Freight Intermediaries – Who Are
They and What is Their Liability?
Henry E. Seaton - Seaton & Husk L.P.
Mark Yunker – RJ Ahmann Company
Inland Marine Underwriters Association
May 18, 2010
This presentation and accompanying
bibliography are also available at
www.transportationlaw.net
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I. Deregulation
Deregulation changed the role of
the intermediary, created
regulatory chaos and frustrates
proper claim resolution.
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A. Different Liability Standards by Mode - different
liability standards exist by mode and by the nature
of the intermediary.
B. Contracts basically trump established precedent
and case law.
C. Traditional intermediaries have become “quasicarriers” particularly in truckload segments.
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II. Review of Modal Inconsistencies
4
A. Motor Carriers/Single Mode
Traditionally governed by the Carmack Amendment (49 U.S.C.
14706), full actual value subject to release rate declaration
5

Truckload Segment. Typically truckload carriers accept
unlimited liability, freight rate is not dependent upon either
weight or susceptibility to damage.

LTL. Traditional pricing based upon released valuation and
susceptibility to damage.

Small Package (UPS/FedEx). Fairly limited liability
exclusions.
B. Ex Air
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
Expedite and Substituted Motor for Air. 50 cents per pound
liability established by custom and usage. See KPX v. Transgroup
Worldwide, 2006 U.S. Dist. LEXIS 6772.

Motor Carrier Ex Air. 50 cents per pound per article established
by airlines and substitute carriers after deregulation

International Air. Based on country of origin and destination.
Could be $9.07 per pound (Warsaw), 17 SDRs or 19 SDRs.
C. Ex Water
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
COGSA, $500 per package (compare wine vats and
string bikinis)

Rotterdam Treaty pending

Himalaya and Clause Paramount intended to extend
COGSA inland but see Kirby/Sompo and Regal-Beloit

Freight carriers should limit liability under release rates
and Carmack to avoid issue. See Intermodal Cartage
Co. v. Natuzzi Americas, Inc., 2005 U.S. Dist. LEXIS
42208 (W.D. Tenn. Oct. 3, 2005)
D. Ex Rail
8

Rail Circular AAR 50 reverses carrier packing
and bracing liability

Staggers Act Contracts
E. NAFTA
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
US outbound unlimited Carmack

Contract changes landscape; U.S. carriers typically will not
accept liability for shipments moving south of border

Mexican carriers typically do not have insurance and claims
adjudication is poor

Mexico outbound de minimis

Canada outbound $2.00 per pound (CDA)

Shipper can contract around Canada & Mexican limits
III. Adding to the Chaos – The
Various Types of Intermediaries
by Mode
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1. Truck Only Intermediaries
Freight Forwarder. Regulated freight forwarder accepts
cargo liability under Carmack
Property Broker - arranges for transportation and then
hires authorized carrier (49 C.F.R. 371):


Under 49 C.F.R. 371 (b)(1) property broker cannot represent
itself as carrier unless it holds carrier authority
Broker not liable for cargo loss or damage under Carmack.
Truck Broker – arranges for transportation of exempt
produce, typically accepts cargo liability by offset
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2. Ex Air Intermediaries
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a.
Air Freight Forwarder/IAC regulated by TSA.
Issues air waybill and accepts cargo liability,
typically hires motor carrier and air provider.
b.
Customs Broker. Acts as agent arranging for
transportation of air shipments, typically eschews
cargo liability.
2. Ex Water Intermediaries
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a.
NVOCC. Accepts ocean carrier liability, issues
bill of lading, can extend liability inland through
Himalaya and Clause Paramount, and by
contract increase accepted liability via through
bill.
b.
OFF. Acts as broker, arranger of ocean
shipments
2. Ex Rail Intermediaries
a.
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Ex Rail. Intermodal marketing company or
IMC resells space on trains, attempts to
eschew cargo liability claiming intermediary
status; only prior or subsequent motor carrier
service is exempt.
Question: So what does the above
analysis suggest? One size does not fit all?
Answer:
Legal liability and risk exposure varies greatly by
mode, the identity of the intermediary and its holding
out and, in a deregulated world, the contractual
liability which the intermediary accepts by written
contract or by its course of dealing.
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Truckload Brokerage – the Most
Troublesome and Dynamic Area
of Concern
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Economic factors exacerbating truckload
brokerage cargo issues:

