Freight Brokers and Contracts

Freight Brokers have a love hate relationship with transportation contracts. They love them when they are using their own form contract to set the terms that their contracted carriers must follow, but they hate them when a shipper imposes liability upon them through the use of a shipper drafted contract. In a perfect broker’s world, a broker is merely an introducer of a shipper to a carrier and the collector of a fee for matching them up. However, there is rarely a perfect world for a broker. Most of the time Brokers find themselves struggling to get negotiate contracts with their shipper customers and with their pool of contracted carriers. This can make the freight broker feel like the baseball runner trapped in a squeeze play. The art of being a successful broker may lie in the ability to negotiate fair contracts with shippers that closely match the terms of a fair broker/carrier contract.

What we at Logistics Lawyers Group have noticed in recent years is an upward trend in shippers’ insurance requirements for carriers moving their freight. Cargo liability limits used to be commonly set at $100,000 per shipment for truckload freight. Shippers are now often requesting limits of $250,000 per shipment. General liability insurance and auto liability insurance used to be commonly set at $1,000,000. Shippers are now requesting $2,000,000 for both GL and auto coverage.

These changes are making it more difficult for brokers to contract with carriers that have these higher levels of insurance. The successful brokers use database management tools to match the terms of the shippers to those of the carriers as much as possible. When there is a gap in coverage, brokers can purchase contingent policies to fill the gaps. However these policies can be very expensive to purchase, and they can contain many exclusions in coverage. Generally contingent policies have certain very restrictive requirements that must be met before they will become effective.

Most small carriers will only have $100,000 in cargo coverage and $1,000,000 in auto and general liability coverage. So, if the shipper customer requires the broker to only use carriers that have $250,000 in cargo liability and $2,000,000 in auto and general liability, the broker can be left holding the bag for the gap in coverage if there is a liability triggering event.

Understanding insurance policies and how to match contract terms is essential for the long term health of freight brokerage companies. Those that understand how to draft and negotiate contracts successfully will prosper. Those that don’t draft and negotiate effectively may end up in a liability sandwich where both their shipper customers and their contracted carriers can become at odds with them over inconsistent contractual arrangements.