Double Payment Risk for Shippers and How to Reduce Exposure
Imagine you hire a landscaping company to transform your backyard into your personal oasis. The landscaping company hires workers to do the job, then the company sends you a bill, which you pay. But suppose the landscaping company doesn’t pay the workers, and they send you a bill for the job. Obviously, you shouldn’t have to pay again. If the workers take you to court, however, you may be ordered to do just that. In cases of double payment liability, innocent Shippers find themselves ordered to pay for services twice. The potential for double payment liability may arise any time a load moves—regardless if freight Broker or forwarder, is involved. The world of cargo contracts, insurance, and liability can be complex and possibly not be 100% addressable. Shippers who aren’t careful can find themselves facing legal fees. Contracting with a reputable Broker can protect you from ending up in this situation. The following are steps to take to reduce the exposure to double payment risk.
Characteristics of Reputable Brokers and Carriers It is a well-known fact among the transportation industry that utilizing the services of Brokers to be intermediaries to ship goods makes economic sense. Without Brokers or forwarders, Shippers would have to allocate additional resources to locating and negotiating with motor Carriers and would likely incur higher transportation costs. So how can Shippers avoid being taken to court for double payment liability cases? It starts by exercising due diligence and knowing the characteristics of a “reputable Broker”.
Money matters If you do your homework, it is easy to determine a Broker’s or forwarder’s financial stability. 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.
Surety Bonds and Insurance You may consider being sure that any Broker you do business with post a surety bond greater than the amount of business you expect to do over a six-month time period. However, this may eliminate many Brokers from consideration as most sureties require 150% collateral, which many smaller Brokers will not have. It may also increase your Brokerage fees, as they might insist that you pay the bond premium. Instead, when vetting for reputable Brokers, keep these three types of insurance 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 just get by with the $10,000 minimum; however, a Broker can choose to purchase supplemental insurance/bond coverage for higher limits. The supplemental limits provide a layer of insurance protection in case a Broker defaults on its obligations and burns through 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.
· Third, 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.
Voluntary higher limits coverage should be documented via a certificate of insurance coverage. In addition to bond/trust fund supplements, reputable Brokers also arm themselves with 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 should raise another red flag.
Control Bill of Lading with Contracts
Those in the transportation industry know that a Bill of Lading (BOL) is one of the most important documents in the shipping industry. The Bill of Lading is a legally binding document providing the driver and the Carrier all the details needed to process the freight shipment and invoice it correctly. Preparing a Bill of Lading is a common practice in the transportation industry, but I am proposing you add additional layers of protection by drawing up contracts that will have control of the Bill of Lading. This means you will need to draft a contract with each Carrier that they WILL NOT Broker any freight. You should monitor this with each shipment receipt and confirm that no other Carrier charges were made. In addition, you should have a contract with each Broker in which they are required to have written contracts with all of the Carriers they intend to use, in which the Carrier specifically designates that the Broker is the sole agent for collection and that the Carrier waives any right to collect from the consignor or consignee if the Broker has been paid. Also require that copies of all contracts with all Carriers the Broker intends to use be forwarded to you for review and confirmation. This needs to be reviewed and maintained on a regular basis. This is the key thing that must be done every time to ensure a result you can be happy about. This amounts to having to do a lot of work on your part. Creating a system for drafting contracts and reviewing contracts reduces risk and helps to ensure your protection, but of course, nothing 100% fool proof. Having a competent attorney on your team who is understands the issues you face is an important aspect of the success of your systems. I recommend looping in an expert attorney to do this for you. Armed with this information and research, the key will be to implement a three-part system of vetting Brokers and Carriers (since they may likewise Broker the freight). The system, as mentioned above, includes determining their financial stability, ensuring they have adequate insurance coverage and the key component of including an attorney familiar the logistics of logistics to draft contracts that control the Bill of Lading. An attorney that can confidently draft and review contracts that control the Bill of Lading will be instrumental to helping Shippers strategically avoid risk and lawsuits. And as I mentioned before, this system must be done every time for everyone. This will contractually bind the Carrier to seek payment from Broker and eliminate liability of the Shipper when the Broker has been paid. I end this article with one caveat. You can do all this and still get the screwed and sued, but implementing solid systems, the more you minimize your risk and liability. If you have specific questions on how to implement this three part system, I invite you to contact our firm.
This week’s article is an excerpt from our April issue of Dickerson Digest, our print newsletter. If you would like to receive Dickerson Digest in your mailbox, CLICK HERE.