As a leading underwriter of truck brokers’ insurance nationally, we are often asked “What would be the perfect insured?” And therefore, “what would be the best practices for risk management and insurance for this perfect insured?”Well, it is important to know how the hackneyed expression “best practices” actually is defined by the insurance industry. Best practices are generally accepted, informally standardized techniques, methods or processes that have proven themselves over time to accomplish positive results. Often based upon common sense, these practices are commonly used where no specific formal methodology is in place or the existing methodology does not sufficiently address the issue. The idea is that with proper processes, checks and testing, a desired outcome can be delivered more effectively with fewer problems and unforeseen complications. In addition, a “best practice” can evolve to become better as improvements are discovered. Best practices are considered by some as an insurance buzzword, used to describe the process of developing and following a standard way of doing things that multiple organizations can use (in this particular case, truck brokers). That being said, some truck brokers feel insurance best practices are a bit of a rouse by the insurance industry to protect their own interests- while actually being counter to the welfare and interests of the truck broker. Why? Because for many truck brokers, risk management sometimes equals sales prevention.
In truth, both truck brokers and insurance companies exist to make a profit- and if they do their job well, they can be partners in profit together. So the endgame for best practices here should be this for the respective entities:
· Insurance companies should provide the best product that offers comprehensive asset protection to truck brokers and their customers-the shippers, thereby facilitating greater commerce for the truck broker.
· Truck Brokers should do all they can to lower or mitigate risk acceptance at both the shipper and carrier level which will insure insurance company’s profitability and create premium continuity.
From a practical side, the perfect insured takes the risk assumed by contract with the shipper and passes that risk completely down to the carrier. The idea is to totally transfer risk. While that is not often possible, it is indeed the game. Where this diligence in operations is not being done, it makes the world very risk assumptive. Also to make matters a bit harder, there is no common spreadsheet or analysis of the risk assumed at the shipper level- and different contracts, indemnifications, and legal promises are made without consideration of whether that risk has been transferred to the carrier. If the risk has not been transferred, the imperfect truck broker insured will need to know what risk is insured versus not insured- and be able to make a business decision accordingly. The business risk of arranging the freight as a truck broker does, and assuming the legal liability as part of the supply chain is a daily occurrence. Not having the truck broker’s assumed liability absorbed by the responsible carrier (or their insurance provider), or the truck broker’s insurance provider is fraught with danger and exposure to the balance sheet- and to the welfare of the business enterprise as a whole. This indeed is a very big deal.
But aside from the contractual ideal or potential contractual chaos, there is an opportunity to use data to harness a more perfect risk management strategy- especially at the carrier level. All brokers utilize transportation management software (TMS) and know which shipper and carrier is making them the most money and in what lanes. As underwriters, we grade carriers every day and have been underwriting trucking risks daily for over 30 years. Through our software vendor partner, we have built an insurance algorithm that grades all carriers and can therefore assign which carriers offer the least exposure to loss – whether a cargo claim or vicarious liability. Therefore, the risk management and perfect insured game becomes easier due to the data. So, if a truck broker matches the carriers that offer them the most profitability per load to the carriers that offer the least risk management exposure per load- and do more business with them, they are certainly becoming both a “best practices” broker and the perfect insured.
Well enough of the high-altitude, philosophical strategies, what can a truck broker do specifically to be a best practices truck broker and the perfect insured? I would like to address this from four different levels with the understanding that there is overlap in all four areas:
· Contractual
· Carrier Selection
· Organization and Administration
· Carrier and Truck Broker Insurance
Contractual
· Broker-Carrier Agreement Requirement Between The insured And All Carriers. No agreement; no load. Why? Because how is our perfect insured going to establish and delineate legal liability in the supply chain? Well, the answer is he has not established squat in his relationship without an agreement. We, as underwriters, are stunned to see the loads transacted without agreement. A plaintiff lawyer can easily establish vicarious liability in the supply chain as nothing was defined.
· Establishing Who the Entities Actually Are by Agreement- The agreement needs to state the motor carrier is hauling loads under the carrier’s own authority and that the insured is operating as a freight or truck broker and solely as an independent contractor. Again, we are stunned at how often our insured has an agreement that does not delineate who they are and, what they are, and who is responsible.
