Freight brokers have become a vital component of the transportation industry, providing an efficient connection between shippers and truckers by utilizing a vast bank of third-party trucking companies. But the rapid growth and success of the freight brokerage model has created additional liability risk exposures that require more comprehensive insurance coverage and enhanced risk management practices.
The freight brokerage industry has added about 1,000 new entrants per year in response to increasing demand for moving freight and now encompasses more than 18,000 transportation operators in the United States. Freight tonnage is projected to increase 25.6% by 2030, according to American Trucking Associations’ “Freight Transportation Forecast: 2019 to 2030,” and with it, revenue is expected to jump almost 54%, to $1.6 trillion. Trucking accounts for 71.1% of 2019 total freight tonnage movement in the United States, according to the ATA.
Freight Brokers Insurance Types and Risks
Historically, most freight brokerage operations were owned by trucking companies, which contracted with other carriers when they did not have enough trucks to meet customer demand. Insurance was provided by the trucking company, usually under the hired/non-owned vehicle coverage provisions of its commercial auto liability policy. However, primary commercial auto insurers eventually got wise to this use of the coverage, which wasn’t its original intent, and began to offer contingent auto liability coverage to address this risk separately.
Today, freight brokers face numerous third-party liability exposures requiring separate, dedicated insurance programs and rigorous third-party vetting to protect their businesses from potentially catastrophic losses stemming from trucker negligence.
During the 1990s, when freight brokerage as a stand-alone operation began to gain in popularity, brokers purchased contingent cargo coverage, which protected the broker from liability associated with a lost cargo claim that was either declined by the motor carrier’s insurer or was valued in excess of the underlying cargo coverage limit. Also at about that time, a handful of insurers began offering truck broker liability coverage, a primary liability insurance policy that provides bodily injury and property damage liability coverage to protect the truck broker if the broker is brought into a legal action caused by a truck accident involving a motor carrier. But the premiums for truck broker liability coverage were sometimes as much as five times that of a standard contingent auto liability policy because the coverage was more comprehensive and served as primary liability coverage.
Additional Liability Limit Strategies for Freight Brokers
In addition to truck broker liability and contingent auto liability, freight brokers purchased excess liability limits under a variety of strategies, including the following:
- Conventional operations purchased third-party liability coverage and scheduled that coverage under their existing excess liability tower.
- Organizations that wanted to protect the motor carrier’s core business purchased separate primary third-party liability coverage, as well as excess liability cover, in a separate placement, creating its own insurance tower. This enabled the motor carrier to operate without the risk of a catastrophic, third-party liability claim sometimes for up to five years, depending on how long the policies remained in force.
- Truck lines that also owned a freight brokerage business made sure they had distinctly different names and operations, as well as separate insurance policies for each entity.
But the legal environment changed significantly for freight brokers in 2011, following a $23 million verdict stemming from a 2004 crash involving a motor carrier that was hauling on behalf of a freight broker. Although the freight broker did not own the truck involved in the crash, it was found negligent by the trial court. And while this award was reversed by an appellate court in 2018 and the case was remanded for retrial, it continues to generate litigation against freight brokers that has impacted the pricing and availability of liability coverage. By 2015, many insurers that had moved heavily into the freight broker liability insurance market withdrew the offering of a truck broker liability policy. Freight brokers either had to self-insure this risk or purchase contingent liability coverage from the London market or the few domestic carriers that remained.
This landmark case also continues to underscore the need for freight brokers to maintain their separation from trucking operations. Otherwise, insurers may exclude the brokerage operation from coverage for those entities that commingle this risk.
Potential Third-Party Liability Risk Exposures
Several other major developments in recent years also have increased freight brokers’ potential third-party liability exposures:
- The Food Safety Modernization Act, which took effect on January 26, 2016, forced cargo insurers to rewrite standard forms that had been used since the 1980s to include coverage for “adulterated freight,” “broken seals” and “refrigeration breakdown.” Before FSMA took effect, such incidents were excluded from coverage, forcing both freight brokers and truckers to pay for such losses themselves or risk losing clients. But the change benefits the public at large by preventing compromised consumer goods and food products from working their way back into the marketplace as salvage.
- Additionally, freight broker bonds have undergone a distinct change over the past 10 years. In 2013, Congress mandated that freight broker bonds increase to $75,000 from $10,000 in an effort to reduce fraud in the industry.
- Lastly, the use of new technologies, especially smartphone apps that facilitate transactions between shippers and motor carriers, do not relieve the freight broker’s obligation to properly vet the third-party motor carriers. It just makes the transaction faster.
Freight Brokers Coverage Qualifications
In response to the transportation industry’s evolving third-party liability environment, insurers have instituted more rigorous underwriting practices. To qualify for coverage, freight brokers must partner with motor carriers that meet the following criteria:
- Submit a formal, written safety program that complies with regulations established by the Federal Motor Carrier Safety Administration.
- Prove they have been operating for at least one year, though some insurers require at least three years’ operation.
- Hold a U.S. Department of Transportation safety rating of “Satisfactory.” In some rare cases, conditional ratings may be acceptable if they are working on improving their rating.
- Pass the FMCSA’s Safety Measurement System Effectiveness Test for unsafe driving, crash indicator, hours-of-service compliance, vehicle maintenance, controlled substances or alcohol, hazardous materials compliance, and driver fitness.
- Minimum auto liability insurance limits of $1 million per occurrence ($5 million aggregate for hazardous materials haulers); minimum general liability limits of $1 million per occurrence/$2 million aggregate; an additional insured endorsement; excess liability limits; at least $100,000 in cargo coverage with broad form endorsements for refrigeration breakdown, FSMA, broken seals and loss payee; statutory workers’ compensation coverage; and at least $1 million in employers’ liability coverage.
- $75,000 surety bond
- $1 million truck broker liability or contingent auto liability
- As much excess liability coverage as possible
- $100,000 in contingent cargo, including legal liability language
- $1 million logistics errors and omissions
- $1 million cyber liability
Conclusion: Businesses Thrive with Additional Freight Brokerage Coverage
In conclusion, growing demand for freight transport services, more stringent food safety standards and rapid technological advancement are expanding the scope of potential third-party liability risks facing the freight brokerage industry. However, companies that purchase separate coverage for freight brokerage operations and institute solid risk management programs should thrive in this dynamic environment.
