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Truck Broker Carrier Selection and Carrier's Insurance Issues with AM Best Rating

We are asked all the time to assist in evaluating carrier quality. While the process can be both tedious, exacting, and time consuming, all stakeholders understand that legal liability has, can and will be determined in a courtroom based on the salient issues of negligent hiring, negligent entrustment and vicarious liability as it relates to a truck brokers selection of carriers to haul their customer's loads. Nobody (or I should say nobody with any sense or anyone looking at any case law) disagrees with this notion.

GTU and its insurance company partners provide free risk management software in carrier selection. The idea serves 2 interests. One it helps GTU assess the pool of carriers a truck broker uses and identify the carriers that can optimize the risk management characteristics that a truck broker's customers both need and expect. It is not often said, but at the end of the day, the value a truck broker brings to its customer is the carrier quality used. And some of their shipper customers would be very disappointed in some of the choices made in carrier selection- that they would never choose themselves if they were hiring the carrier directly.

Secondly the truck broker is served by optimizing the placement of loads with the carriers that represent a better risk management profile

While carrier DOT Safety Ratings are a fairly black and white issue relative to carrier vetting(we suggest forgoing carriers with a conditional or unsatisfactory DOT Safety Rating), CSA equivalent assessment is a much more dynamic process. At issue is the data. Roughly 75-80% of the carriers have no relevant data so using CSA equivalents in the process is more problematic. That said, less than 4% of the carriers have 2 or more Alerts so that should tell a truck broker to go get the 96% that do not have these inspection problems that can and have been used in a courtroom.

A bigger issue is the carrier insurance AM Best ( Best) ratings. The Best rating relates to the financial stability of the insurance company in both key ratios and capital size. Again the data is relevant . Note 16% of the carriers have insurance with a carrier that is less than A-rated. That's right, just 16% which means 84% of carriers have insurance with Best A-rated insurance. So again why would a truck broker use an carrier with insurance less than A? As far is the truck broker is concerned, it typically has to do with the cost of moving the freight or finding a carrier at all. And that is a poor answer.

What is more perplexing is that if the shipper customer was aware that a truck broker was using a carrier with less than Best A-rated insurance, they would not use that truck broker at all. We see contracts from the shipper that require the broker to use carriers with A-rated insurance- only to not know that truck broker is not honoring those contract terms.

So what is the deal with A-rated insurance? Best confused the issue as well by denoting that a B++ rating is Very Good as far as their rating standards. That said, all insurance agents know that is not the case. And while some will sell poorly rated insurance carriers, most of the agents errors and omissions coverage excludes loss and financial insolvency issues that go along with it when using less than A-rated carriers.

What adds gas to the fire is that most excess insurers will not write over less than A-rated insurance, and most trucking insurance agents would state, albeit subjectively, that placement with a carrier that is less than Best A-rated is a sign that the carrier has loss problems or other issues making it less than a stellar carrier. And with A-rated insurance being plentiful( think 84% again), a truck broker should select those carriers,

There are exceptions in this marketplace that are worth noting. Many of the insurance companies that have been downgraded to less than A-rated have paid other insurance companies to assume their liability or utilize a cut-through endorsement. As underwriters, we think this is both prudent and should be acceptable to all stakeholders. But why would we make this exception?

An Assumption of Liability Endorsement means an insurance company has assumed the liability of the ceding company. So if XYZ Insurance Company is B rated and has had ABC company which is A-rated assume its liability, you in essence have 2 insurance companies on the risk where one of them is A-rated- not bad. The same holds true where a "Cut Through" endorsement has been issued. A Cut Through allows in the case of XYZ's insolvency that an insured will have access to the assets of ABC- again not a bad situation.

In closing, managing carriers along with  their insurance carriers and their Best rating is a fundamental part of the risk management. Our business and the truck broker's business is getting more scientific in risk management and risk mitigation. At GTU, we include this service as a free benefit to insurance placement, so it is a "why not" for the truck broker. And it can save a truck broker's bacon so to speak in a courtroom. So do it.