· Double Brokering- If a truck broker has gone to all the trouble to qualify a carrier and the carrier double brokers the load (has it hauled by a carrier other that the carrier designated), the carrier might as be giving a load to Large Loss Trucking Company. The perfect insured should state in his contract that you do not sanction or allow double brokering- so if a carrier does it and they crash, a truck broker can show they exercised due diligence- and it was the carrier, not the perfect truck broker who took matters poorly into his own hands.
· Indemnification and Hold Harmless- An indemnification and hold harmless should be required by the carrier in all cases and in all agreements. Note indemnification agreements and the state laws effective are a work in progress. In most states, a good many shipper-carrier agreements have invalidated where the carrier has agreed to indemnify the shipper for the shipper’s negligence- not just their own. Now put a truck broker in the mix and you have truck brokers, especially the perfect insureds, requiring full indemnification and hold harmless for all of the carrier’s responsibility. As many shipper agreements require truck brokers to waive subrogation, we are advocates of asking the carrier to do the same- although we recognize these are early days and there is great resistance for a carrier to acquiesce to a waiver in the supply chain- and certainly the carrier’s insurance company will not like it. That being said, many imperfect insureds are waiving subrogation in their shipper contracts. So say if a shipper loads improperly a trailer which results in a fatality and our truck broker pays a loss, he would have no contractual recourse.
· Additional Insureds and Other Contractual Legal Requirements with the Shipper- This is a pervasive and growing problem. More shippers are requiring in their broker-shipper contract such things as being named as an additional insured, provide 30 day notice of cancellation, waive subrogation, provide primary and non-contributory coverage , provide a per location aggregate, require pollution coverage and on and on… We have seen it all. Sometimes the broker-shipper contract is non-negotiable. But every time we have to amend the insurance policy with one of these provisions, the insured is digging himself a hole. I spoke to a transportation defense attorney and defending an additional insured adds $50,000 to a claim as a minimum and $75,000 if it has to go to trial. Then there is the issue of limit adequacy because if you add another party to your contract, you are sharing limits. So then you need higher limits. Best practices would be to prioritize the shipper relationships that do not require this and minimize the relationships that require alteration of your insurance contract. The perfect insured does this and minimizes the contracts that make them assume more legal liability.
· Hazardous Material Specifications- Most truck brokers are not involved in the hauling of hazardous materials but those that are need to make sure they are protected both in their broker-carrier contract and verify coverage in the insurance certificate they receive either by mail or electronically. And what coverage is that? It is something called the CA 9948 which is an endorsement to the commercial auto insurance policy that provides sudden and accidental pollution coverage. This limits a potential gap in coverage where a pollution loss occurs in transit and is not covered- thus exposing our imperfect insured to loss. For all haz-mat loads, the contract should require the CA 9948 and verify same in the certificate of insurance. The perfect insured does this.
Carrier Selection
· DOT Safety Rating- Unsatisfactory or Conditional- If a carrier has a DOT Safety Rating as Unsatisfactory and a truck broker does business with them, whoever authorized this at the truck broker’s office needs to be hung, drawn, and quartered. No one will argue that hiring a carrier with an unsatisfactory DOT Safety Rating it is indefensible. ( Also when I last looked there was 64, yes 64, carriers nationwide that had a Unsatisfactory DOT safety rating. What about Conditional Safety Ratings? We do not like it but insurance defense attorneys feel defending a carrier with a conditional DOT rating puts the truck broker in harm’s way with respect to issues of vicarious liability, negligent hiring and negligent entrustment. We unfortunately agree with that position. Why? The answer is the data. The recent data showed only 3.7%; yes 3.7% of all carriers had a conditional DOT rating. That means that 96.3% of carriers do not have a conditional rating. So why would you use them? Well, the perfect truck broker would not. Is it fair? Absolutely not. Why? Because there are plenty of conditional carriers that have fixed their problem and never been re-inspected. If they are not re-inspected, their rating cannot be raised to satisfactory- and more insultingly, 79%, yes 79% of carriers have NO safety rating which means they may be a worse risk than a conditional carrier, but they have lucked out to not have been inspected- and thus have no rating. It is not ethical that a carrier be prejudiced with a score while other carriers are not. If I were a carrier, this would make me go ballistic. However, you cannot disagree with the 96.3% data figure. So the perfect insured uses only carriers with a Satisfactory DOT Safety Rating or No DOT Safety Rating and forgoes doing business with carriers with Conditional and Unsatisfactory Ratings. We do not like it, but the business is about percentages, and as a perfect insured,you have to play the percentages.
