Freight brokers don’t haul freight, but they do play a crucial role in moving it. Moreover, they can find themselves on the hook for in-transit liabilities if they’re not careful. Those considering a career as a broker should not only know the ins and outs of freight, but should also know how to protect themselves from the risks associated with brokering loads.
When it comes to risk mitigation, due diligence of the carriers you broker to is just as important to having the right insurance policies.
“Brokers can be held liable for claims for damage and lost cargo, but also for liabilities such as wrongful death and personal injuries,” said Micah Keith, Reliance Partners’ senior director of sales. “It’s best to have yourself protected.”
Upon completing the legal work needed to establish your business in addition to applying for broker authority with the Federal Motor Carrier Safety Administration (FMCSA), new brokers should focus on obtaining a surety bond per the BMC-84 program.
Up to its limits, the bond serves as a payment guarantee to motor carriers and shippers should a broker not comply with its contractual obligations. Keith notes that once the $75,000 limit bond is in place, the broker will have an active listing in the FMCSA’s Safety and Fitness Electronic Records (SAFER) database.
Now it’s time to consider your insurance options. It’s not a matter of if you need coverage, but how much.
Freight brokers have a couple of auto liability coverages to choose from, including contingent auto liability, truck broker liability or third-party liability insurance. The standard minimum coverage is $1 million.
Contingent auto liability is designed to cover the liability of a freight broker from an auto liability claim on a contingent basis. Reliance Partners states that primary coverage is represented by the motor carrier’s insurance while contingent auto liability picks up a valid claim within the scope of the policy that a motor carrier’s policy doesn’t cover or in case a motor carrier’s insurer becomes insolvent or in some cases fails to cover a valid claim.
Limits of $1 million-$10 million are typical before an excess market is needed for additional limits depending on the insurer.
As a broader form of coverage, truck broker liability insurance or third-party liability is designed to cover bodily injury in addition to property damage resulting from the freight broker’s operations as a transportation property broker. This insurance is specifically for the brokerage if they are found to have been liable. It is not intended to cover the shipper or be considered excess coverage over the motor carrier. Liabilities stemming from the actions of a motor carrier or shipper are not covered.
Coverage normally ranges from $1 million-$10 million before additional limits are needed from an excess market.
Don’t forget that brokered cargo will need insurance, too.
A contingent cargo policy protects the broker on a contingent basis for cargo loss or damages. It’s important for brokers to double-check what’s covered on each contingent cargo form, as it’s common for motor carriers to deny claims based on exclusions in their own policy. It is also important to draw a distinction between contingent and primary cargo insurance. If a broker is assuming liability for cargo loss or damage, then it may be necessary to look at different options.
There are many types of cargo forms and listed exclusions. Reliance Partners lists “follow form” policies as one to watch out for. If a motor carrier has a policy exclusion in place, then technically so does the broker in many instances.
Keith recommends buying at least $100,000 in contingent cargo coverage, as that’s the standard minimum.
Manage risks proactively through carrier vetting
Operating with the added protection of insurance provides some peace of mind for the risk-averse broker, but policies are only a reactive measure. Proactive risk mitigation requires a bit of homework on behalf of the broker, especially when deciding which carriers to work with.
“Plaintiff attorneys are attacking as many policies as they can. If they find a way in court to prove that a broker shouldn’t have done business with a carrier, then lawyers will go after the brokerage as well,” Keith said. “You should be vetting carriers thoroughly by scanning their SAFER records as well as the Central Analysis Bureau [CAB] for bad alerts and accident history.”
Ronald Ramsey, Reliance Partners’ Chief Commercial Officer, encourages brokers to use reputable carriers, have a carrier-vetting system in place and stick with it. While there isn’t a standard game plan, Ramsey urges brokers to develop their own effective strategies and understand the risks that are uninsurable.
Some brokers look at CSA BASICs scores; some take into consideration how long the carrier has been in operation,” Ramsey said. “Many brokers won’t use a carrier unless they’ve been active for at least a year while other brokers require only three months … . There’s no uniform or universal rule after that. You just need to have a standardized process in place and stick to it.”
“Freight brokers can become liable under three scenarios. Those include negligent hiring/negligent entrustment, vicarious liability or by assuming liability in a contract. It is important to remember that contractual liability is generally not considered a covered loss in a scenario where a broker agrees to indemnify and hold a shipper harmless,” Ramsey said.
Shawn McLeod, vice president of logistics at Axle Logistics, recommends utilizing carrier-monitoring and risk management services such as Carrier411 and RMIS when selecting carriers to do business with.
“You’ve got to research who’s hauling your freight,” McLeod said. “It’s best to have a couple of good tools on hand to show a holistic view of the carrier. You’ll need to not only know if the carrier still has an authority that’s active, but also if their insurance covers exactly what you need to in terms of cost for the shipment.”
RMIS, or Registry Monitoring Insurance Services, provides transportation brokerages with automated carrier onboarding and compliance monitoring. Its carrier database monitors nearly 98% of all active carriers in North America.
“I also tell my team to review each carrier’s out-of-service percentage,” McLeod said. “If it’s at 20% or less, that’s usually OK. However, I’m not willing to take a gamble on my customers if the percentage is at 25% for one reason or another.”
McLeod also recommends using RMIS to monitor carrier safety ratings to determine whether they’re rated satisfactory, conditional or nonrated. Carrier safety ratings can also be easily accessed by visiting FMCSA’s Safety Measurement System (SMS) website.
However, new motor carriers are granted trucking authority constantly, resulting in a large percentage of trucking companies listed without a safety rating.
Joshua Hoyle, GlobalTranz manager of contracts and carrier compliance, explains: “FMCSA simply doesn’t have the manpower to audit every carrier routinely … . Do you want to use carriers with conditional ratings? If so, are you going to do anything extra — are you going to use them only if they show you what they’re doing to improve the areas of deficiency that the Department of Transportation discovered?
“You also have to determine what you’re going to do with the unrated carriers — all the ones with no safety ratings,” Hoyle continued. “Are you going to use them, or are you going to do anything additional to ensure that that company is reasonably safe?”
It’s one thing for the motor carrier to slip up, but what about the broker?
Freight broker errors and omissions (E&O) insurance addresses liability related to freight broker negligence. This doesn’t mean that it directly insures against bodily injury or damages to cargo and property. Rather, E&O responds up to the limits of a policy for the freight broker’s negligence or errors and omissions involved in conducting business, such as providing wrong information to a carrier that, in turn, results in a claim on a shipment.
“A lot of people new to an industry, as well as veterans, can make mistakes,” Keith said. “I would suggest brokers carry at least $100,000 in coverage getting started, but they can go up to $1 million for most policies to meet contract requirements.”
Other things to consider
Keith encourages aspiring freight brokers to lean on their insurance provider for advice on what’s needed to enter the industry. He urges them not to shy away from questions they may have, but instead to be inquisitive about the different ways a broker could be held liable in certain situations.
“There seems to be a lot of interest in starting a freight brokerage in the last year or two,” Keith said. “I’d say that it’s a good time to get into the brokerage world if you do it the right way. The insurance costs aren’t too bad at the moment compared to what you can make.”
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