Transportation Liability: Busting Seven Common Myths

Tags: Insurance, Transportation

What you don't know about transportation liability can cost you big time. Learn fact from fiction before you tender your next load.

More to the Story:

Transportation liability used to be simpleR to understand. Under traditional principles of U.S. federal transportation law, carriers were responsible for the freight until delivery. But today, with individual contracts negotiated between each shipper and carrier, it may not be clear who is responsible for transportation incidents such as cargo and property damage or injuries. As a result, plaintiff attorneys are increasingly moving up the supply chain—from carrier to broker, and possibly even shipper—for compensation.

In addition, the Federal Motor Carrier Safety Administration's (FMCSA) evolving Compliance, Safety, Accountability (CSA) program and Safety Measurement System (SMS) continue to confuse shippers. Do these safety programs impact shippers' potential liability? What actions should they take as a result?

All these developments are prompting shippers to pay closer attention to contract language and the details of shipper and carrier insurance policies. Learning the details of shipping liability isn't just for lawyers anymore.

Here are seven misconceptions some shippers hold about their liability status. 

Myth #1: “CSA 2010/SMS is Law.”

SOME shippers believe CSA 2010/SMS methodology is law and, therefore, they are required to use it to verify their carriers' safety records.

Evidence of this misunderstanding is showing up in the actions of transportation insurance companies. When assessing insurability, some companies are beginning to consider whether a shipper includes CSA score verification as part of its shipping procurement methodology.

"Verifying CSA scores could be the difference between whether we will or will not insure the risk, particularly for cargo with high value or special handling requirements," says Robert Optiz, worldwide inland marine manager for the Chubb Group of Insurance Companies, Warren, N.J.

But CSA 2010/SMS methodology is not the law, and has not been approved for the FMCSA to use for rulemaking, contends a group of transportation trade associations represented by attorney Henry Seaton, partner in Vienna, Va.-based transportation law firm Seaton & Husk, LP.

Seaton represents petitioners in ASECTT et al. v. FMCSA, which seeks judicial affirmation that only the FMCSA is required to determine carrier safety. Shippers and brokers should rely on the agency's ultimate safety fitness determination for a given carrier, says Seaton. And, under existing laws, shippers and brokers are not required to second-guess the agency's ultimate decision (known as a safety rating) by monitoring SMS ratings. Under the laws of Congress, the Commerce Clause of the Constitution, and the doctrine of federal preemption, federal law trumps state law, Seaton asserts.

"Shippers should have no negligent selection liability under state law concepts when they choose a carrier the agency has determined is fit to operate on the nation's roadways," Seaton says.

ASECTT et al. v. FMCSA came about after the agency published guidance to shippers, brokers, and insurers on May 16, 2012, suggesting that SMS methodology should be used in credentialing carriers, and that safety ratings were not a reliable benchmark. ASECTT (Alliance for Safe, Efficient and Competitive Truck Transportation) is joined by 19 other named plaintiffs in the suit.

The plaintiffs cite that the agency itself "already affirmed in a settlement of a prior suit, NASTC et al. v. FMCSA, that unless a motor carrier in the SMS has received an unsatisfactory safety rating pursuant to 49 CFR Part 385, or has otherwise been ordered by the FMCSA to discontinue operations, it is authorized to operate," says Seaton.

Petitioners' opening briefs were recently filed in ASECTT et al. v. FMCSA, and two other logistics industry groups have filed supporting documents.

In the meantime, the FMCSA's actions have led to widespread misunderstanding about CSA 2010 and SMS methodology, Seaton notes. Many shippers erroneously believe that:

  • CSA became law in December 2010.
  • Shippers are required to use SMS methodology in credentialing carriers to avoid state law liability for negligent selection.
  • SMS percentile ranking is an accurate predictor of carrier safety performance.

Shippers' mistaken belief that they are required to use SMS ratings creates several vexing liability issues, Seaton says. Among the questions raised are:

  • How does a shipper use SMS methodology and maintain its best defense against negligent selection suits? Federal law trumps state law causes of action, and the settlement in NASTC v. FMCSA makes clear it is the agency's job—not the shipper's responsibility—to certify safety.
  • If a shipper uses SMS methodology in credentialing carriers, how does it challenge the admissibility of any carrier score by the plaintiff's bar in a lawsuit?
  • Because SMS percentile rankings will always arbitrarily find that more than half of the carriers it scores exceed one or more enforcement thresholds, how does a shipper use the scores without losing capacity and carrier choice?
  • Because carrier percentile rankings change monthly and scores can fluctuate wildly—particularly for small carriers based upon single paperwork violations—how does a shipper use SMS methodology and still establish stable, long-term relationships with dedicated service providers?

