Balancing Risk Management With Your Operations Strategy

As the nation’s economy recovers from the recent downturn, the domestic freight industry represents a leading indicator of commercial activity and (hopefully) corporate profits. Asset-based carriers, a segment that has taken it on the chin the past few years, are thought to have pricing power because increasing freight volumes—albeit off severe lows—have been met with declining truckload capacity, as more than 10,000 licensed motor carriers have shuttered in the past two years.

It is easy to understand analyst expectations that Comprehensive Safety Analysis (CSA) 2010, a major Federal Motor Carrier Safety Administration (FMCSA) initiative designed to improve the effectiveness of FMCSA’s compliance programs, will create further pressure in the truckload market. We can all hope that whatever pricing leverage motor carriers do enjoy will be sufficient to keep pace with the direct and indirect costs of this significant increase in government regulation, set to roll out in 2011.

The motor carrier segment is not the only group facing increased regulation. The proposed Motor Carrier Protection Act of 2010 includes raising the freight broker’s surety bond from $10,000 to $100,000, among other ideas for financial reform in this often-criticized segment.

The purpose of the surety bond is to reassure motor carriers that brokers are responsible and capable of meeting financial obligations, such as paying freight charges. This legislation will help fight fraud and the resulting revenue losses that hit carriers in the pocket.

Some brokers may be hurt by a higher bond requirement, which typically requires substantial balance sheet equity or cash deposit collateral, but expect the skilled, reputable, and properly capitalized organizations to find providers of bond services willing to do business.

The predicted results of this legislation are mixed. There might be fewer motor carriers and brokers, but unsafe, financially weak motor carriers and brokers exiting the market benefits both public safety and carrier cash flow.

What can freight shippers do to ensure that possible higher transportation costs result in fewer incidents of freight claims and other unfavorable exposures to risk? Many gain advantage by forming alliances within the supply chain to proactively balance risk as a core element of their operations strategy. In doing so, the frontline producers and consumers, those that demand cost-effective and superior transportation service metrics, can improve performance margins without sacrificing risk management goals.

cargo Liability

Unless otherwise agreed between shippers and motor carriers, carriers are legally responsible for the safe handling and delivered condition of freight they transport. To insure against most perils, motor carriers typically carry a form of primary trucker’s cargo liability insurance.

While brokers rarely handle, control, or touch freight, most carry contingent cargo insurance, which usually acts as a back-up to the coverage provided under the motor carrier’s own insurance. The default insurance limit for cargo policies is $100,000, so higher-value shipments must be placed with best-in-class, financially secure motor carriers with higher limits, up to $250,000. If a broker is involved, the contingent cargo policy should follow suit.

Brokers may not provide claims processing services, but those that do often also have a superior carrier selection process. These companies balance risk within the selection process while meeting on-time delivery promises. Not only do diligent brokers add value through their expertise in managing the capacity marketplace, they also contribute to mitigating financial risks relating to cargo safety, including prevention.

Injury and Property Damage

Highway transport of freight poses the constant risk of catastrophic accidents resulting in serious personal injuries and property losses. Federal motor carrier safety regulations mandate minimum auto liability insurance limits of $750,000; however, $1 million limits are relatively common.

Unfortunately, neither limit is sufficient to cover the possible range of losses when there is significant property damage and/or loss of life or permanent impairment. Motor carriers that proactively manage risk can be expected to have $2 million or more of coverage, but recent jury verdicts at more than 10 times that amount have legal departments scrambling to review carrier selection procedures.

Recent litigation has identified a possible growing exposure for brokers, too. Some jurisdictions allow a cause of action against the broker for negligence in hiring or selecting the motor carrier that causes injury. The insurance market has responded with a type of insurance that covers this risk: primary truck brokers liability insurance. It covers a broker’s use of non-owned, hired motor vehicles to move brokered freight, the core activity in which brokers are engaged.

Utilizing a skilled third party or broker, one that incorporates risk mitigation in the selection process, reduces the risk to parties further removed from the transportation cycle.

It should be the standard today, not tomorrow, that broker alliances be buttressed with sturdy contingent cargo and primary truck broker liability insurance, which ultimately protects the broker’s customer and others downstream and upstream.

For shippers concerned about risk management, choosing a freight management company should always include assessing the broker’s financial responsibility and insurance. Parties that work together, with a common approach and sincere commitment to safety, can achieve greater success than those that do not.

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