· Carrier with over 1 Alert in a CSA Basic- we could spend a year on DOT’s CSA which stands for Compliance, Safety, and Accountability- which to some disgruntled masses, they believe should stand for Confusion, Stupidity, and Acrimony. So all truckers, and more importantly their shippers, know about them- and everybody would like to be looking the other way and say CSA scores do not matter- but they do. And while plaintiff’s attorneys are not supposed to using them in court, they do it just the same. The deal about the Alert’s is this: When you are a carrier in an Alert status, you have the new found fortune of exceeding the national average relative and are therefore construed as being at the bottom of the heap. So if a carrier has alerts in Fatigued Driving, Vehicle Maintenance, or one other of the five BASICS, you lose. To add insult to injury, some independent organizations have proved in their own data research that some of the BASICS do not directly correspond to a greater crash incidence- meaning the data does not work. And if people are going to judge carriers on flawed data (and a flawed algorithm to begin with), it is not fair. All true. But then you look at the data again and an insurance underwriter cannot overlook the facts about data. Recently, we looked at the complete carrier data, (and the data changes daily), there were 6,947 carriers with 2 or more BASIC Alerts over the threshold. This is out of 173,674 carriers in the US. Well, that means only 4%; yes 4% of all truckers have 2 or more Alerts out of the 5 total Alerts. So that means that 96% of the carriers do not have more than 1 BASIC in an Alert status. So why would you use the 4%? There may be good reasons; however, if there are 96% of carriers that do not have these ratings, why would the perfect insured use them? Well, he wouldn’t. Again, is it fair that the algorithm is imperfect or that some carriers are unfairly discriminated against? Absolutely not. But fair has nothing to do with it. If you want to stay out of harm’s way, the perfect insured uses the 96%. Is this sounding like Money Ball where data allowed the Oakland Athletics to triumph in baseball? Maybe. Should there be flexibility here? Absolutely. But only in a best practices, common sense way.
· Using Pre-Authorized Carriers- Whew! After reviewing DOT and CSA score considerations, this is an easy one. How could the perfect insured use a carrier he has not vetted through some type of standards? Well, he wouldn’t, of course. Interestingly, we have never seen this question answered where the truck broker does not use a pre-authorized carrier but we can bet it happens. But not to our perfect insured who is exhibiting best practices.
· Bill of Lading in the Truck Broker’s Name Only- This is a huge item that the truck brokerage industry is coming to grips with- albeit slowly. The perfect insured exhibiting best practices never, and I mean never, allows the shipper to cut the bill of lading where the carrier is shown as the broker. Well, that is easier said than done. If the shipper is using a truck broker and is creating a bill of lading, the shipper might not know who the carrier is at the time the bill of lading is manifested. If the shipper has to put a name in the carrier spot and they do not know the carrier, they will typically put the name in the truck broker. Very bad news. Allowing the shipper to have the truck broker listed as the carrier on the bill of lading is certainly asking for financial suicide. Why? First of all, there is the legal issue, the DOT decrees that the carrier shall issue the bill of lading. They do not say anything about the carrier might or should or sometimes ought to be on the bill of lading. It says the carrier “shall” issue the bill of lading. Period. And yes, that does not mean that that a truck broker can be listed as a carrier on a bill of lading. I did not make this up; it is the regulation. Also, experienced counsel have endorsed this thought process accordingly. So if a truck broker looks the other way and allows the shipper to issue a bill of lading, he is in essence either acquiescing or sanctioning illicit activity. And do you think the lawyers are going to have a field day when this happens with a fatality as a consequence? Absolutely. Secondly, there is the independent contractor issue. By both law and most broker carrier contracts, the truck broker is not a carrier, owns no vehicles, and is an independent contractor in the supply chain. In most cases, broker carrier contracts decree the carrier is responsible for the carrier’s actions solely. So when the bill of lading either accidently or purposefully gets issued with the truck brokers name on it, the truck broker is dead in a court room. At least that is how defense attorneys (and I) see it. How is the truck broker going to purport that they are nothing more than a middleman when they serve as a carrier on the legal instrument of carriage. Answer, they are not. And the perfect insured exhibiting best practices is not going to let it happen.
