Review of Exposures: Domestic Freight Brokerage Industry

Domestic Freight Broker’s moving freight through third party trucking, rail carriers and airlines have financial exposures that are truly unique from any other industry. A thorough and complete understanding of financial exposure is critical to the long term success of a Freight Broker or Freight Forwarder.

It is important to first understand the risks and financial exposures then design a program with the support of knowledgeable professionals dedicated to the logistics industry. The ultimate goal should be to design a Risk Management, Claims Control and Insurance Program that responds to the exposures that are unique to your firm and the customers you represent.

Unique Exposures for Domestic Freight Brokers:

A company staying within the box of domestic freight brokerage is known as an asset free company. This means they do not move freight with their own equipment but rather use third parties (trucking operations, rail carriers and airlines). As a result, they never take cargo they are hired to move into their care, custody or control. The Carmack Amendment implies that the Freight Broker’s don’t actually assume liability to the cargo they move. This does not, however, guarantee they won’t be dragged into a claim when one arises which means the cost associated with defending themselves and responding to cargo claims can not necessarily be avoided.


Methods of addressing exposures:

 1) Contracts – The trading terms and conditions in which you operate under should communicate the extent of your liability should something go wrong. The Transportation Intermediaries Association (TIA) has a recommended format and it would be advisable to become a member.

Recommended Contracts:

• A Shipper/Broker Contract establishes an understanding on the extent of broker’s liability to the freight he is moving.
• A Carrier/Shipper/Broker Contract establishes the extent of liability a carrier (trucker, rail carrier or airline) has to the cargo being moved.

Be aware that most major shipper’s will ask you to sign their format of shipper broker contracts. These contracts should be reviewed with the support of an attorney dedicated to the logistic industry. These contracts should also be reviewed with your insurance agent as your signature could potentially impact the coverage you have in place. Your insurance carriers, in many cases, can invalidate your coverage if you unwittingly increase your legal liability without giving them the opportunity to review and approve of the contract.

2) Technology and Procedures – This can help your firm minimize human error and the exposures that could result from these errors. Technology has been developed specifically to assist freight broker’s track shipments and monitor the insurance coverage a carrier has in place. Written procedures that all employees are required to follow might also help in reducing exposures.

3) Work with Professionals knowledgeable and dedicated to the logistics industry – Attorneys and Insurance Agents have areas of expertise, therefore, you should try to work with professional who are knowledgeable in your industry.
Attorney’s experienced in the risks associated with logistics can help you interpret your exposures, set up a corporation to protect your private assets and provide council on legal issues relating to transportation.

Insurance Agents dedicated to the logistics industry will provide you with insurance carriers and coverage that are unique to this industry. They will also be able to help you evaluate your exposures after better understanding the full extent of the services you offer.

An insurance program can then be designed around the services you offer, the nature of clients you have, the contracts you have in place and the cargo that is moved by your firm.

4) Professional Claims and Recovery Firms – Professional claims adjusters and recovery experts can help freight brokers collect difficult claims from carriers and third parties. Their services are typically offered on a no cure, no pay basis. Fees can range from 30%, to as low as 10% of the amount recovered depending on the size of the claim.

5) Insurance programs designed to address the intricacies of your operation – An insurance policy is a contract that transfers some of the financial risks and exposures inherit in your business to an insurance company willing to accept these exposures. Understanding what is and what is not covered is critical. For that reason, you should request a sample policy, prior to binding coverage, and make sure you read and thoroughly understand your policy. Your insurance agent should be able to help you interpret the policies put in place for your firm. It is a good idea to pose any questions you may have to your insurance agent with a request that underwriters review and respond back in writing. It is important to note that when questions arise that the insurance carrier responds back in writing.

Your policy is the contract in place between you and your insurance carrier therefore it is very important that you have a clear understanding of the coverage it will provide.

Typical Insurance Policies in place for a Freight Broker or Domestic Freight Forwarder include:

• Contingent Cargo Policy
• Contingent Cargo/Contingent Auto Liability Policy
• Shipper’s Interest Cargo program
• Excess spot Cargo Insurance Program (when Truckers Motor Truck Policy limit isn’t high enough to match value of cargo being shipped)
• Cargo Legal/Errors & Omissions Policy
• Comprehensive General Liability Policy
• Crime and Employee Dishonest coverage
• Property Insurance – Covering owned building and/or contents
• Business Auto – Non owned and hired coverage (if employees use their vehicles for company related work)
• Umbrella policy – Increasing the limit of your GL, Auto Liability or Employee Liability
• Workmen’s Compensations with employee liability coverage

Small things are often overlooked which can result in serious problems later on. It is important to take the time to be diligent in evaluating the exposures your company will incur. Utilize the support of professionals dedicated to your industry as this will put you in the best position to design your Risk Management, Claims Control and Insurance program to address the exposures your firm could incur moving freight.

