Double Trouble: Avoiding Excess Freight Charge Liability Risk
In cases of double payment liability, innocent shippers and consignees find themselves ordered to pay for services twice. Contracting with a reputable broker can protect you from ending up in this situation.
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The world of cargo contracts, insurance, and liability can be complex and confusing. Shippers who aren't careful can find themselves facing legal fees... and worse.
Imagine you hire a painting service when you redecorate your house. The painting service hires a worker to do the job, then the service sends you a bill, which you pay.
But suppose the painting service doesn't pay the worker, and he sends you a bill for the job. Obviously, you shouldn't have to pay again. If the worker takes you to court, however, you may be ordered to do just that.
This is a double payment liability situation.
Shippers and consignees face potential double payment liability to motor carriers for freight transportation charges. In three recent federal cases, courts imposed double payment liability:
- For non-brokered shipments on consignee Kawasaki Motors.
- For brokered shipments on shipper and consignee Sears, Roebuck & Co.
- On consignees Peters Hospitality and Polaroid Electronics for loads passing through a freight forwarder (for details, see case study sidebars).
These cases illustrate the breadth of potential double payment liability that may arise any time a load moves—regardless of whether or not a transportation intermediary, such as a freight broker or forwarder, is involved.
EXERCISING DUE DILIGENCE
No one can disparage motor carriers that bring double liability claims against financially viable shippers/consignees. After all, the trucking company has performed a valuable service and is simply trying to be paid for it.
The problem is, the financially viable shipper or consignee may have to pay twice if a bankrupt or insolvent third party absconds with the fees. Shippers and consignees can avoid being taken to court on one of these claims by exercising due diligence in selecting a freight broker for their transportation needs.
Double liability claims can be defeated, of course. The court will uphold clear, contractual liability specifications for freight charges. Something as simple as properly marking bills of lading can be a determining factor. "Freight pre-paid" typically imposes primary liability on the shipper, while "freight collect" places primary liability on the consignee.
Given the high cost of litigation, however, even successfully defending a double payment liability claim hardly feels like a victory. You have simply lost less than you would have otherwise.
What you really want to accomplish is avoiding any such suit in the first place. But shunning broker and forwarder relationships isn't a viable option because outsourcing motor carrier transportation to freight brokers makes bottom-line economic sense. In fact, Federal Motor Carrier Safety Administration (FMCSA) findings document significant savings for shippers who use brokers.
"General commodities brokers and freight forwarders offer valuable services to the business community," states the FMCSA report Registration of Brokers and Freight Forwarders of Non-Household Goods. "They work with motor carriers to find less-expensive transportation alternatives for commercial shippers and provide additional services to assist shippers. Without these intermediaries, shippers would have to devote additional resources to locating and negotiating with motor carriers, and would likely incur higher transportation costs. Small businesses, in particular, would be at a disadvantage if they couldn't rely on the services provided by brokers and freight forwarders."
The transportation industry's increased use of brokers, coupled with a cost-benefit analysis, reflect the economic advantages of using brokers rather than incurring the cost of establishing an internal transportation division to secure vetted motor carriers at competitive price points.
The courts have admonished shippers and consignees in double payment liability cases to use the services of "reputable" forwarders/brokers as a way to avoid future lawsuits. What are the characteristics of a "reputable broker," and how do you exercise due diligence to make that determination?
Three qualities characterize a reputable freight broker: financial stability, adequate insurance, and a long-standing good reputation that includes shipper/consignee service and prompt payment to motor carriers.
MONEY MATTERS: FINANCIAL STABILITY
If you do your homework, it is easy to determine a broker's or forwarder's financial stability. Independent companies such as Dun & Bradstreet (D&B), Experian, and Cortera provide business reports that include credit history, liens and lawsuits, Uniform Commercial Code (UCC) filings, and summaries of timeliness in debt payments.
Require a prospective broker or forwarder to provide you its D-U-N-S Number, an identification code assigned to each physical location for companies registered with D&B. Use the number to help track the broker during your due diligence.
Of particular interest in evaluating a freight broker is its D&B PAYDEX score, which evaluates a company's timeliness in debt payments. Scores range from one to 100, with higher scores generated by a company's payment of debts prior to due date terms.
If a company, on average, pays its debts on time (typically within 30 days), it earns a PAYDEX score of 80; if it pays 30 days before the due date, it earns a PAYDEX score of 100. A PAYDEX score of less than 80 raises a red flag.
