Freight Brokers Need Insurance – What Kind?
Understanding Freight Broker Insurance
What is Freight Broker Insurance?
Anyone starting, running, or selling a freight brokerage should acknowledge the value provided by a freight broker insurance policy. The broker insurance policy is based on a business concept called cargo liability. Although there are other forms of broker insurance coverage, the principle of cargo liability is the most basic and fundamental because it covers claims that are not covered by the carrier’s cargo liability policy.
It is vital for freight brokers, or third-party marketers, in general, to understand that freight broker insurance does not apply if the broker is directly liable for the loss . In other words, if a broker is negligent and is sued, the broker carrier policy is not going to cover the broker’s defense costs or any judgment against the broker for its own negligent acts. Instead, freight broker insurance is intended to cover non-negligent claims and lawsuits and is only triggered if the freight broker is found not to be at fault.
It is also important to understand that carrier contract liability exclusions have been shown to be unconscionable by the courts when reasonably estimating damages at the time the contract was created is too difficult. Additionally, an estimation of damages in carrier contracts is a recognized exception to the doctrine of unconscionable contract terms as well as an exception to the general disallowance of punitive damages in tort actions.
Freight Brokers Are Legally Required To Have Insurance
Truck brokers are subject to both federal and state laws regarding the maintenance of insurance policies. These laws serve a variety of purposes, including protecting the public in the event a broker fails to pay a carrier for services rendered or fails to ensure the safety of its traffic.
Federal Regulations
Brokers who operate in interstate shipments are required to maintain $75,000 of financial security known by most as a bond. This bond is intended to cover damages caused as a result of the broker’s negligence.
The Federal Motor Carrier Safety Administration ("FMCSA") is the regulatory body responsible for gathering the information necessary for brokers to obtain a bond. The FMCSA requires brokers to file proof of their bond, which is often a Form BMC-84 or other reputable surety company form. These forms, along with each broker’s application, provide the surety with the information necessary to analyze risk and determine what rate to charge to underwrite the requested bond. If approved, the surety issues the bond and mails a copy of the bond to the FMCSA, as well as the surety’s A.M. Best and SNL (Standard & Poor’s) ratings.
Once it has the necessary bond, the broker is required to file its own Certificate of Liability Insurance Form BMC-91X with the FMCSA. It must also file a copy of the supplemental General Powers of Attorney Form BMC-85 in which the broker authorizes the surety to cancel the bond on its behalf upon notification that an initial application has been filed. A broker can apply for a bond directly with a surety through a licensed agent or through a broker.
State Regulations
In addition to requiring a federal bond, states may impose license fees and additional coverage requirements on brokers operating solely within their borders, and have authority to enforce and penalize a broker for failing to comply with such requirements. However, because state regulatory authority primarily exists over intrastate commerce, a broker operating exclusively within a single state will find these state-mandated rules inapplicable in its business dealings in interstate commerce. A state cannot regulate interstate commerce because of the Commerce Clause of the U.S. Constitution, which grants exclusive power to congress. For example, a Wisconsin-based broker operating within the state of Wisconsin would be subject to the options set forth in the state law, whereas a Wisconsin-based broker that also seeks to broker shipments throughout the United States would be subject only to the federal law noted above.
Types of Insurance Coverage Freight Brokers Should Have
In terms of the types and amounts of insurance coverage they need, freight brokers are in a unique position. Because freight brokers are middlemen between a client and a shipping carrier, the wrong incident can expose them to liability from either end. In addition, many individuals and businesses require clients to be insured before they will do business with them. If the client has no insurance, the broker must step in or even become completely liable.
The most common types of coverage needed by a freight broker are:
General Liability
General liability insurance is required by most clients. It pays for damages to others for which you are responsible. If a truck delivering goods you arranged is in an accident, for example, your general liability insurance should pay some or all of the damages, depending on how much fault you share with them.
