ----------
Claims paid by $32.5 $32.5 $32.5 $32.5
DOD
Less recovery -6.2 -22.5 -22.5 -22.5
from carriers
Plus 0 10.6 11.9 14.4
compensatory
payment for
increased
liability
Total DOD $26.4 $20.6 $22 $24.5
claims cost
Percent paid 81 63 68 75
by DOD
Percent paid 19 37 32 25
by carriers
------------------------------------------------------------
Note: Figures are based on average performance levels, all services,
fiscal years 1989-91. Totals may not add due to rounding.
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.
--------------------
\3 This rate makes no provision for additional payment to carriers
for the increased liability based on a percentage of storage in
transit costs. Carrier industry officials told us that, unlike
domestic agents, many foreign agents responsible for final delivery
and storage of international household goods shipments are unwilling
to assume any liability for shipment loss or damage. The method we
used to calculate the rate was adjusted to include these payments.
IMPACT OF THE TEMPORARY $1.80
PER POUND PER ARTICLE RATE
---------------------------------------------------------- Chapter 3:5
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
---------------------------------------------------------- Chapter 3:6
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
---------------------------------------------------------- Chapter 3:7
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
---------------------------------------------------------- Chapter 3:8
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
---------------------------------------------------------- Chapter 3:9
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
--------------------------------------------------------- Chapter 3:10
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.\4 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.
--------------------
\4 Issues and recommendations regarding the selection of carriers for
moving DOD shipments are addressed in Household Goods: Competition
Among Commercial Movers Serving DOD Can Be Improved (GAO/NSIAD-90-50,
Feb. 12, 1990), DOD Commercial Transportation: Savings Possible
Through Better Audit and Negotiation of Rates (GAO/NSIAD-92-61, Dec.
27, 1991), and Defense Transportation: Commercial Practices Offer
Improvement Opportunities (GAO/NSIAD-94-26, Nov. 26, 1993).
PROBLEMS NEED TO BE ADDRESSED FOR
INCREASED LIABILITY TO BE FULLY
EFFECTIVE
============================================================ Chapter 4
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
---------------------------------------------------------- Chapter 4:1
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
---------------------------------------------------------- Chapter 4:2
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
---------------------------------------------------------- Chapter 4:3
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
-------------------------------------------------------- Chapter 4:3.1
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
-------------------------------------------------------- Chapter 4:3.2
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
-------------------------------------------------------- Chapter 4:3.3
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
---------------------------------------------------------- Chapter 4:4
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.
Table 4.1
Rate of Household Goods Claims Filings,
Fiscal Year 1991
Filing Percen Cumulative Cumulative
Months s t filings percent
-------- ------ ------ ---------------- ----------------
3 23,310 35.6 23,310 35.6
6 19,133 29.2 42,443 64.9
9 8,578 13.1 51,021 78.0
12 5,107 7.7 56,128 85.8
15 3,228 4.9 59,356 90.7
18 2,095 3.2 61,451 93.9
21 1,556 2.4 63,007 96.3
24 1,253 1.9 64,260 98.2
over 24 1,173 1.8 65,433 100.0
------------------------------------------------------------
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
---------------------------------------------------------- Chapter 4:5
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
---------------------------------------------------------- Chapter 4:6
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
---------------------------------------------------------- Chapter 4:7
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
---------------------------------------------------------- Chapter 4:8
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
---------------------------------------------------------- Chapter 4:9
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.
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================ Chapter 4
(See figure in printed edition.)
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Now on pp. 3 and 12-15.
Now on pp. 18-24.
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Now on pp. 3 and 32.
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Now on pp. 4 and 33-34.
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Now on pp. 4 and 35-37.
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Now on pp. 4 and 37-39.
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Now on pp. 3 and 40-41.
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Now on pp. 5 and 49-50.
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Now on pp. 5 and 50-52.
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Now on pp. 5 and 52-54.
Now on pp. 5 and 28.
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Now on pp. 6 and 44.
Now on p. 54.
Now on p. 54.
Now on p. 55.
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Now on p. 55.
Now on pp. 6 and 55.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE AMERICAN MOVERS
CONFERENCE
============================================================ Chapter 4
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(See figure in printed edition.)Appendix III
COMMENTS FROM THE HOUSEHOLD GOODS
FORWARDERS ASSOCIATION OF AMERICA
============================================================ Chapter 4
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DRAFT OF PROPOSED STATUTORY
CHANGES
========================================================== Appendix IV
We propose that 31 U.S.C. 3721(g) be modified as follows:
(g) A claim may be allowed under this section only if it is presented
in writing within 2 years after it accrues, except that a claim for
damage to, or loss of, personal property in a government-arranged or
reimbursed commercial shipment or storage accruing after [DATE] may
be allowed only if such claim is presented in writing within 1 year
after it accrues. However, if a claim under subsection (b) of this
section accrues during war or armed conflict in which an armed force
of the United States is involved, or is not yet untimely under this
subsection at the time a war or an armed conflict begins, and for
cause shown, the claim must be presented within 2 years (or, after
[DATE], for claims involving damage to, or loss of, personal property
in a government-arranged or reimbursed commercial shipment or
storage, within 1 year) after the cause no longer exists or after the
war or armed conflict ends, whichever is earlier. An armed conflict
begins and ends as stated in a concurrent resolution of Congress or a
decision of the President.
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
Edward M. Balderson, Assistant Director
Waverly E. Sykes, Assistant Director
William W. Cawood, Evaluator-in-Charge
Christina Quattrociocchi, Evaluator
Daniel C. Hoagland, Operations Research Analyst
Julia M. Kennon, Computer Specialist
OFFICE OF THE CHIEF ECONOMIST
Richard S. Krashevski, Senior Economist
OFFICE OF THE GENERAL COUNSEL
Michael D. Hipple, Senior Attorney