Broker Shipper Contracts and The Broker's Assumption of Shipper Liability and Carrier Liability

We continue to see a poor trend in broker shipper contracts respects their being more onerous and risk assumptive on the part of the broker. It is clear that, in consideration of the broker's arranging transportation on behalf of the shipper, that the shipper wants the broker to assume contractually all liability for any transportation claim involving the shipper's goods- period.

While it makes sense for a truck broker to guarantee and indemnify for the truck brokers legal liability in the supply chain, it is almost impossible for a truck broker to guarantee the performance of any third party- and most specifically a carrier for hire. Even more, a truck broker cannot guarantee the performance of the carrier's insurance company.

So if the truck broker has signed a contract to guarantee the aforementioned performance, this is a recipe for failure. And the truck broker will want its insurance company to assume all this contractual liability and that rarely happens. Only a few insurers provide contractual liability for either truck broker liability or contingent auto liability- but in our view it does not really matter per the analysis below.

Regrettably shippers, shipper's counsel, truck brokers, truck broker's counsel, their insurance agents,and in some cases their insurance companies do not understand that if contractual liability is actually afforded, it is not expanding the terms and conditions of the policy to be broader than it already is; moreover, since most shippers require being added as an additional insured for defense and indemnity reasons, the issue becomes moot. Shippers are defended and indemnified anyway in most cases.

In broker shipper contracts, the indemnification clauses vary,  and again, it is clear that shippers are looking for their shipper liability to be transferred to the truck broker. That can work effectively if only two things happen:

1) The shipper was added as an additional insured under the truck brokers policy, and
2) Both the shipper and broker were legally liable.

One of the challenges is that if the shipper is liable but the truck broker is not legally liable, defense and indemnification will not happen in the truck brokers policy to defend and indemnify the shipper. In fact , in most broker shipper agreements , indemnification for legal liabilities are irrespective of whether the broker has legal liability- thereby creating a big coverage gap and an uninsurable liability.

But it gets worse, due to some very overzealous shipper attorney's, we are seeing contracts that require the truck broker to be responsible and thereby assume the legal liability as a carrier. And there are 2 issues with that as well.

1)  The Moving America Towards Progress in the 21st Century ( MAP-21) established clarity respects a carrier always representing themselves as a carrier to the general public and a truck broker representing themselves as a truck broker to the general public. So it begs the issue of how a broker is supposed to assume contractually the legal liability of a carrier, when it is solely responsible for acting as a truck broker in the supply chain.
2) Truck broker insurance can and does cover losses due to negligent hiring, negligent entrustment, and vicarious liability for the carriers a truck broker hires. But it is not the intention of current truck brokerage insurance to ever cover the truck broker for carrier liability. A commercial auto policy does that. And truck broker policies are not commercial auto policies.

So again, stakeholders trying to seek coverage for shipper contracts are placing potential coverage gaps in the laps of both truck brokers and shippers. It begs the question, do the shippers really want truck brokers to be guaranteeing exposures they might be self-insuring? They indeed may.  And do they really want the truck brokers being liable for guaranteeing carrier performance they cannot control? Again they indeed may.

It's early days in the contract development between the truck broker and their shipper customer. Let's hope the trend does not get worse.

Communication Versus Control- Issues and Dilemmas for Truck Brokers

Control has been a major determination of liability as it relates to case law. How a truck broker communicates to a carrier can be a major determinant of legal liability in a courtroom.

That being said, there are no best practices or communications regulations dictated by the Federal Motor Carrier Safety Administration (FMCSA) of which we are aware. Furthermore and specifically, the FMCSA has not provided any road map (so to speak) as to how communication is to transpire between a truck broker and a carrier.

Conversely, the FMCSA has given strict rules as it relates to Coercion. See the attached link:
https://www.fmcsa.dot.gov/safety/coercion


Prudence lends itself to suggest that if a truck broker is doing business with a carrier who has an office or central dispatch, communication should only take place between the insured and the office/central dispatch- and not the driver.

That being said, when the carrier owner is also the operator, there is really no choice for the truck broker but to get in touch with owner operator driver. How the insured should communicate is up for debate.

Texting (essentially illegal in all states while driving) when you know the carrier driver is driving would sell poorly in a court room- although it could be argued that there was no other way to get in touch other than calling. A best practices approach to texting that is quite sensible is for them to add a line at the bottom of the text "that they do not expect the driver to check any texts from the brokerage during the course of transit".