Contingent Cargo
Sometimes called freight insurance, contingent cargo policies protect you from damage to products transported on freight you arranged but that is damaged or stolen. Goods in transit are more likely to be damaged than stored ones, so this is especially important for freight brokers who don’t own any trucks or warehouses.
Errors and Omissions (E&O) Insurance
Errors and omissions (E&O) insurance has a different name in the freight broker industry. Many in that industry use the terms "Freight Broker Professional Indemnity Insurance" or "Freight Broker Professional Liability Insurance". Regardless of the name, an E&O policy protects against negligence and errors. If your client is unhappy with your service and it leads to a loss for them, an E&O policy pays either their loss or your costs in defending against a lawsuit.
How to Get Freight Broker Insurance
One of the best ways to pay less for freight broker insurance is to rely on the wide variety of insurance brokers and companies that are ultimately looking out for your best interests. When you have enough competition and enough trust, you are able to get the best freight broker insurance policy with minimal costs. If you ever wonder why some shippers are able to get better cargo insurance rates than others, it is in part because their freight broker has an insurance broker capable of offering better rates than competitors.
Freight brokers take many steps to get insured, especially if they are just getting started. An experienced freight broker takes many of these steps long before the day they actually need insurance. Even if you are an experienced freight broker, it can help to refresh your memory.
The first step is finding a freight broker insurance broker with experience handling freight brokers. A freight broker insurance broker has the background and experience of working with smaller freight brokers, medium-sized ones, and large ones. The cost of insurance should not matter. When a freight broker hauls cargo for a major shipper, it will likely be insured for $100,000 and the broker will likely not care — they want to be certain of their money in case a cargo loss occurs. A good freight broker insurance broker can help you get new freight broker insurance so long as you fill out the free application. You will be asked about your name, the type of freight your customers expect you to haul for them (dry freight or refrigerated), whether you will be operating in Mexico or Canada, and whether you will be hauling hazardous materials (HAZMAT). There are many more questions, but we can say that most applications are quite lengthy. You will just need to answer the questions honestly. A licensed freight broker insurance broker will already know most of the things about your company and the things that can impact your rates. Once you fill out the application, the freight broker insurance broker will connect you with two or more freight broker insurance companies and send the applications to them. When you receive application offers, you can select the one you feel is best for you.
The Cost of Freight Broker Insurance
One size does not fit all when it comes to freight broker insurance. Transportation insurance policies are written based on the insurance company gathering facts to best assess risk. Over and under coverage are not good policies to have for either party. Several factors go into determining the cost of broker insurance.
Factors affecting the cost of insurance:
• Business Size
• Freight Class and Types of Freight
• Loss History
• Number of Employees
Each of the above factors is a piece of the puzzle used to determine what kind of coverage you will get and what it will cost you. For instance, if you’re running a larger business, you will more than likely be paying less per dollar of coverage than a small operator. Why? Because if you’ve been in business for a long period of time, your loss history is looked at and determined to be favorable. Your reputation and how you’ve conducted yourself speaks for itself. Large businesses that have an established track record are generally looked upon more favorably and therefore considered a smaller risk with costs for coverage lower than that of unproven competitors.
Smaller operations without much of a record , on the other hand, may end up paying more per dollar of coverage than their larger competitors. This commonly happens because the insurer is unable to get a good gauge on the risk and there are fewer brokers willing to insure small operations.
The type of freight moved is also factored into premium. Some types of freight are more highly sought-after by thieves, such as high-end electronics. Moving this type of freight requires higher premiums.
Claim history is perhaps the most important factor insurers use to determine premium rates. If you have had several losses in the past, the insurance company may consider your business to be a higher risk. While some insurers look at the reasons behind the losses and judge the company accordingly, others see a company with claims history and consider them to be an increased risk.