· Rate Sheet Clarification Respects Hours of Service Disclaimers- This is a minor element of risk management that is viewed to help deter liability. In the cases where truck brokers have been held legally liable, there has been an assessment by the courts that the truck broker controlled the trucker. In essence, the trucker broker was complicit in making the carrier act poorly and not protecting the public interest. We all know that disclaimers are sometimes not worth the paper they are printed on. That being said, they at least provide a written position that the truck broker is all about best practices. And what are those best practices here? Due to the hours of service bedlam along with the national infrastructural challenges of our highways, carriers are having a harder and harder time getting freight delivered on time. Shippers regularly demand from their truck brokers that freight be delivered on time. When a carrier accepts a load from a truck broker, the later has no idea of how many hours the driver has left in his allowance of total drivable hours- or whether there might be other non-compliance issues with FMCSA guidelines by the carrier accepting the load. So risk management best practices for the perfect insured ask that when the rate sheet is tendered (in essence the accepted bid for a load), that there be verbiage that says the truck broker neither sanctions nor acknowledges that acceptance of the terms creates any issues with hours of service or other FMCSA guidelines. So if the carrier fails in that respect, the perfect insured has written communication that they did not sanction the non-compliance carrier issues that led to the crash.
· Special Handling Instructions by the Shipper, Not the Broker- Another minor element of risk management arises here that relates to the broker controlling the carrier in the supply chain. In an effort to stay out of the sight of plaintiff’s lawyers, it should be communicated that any special handling instruction was directed by the shipper, not the broker. If a truck broker knows that being in control of the load does not put them in good stead in the courtroom, then the perfect insured always states when kid glove treatment is necessary that the instructions are directed by the shipper- not the broker.
· Ownership Interest in the Cargo- Most truck brokers are in essence in the delivery of third party cargo. That is, they do not own it. As such, the issue with respect to ownership becomes a moot point. That issue becomes grey when the truck broker is actually an arm of a manufacturer or processor. So if a truck broker is arranging freight for an owned or related party, it is hard to show he is an independent contractor in the supply chain. Certainly if you own the goods or a related party owns the cargo, it is hard to construe that there is really any independent contractor relationship. There are many opportunities in the supply chain to transfer ownership of the cargo being hauled. The perfect insured never wants to own the load.
· Communication Policy between the Broker and the Carrier that the Broker is Never in Control- This is probably the haziest of the recommendations as to practices by the perfect insured. Clearly it is good policy and service to regularly communicate with the carrier in transit with a brokered load. The challenge is that a broker should not demand anything in transit to a carrier verbally or in writing that would have been construed to make the broker complicit with the carrier in the negligence leading up to a crash.
· No Penalty Policy with Carriers- Like the aforementioned communication issue, a penalty policy is a loser. I have never seen penalty revenue to be a significant source of revenue for a truck broker. Conversely, a penalty equals forcing a carrier to do something they maybe would not have done otherwise. And this leads back to the dreaded courtroom word- control. Do carriers mess up and should they be held accountable? Absolutely. But do not penalize them; just stop using them. It’s that easy and remember penalized carriers are not good for customer satisfaction anyway.
· No Carriers with Less Than A- rated Insurance- This is back to the data game. Less than A-rated insurance means that the carrier is substandard. The carrier either did not care about the financial security of the insurance company or was such a crummy carrier, he could not get coverage elsewhere. And a good deal of shippers would never, ever let a load be hauled by carrier with less than A-rated insurance. So why would a truck broker do it? Again, he wouldn’t. Aside from shipper standards (and a requirement of A-rated insurance in some shipper agreements), the data shows 3,323 carriers or less than 2%; yes 2%, of carriers have less than A-rated insurance. We think that number will continue to drop as several B-rated insurance companies have quit writing commercial auto. Since 98% of the carriers have A-rated insurance, why would a broker use the 2%? The perfect insured would not.
· Certificates of Carriers Commercial Auto Insurance with a Minimum of $1 million CSL- Note the DOT/FMCSA requires for most common and contract carriers $750,000 CSL limits. We do see this number rising as there has been no adjustment for medical inflation for years. And shippers normally require $1 million CSL to be able to haul. So would the perfect insured use a carrier with less than $1 million CSL? No.