Certainly standards for communication need to set by the FMCSA. Disclaimers, while certainly fallible, do help. We recommend that during the load/transit negotiation and agreement between a carrier and the broker that in writing there should be "the insured/broker does not sanction any FMCSA violations by the carrier in the acceptance of the load". It does not hurt and certainly looks better in the courtroom.

Also, the improvements in technology provide less need for communication and less exposure. We understand there is GPS software that always knows where the load is for as little as $1 a load. If the broker always knows where the carrier is (sooner or later this will be a requirement of transit to obtain the business from the shipper), then there is less reason to need to communicate. Less communication is less control. Less control = less legal liability.  

Why We (And You) Should Use SaferWatch for Carrier Selection

Automation is becoming more important to transportation insurance- especially to the logistics/truck broker side of the equation. There are vast amounts of data available to both friends and foes of truck brokerage operations. The biggest growth area is in carrier selection data.

As the data is easily obtainable from both public and private sources, failure of an insured to obtain information on their carriers can and will be used against them in a courtroom. So even the smallest truck broker is using carrier selection software to qualify carriers that not only protect their insurance company and balance sheet, but also to augment commerce by providing their shipper customers the best carriers they can find.

From an insurance agent's perspective, it is important to know that there is not only the opportunity to sell best-in-class insurance coverage, but also provide risk management turnkey within the insurance sale. We see no other such value added being offered in the logistic insurance sector.

There are several good vendors in the carrier selection data and software business. There is only one great one from our perspective, SaferWatch. www.saferwatch.com

While GTU has no financial interest in SaferWatch, we have partnered with them for many years. The partnership has been so good that our carrier insurance partners for whom we have the underwriting pen also believe in their inherent value.  Likewise, as GTU is the only underwriter nationally to have a trucking insurance division alongside a truck brokerage insurance division, SaferWatch wanted to learn how a trucking underwriter views and grades carriers. The upshot of our collective work is that we created a carrier risk management algorithm which grades every single carrier in the FMCSA database like a trucking underwriter would. Go to http://www.saferwatch.com/main/gtu-saferwatch-snapshot/ .

Note the carrier selection algorithm is based on carrier risk selection underwriting that has been both tested and proven for over 30 years. As part of our service, we actually upload from Excel the carrier name and MC(motor carrier #) and provide the report free of charge.

The idea is not to advise a truck brokerage or their agent who their carrier heroes or zeroes are. Rather, it is to provide data that integrates with their TMS ( transportation management software) . So with their TMS, they can know which carriers, shippers and freight lanes are most profitable to them. By integrating SaferWatch, they can dovetail carriers that have the risk management data with profitability- thereby creating a scientific, best practices solution to something today that is used subjectively and with happenstance.

What makes this more compelling is that if GTU writes the contingent auto liability or the truck brokerage liability, our carrier insurance partners will provide free annual service with SaferWatch  by discounting the premium for the cost of the basic annual service. So at binding they simply get a username and password and they are able to add and delete carriers at will. The value of the service is that anytime the information changes, whether it be safety rating, CSA-e percentile score or insurance carrier, that data will be automatically updated and the insured will be notified of the changes. Pretty cool indeed.

So how does SaferWatch compare to other carrier selection software services? We looked at two competitors and this is what we found out:

1. Carrier 411
   

From a very general perspective, Carrier411 is similar to SaferWatch Guardian, except it is more expensive and less robust. 

• SaferWatch technology for updating carrier data is superior to Carrier411.
• SaferWatch calculates and provides CSA-e percentile scores, the comparable to CSA scores still used by SMS.  Carrier411 does not.
• SaferWatch Guardian offers users the ability to create custom carrier selection guidelines, as well as multiple shipper specific checklists.  Carrier411 does not.
• At the next level, SaferWatch Assure includes Certificate of Insurance requesting and monitoring.  Carrier411 does not. 
• Carrier411 has FreightGuard Reports for marketplace fraud reporting.  These reports are very popular with their users.  SaferWatch counters with TIA Watchdog Reports, however, this feature is only available to TIA members.  