SMS methodology is not the law, its use is contrary to shippers' best interests, and it can only heighten—not diminish—shipper liability, Seaton maintains. Shippers need to rely on their transportation legal counsel to determine the right stance as the logistics community awaits the outcome of ASECTT et al. v. FMCSA.

Myth #2: “Broker/carrier contracts are standard and will protect me.”

While most shippers negotiate contracts with their favored carriers, too many at the extremes take just a cursory look at the broker's or carrier's document, and assume it covers them. Or they go overboard, building into contracts clauses that exhibit excess control or violate laws. The contract could also be with a third-party logistics (3PL) provider, but technically, there is no such entity in the law called a 3PL. The party that procures transportation for you and does not own the equipment is either your agent or a broker.

"Shippers aren't really taking control of the transaction," observes Chubb's Opitz. "They ask a 3PL or broker to arrange for transportation, and they think that party has their best interests in mind."

But the first interest of any outside organization—broker, 3PL, freight forwarder, carrier, insurance company—is its own. That transportation contract may very well include a high deductible, limitations, and exclusions.

Another area to examine is bill of lading variations, such as compensating for a loss based on price per pound instead of total wholesale, retail, or replacement value; courts have varied widely on how they interpret contract terms such as a shipment's full actual value. That's particularly the case when shipping requirements are unique. Another issue is the use of subcontractors.

Most carriers offer a legal liability contract, which is different from a standard or general liability contract. "Not everything that could happen to goods, such as acts of God, is covered by a legal liability contract," Opitz says. So any claims would go toward the shipper's own insurance policy.

In addition, too many shippers are writing contracts without lawyers—or without lawyers specializing in transportation, says Ronald Leibman, counsel at Riker Danzig Scherer Hyland & Perretti LLP, Morristown, N.J.

As a result, important clauses could be left out, or written in a way that violates applicable laws. For example, Leibman recently saw a California-based Fortune 100 company's contract that contained anti-indemnification language that violated California law because that shipper, and perhaps its lawyers, misunderstood the intricacies of transportation law. Shippers sometimes think a single firm can handle all their corporate needs, including transportation-specific matters.

Contracts are not one-size-fits-all for any carrier, broker, or shipper. "There is no such thing as a standard clause, but there is standardization of concepts," says Leibman. "My transportation contract started in 1995 and has been through 75 iterations to refine its language and keep up with legal changes."

Laws such as the Carmack Amendment, which control and limit the liability of common carriers for in-transit cargo, are already in place to address some aspects of shipment. But a shipper moving an exempt commodity—fresh produce, for example—needs specific language about these liabilities because Carmack doesn't cover the goods. Requirements vary within a vertical market such as foods, or by transportation mode. And specific industries must also answer to agencies such as the FDA and USDA regarding shipments.

Shipper-carrier or shipper-broker-carrier contracts must be negotiated for each shipper's specific conditions, clearly spell out issues such as how a dispute will be addressed, and balance liabilities across the parties.

"Anyone who ships freight in any volume without a contract will have liability issues," says Leibman.

Liability, he says, is negotiable.

"Carriers are willing to expand a contract's normal terms to get business," says Opitz. "Carriers are taking a more all-risk approach to insuring their loads because shippers are demanding the carrier be responsible in all cases, not just legal liability."

He recommends shippers seek opportunities in terms of sale to shift liability to other parties as quickly as possible. For example, instead of the shipper being the responsible party from its warehouse to the purchaser's warehouse, the shipper is only responsible from warehouse to port.

Myth #3: “I can tell the carrier exactly how to ship my cargo.”

Some shippers take the opportunity to push contracts to the extreme, dictating how the carrier should handle a shipment even after it leaves their possession. This opens the door to all sorts of legal complications, including the definition of legal relationships among the parties.

"Don't be overbearing; don't control in finite detail how the carrier and broker perform their roles," urges Joseph Swift, principal at Brown & James, a St. Louis, Mo.-based firm that advises insurers in transportation matters.

But not every attorney agrees. "You have the right to ask carriers to comply with the law, and generally control their actions when they're on your premises," says Riker's Leibman. "It's a big jump from a contract that says the vendor has to comply with federal wage law to one that says you are controlling that company's employees."

Another liability concern is ensuring the truck to be tendered is loaded correctly. Opitz advises shippers to implement good protocols for safe loading practices, and consider hiring third-party load surveyors to offer a second opinion on those practices.

Myth #4: “I have insurance, so I don't have to worry.”

No one wants to be subject to a lawsuit that requires their insurer to pay out. But too many shippers regard their insurance policies as filling the gaps in the carrier's liability, or believe that the carrier's insurance is comprehensive and will cover the claim in all cases.