· Using Larger Carriers- I am afraid this is bit prejudicial here. Small carriers are the backbone (and the primary supply chain) of the truck broker. The small trucker was also viewed as the more established and less volatile carrier in the trucking universe. That changed with the last recession. Not having capital support or good cash-flow, many small truckers failed. Those that stayed in the business leased onto others that did have better economies and operation margins. And typically smaller truckers have poorer quality insurance- especially on the cargo insurance side of the equation. In states like Florida, California, and Louisiana which have a great deal of small truckers, many insurance carriers exclude loss of certain commodities, only write scheduled auto policies ( if it is not on the schedule, it is not covered) and can exclude wetness losses for flatbeds. Theft losses are often excluded when there is no visible sign of forcible entry, and where there is an unattended vehicle theft loss- the most frequent type of theft loss. These problems are endemic to small carrier insurance policies where the buyer (and sometimes insurance agent) are not sophisticated enough to know that these are limitations that are not pervasive everywhere. And most certainly larger carriers are demanding, and receiving better coverage. One other important issue not often discussed is that smaller carriers are written on a “scheduled” auto basis versus “any auto” on a fleet policy. If the small carrier fails to let the agent and the respective insurance company know to add a new unit to the policy, there could be a coverage gap. Coverage gaps in the carriers insurance do create claims issues for our perfect insured. We will go into more detail relative to the types of insurance shortly.
Organization and Administration
· Marketing Material Consistency- the perfect insured makes sure the representations and warranties in all communications mirrors or matches the contractual representations. Frequently, we see items such as web-pages cross the line by not delineating the same responsibility as the contract. This is harder when there is a sister trucking operation. Why? Because the truck broker and trucker are different operations and the former arranges freight and the later carries the freight. If the operation is all things to a shipper, then it becomes all things to a court. Did the broker or the trucker haul the load? This is an even worse consideration if the insured has trucking, truck brokering, freight forwarding and other 3PL responsibilities. We are dead sure that many combined operations are inadequately or inappropriately insured. The perfect insured delineates which operation is doing what throughout its communications.
· Operational Firewall- This is only a factor for brokers that have multiple operations as per the previous bullet point. If there are multiple operations, it should be easy to determine which operations are which. Such things as a different phone number (and office location) are important. Having employees work for a definitive division is equally important. The perfect insured is trying to establish and maintain liability for its division only- and not assume the liability of others. If a broker has authority and there is common and contract authority in the same name, the chances of the other operations becoming part of litigation is great. We have even seen the freight forwarder in the same name as the truck broker. So why would any multiple operation want this exposure? Because it is more sales friendly to the shipper. The multiple operation will say they can always handle the load- irrespective of what division handles it. That could be the broker- or it could be the common or contract carrier, the freight forwarder, the 3PL, etc… The more operations without an operational firewall; the greater the exposure. The perfect insured maintains completely separate operations for all companies.
· Not Brokering Freight to a Related Company- The incestuous part of the supply chain continues. We have recently found out that a leading US transportation attorney recommended that if a trucking company had a sister truck brokering operation, that all the sales go through the truck brokerage operation, who, in turn, would either load the sister trucking company or an unrelated third party carrier. This is so stupid it is hard for me to write about it. Why would any organization expose two entities to loss when they could only expose one? The answer: nobody. So why do they do it? Again for sales reasons. We have got your load handled is why. Most perfect insureds are unaware of it but loads carried by a sister company are often excluded from coverage. Why? Because the truck broker insurer does not want to stack limits with the truck insurer. Well, that seems logical. So as you can see, brokering to a related company is a big “no” and the perfect insured would not do it. If they do it nonetheless, the trucking insurer should add the truck broker as an additional insured- and they frequently will not. So again, the balance sheet is unnecessarily exposed.
· Great Transportation Management Software- the perfect insured has great transportation management software. While we are certainly not an authority on all the providers, we certainly know some of the good ones- and feel those that offer the software to slice and dice data are better served. The better systems are integrated with automated risk management services, like our partner SaferWatch, and can therefore complete the mission of marrying the carriers who offer the best return with those carriers that mitigate the most risk. We simply need to be able to export the carrier list in MC # so we can assess the carrier quality. The perfect insured gets this and assist us so we can affect a better partnership.