Deregulation proliferated the number of new carriers in the market
segment to over 600,000

Filed rate doctrine fiasco led shippers to insist on waiver of tariffs
and use of contracts which trump Carmack

Shippers frustrated by price and poor claims history turn to 3PLs or
brokers to arrange for transportation

Brokers marketed the following:
–
–
–

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Cheap rates using transactional carriers in the spot market
Protection against vicarious liability
Assurance that claims would be timely paid
Working on a 15-25% gross margin, property brokers became
“quasi-carriers” accepting carrier duties and indemnity obligations
When Instrumentalities of Federal
Transportation Law Lose Meaning




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Brokers market themselves as carriers
Carriers hire other carriers to handle excess capacity
Shipper wants indemnity for everything
Brokers erroneously assume carrier duties in shipper
contracts
Carriers Are Not BrokersBrokers Are Not Carriers
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A. Carriers Are Not Brokers
1.
When they arrange for transportation they are legally bound
to transport – 49 C.F.R. 371.2 / 49 U.S.C 13102(2)
2.
Carriers, like freight forwarders, have indemnity recourse to
carrier in possession at time of loss - 49 U.S.C. 14706(b)
Landair Transport, Inc. v. Schneider National Carriers, Inc.,
2009 U.S. Dist. LEXIS 103495, 2009 WL 3423037 (N.D.
Tex.)
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A. Brokers Are Not Carriers
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1)
Broker regulations provide it is a
“misrepresentation” for broker to claim carrier
status 49 C.F.R. 371.11
2)
Broker cannot hold out to provide transportation
unless it is also licensed and registered as a
carrier - 49 U.S.C. 13904(b)
C. Roles of Carrier & Broker are
Muddled by “Deregulation”
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(1)
Federal Government  “transportation
service provider”
(2)
Shipper Contracts – Vicarious liability /
assume safety duties
(3)
Fodder for plaintiff’s bar
Vicarious Liability
of Property Brokers
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Liability Travels Up
The Supply Chain
“Pigs get fat,
Hogs get slaughtered.”
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PLAINTIFF’S BAR
MAKES BIG
BROKER THE
TARGET
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State Law Theories
1.
2.
3.
4.
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Non delegable duty of carrier
Broker accepts carrier duties
Joint venture
Negligent selection (or hiring)
Vicarious Liability
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
See Schramm v. Foster, 2004 U.S. Dist. Lexis
16875 (D.Md. August 23, 2004)

Serna v. Pettey Leach Trucking, Inc., 110 Cal. App.
4th 1475 (Cal. App. 2d Dist. 2003)

Ill. Bulk Carrier, Inc. v. Jackson, 2009 Ind. App.
LEXIS 900 (Ind. Ct. App. June 16, 2009)
Defending Vicarious Liability Suits
A.
B.
C.
D.
E.
F.
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“A Different Point of View” at
http://www.transportationlaw.net/pdf/different_point
_of_view-in_transit11-07.pdf
Plantiff’s misuse of SafeStat - not fit for public
consumption
Carrier is solely responsible for safety compliance
Broker only required to hire licensed and
authorized motor carriers
Federal preemption of state law
Unrated carriers / “presumed safe”
Second Guessing Not Required

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CSA 2010 – Problem with “At Risk” Carriers
Needs Fixing
Contingent Auto Cargo Liability


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Large brokers feel need for contingent auto
cargo liability
Increasingly shippers insist upon it
So What is Due Diligence?