If you contract truckers to move freight and someone is injured or killed, are you covered?

Serious financial exposures confront domestic freight brokers, freight forwarders and their shipper clients when trucking operations they contract to move freight injure or cause fatalities.

 Are you covered?

 
The Right Policy is out there but do you have it in place?

 Have you ever asked yourself the question, “I am a company with domestic freight broker authority and how do I protect myself from law suits if I get named in one because a Common Carrier or Contract Carrier I contracted to move freight causes an injury or fatality?”
 You may have heard different arguments on how to cover this exposure. Of great concern to this writer is the fact some insured’s are under the mistaken impression that a “Non Owned and Hired Endorsement” added to a General Liability or Executive Auto policy is a means of covering this exposure.

You are mistaken if you feel this coverage will respond to the exposure facing domestic freight brokers and their shipper clients. This is a mistake that could be very costly as we have seen in the recent case Sperl Vs CH Robinson/Tyson Food Logistic involving a 23 million dollar judgment against this freight broker and shipper. (A post trial motion has been filed).

With this in mind, it is critical for the sustainability of any operation, that this exposure be addressed with the right coverage.

A close examination of the NOH Endorsement format makes it pretty clear this is NOT intended to address the exposures incurred when you contract 3rd party truckers to move freight for you.

The basis of premium rating and premium adjustment under a NOH endorsement states salaries of employees because the intent of the endorsement is to cover the Non Own & Hired exposures of an employee using their vehicles for company purposes, such as bank deposits. Ask any commercial underwriter what the intent of a NOH endorsement is and they will state that it is to cover the exposures of employees driving their own vehicles for company business or an executive on a business trip using a rented car for business purposes.

The right policy: Contingent Auto Liability policy for domestics freight brokers or domestic freight forwarders.

A specific policy format has been developed for domestic freight brokerage and freight forwarding operations. The policy has been referred to as Contingent Auto liability policy. The key feature to a policy that truly covers the exposure is specific reference within its format that it is intended to cover. Such copy states, “Companies with Freight Broker Authority or Domestic freight forwarding authority who contract trucking operations who are independent agents with Common Carrier Authority, Contract Carrier authority or Intra-state authority.”

Some policy formats in the marketplace clearly state the insurance carrier has a duty to defend. Having this clause reflected within the format is another critical element to the coverage a freight broker must have in place. The principal benefit is underwriters responding to legal costs should they be named in a law suit because a third party trucker caused an injury or fatality and the freight broker ends up being named in the law suit.

Very few insurance carriers are willing to write a Auto Liability policy for domestic freight brokerage operations and domestic freight forwarding.

You will find a very limited number of insurance companies willing to write the commercial auto exposure that faces a domestic freight broker or forwarding operation for the following reasons.

The normal paradigm for underwriters of commercial auto coverage is to review detailed information associated with the trucking operations. Most insurance carriers that write commercial auto require MVR’s, hard copy loss runs and vehicle ID numbers, all relating to the commercial auto exposure. Indeed this level of information is impossible for a domestic freight broker to provide as they could be working with thousands of common carriers each one with countless drivers and equipment lists.

Accordingly without such information, they won’t offer a quote. What you are left with are maybe six insurance carriers that openly acknowledge they are willing to take on the commercial auto exposures a domestic freight broker or freight forwarder incurs under their authority.

The shortage of insurance carriers willing to write the commercial auto exposures of domestic freight broker or freight forwarder may be one of the reasons the wrong type of coverage is being suggested by some insurance agents. These agents may not have an appointment with one of the few insurance carriers writing the class, leaving them to suggest alternatives that don’t really address the exposure.

Buyers beware, make certain if you are domestic freight broker or freight forwarder be certain your auto policies is intended to address the real exposure you face.

Domestic shippers beware, move freight only with domestic logistic operations that have the right coverage in place, if you don’t it could a very costly error.