Penalties for Not Having Insurance for Freight Brokers
The legal ramifications for freight brokers not maintaining the required insurance coverage are significant. A broker without surety as to his air-tight coverage could be drawn into personal liability suits for the actions of his employees (i.e., the owner-operator). In a case out of the United States Court of Appeals for the Third Circuit earlier this year, a Freight Broker Limited Liability Company owner was personally sued, along with his company, for hiring an owner-operator who had a history of DUI’s, and who ultimately injured the plaintiff in an auto collision. Ang v. McIntyre Trucking, Inc. and Robert J. McIntyre, Case No. 13-3051 (3d Cir. Feb. 2, 2015). The plaintiff in Ang sued the trucking company under theories of negligence arising from the doctrine of respondeat superior. In Pennsylvania, respondeat superior holds that an employer can be held liable for the torts of an agent (in this case, the owner operator) when the agent is acting within the course and scope of the employment relationship. In response to the personal liability, the Freight Broker Plaintiffs argued that "appellant is not able to be personally liable unless he is personally negligent."[i] The Court ultimately instructed the Jury that "McIntyre could be held personally liable for the torts of appellant if they determined that McIntyre had breached "a duty personally owed to Appellees in his own right…[and that] McIntyre’s breach of that duty was a proximate cause of the harm suffered by Appellees." Id. at 23-24. As a result, the jury found the Broker Plaintiffs to be jointly and severally liable in the amount of $1,500,000.00.
Moreover, among other things, the Broker Agreement states that "the Broker shall indemnify, hold harmless and defend Shipper against all claims to the extent that, but only to the extent that such claims are due to [the Brokers] negligence, omission or other default." Id. at 12. This language is important because it shows that the Broker is liable as the "negligent party" even though it did not hire the owner-operator. This is so even under the law of the state of New Jersey, the state of the Miller Act claim which requires any subcontractor to maintain certain insurance levels. Here, the freight broker purchased $100,000 in insurance from the provable carrier, placing the obligation on the plaintiff to only maintain a minimum of $25,000 in coverage. Additionally, the broker was contractually bound to defend and indemnify the owner operator against alleged acts, inaction, etc., etc….
Finally, it is always important to remember that state law can greatly impact the cost/availability of insurance coverage. Additionally, insurance regulations may vary dramatically from one state to the next. Some states may also allow brokers to reduce their limits of liability under certain conditions. The Broker Agreement at issue in Ang stated "Any insurance obtained by Contractor shall be governed solely by the laws of the State of New Jersey; and whether obtained by Contractor or Shipper, such insurance shall name Shipper as additional insured." Ang, at 16. Now that the assets of the Broker have been compromised to satisfy the jury’s verdict, the Court has rescheduled the damages hearing to determine the appropriate share of damages to be awarded.
Accordingly, the freight brokerage industry should always consider whether the coverage they purchase is sufficient, and whether they hold ultimate liability if a claim is deemed to arise from them.
Freight Broker Insurance – Common Mistakes
There are several common mistakes made with regard to freight broker insurance policies that can be easily avoided if you remain aware of them and take preventative action. The most common mistake that we see is that the named insured on the policy will be the parent or a subsidiary as opposed to the actual company entity that is doing business. This happens all of the time due to the way that they are set up, particularly when an agent is used. However, freight broker insurance companies will not accept claims for the named insured that are incurred by a different company entity and any money that is passed through to the named insured becomes a windfall. Therefore, be sure to list the actual company entity on the freight broker insurance policy and not a different parent or affiliated company.
Another mistake that is made is that brokers forget to name the carrier on the policy as an additional insured . All carriers should be named as additional insureds with respect to coverage for operations of the broker. The failure to do so can leave the carrier without any insurance at all for an accident in which the carrier is liable.
The third, and most heartbreaking mistake, is to allow a freight broker insurer to misspend its premium dollars. Check for coverage on the policy and the terms and conditions of that coverage. This coverage is not a commodity. The policy form varies from one insurer to the next. There are many brokers who have come to me with $10,000,000 in premium spent on a policy and that policy does not even include coverage for cyber liability. This is not unusual and I see it all the time, therefore be careful.
Other common mistakes include: failing to have your insurance agent confirm all the statements on the application; booking trip lease agreements in addition to brokered freight; failing to pile on additional coverage for the coverage you actually need.
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