· Great Risk Management Software- Brokers exhibiting best practices know that automated risk management is much better than human risk management when it comes to carrier review. Automated risk management is a cheaper alternative to having a human physically trying to maintain carrier files. It also offers 24/7/365 ability so it can be viewed before every load is hauled and therefore if a carrier deteriorates, those issues can be dealt with immediately. Insurance discounts are available for risk management software like SaferWatch, and we are stunned that more people are not switching to better technologies out there.
Carrier and Truck Broker Insurance
We could spend some time on this but suffice it to say, the perfect insured has the best available insurance coverage. To protect his own insurance and his balance sheet to those respective claims or losses, the perfect insured needs to make sure his carriers have the best insurance available to be the first line of protection from legal liabilities to both the general public and shippers:
Carriers Insurance- It is important to look at the ramifications of a carrier’s insurance policy as it relates to a broker’s insurance policy. For example, if the broker can be named as an additional insured on the carriers policy (which trucking insurers do not like to do), those carriers should be put in a preferred status as their policy would defend our truck broker and not affect truck brokers coverage except in a secondary or residual capacity (there are exceptions to this which will be discussed). Also, if subrogation should be waived, that would help too; however, I am not aware of any transportation insurer agreeing to do that either. The challenge is we see a good deal of broker-shipper contracts requiring brokers’ insurance policies to add the shipper as an additional insured and waive subrogation (as well as requiring full indemnification for loss). Like a trucking carrier’s insurer, truck broker’s insurance companies do not like adding additional insureds or waiving subrogation either. If the truck broker insurers are adding shippers as additional insureds and also waiving subrogation- and the carrier’s insurance does not put the broker in the same position, our truck broker is in an imperfect position of providing broader indemnity and coverage to the shipper than they are getting in return from the carrier. This is certainly not an optimal scenario. So what coverages should the broker want from the carrier?
· Commercial Auto Liability -The carrier needs to have a minimum of $1,000,000 limits of commercial auto liability and it should be written on ISO’s “motor carrier” policy form- which is the most current insurance industry transportation coverage form for the trucker. The motor carrier form does a good job in addressing the contractual relationships a carrier has with outside parties. That would include agreements the carrier has with shippers and brokers. So the broker- carrier agreement would be an important consideration as it relates to coverage. If a carrier had higher limits than $1,000,000, they should be given preference. If they would name our perfect insured as an additional insured or waive subrogation, they would be given more preference. Finally, if they were written on an any auto basis versus scheduled auto as previously discussed, they should be given more preference. As you can see, the degree of insurance matters. Of note, a fatality claim is viewed as “working layer” at a $3,000,000 limit which is insurance company vernacular meaning that a fatality claim can easily result in a $3,000,000 settlement or payment- thus showing us all why carriers with higher limits should be preferred in all cases.
· Motor Truck Cargo- Like commercial auto liability, motor truck cargo is third party legal liability for loss of goods under the carrier’s care, custody, and control. Cargo insurance is unregulated in most states (unlike auto coverages) and therefore there are many different coverage forms. If a broker is trying to understand the quality of both the carrier’s insurance company and coverage form, an Acord certificate of insurance is not going to cut it. Why? Because like every other business, insurance companies are trying to write profitable business. To do that they have to take in more premiums than they pay in claims. Pretty simple. The way they do that is limiting coverage. There is the perception that a carrier’s cargo insurance covers everything. Nothing could be farther from the truth. So what coverage should the perfect insured require?
a) Coverage form is Full Cargo liability (not specified perils) and can be construed to be All Risk coverage. Full Cargo Coverage means a loss is covered unless the conditions of coverage in the policy form have not been met, or the type of loss is specifically excluded in the policy exclusions.
b) No exclusions for locked vehicle or unattended vehicle. The broker would need to get confirmation from the insurance agent or review the insurance policy.
c) No exclusion for wetness. This is a frequent exclusion for flatbed business where loads get wet and are refused.
d) Requiring refrigeration breakdown coverage- Obviously this is for carriers who haul refrigerated loads. The coverage form usually requires the carriers to evidence that the refrigerated units are serviced monthly or there is no coverage. If coverage can be provided for the carrier’s driver setting the refrigeration unit at the wrong temperature, they should be given preference.
e) Spoilage coverage is offered- Again this is for perishable loads.
f) No commodity exclusions for the cargo being hauled. All cargo policies have commodity exclusions. The perfect insured determines what loads are being hauled and confirms there are no exclusions or limitations (a lower coverage limit) that would lend itself to an unpaid claim.