    

     2. RMIS (Registry Monitoring Insurance Services)

From the perspective of a third party certificate of insurance company, RMIS is similar to SaferWatch Assure.  That said, as a robust carrier risk management solution (with certificates of insurance), RMIS falls far short of SaferWatch Assure, and it too, is far more expensive.

• SaferWatch data, and technology for updating carrier data is far superior to RMIS. 
• SaferWatch calculates and provides CSA-e percentile scores, the comparable to CSA scores still used by SMS.  RMIS does not.
• SaferWatch provides users the ability to create custom carrier selection guidelines, as well as multiple shipper specific checklists.  RMIS does not.
• SaferWatch provides carrier search tools for capacity development on a scale that no other product can compete with. 
• SaferWatch Assure provides immediate 'load waiting' Certificate of Insurance requesting with a Service Level Guarantee.  RMIS does not.  
• SaferWatch Assure offers unlimited requesting and monitoring.  RMIS prices based on the number of carriers monitored. 
• SaferWatch Assure is priced hundreds of dollars (sometimes $1000's) less per month than RMIS

Note SaferWatch integrates with virtually all TMS ( transportation management software). It is not a requirement that the insured change vendors. We are just trying to offer a value added and since the service is less expensive , it’s a why not from our perspective.

So in closing, SaferWatch is the perfect risk management solution for truck brokers. The data is more robust and it is cheaper. It's like the insured getting better coverage at a cheaper price. Truly the value added proposition.

Contingent Cargo Case Law- The Problem and The Solution

Recently I read an excellent case law summary by Robert Green with Smith Moore Leatherwood, which has a highly reputable transportation legal practice.  See the attached link:

http://www.smithmoorelaw.com/Court-Affirms-Contingent-Cargo-Policy-Limiting-Coverage-to-the-Amount-Available-Under-Primary-Policy

The upshot of the case, which is a frequent claims issue and problem, is that Travelers did not cover the loss the way the insured, a truck broker, had expected. In fairness to Travelers, contingent cargo coverage assumes that there are primary limits that are equal to the value of the load. In this case, the truck broker insured was probably provided with a certificate of insurance that said nothing about there being a sub-limit for the copper commodity. As such the insured was left with a difference-in-limit claim or insufficient limits claim.

Clearly Travelers failure here is an industry failure- and if the insured truck broker obtained a certificate of insurance from an A -rated carrier, they would feel they have done their job to honor the terms and conditions for triggering a contingent cargo claim.

Note the failure of of the MTC insurer and the carrier to pay the claim are coverage triggers for a contingent cargo claim. So there must have been a communication problem with this claim as it does not appear that the insured ( and we assume their agent) was aware that an MTC insurance policy having a sub-limit was not going to trigger excess coverage in Travelers form.

So there are a couple of solutions that we offer that involve risk management and best practices perspective:

• Risk Management in the broker carrier agreement- The insured should have in their insurance section of their broker carrier agreement that insurance coverage should have no sub-limit for any commodity being hauled. While this is certainly not fail-safe, it does provide evidence that the insured did not sanction the carrier not having enough limits- which would certainly help in a subrogation case.
• Best Practices Operations when Handling Target commodities- Clearly when copper is being hauled, or any target commodity is being hauled, it is more important for the insured truck broker to go beyond just getting a certificate of insurance and ascertain coverage forms, whether there are sub-limit issues ( or unattended vehicle exclusions), and obtaining MTC carriers reputation for paying claims and losses.

Also, there are coverage solutions. With GTU we can provide in 5 different insurers difference in limits coverage for claims such as these. So clearly the coverage form discussed in this claim with Travelers is deficient for the insureds needs.  That being said, most coverage forms require the insured to verify the coverage limit is equal to the value of the load. However, if they had a sub-limit situation like this, our coverage would provide coverage for the difference in the limit up to the limit of the policy. That is what the insured wants and needs and its a shame to see Travelers not covering this kind of loss ( we see others as well).

The main coverages that are sought by truck brokers on contingent policies are:

• Difference in conditions/ coverage excluded
• Difference in limits
• MTC insurer insolvent
• MTC policy cancelled/ coverage not applicable

We are able to offer coverage even for lack of response with one of our partner insurers. Also we offer a new Bridge coverage form to build limits beyond $100,000 MTC limits  (which approximately 90% of carriers have) up to $250,000. We offer shippers/ interest and cargo insurance as well up $1,000,000.