International and Domestic Freight Logistics Operations – A Review of Exposures and Means of Addressing Them.

International and Dometic Logistic Operations, Exposures reviewed.

What service do you provide?

1) Do you act as an International Freight Forwarder?

This operation often offers a multitude of services, where each assumes different liability. For example, you may act purely as freight forwarder or domestic freight broker moving cargo either for export/import or domestic transit. This may be done through the use of a third party carrier including trucking operations, airlines, steamship lines or rail carriers. Your service may include deconsolidation and consolidation of cargo preparing for export in ocean containers or dealing with it on import shipments. For imports a very critical service you may provide is seeing to it that proper documentation is provided. This among other things confirms the shipper’s have been paid for cargo imported prior to releasing cargo to the consignee or their agent.

2) Do you act as a Custom House Broker?

This operation includes processing documentation, collecting duty, the purchase of U.S. Custom bonds on behalf of importers, etc. These processes all relate to the importation of cargo into the U.S. In providing such services, you may operate under specific trading terms and conditions. A common format approved by the NCBFFA (National Custom Brokers and Freight Forwarders Association) is used by many firms and has been used effectively to limit liability to $50 a shipment or entry. Trading terms are often posted on their web site, as well as on the back of the CHB’s invoices. Ideally you have clients sign a contract where these terms are reflected which, among other things, confirms the services you will provide, the charges associated with your services, the responsibilities of the parties involved and the extent of the logistic firm’s liability. If the Shipper/Freight Forwarding contracts are in place and signed by both parties, it is common that they do not have to be issued and signed for each and every shipment in a similar fashion to bill of ladings. As the contract lays out there will be a steady stream of shipments and this contract is intended to address the above issues.

3) Do you act as an NVOCC (Non Vessels Operating Common Carrier)?

NVOCC’s issue House Ocean Bill of Ladings. With this your clients are reflected as the shipper and consignee. They then make arrangements with actual ocean carriers for the actual transit, who in turn issues the Master Bill of Lading where you are reflected as the shipper and an agent you assign at destination is reflected as the party to receive cargo. Ocean bill of ladings, among other things, speak to the extent of liability assumed by the NVOCC and the actual steamship line. These are issued on a shipment by shipment basis. There is often reference to COGSA “the Carriage of Goods by Sea Act” in Ocean Bill of lading formats, as well as Hague Visibly. COGSA applies to shipments to and from the U.S. The essence of COGSA suggests that an ocean carrier liability is limited to $500 a shipping unit, which, depending on how the bill of lading is issued, could be $500 for an entire container. There are often other exclusions commonly present in the bill of lading which could invalidate any liability for the ocean carrier. The reason why owners of cargo should have Shipper’s Interest Cargo insurance in effect is due to the fact that steamship lines and NVOCC’s can limit their liability. Shipper’s Interest Cargo Insurance protects the owner of cargo for the total insured value of a shipment (commonly the C.I.F plus 10% value of the product) should it be lost or damaged in transit. It is common for International Freight Forwarders to have a “Shipper’s Interest Cargo Insurance Policy” in place so they can offer this form of coverage to their customers. The cost of the insurance is passed along to shipper or consignee. It is common to see a fee added to cover the expense of administrating this cargo insurance. The policy form is NOT a legal liability format, but rather a direct physical damage form of coverage. With this you do not have to prove who is liable for the theft or damage of cargo, but rather that it took place during the course of an insured shipment. Shipper’s interest cargo insurance also protects the owners of cargo and freight forwarders for General Average claims which can be significant. General Average is a principle of maritime law where in the event of an emergency, such as the cargo is jettisoned or expenses incurred due to the emergency, that loss is shared proportionately by all parties with a financial interest in the voyage.

4) Do you act as an “Indirect Air Carrier”?

An Indirect Air Carrier offers a service similar to that of an NVOCC, and typical operations are that of issuing the House Airway Bill. The liability of International Air Carriers was established by the Warsaw Convention which limits an air carrier’s liability to $9.07 per lb. Once again, this limited liability creates the need for a Shippers Interest Cargo Insurance.

What is the understanding between you and your client on the extent of liability you assume if something goes wrong? It is important that your client understands the extent of your liability for the services you offer to them. As noted above, it is common practice for an international freight forwarder to operate under the trading terms and conditions of the NCBFFA (National Custom Brokers and Freight Forwarders Association). It is wise to have specific contracts in place with clients so everyone understands the responsibilities and extent of liability assumed by each party. Having awareness of each parties liability helps to identify where and when insurance coverage should be in place.