There is a good deal more specific commodity information (such as van versus flatbed versus refrigerated versus specialized versus target commodity exposures) we could discuss further here but in an effort to have brevity (don’t laugh), I am forgoing further details and explanation respects cargo insurance
· Commercial General Liability- This is, in essence, premises coverage for the trucker. As the commercial auto policy covers the typical completed operations exposure ( getting the cargo hauled) and the commercial general liability policy excludes all auto exposures, general liability coverage is viewed as ancillary and not important. While it is certainly not as important as commercial auto coverage, general liability is still important. The biggest exposure to a broker’s balance sheet is unpaid bodily injury and property damage claims. If our insured got named in a suit where there was a slip and fall at the carriers premises, or a carrier’s forklift backed over a third party while handling a brokered load, the insured would be exposed. Shippers require general liability out of their carriers and so should brokers.
· Workers Compensation- While I have seen no case law where a broker has been subrogated against by a carriers workers compensation carrier (and that does not mean those cases do not exist since I am no lawyer), the exposure exists and is real. Workers Compensation is compulsory in most states; however, there are exceptions due to size of operation. For example, in Tennessee, businesses with less than 5 employees are not required to have workers compensation. Workers compensation insurance is very expensive for a trucker due to very poor claims experience, so if a carrier could forgo it, they would.
There are other coverages available to truckers such as property, physical damage, and umbrella. Only umbrella would be pertinent as it would in essence cover excess auto. We see very few carriers except the larger carriers have umbrella. It is good to ask each and every time if they have same but the answer will typically be negative.
So we have gone over a carrier’s insurance, what about the truck broker’s insurance. As discussed in the beginning, insurance providers should be all about putting the perfect insured in position to have best-in-class insurance. Unlike carrier insurance which is commoditized (little difference in coverage form exclusive of motor truck cargo previously discussed); truck broker insurance is still evolving in the insurance frontier. New coverages are being devised daily. So what coverages should be provided?
a) Truck Broker Liability- Truck broker liability provides the perfect insured primary coverage for the vicarious liability, including negligent hiring and negligent entrustment of hiring a poor quality carrier that results in legal liability. While it is equivalent to a carrier’s commercial auto policy, it is not an auto insurance policy per se as an auto policy requires owned vehicles being operated under your operating authority. A truck broker does not own any vehicles so this state-of-the-art coverage provides in essence a general liability policy to protect the truck broker for being liable for a carrier’s auto losses. This is a better product than contingent auto liability. Why? Contingent auto coverage pays after the carrier’s insurance policy has paid or not. As bodily injury claims can end up in court for many years, it is difficult for the truck broker and his respective shipper to wait and see if coverage is going to be applicable- and sometimes it is not. If the truck broker is sued, truck broker liability can be extremely viable. More and more shippers, who were previously unaware of this coverage, are now requiring it. A minimum of $1,000,000 in coverage should be purchased with the lowest deductible possible (we presently offer no deductible). Some insurance personnel think a hired and non-owned policy provides coverage but we feel this is a faulty assumption. The insured is hiring carriers. Right? Well, they are but the truck broker holds themselves out to be an independent contractor. In that light, hiring a carrier and their autos are not used in the broker’s business. They are used in the carrier’s business. A general contractor with a plumbing subcontractor would not pick up the plumber’s vehicles as part of their overall hired exposure. We see gross misrepresentation when an agent tries to sell a broker a hired and non-owned policy to cover the insured’s vicarious liability in their hiring of an unrelated carrier’s vehicles. Insurance companies have fortunately corroborated this viewpoint.
b) Contingent Cargo- Contingent Cargo is supposed to pay losses that are not covered by the carrier’s motor truck cargo policy. In fact, that is the coverage trigger. For coverage to be applicable, the carrier’s insurance policy has to decline in writing their legal liability for loss. For contingent cargo coverage, a truck broker is looking for 6 coverages:
1. Fraudulent or inaccurate certificate of insurance
2. Insurance company insolvency
3. Excess – Note this is not excess motor truck cargo. It would cover the difference in loss if there were not enough coverage for the limit. Many insurance carriers do not cover this.