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“Licensed, authorized & insured or more?”
When Brokers Are Sued For
Unintended Cargo Liability
A.
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Hornbook Law - Brokers are not liable where their status is clear
(1)
Chubb Group of Insurance Companies v. H.A. Transportation
Systems, Inc., 243 F. Supp. 2d 1064 (C.D.Cal. 2002)
(2)
Rexroth Hydraudine v. Ocean World Lines, Inc., 2008 U.S. App.
Lexis 23078, 547 F. 3d. 351 (2d. Cir. 2008)
(3)
Hewlett-Packard v. Brother’s Trucking and Salem Logistics, 373 F.
Supp 2d 1349 (S.D. Fla. 2005)
(4)
Professional Communications, Inc. v. Contract Freighters, Inc., 171
F. Supp. 2d. 546, 550 (D. Md. 2001)
(5)
Milan Express Co., Inc. v. Western Surety Co., 886 F, 2d. 783, 784
(6th Cir. 1989) - Role of broker defined
When Brokers Are Sued For
Unintended Cargo Liability
B.
But if broker acts like carrier or accepts cargo duties, Courts
have imposed liability
(1)
(2)
(3)
(4)
(5)
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Broker named as carrier on Bill - Zima Corp. v. M.V. Roman
Pazinski, 493 F.Supp 268 (SDNY 1980)
Broker holds out to be carrier - Hewlett-Packard v. Brother’s
Trucking and Salem Logistics, 373 F. Supp 2d 1349 (S.D. Fla.
2005)
Shipper’s “Understanding” – Custom Cartage v. Motorola, 1999
WL 965686*9 (N.D. Ill. 1999)
Broker bills for freight charges, not showing broker status –
Delta Research Corporation v. EMS, Inc. 2005 WL 20900890
CGU Int’l v. Keystone Lines. 2004 WL 1047982 (N.D. Cal 2004
But See:
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
Tokio Marine & Fire Insurance Co. Ltd. v. Megatrux, Inc., 2006 Cal. App.
Unpub. Lexis 6964 (2006) - Broker named as Carrier on bill not fatal

Traveler’s Indemnity Co. v. “Hanjin Kwangyang” et. al.,1995 WL 539635
(S.D.N.Y.1995)

Toledo v. Van & Waters Rogers Inc., 92 F. Supp. 2d 44, 55, (D.R.I. 2002)

Fireman’s Fund Insurance Company a/s/o Expack Seafood, Inc. v. ATS
Logistics Services, Inc., et. al., 2009 U.S. Dist Lexis 65870 (S.D. Tex.
2009)

American Home Assurance Company v. Forward Air, Inc., 130 F.3d 443
(11th Cir. 1997)
Risks Can Be Significant
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(1)
NY Case pending - $800,000 sought for
Broker / Carrier had only $100,000
(2)
KY Case pending - $2.7 Million cargo loss;
Carrier has $100,000 release rate
If Shipper contracts can trump
general principles of federal
transportation law, what is the
best advice for property brokers?
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Answer:
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
Be an “arranger” not a provider of transportation

Accept only the statutory duties of a broker.

Do not accept direct liability for cargo loss or damage or safe
operations of the contracted carrier’s equipment.

Do not indemnify shipper for all loss to cargo. Require filing of
claims with carrier and claims adjustment under Section 370.

Warrant only that claims for which the retained carrier is adjudged
liable will be paid subject to an agreed limitation (e.g. $100,000
per truckload).

Require payment of freight charges without offset.

Offer TLA arbitration of disputed claims.
Answer: (continued)

Never let broker’s name appear as the carrier
on bill of lading
(a)
(b)
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Insure carrier hired by broker issues bills
Direct shipper in contract to show Broker as
third party bill-to in specific instructions
What are the major
pitfalls facing truckload
brokers and their
contingent cargo
insurers?
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Answer:
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1)
Shippers require broker to accept carrier duties
2)
Shippers insist on right of setoff
3)
Shippers discard Carmack in favor of “reject it, crush it, and dump it”
waiving obligation to mitigate
4)
Scourge of double brokerage
5)
Homer provisions
6)
Subrogation problem against undercapitalized carrier with spotty
coverage
Pitfalls in Accepting Carrier Duties
1.
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Claims Process Short Circuited
a) No cargo inspection
b) No mitigation
c) No formal claims
Pitfalls in Accepting Carrier Duties
(continued)
2. Broker insists on right of setoff
– Broker’s duty of constructive trust is violated
– Money to broker for services performed without
claim by other carriers is offset against claim from
offending carrier.
– Broker is left in violation of fiduciary obligation to
receive funds in trust.
– Claims procedures are short circuited as shipper
becomes judge and jury of claim.
– Offset cram-down by broker on small carrier results
in spiral of death for small carriers
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Pitfalls in Accepting Carrier Duties
(continued)
3.
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Reject it, crush it, and dump it
–
Shipper contracts quickly outweigh reject it, crush it, and dump
it (particularly prevalent in foodstuffs, missing seal cases)
–
Makes hash of claims procedures
–
Insurer cannot underwrite liability when shipper has “sole
discretion” not subject to reasonableness standard
–
Broker cannot get shipper’s insurer to pay unadjusted claim
–
D&M Carriers Inc v. Bruce Alan Reed, 5:07-cv-00877 (W.D.OK)
–
Dairy Farmers v. Prairie Lakes Logistics
 Broken Seal
 No inspection allowed
 Cheese fed to hogs
Special & Consequential
Damages
“Hire me a jet plane to
Mexico”
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Scourge of double brokerage

