Picture yourself as a freight broker. Your Gross Freight Receipts(GFR) are down, yet your insurance policy premiums are on the rise. You scratch your head, wondering why this could be happening. Well, three significant factors are likely contributing to this situation: litigation trends, brokers capitulating to shipper demands, and misrepresentations by freight broker’s sales and marketing teams. In this article we’ll dive a little deeper into each of these reasons to help retail insurance agents understand the changing market.
1. Shifting liability landscape
Over the past half-decade, freight brokers have found themselves more liable than ever in the face of lawsuits. Previously, they were “protected” under federal preemption, a protection generally applied to the cargo only. However, a series of court rulings has resulted in a heightened liability trend. Brokers are now frequently named in lawsuits involving bodily harm or fatal accidents, typically escalating to jury trials.
During these trials, all shipment parties – the shipper, broker, and carrier – are considered liable. The complexity of the supply chain, combined with a jury’s lack of expert understanding, often leads to a subjective view where all businesses involved are deemed at fault. As a result, the fear of court cases has increased settlement figures significantly. This situation has created a trend where defendants and their lawyers, aware of this fear, push for and exploit larger out-of-court settlements.
2. Brokers relenting to shipper demands
In their quest to shift liability from themselves to logistics partners and carriers, shippers strategically negotiate their Shipper Broker Contract. Brokers, aiming to secure new business, particularly during market downturns, frequently yield to these demands, accepting more liability than they can realistically manage.
Take, for instance, a contract clause requiring brokers to ensure carriers perform pre-trip inspections before shipping freight. In reality, brokers can’t guarantee this action, and if an accident occurs without a pre-trip inspection, the question of liability between the broker and carrier arises.
3. Misrepresentation by the freight broker’s sales and marketing team can be a catalyst for judgements
As part of their marketing strategy, brokers often add services or make statements that may lead to misrepresentation. For example, a broker might present their firm as a carrier, an inaccuracy that could be used against them in court, leading to increased responsibility and subsequent insurance costs.
Calculating Policy Premiums: GFR vs Load Count
Historically, policy premiums were solely based on GFR. However, they now also consider the number of loads a freight broker manages. For instance, a broker who previously managed $150m GFR through 100,000 loads but is now only managing $100m GFR through the same 100,000 loads will likely not see their insurance premium decrease despite the reduced GFR.
Many brokers mistakenly believe that a decline in revenue should directly result in reduced insurance costs. However, the critical factor isn’t the revenue per load but the actual number of loads managed. If a broker charged $2000 per load in 2022 and has dropped to $1200 in 2023, the risk associated with the truck remains unchanged. Your load count equates to the number of trucks on the road and your exposure is directly proportional to that. Thus, despite variations in GFR, the need for adequate insurance remains the same.
The most common allegations against freight brokers
The freight industry is heavily regulated, and any misstep could result in significant legal consequences. For freight brokers, here are two common allegations that we see occurring more and more in recent years:
Allegations of vicarious liability
Vicarious liability refers to the legal principle where a company is held responsible for the actions of its employees or agents. In the context of freight brokerage, it implies that if a freight broker exercises excessive control over a shipment (such as over the equipment, driver, or other elements), they may be held accountable if an accident involving the carrier occurs.
This principle is based on the theory that the party in control – in this case, the broker – should have the responsibility of ensuring safety. If a broker is found to have exerted extensive control over the carrier’s operations, they might be held as liable as the carrier in the event of a mishap.
Allegation of negligent hire
The second common allegation, negligent hire, arises when a freight broker fails to exercise reasonable care, breaches a duty of care owed to others, or does not fulfill contractual obligations. This negligence can often be attributed to inadequate vetting of carriers, failure to fulfill contractual duties, or non-compliance with regulatory requirements.
For instance, if a broker hires a carrier with a history of safety violations, they could face a negligent hire claim if an accident happens. This can result in severe financial and reputational damage. Therefore, it’s crucial for freight brokers to perform thorough due diligence before engaging with carriers.
Total Aggregate Limits: A Hidden Pitfall
An aggregate limit is the maximum amount an insurer will pay for covered losses during a policy term. Consider a freight broker who has a policy with a $1m total aggregate limit. In a policy year with multiple claims, the probability of exceeding this limit is quite substantial. When this limit is reached, the broker would be responsible for covering any additional losses out-of-pocket, a potentially devastating financial blow.
Many brokers may not fully understand the implications of their aggregate limit and might assume it’s sufficient, only to find themselves in a precarious situation when multiple claims arise. Thus, it’s imperative for brokers to not only understand their policy limits but also ensure they are set at a level that provides ample protection.
Punitive Damages: A Significant Risk
Punitive damages represent another considerable risk for freight brokers. Many policies explicitly exclude coverage for these damages, which are often substantial. Punitive damages are typically assessed when an accident results from malicious, intentional, fraudulent, or reckless actions of the truck driver or company.
If a freight broker is hit with a substantial punitive damage judgment, it can be a significant financial strain, especially if their policy does not provide coverage. Consequently, brokers need to understand their policy’s stance on punitive damages and consider seeking a policy that provides coverage for these, if feasible.
As you can see, the nuances of freight insurance can be complex. Without a thorough understanding of each policy, there’s a risk of inadvertently suggesting insufficient coverage, leaving freight brokers underinsured. That’s why LogistIQ supports and educates our appointed retail agents.
Broker Shield: An Insurance Solution Designed for Freight Brokers
Broker Shield continues to be the most comprehensive coverage on the market and is specifically designed for freight brokers. Our unique combination of insurance lines and 40+ years of extensive industry knowledge positions us as the superior partner for retail insurance agents with freight broker clients. We cover what others don’t, and our top-notch claims handling process supports you and your clients every mile of the way.