Freight Intermediaries

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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
  quasi-carriers particularly in truckload
  segments.

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II. Review of Modal Inconsistencies
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A. Motor Carriers/Single Mode

• Traditionally governed by the Carmack Amendment
  (49 U.S.C. 14706), full actual value subject to
  release rate declaration
• 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.

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B. Ex Air

• 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.

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C. Ex Water

• 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)

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D. Ex Rail

• Rail Circular AAR 50 reverses carrier packing and
  bracing liability
• Staggers Act Contracts

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E. NAFTA

• 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

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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

1. Air Freight Forwarder/IAC regulated by TSA.
   Issues air waybill and accepts cargo liability,
   typically hires motor carrier and air provider.
2. Customs Broker. Acts as agent arranging for
   transportation of air shipments, typically
   eschews cargo liability.

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2. Ex Water Intermediaries

• 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.
• OFF. Acts as broker, arranger of ocean shipments

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2. Ex Rail Intermediaries

1. 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.

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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
• 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

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When Instrumentalities of Federal Transportation
Law Lose Meaning

• 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

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Carriers Are Not Brokers-Brokers Are Not Carriers
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A. Carriers Are Not Brokers

• When they arrange for transportation they are
  legally bound to transport 49 C.F.R. 371.2 / 49
  U.S.C 13102(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

• Broker regulations provide it is a
  misrepresentation for broker to claim carrier
  status 49 C.F.R. 371.11
• Broker cannot hold out to provide transportation
  unless it is also licensed and registered as a
  carrier - 49 U.S.C. 13904(b)

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Roles of Carrier Broker are Muddled by
Deregulation

1. Federal Government ? transportation service
   provider
2. Shipper Contracts Vicarious liability / assume
   safety duties
3. Fodder for plaintiffs bar

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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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PLAINTIFFS BAR MAKES BIG BROKER THE TARGET
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State Law Theories

1. Non delegable duty of carrier
2. Broker accepts carrier duties
3. Joint venture
4. Negligent selection (or hiring)

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Vicarious Liability

• 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)

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Defending Vicarious Liability Suits

1. A Different Point of View at http//www.transpor
   tationlaw.net/pdf/different_point_of_view-in_trans
   it11-07.pdf
2. Plantiffs misuse of SafeStat - not fit for
   public consumption
3. Carrier is solely responsible for safety
   compliance
4. Broker only required to hire licensed and
   authorized motor carriers
5. Federal preemption of state law
6. Unrated carriers / presumed safe

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Second Guessing Not Required

• CSA 2010 Problem with At Risk Carriers Needs
  Fixing

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Contingent Auto Cargo Liability

• Large brokers feel need for contingent auto cargo
  liability
• Increasingly shippers insist upon it

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So What is Due Diligence?

• Licensed, authorized insured or more?

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When Brokers Are Sued For Unintended Cargo
Liability

• A. Hornbook Law - Brokers are not liable where
  their status is clear
• Chubb Group of Insurance Companies v. H.A.
  Transportation Systems, Inc., 243 F. Supp. 2d
  1064 (C.D.Cal. 2002)
• Rexroth Hydraudine v. Ocean World Lines, Inc.,
  2008 U.S. App. Lexis 23078, 547 F. 3d. 351 (2d.
  Cir. 2008)
• Hewlett-Packard v. Brothers Trucking and Salem
  Logistics, 373 F. Supp 2d 1349 (S.D. Fla. 2005)
• Professional Communications, Inc. v. Contract
  Freighters, Inc., 171 F. Supp. 2d. 546, 550 (D.
  Md. 2001)
• Milan Express Co., Inc. v. Western Surety Co.,
  886 F, 2d. 783, 784 (6th Cir. 1989) - Role of
  broker defined

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When Brokers Are Sued For Unintended Cargo
Liability

• But if broker acts like carrier or accepts cargo
  duties, Courts have imposed liability
• 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. Brothers Trucking and Salem Logistics, 373 F.
  Supp 2d 1349 (S.D. Fla. 2005)
• Shippers Understanding Custom Cartage v.
  Motorola, 1999 WL 9656869 (N.D. Ill. 1999)
• Broker bills for freight charges, not showing
  broker status Delta Research Corporation v.
  EMS, Inc. 2005 WL 20900890
• CGU Intl v. Keystone Lines. 2004 WL 1047982
  (N.D. Cal 2004

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But See

• Tokio Marine Fire Insurance Co. Ltd. v.
  Megatrux, Inc., 2006 Cal. App. Unpub. Lexis 6964
  (2006) - Broker named as Carrier on bill not
  fatal
• Travelers 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)
• Firemans 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)

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Risks Can Be Significant

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

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• If Shipper contracts can trump general
  principles of federal transportation law, what is
  the best advice for property brokers?

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Answer

• 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
  carriers 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.

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Answer (continued)

• Never let brokers name appear as the carrier on
  bill of lading
• Insure carrier hired by broker issues bills
• Direct shipper in contract to show Broker as
  third party bill-to in specific instructions

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• What are the major pitfalls facing truckload
  brokers and their contingent cargo insurers?

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Answer

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

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Pitfalls in Accepting Carrier Duties

• Claims Process Short Circuited
• No cargo inspection
• No mitigation
• No formal claims

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Pitfalls in Accepting Carrier Duties(continued)

• 2. Broker insists on right of setoff
• Brokers 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. 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 shippers insurer to pay
  unadjusted claim
• DM Carriers Inc v. Bruce Alan Reed,
  507-cv-00877 (W.D.OK)
• Dairy Farmers v. Prairie Lakes Logistics
• Broken Seal
• No inspection allowed
• Cheese fed to hogs

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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
• Wetness, flatbed, tarp endorsement doesnt fix
• Temperature damage, refrigerated foodstuffs,
  reefer breakdown doesnt fix
• Theft
• 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

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So what does a truckload broker actually need to
be assured that the retained carriers insurance
contains no exclusion term or condition which
would preclude recovery?
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Answer

• 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

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Conundrums Facing Underwriters of Contingent
Liability Insurance

• 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 brokers 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 carriers insurer
  accepts liability and will not assert privity of
  contract as a nonpayment defense.

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So How Do You Handicap Risk With Writing
Contingent Broker Policies?

• 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

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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
• 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.

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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
• 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

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• 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_at_transportationlaw.net
• Thank you!