I frequently write about topics that I think both insurance agents and freight/truck brokers need to know about. The point is not to provide pejorative or even special insight; moreover, while my point of view can be viewed as merely that- a point of view, it has to be worth providing information that will hopefully not be viewed as conjecture. In this case, I am told by my logistics underwriting team that neither insurance agents nor freight/truck brokers are “getting it” with respect to affiliated operations. So my charge here is change that with this narrative.
So what are they “not getting”?
1) Insurance carriers writing freight brokerage do not want pick up additional exposures that are not freight brokerage.
2) Insurance carriers writing freight brokerage do not want to be writing commercial auto business.
3) Insurance carriers writing freight brokerage often exclude loss involving any affiliated trucking operation.
4) Insurance carriers writing freight brokerage always exclude loss when the insured is operating or representing themselves as a carrier.
Of course, that makes sense to anyone in the insurance business. After all, for trucking operations, commercial auto insurance is the solution- not freight brokerage insurance for trucking operations.
But if the point is to cover the freight broker, why doesn’t coverage apply when a freight/truck broker brokers freight to an affiliated trucking operation since the trucking operation will have its own coverage. The problem, due to regulations, is how the insured represented themselves to the general public as to what the operation was at the time of loss. Were they a trucker or a broker, or both? In a catastrophe claim, there is a high likelihood that the court will look to both the trucker (with their commercial auto policy) and the freight broker (with their freight brokerage policy) and to stack limits (pooling available assets and their insurances).
Stacking of limits is most certainly a bad thing. And the brokering of freight to the affiliated trucking operation is really a poor choice when the carrier could have just taken the load directly from the shipper. Risk Management 101 would advocate only utilizing one company when given a choice of using only one company versus two companies (again the freight broker and the trucker).
So why would a combined carrier-broker operation broker to themselves?
The answer is sales. It is deemed easier and better for relationships for a combined carrier-broker operation to be able to say to the shipper that “we can put the load on one of our trucks, or if our trucks are currently dedicated and not available, we can broker the load to one of our friendly outside carriers”. We have even seen certain transportation attorneys recommend that all sales for either the carrier or the brokerage to emanate from the brokerage operation. So, the idea is that all sales would come through the brokerage and flow to the carrier and then to the brokerage operation as the backup. That way, the sale is not lost. Makes sense? You bet, but not when you consider the regulatory, contractual and operational issues. I will show you why.
Regulatory Concerns
With respect to regulations, I have been told that the legislation of MAP-21 (Moving America towards Progress in the 21st Century- the Highway Infrastructure Bill signed by Obama) set forth the rules and the playing field guidelines by which carriers and brokers operate. Specifically, a broker shall not represent themselves as a carrier, and a carrier shall not represent themselves as a broker. So when an entity operates as both, the regulatory compliance issues become problematic. How is a court to determine how the operation actually represented themselves to the general public? The likelihood of the brokerage operation having an agency situation with the carrier is high. Just ask any defense council. Again if the shipper just used the carrier directly, this would not be an issue.
Contractual Concerns
Then to make matters tougher, there are broker-shipper contract issues. Even though MAP-21 decrees the actual authority must be named in the contractual agreement, many carrier broker operations have the carrier named in the contract versus the broker (or no mention of the brokerage entity at all)- so even if the load was brokered, the carrier broker entity has represented themselves as a carrier to their customer. So the prospect for the broker only be viewed as a broker becomes problematic based on contractual issues.
Operational Concerns
Finally, the operational issue of affiliated entities makes it harder overall. A freight/truck broker is licensed with an MC number and is viewed as an independent contractor in the marketplace. If assets in the form of an affiliated carrier are added to the equation, then the insured has a hard time just representing themselves operationally as a broker.
Solutions
Can losses or claims involving brokered freight to an affiliated carrier be covered under a freight brokerage policy? Yes, by exception but there has to be great data on the carrier and an agreement that the carrier will indemnify the broker for any and all loss. Another solution, since losses from affiliated carriers are most often excluded is to have the freight/truck broker added as an additional insured under the carrier’s commercial auto policy. That said, many commercial auto carriers are not delighted to add a freight broker as an AI, and they often exclude any loss from all freight broker operations.
Other considerations
It is worth noting that brokering to affiliated entities can also mess up commercial auto coverage. Why? Because for interstate commerce, all commercial auto policies are going to have a financial responsibility filing with the FMCSA or what is known as the MCS-90. If the bill of lading on a brokered load is incorrectly in the carrier’s name, the carrier’s insurance will become applicable and typically primary- irrespective of a brokerage exclusion.
I hope insurance agents and freight brokers with affiliated asset operations now “get it.”
One final discussion point
Freight brokerage’s, even small ones, are highly profitable and valuable assets. By involving them with affiliated operations, you are getting a risk management zero as you again can create an issue of stacking limits between the carrier and the broker.
Sales aside. You can see that such a strategy is playing in a fire. Practice safe brokerage!