We hope to see the industry do a better job covering contingent cargo claims in the future. And the agent and the buyer should read their policy forms and ask questions!

Professional Liability Insurance for Truck Brokers- Why They Need It and Coverage Intentions

Professional Liability is a very interesting insurance product that has recently received much more notice for truck brokers. Which raises the question: why would a truck broker need Professional Liability coverage when it is not offered for truckers? In my view, we will eventually see truckers required to have Professional Liability. But let's not get the trailer in front of the tractor….

First, let's go back to what coverages truck brokers are buying today (in order of popularity):

* a Broker Bond for $75,000.
* Contingent Cargo- most look for coverage that includes excess, difference in conditions and sublimits for Identity Theft and Earned Freight.
* Truck Broker Liability- this provides primary coverage versus contingent auto coverage for best practices brokers. Most brokers need and many shippers require this coverage.
* General Liability- this is for premises and incidental exposures normal to truck broker operations.

So why the sudden need for Professional Liability? Both shippers and truck brokers have figured out that, while there has been a vast improvement over the years, truck broker insurance coverage is still in its early days- meaning that the case precedents against truck brokers have not been completely assessed, examined or assimilated in the marketplace. In reviewing the aforementioned coverages, we will then be able to identify the coverage gaps that Professional Liability can fill. Contingent Cargo covers the property or cargo loss that results from the failure of the trucker’s policy to provide coverage. Truck Broker Liability covers the legal liability of the broker for bodily injury, property damage, and pollution for negligence in the supply chain. General Liability covers the premises and can include miscellaneous operations like sales out of the office.

So here is the gap. Could a truck broker be legally liable for a loss that does not result in bodily injury, property damage, or pollution that is not covered in a TBL or GL policy? Could a truck broker be liable for financial loss that is not the property of others? You bet.

A Professional Liability policy covers errors and omissions that are committed during the course of a truck broker's business day. A truck broker may make mistakes while undertaking their work (overlook a critical piece of information, incorrectly state a fact, etc.) and could be sued by their clients. The fact that a truck broker is in essence a middleman between the shipper and the carrier can create a completely different exposure than for a carrier dealing directly with a shipper. To be more specific, a truck broker needs Professional Liability coverage to cover the following exposures:

* Misdelivery- the truck broker instructed the carrier to deliver the goods to the wrong place.
* Miscommunication- the truck broker told the consignee the load would be delivered on Thursday when he meant Tuesday.
* Regulatory Errors- the truck broker did not know the rules and the load was impounded by a civil authority.
* Discrimination- the truck broker was seen to discriminate against a long standing carrier in favor of another one.
* Negligent Hiring- the truck broker hired an incompetent carrier whose deficiencies resulted in financial loss other than bodily injury, property damage or loss of cargo.
* Negligent Acts

* Negligent Omissions

Although we at GTU are able to sell the only three occurrence forms in the marketplace, most Professional Liability coverage forms are claims-made. Deficient programs only offer coverage on claims-made & reported versus pure claims-made. GTU not only offers claims-made and occurrence coverage, but can also cover punitive damages (where permissible by law), personal injury, disciplinary proceedings, loss of earnings and expense reimbursements.

Aside from normal policy terms and conditions and exclusions, it is important to understand that a Professional Liability policy does not cover:
* The cargo or property lost or damaged in transit (that's what Contingent Cargo policies are for).
* Bodily injury or property damage (that is what the TBL and GL policies are for).

One last fact to know when dealing with a prospective truck broker. The truck broker business is thriving and averaging 15-20% pretax profit. So if you have a broker doing $5 million in revenue, he is making usually $750,000 to $1 million. If they have any retained earnings, their business is worth way, way more than that pretax profit. So when you are discussing something that seems as insignificant as Professional Liability, the question is: if your business is worth as much as the average truck broker, why would you not have Professional Liability coverage that may pick up the coverage gap?

We hope this offers a clear overview of Professional Liability coverage. Don’t have an E&O by failing to sell Truck Broker Professional Liability/E&O coverage.