The array of a shipper's insurance policies must address cargo, injury, and property liability. Shippers who move products infrequently are sometimes unaware of the coverage they need. And sometimes the operations department doesn't realize that an exceptional shipment will fall outside the scope of the shipper's current insurance coverage. It's important for operations and risk management departments to work together to prevent that, notes Leibman.

The biggest misconception involving cargo insurance is that requiring a certificate of insurance is tantamount to having evidence of coverage, says Seaton. Almost all cargo policies have exclusions, and the best policies carriers can buy will, at best, meet their legal liability under the Carmack Amendment.

A shipper can ask for more, and may get it through broadly worded indemnity, or sole discretion to not mitigate damages, but "don't expect the carrier's insurance company to pay the claim, and you may bankrupt the motor carrier in the meantime," says Seaton.

Insurance terms must also fit your shipments. "You can have liability because you are uninsured or underinsured," says Leibman.

Myth #5: “If anything happens, my broker will cover it.”

In July 2012, Congress passed the Moving Ahead for Progress in the 21st Century (MAP-21) Act. Part of this extensive highway bill requires that brokers post a bond or other financial security of at least $75,000—up from $10,000—starting in mid- to late 2013. That change is intended to ensure that the broker has adequate funds to pay a carrier for a shipment or any lawsuit stemming from that shipment. This could reduce the chance that an unpaid carrier goes after the shipper for payment—even though the shipper already paid the broker.

Another important component of the legislation requires that brokers and carriers carry appropriate licenses; a transportation broker must bank at least three years of experience before being permitted to open a brokerage. These steps should help ensure that shippers are doing business with legitimate, qualified parties.

But what the measure doesn't do is eliminate the shipper's liability in the event of an accident, says Riker's Leibman. That's why it's critical to maintain sufficient insurance coverage for cargo, property damage, and injury claims. It's also important to ensure your brokers and carriers maintain sufficient coverage.

Myth #6: “Most truck drivers are independents, not employees.”

Shippers who use owner/operator drivers should pay close attention to movement in driver status, advises Leibman. Cases such as Luxama v. Ironbound Express, Inc. et al. and Virginia Van Dusen, et al v. Swift Transportation question whether dock workers and drivers should be considered employees rather than independent contractors. If they are deemed employees, then the contracting company becomes responsible to pay employment taxes, health care, and other benefits. The employment status has liability implications, as well. "It could create a new paradigm in how to run your business," Leibman says.

The Luxama v. Ironbound Express case took place in New Jersey, where organized labor has strongly advocated for new laws limiting the use of owner/operators. While the intermodal freight carrier was successful in this case, the court noted that the long and exclusive nature of the relationships between the carrier and each owner-operator, and the integral value of their services, tip the scales toward employee-employer relationship status. Those contracting with owner/operators need to take great care with their practices and contract language to maintain compliance with current definitions of employee versus independent contractor status.

Myth #7: “International and domestic transportation liability are similar.”

As a growing number of shippers expand operations across the globe, they may not be aware of the differences in applicable laws and treaties. Liability issues change considerably as a shipment crosses international borders, and differ by mode as well; some are guided by statute, others by industry practices.

In the United States, for example, motor carriers ordinarily impose liability limits of 50 cents per pound per article through their service conditions on domestic ex-air moves, Seaton explains. But for international ex-air shipments, the applicable international treaty limitation is typically extended inland. The treaty limitation set forth in the Montreal Convention (applicable to most industrial nations) is 19 Special Drawing Rights, which works out to be about $12 per pound per article.

Multiple international laws—such as the Carriers of Goods by Sea Act, the Foreign Corrupt Practices Act, the Hague Convention, and the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)—may govern the liabilities for a particular shipment.

Shippers doing business internationally "should contact their insurance company to provide adequate coverage for those goods in transit," says Chubb's Opitz.

As with any aspect of transportation, it's critical for shippers to select good broker, forwarder, and carrier partners by vetting them for financial health, safety record, security, communication, insurance coverage, and the ability to educate. International legal and insurance expertise is also vital.

"You may not know all the answers, but you need to know the questions to ask, such as your liabilities and protections throughout the supply chain," says Opitz. "Being engaged in the process is key."

Buyer Beware

Tendering shipments and taking deliveries is a routine part of daily business, but every load shipped has the potential to go wrong: an accident, theft, poor business processes, and more. While liability is rarely top of mind for those involved in procuring carriers, and building and tendering loads, the potential for major financial ramifications for shippers as a result of accidents and other events is growing. Legal experts urge those on the business side of the supply chain to keep up with the evolving legalities of transportation liability.

Nothing in this article should be relied upon as legal advice in any particular matter.