4. Difference-in-Conditions- This is construed to be the most needed of coverages. If the terms and condition of the carriers insurance result in a declination of coverage (such as an unattended vehicle exclusion), it is hoped the contingent cargo would pay the loss. Note most insurance carriers do not offer this
5. Errors and Omissions in the dispensation of cargo- this is a newer coverage and a result of a truck broker’s negligence in directing the load. An example would be the truck broker told the carrier to set the vehicle temperature at the wrong level- resulting in cargo loss. Very few carriers offer this in their coverage form.
6. Identity Theft- Also known as conversion, this is where a fraudulent carrier misrepresents the identity of the carrier the truck broker contracted with, and absconded with the load. We are aware of only one carrier providing this coverage today- Hanover.
The challenge with contingent cargo insurance is that the carrier’s primary MTC does not cover certain exposures like employee dishonesty and most contingent cargo policies do not pick up that exposure either. And you can bet the truck broker has agreed to indemnify fully for loss –irrespective of whether the insurance works or does not. So it is important for the perfect insured to review coverage and understand what is insured and what is not. It should be the goal to have as few coverage gaps as possible. That being said, everything is not insured and it’s important for all parties to understand that. We are starting to see some shippers demand primary motor truck cargo coverage out of brokers and that has created some consternation in the insurance community.
c) Professional Liability- It should be noted that carriers do not purchase professional liability coverage and they are not required by shippers to have this coverage today. In my opinion, they certainly will have to have this coverage someday. So why does a truck broker need the coverage? As part of their charter, truck brokers arrange a marriage between the shipper and a carrier. In most cases, that marriage works. But in other cases, that marriage can end in an ugly divorce. Remember that the shipper requires full indemnification for loss. So again truck broker coverage covers the truck broker for bodily injury and property damage for which they would be vicariously libel. Contingent cargo coverage covers loss of property for which the insured is legally liable. Are there other exposures not covered that the insured is legally liable for? You bet. Professional liability coverage would pick up the financial loss the insured was legally liable for other that bodily injury and property damage. A few examples of loss would be misdelivery and incorrect instructions. A truck broker could ask a carrier to take a load to Nashville, Indiana when he meant to send them to Nashville, Tennessee. The consignee could incur expenses associated with that misdelivery or suffer financial loss that they will want the truck broker to be legally responsible for. That legal responsibility is in the broker-shipper contract. Also the insured could ask the carrier to set the temperature at 0 degrees Celsius when he meant 0 degrees Fahrenheit. While the loss of cargo would not be covered in the professional liability policy, the financial loss associated with the insureds failure would be covered.
d) General Liability- This is really no different that the trucker’s GL policy- and the exposures are less in that the insured does not have a yard or a mobile equipment exposure. Furthermore, the exposure is clerical and would be construed to be a premises exposure. A salesman could incur an exposure off site. We have seen one advertising injury loss unbelievably where an insured’s employee has stolen from a former employer their list of carriers and shippers. We do think there will be a greater exposure in the future as court decisions get rendered and the truck broker’s actual liability exposure is quantified.
e) Excess- More and more truck brokers are being required to carry higher limits. Why? Shippers recognize that carriers are usually only providing limits of $1,000,000 CSL. And they recognize that a bodily injury claim can be well over that sum. So more and more shippers are requiring higher limits. Also, the business valuation of a truck broker is far higher than it used to be and their assets are worth more. If the truck brokers are able to obtain a 15%-20% pretax profit as they are doing today, they candidly cannot buy enough insurance to protect the balance sheet as their business is worth insuring completely and thoroughly.
There are other worthwhile insurance coverages such as property coverage (we think there will someday be a truck brokers Business Owners Policy (BOP)), crime, employment practices, umbrella, key-man, and health insurance. The types of other policies should be reviewed with an insurance professional and determine their needs.
In summation, it does take a bit of work to become the perfect insured by requiring and adhering to best practices. It is important to understand that the world of the truck broker, truck broker best practices, and the insurance for truck brokers is changing. So, it will be important for all of us serving the truck broker community that we continue to be a student of the business of truck brokers, in particular, and the freight intermediary world, in general.
