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Freight Intermediaries


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 ... – PowerPoint PPT presentation

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Title: Freight Intermediaries

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

I. Deregulation
  • Deregulation changed the role of the
    intermediary, created regulatory chaos and
    frustrates proper claim resolution.

  • 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

II. Review of Modal Inconsistencies
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
  • LTL. Traditional pricing based upon released
    valuation and susceptibility to damage.
  • Small Package (UPS/FedEx). Fairly limited
    liability exclusions.

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.

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,

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

  • 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

III. Adding to the Chaos The Various Types of
Intermediaries by Mode
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.
  • 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
  • Truck Broker arranges for transportation of
    exempt produce, typically accepts cargo liability
    by offset

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.

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
  • OFF. Acts as broker, arranger of ocean shipments

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

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

Truckload Brokerage the Most Troublesome and
Dynamic Area of Concern
  • 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
  • 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

When Instrumentalities of Federal Transportation
Law Lose Meaning
  • Brokers market themselves as carriers
  • Carriers hire other carriers to handle excess
  • Shipper wants indemnity for everything
  • Brokers erroneously assume carrier duties in
    shipper contracts

Carriers Are Not Brokers-Brokers Are Not Carriers
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.)

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)

Roles of Carrier Broker are Muddled by
  1. Federal Government ? transportation service
  2. Shipper Contracts Vicarious liability / assume
    safety duties
  3. Fodder for plaintiffs bar

Vicarious Liability of Property Brokers
Liability Travels Up The Supply Chain
  • Pigs get fat,
  • Hogs get slaughtered.

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

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)

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

Second Guessing Not Required
  • CSA 2010 Problem with At Risk Carriers Needs

Contingent Auto Cargo Liability
  • Large brokers feel need for contingent auto cargo
  • Increasingly shippers insist upon it

So What is Due Diligence?
  • Licensed, authorized insured or more?

When Brokers Are Sued For Unintended Cargo
  • 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

When Brokers Are Sued For Unintended Cargo
  • 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

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
  • 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.
  • American Home Assurance Company v. Forward Air,
    Inc., 130 F.3d 443 (11th Cir. 1997)

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

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

  • 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
  • Require payment of freight charges without
  • Offer TLA arbitration of disputed claims.

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

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

  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
  4. Scourge of double brokerage
  5. Homer provisions
  6. Subrogation problem against undercapitalized
    carrier with spotty coverage

Pitfalls in Accepting Carrier Duties
  • Claims Process Short Circuited
  • No cargo inspection
  • No mitigation
  • No formal claims

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

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

Special Consequential Damages
  • Hire me a jet plane to Mexico

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)

Homer Provision
  • Carmack permits federal court access where claim
  • Homer provision freight resolution forces broker
    to forum where carrier may not be found (Alabama
    broker example)

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

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?
  • 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
  • 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.

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

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
  • 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
  • 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//
  • Question and comments can be directed to Henry
    Seaton at
  • Thank you!
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