Another point to consider is whether a broker factors its accounts receivable (A/R). In this practice, a company sells its A/R to a factoring company for an average of 80 percent of the invoice value. When the invoice is paid, the factoring company gives the broker the remaining funds, minus its fee. The broker is trading a portion of the money it is due for immediate cash.
In the highly competitive freight brokerage business, many brokers operate on a thin profit margin, and the immediate cashflow A/R factoring delivers can help meet expenses. But engaging in this practice raises a red flag because it indicates that the broker may be operating at break-even, or worse.
When researching a potential broker, be sure to check UCC filings. If the company is factoring its A/R, the UCC financing statement will clearly state that the secured creditor holds a security interest in accounts receivable. Lenders other than factors will sometimes secure equipment or mortgage loans with A/R, so research the secured creditor listed on the UCC to determine if it is a factor.
If you doubt whether a secured creditor is factoring the broker's accounts, get the prospective broker's written consent for the creditor to disclose any factoring or other security agreements.
UNDER COVER: ADEQUATE INSURANCE
Another hallmark of a reputable broker or forwarder is adequate insurance coverage. Keep these three considerations in mind: insurance supplementing the broker's bond/trust fund, contingent cargo insurance, and general liability insurance.
The FMCSA requires registered freight brokers to post a minimum broker's bond or establish a $10,000 trust fund so it can pay shippers or motor carriers if the broker fails to carry out its contracts. Most brokers simply comply with the $10,000 minimum; however, a broker may elect to purchase supplemental insurance/bond coverage for higher limits.
The supplemental limits provide a layer of insurance protection in the event a broker defaults on its obligations and exhausts the $10,000 bond/trust fund. Supplemental coverage is typically offered in increments up to $100,000. While larger supplemental limits may be offered, premiums for these policies are correspondingly higher and must be passed on to a customer.
A broker that carries a higher limit supplemental policy and remains price competitive is the broker of choice for several reasons.
First, obtaining supplemental coverage demonstrates the broker's commitment to fulfilling its obligations.
Second, both the bond and supplemental policy/bond proceeds are available should the broker fail in that commitment.
Finally, insurers offering such coverage require the broker to meet more stringent underwriting requirements than one who simply posts a minimum surety bond or trust fund. Think twice about working with a broker who can't meet those underwriting requirements.
The FMCSA's SAFER Web site allows you to track a broker's filings with the Administration. The site, however, only reflects whether a broker has met its minimally required $10,000 bond/trust fund; it does not show voluntary higher limits coverage data. Voluntary higher limits coverage should be documented via a certificate of insurance coverage.
In addition to bond/trust fund supplements, reputable brokers also invest in contingent cargo insurance. To protect itself and its customers, the broker should secure certificates of coverage for motor carriers' primary cargo and motor vehicle liability insurance.
Additionally, a broker should carry its own contingent cargo insurance, which provides coverage if the motor carrier's primary cargo insurance denies coverage or is insolvent.
Insurance levels should be adequate to cover the value of the cargo on any one shipment. While $200,000 in contingent cargo coverage is typically adequate, a shipper whose cargo will exceed that value should require a higher level, which can be accomplished by a special endorsement to the policy or via spot coverage.
Finally, ensure the broker carries adequate general liability insurance, and get a certificate of coverage. Although your company probably will not qualify as an insured party under a broker's general liability policy, the fact that the broker carries such insurance is a good sign. A broker operating without a general commercial liability policy of at least $1 million is a sign of trouble.
SMART PARTNERS: SOLID REPUTATIONS
Perhaps the simplest indication of a trustworthy broker is its business reputation. Longevity bears on a broker's experience and establishes a longer track record for evaluation, but it is not the sole criterion by which to judge a broker—every long-standing business was once a start-up.
Think of choosing a broker as similar to interviewing a job applicant. Look for good references. Recognizable, long-standing customers who vouch for the broker's service record are a positive sign; caveat emptor if a broker is reluctant to provide those references. In addition, the broker's D&B PAYDEX score will provide information that reflects its relationship and reputation with motor carriers.
Conducting due diligence when selecting freight brokers can greatly reduce your potential to be exposed to a double payment liability claim. Consider due diligence an investment in your company's financial security.
Roger F. Huff is a practicing attorney in Duluth, Ga. Contact him via email: email@example.com