Insurance Policies to consider as an International Freight Forwarder.

Shipper’s Interest Cargo programs. It is common practice for international freight forwarders to have shipper’s interest cargo insurance programs in place. This allows the freight forwarder to put a very broad form of “direct” physical loss or damage coverage in place for the cargo in which they organize international transit on. This coverage is “Customer Friendly” in that, when a claim occurs, the principal issue that has to be proven is that the cargo did suffer physical loss or damaged during the insured transit in order to be collected.

The Shipper Interest program effectively covers both the freight forwarder and their clients because the freight forwarder is a named insured under the policy. Practically speaking, their client should be indemnified for covered cargo claims, which then gives their client no cause of action against freight forwarder. The freight forwarder is protected from recovery actions/subrogation claims by the insurance carrier providing this coverage as they are a “named insured” under the policy which prevents the insurance carrier from claiming against them. Furthermore, subrogation claims will be pursued against the actual transportation company who provides the transport and who had it in their care, custody and control when the claim occurred.

The premium associated with this coverage is typically generated by reporting each shipment through a “Cargo Insurance” web site specifically set up for a freight forwarder. A rate is established depending on factors such as the transit involved, whether it is an ocean shipment or an air shipment, etc. The premium associated with the shipment is billed to the freight forwarders client and collected along the freight costs associated with the shipment. Many freight forwarders charge a service fee for putting this coverage into effect and offering this service actually becomes another profit center for many forwarders.

Cargo Legal / Errors and Omission policy. The fact alone that most freight forwarders have the option but fail to insure every shipment provides great reason supporting the need to have a Cargo Legal / E&O policy. Cargo Legal/E&O can be designed to address the “legal liability” exposure to cargo moved for clients. A Cargo Legal/E&O policy is not a customer friendly policy, it is rather one that is designed to “defend” the freight forwarder from claims and law suits. One of the principal benefits for covered claims is legal representation and the costs associated with it being assumed by underwriters up to the policy limits in place. The costs can vary significantly in defending one's self, even if it is apparent the company doesn’t have liability under law. Just the costs to extricate the insured from a law suit can be monumental. There is no major down side for a plaintiff’s attorney to drag in as many parties as possible into a law suit to leverage some type of settlement. The cost to defend oneself versus making some type of settlement will often motivate a defendant to end the bleeding and make some type of offer. It then just becomes an economic reality to pay them something to go away and stop the costs of legal representation. This is an unfortunate result of the legal system in the U.S. where losers of law suits are not forced, in most cases, to respond to the defense costs of defendant. In many other countries in the world a plaintiff must pay the expenses of their legal counsel who can’t work for a contingent fee. In additions plaintiff’s who lose their case can be forced to pay the defense costs of a defendant. This helps to avoid a significant volume of law suits but it highly unlikely this will ever be adopted in the U.S. in our opinion.

General Liability policy. This is the most common type of business liability insurance. It is intended to cover legal liability for bodily injury, death and third party property damage. For example, should someone be visiting your office and slips and falls and then sues you for bodily injury. A general liability policy would provide your legal defense and pay any settlement amount you are legally obligated to pay. Some forms are broad enough to address exposures such as third parties who are injured or killed during the unloading of cargo. Other exposures that can be covered by General Liability policies include Personal/Advertising injury, Fire Damage Legal Liability, or Medical Payments to name a few.

An insurance agent can also help with interpretation of the policies that are put in place. It is important for your agent to fully understanding the full extent of services you offer, understand the nature of your client base and the cargo you typically move in order for them to put the proper policies in place.

Other typical Insurance policies in place for an international freight forwarder include the following:

- Contingent Auto Liability Policy.
- Crime and Employee Dishonest coverage.
- Property Insurance – Covering owned building and/or contents.
- Business Auto – Non owned and hired coverage
(if employees use their vehicles for company related work).
- Umbrella policy – Increasing the limit of GL, Auto Liability or Employee Liability policies.
- Workmen’s Compensations with employee liability coverage.

The devil is in the details, so take time to be as diligent as possible in evaluating the exposures your company will incur with the support of professionals dedicated to your industry. That will put you in the best position to design your Risk Management, Claims Control and Insurance program to address the exposures your firm could incur moving freight.