By: Brian Schrumpf
Freight brokers are experiencing an increase in claims and lawsuits for both cargo claims and auto accidents, especially due to Plaintiffs’ attorneys seeking more and deeper pockets. In addition, customers of freight brokers often expect brokers to be responsible for cargo damage. With the evolving landscape of freight broker exposure, freight broker insurance is becoming more important.
Freight broker insurance has evolved, and there are common misconceptions regarding the types of broker insurance and the coverage they provide. This article provides a summary of the different types of broker insurance policies and some important information to help brokers make sure they are getting the insurance they expect.
First, it is very important that brokers read the terms of the policy, including endorsements. Insurance policies contain requirements and exclusions that create gaps in coverage that brokers are often unaware of. Reading the policy and understanding the scope of the policy’s coverage can prevent a broker from having to defend a lawsuit and/or pay a claim out of pocket.
Following are the common types of insurance available to freight brokers. These types of policies are also available for the brokerage operations of freight forwarders.
Cargo insurance for freight brokers: Cargo claims (loss or damage to cargo) are the most common claims freight brokers receive, and broker cargo insurance is the most frequently used broker insurance policy. Often brokers are surprised when their cargo insurance policy does not cover a claim when the motor carrier’s insurance doesn’t pay. Selecting the right type of cargo insurance can help avoid these unwelcome surprises and keep freight brokers from having to pay claims out of pocket to keep an important customer happy.
Following are the most common types of cargo insurance policies available for freight brokers. Coverage depends on the exact terms of each policy, so the terms of each policy must be reviewed to understand the exact scope of coverage.
Contingent. You may have heard freight broker cargo insurance universally referred to as “Contingent Cargo Insurance.” However, some broker cargo insurance policies are contingent and some are not. In addition, contingent cargo coverage can vary dramatically across policies. It’s easiest to think of “contingent” to mean that the contingent cargo policy is secondary to the motor carrier’s cargo policy and depends on the motor carrier’s cargo policy.
Contingent cargo policies only provide coverage if the motor carrier’s insurance does not provide coverage. However, a contingent cargo policy is not guaranteed to provide coverage merely because the motor carrier’s cargo insurance does not cover a claim.
A contingent cargo policy is not primary, and a contingent cargo claim will not be processed until the claim on the motor carrier’s cargo insurance policy is processed. So, if the motor carrier’s insurance company is dragging their feet, a broker with a contingent policy will have to wait. In addition, a contingent cargo policy will not pay on top of the motor carrier’s cargo insurance (e.g. a cargo claim is 175K, the motor carrier’s policy pays policy limits of 100K, the contingent policy will not pay the remaining 75K).
Contingent, follow-form. This type of policy provides little to no coverage. This policy mirrors the motor carrier’s cargo policy. So, if the motor carrier’s policy has an exclusion that results in no coverage, this contingent policy will not provide coverage. When then does this policy actually provide coverage? Coverage may be available in limited circumstances where the motor carrier fails to pay their premiums or the motor carrier’s policy is otherwise cancelled.
Primary. This type of policy can broadly cover cargo claims similar to a motor carrier’s cargo policy, but it will not provide coverage above the motor carrier’s insurance policy limit.
Primary and excess. The Cadillac of freight broker insurance. This type of policy can broadly cover cargo claims similar to a motor carrier’s cargo policy, and it can cover damages above the motor carrier’s insurance policy limit.
A very important term to understand in a broker cargo policy is whether the policy only covers the freight broker’s liability. Many freight broker cargo policies only cover the freight broker’s liability for cargo damage. As a general rule, however, freight brokers are not liable for cargo damage. As such, these liability-based policies will often exclude coverage.
Also, be aware that most broker cargo policies require the broker to have a Broker-Carrier Agreement in place with the motor carrier. If the broker does not have a Broker-Carrier Agreement with the motor carrier, the insurance company may deny coverage. Similarly, some freight broker cargo policies do not cover loads that are double brokered (transported by a motor carrier that the broker did not hire).
Shipper’s Interest insurance: Shipper’s Interest insurance also covers damage to cargo during transport. The key distinction is that Shipper’s Interest policies insure the shipper for its property during transport, instead of insuring a broker for damage to cargo brokered by the broker.
Freight brokers can obtain Shipper’s Interest insurance for the benefit of their customers. Some Shipper’s Interest policies can provide coverage on a load by load basis, and some Shipper’s Interest policies can provide coverage on blanket basis for some customers or all customers. Shipper’s Interest insurance can be useful for insuring high-value loads that exceed the motor carrier’s insurance coverage.
Errors & Omissions insurance: Errors & Omissions insurance essentially provides coverage arising from mistakes made by broker. For example, a broker fails to pass along a tarping instruction from the shipper to the motor carrier. This coverage may overlap with other broker insurance policies, so make sure you are not paying double for exposure already covered by another policy.
Auto Liability insurance for freight brokers: Freight broker Auto Liability insurance (often referred to as contingent auto liability) provides coverage to freight brokers for accidents caused by motor carriers.
Plaintiffs’ attorneys are joining freight brokers to auto accidents more frequently. While motor carriers generally carry $1,000,000 in liability insurance, Plaintiffs often seek more than $1,000,000. Additionally, if a motor carrier’s insurance disputes a claim, the Plaintiff’s attorney may file a lawsuit and join the broker. The legal fees alone involved with defending this type of lawsuits can make the policy pay for itself.
General Liability insurance: General Liability insurance is available for freight brokers as well. General Liability insurance is typically cheap and is seldom used.
Be aware that sometimes the policies discussed above are independent of each other, with each type of coverage contained in a separate policy. But sometimes multiples types of coverage are bundled into one policy or via endorsements.
If a broker has motor carrier affiliate(s) or other affiliate(s), it’s generally good to have the affiliate(s) named as additional insureds on the broker policies (e.g. in case a lawsuit is filed against the affiliate for the broker’s operations).
Insurance is becoming a more important part of a broker’s business and risk management. The landscape is changing for freight brokers as brokers face more exposure from lawsuits and claims.
Again, please read the terms of your policy to verify you have the coverage you expect. Insurance policies contain requirements and exclusions that limit coverage. Do not wait until an important claim is denied by your insurance company to read the policy.