Results when carrier accepts shipment from broker and tenders
to another carrier

Most cargo policies exclude coverage for subcontracted carrier
although it is actually an interline for which carrier is liable. See
Landair Transport, Inc. v. Schneider National Carriers, Inc.,
2009 U.S. Dist. LEXIS 103495, 2009 WL 3423037 (N.D. Tex.)
Carrier in possession and control may have no insurance
or specific vehicle endorsement (Dupre)
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Homer Provision

Carmack permits federal court access where
claim occurred.
Homer provision freight resolution forces broker
to forum where carrier may not be found
(Alabama broker example)
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Undisclosed Policy Loopholes Which Frustrate
Broker Recourse to Carrier Cargo Insurance
Acord is worthless
Loopholes
1.
2.
Wetness, flatbed, tarp
endorsement doesn’t fix
Temperature damage,
refrigerated foodstuffs, reefer
breakdown doesn’t fix
Theft
–
–
–




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Unattended vehicle
Unguarded lot
Not “in transit” argument
Unattached trailer not covered
–
–
–
–
–
–
–
Co-insurance
No claim made by insured
Replacement value / not
file actual value
Shipment not on specified
vehicle
Undisclosed deductible
Failure to mitigate
No duty to defend / double
suit required
So what does a truckload broker actually
need to be assured that the retained
carrier’s insurance contains no exclusion
term or condition which would preclude
recovery?
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Answer:
49

Broker must either grade out insurers or insist on a
BMC-34-like endorsement

Clear understanding of contingent coverage
including underwriter review of contracts

TLA arbitration by contractual agreement with
shipper, carrier, and contingent cargo to avoid legal
fees
Conundrums Facing Underwriters of
Contingent Liability Insurance
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
Do you provide contractual indemnity/does this require you
to review every contract?

Is contractual legal liability more than Carmack?

If you provide contractual indemnity and/or Carmack, do you restrict
the broker’s use to carriers with approved cargo insurance or accept
a simple Acord from an insurer you know has loopholes? Examine
refrigerated exclusions for reefer carriers.

At what point do you become involved and how do you gain
assurance that the carrier’s insurer accepts liability and will not
assert privity of contract as a nonpayment defense.
So How Do You Handicap Risk With Writing
Contingent Broker Policies?
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
On a load-by-load (shipper by carrier) basis – a task
too arduous

By insisting brokers accept only Carmack/legal
liability warranties for the performance of their
underlying carriers and require the underlying
carriers to have approved insurance subject to a per
truckload limitation

Raise BMC-32 endorsement to reasonable truckload
level applied to all cargo regardless of contract and
modify Acord warranties provided by carrier to broker
Where Do We Go From Here?




How to reduce uninsured risk
Use Carmack as a standard.
Failed request on behalf of broker to have carrier underwriters
clearly disclose loopholes and exceptions.
Leads to gold star program in which preference is given to carriers
whose insurer:
–
–
–


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certifies policy does not contain primary exclusions
agrees to fine endorsement equipment
agrees to BMC-32 in the amount of 100K
Underwriters for contracted carriers hold insurance with same
underwriter as contingent cargo and agree to extend coverage
through additional insured endorsement.
Program is currently being explored with major underwriters and
insurance brokers.
Where Do We Go From Here?
(continued)






Education
Start with agent
Candor on policy coverage
Establish contract review procedures
Approve standard contract/website terms
Educate intermediary
–
–
–
–
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Release rate
Cargo carrier out from indemnity language
Carmack and 370
Warrant payment only in event carrier and insurer fail to pay
subject to agreed limit
A bibliography of additional sources and cites is
available at:
http://www.transportationlaw.net/webinars.html
Question and comments can be directed to Henry
Seaton at info@transportationlaw.net
Thank you!
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