Insurance Coverage Guidelines for Freight Brokers, from Mark Yunker

Insurance Coverage Guidelines for Freight Brokers, from Mark Yunker

Mark Yunker, vice-president of RJ Ahmann, is an expert in the area of contingent cargo insurance for the transportation industry, with 20 years of experience. Yunker is a member of the TIA Directors Circle. His comments are excerpted from a recorded session when Yunker answered insurance questions posed by a group of TransCore customers. Click here to download the accompanying webinar.

Q: What insurance coverage do you recommend for brokers?

A: There are a number of insurance products available to brokers. Here is an overview of the major ones:

1. Property and general liability: If you have property, whether you own or lease the building, you can buy property insurance. It's usually best to package that with general liability insurance for your premises and operations.
2. Vicarious auto liability and umbrella: Brokers need vicarious auto liability insurance, so that, if you are named in [a negligent hiring] case as the broker, you have an insurer that will defend you and you have insurance to pay if you're found liable. You can buy an umbrella policy, which will allow you to buy higher limits of liability insurance. Umbrellas come in increments of a million dollars.
3. Workers’ compensation: If you're a broker that has employees, particularly if you have two or more, almost every state requires you have workers’ compensation insurance.
4. Contingent cargo: You don't know what the carrier's policy covers and doesn't cover, so the only way to preserve your relationship with your customer is to have a policy where you do know what's covered. Your contingent cargo should fill some of the gaps that a carrier's policy might have.
5. Errors and omissions: There can be claims that are not covered under the other policies, including contingent cargo. So, for example, if the broker gives incorrect information to a carrier, which is really a mistake, it could be considered negligence on the part of the broker. That may not be covered by any other type of insurance, but it can be covered by errors and omissions (E&O) insurance. However, you should know that E&O insurance is always going to have two exclusions right up front: (1) it will not pay for bodily injury; and (2) it will not pay for property damage. So E&O insurance is not going to help you if a person gets injured in a truck accident, and it's probably not going to help you if the cargo gets damaged. Cargo damage might be covered if the E&O is a part of your contingent cargo policy.

Q: Can you offer any general guidelines for decision-making?

A: All of these insurance products – except workers’ comp, which is required by law – are part of a larger business decision: how to handle risk. At the end of the day, you have to assess the risks that you have in operating your company in the specific lanes and with the particular type of freight you handle. All these different insurance tools are intended to help you address the various risks that you have in the business.

Q: Would becoming an additional insured under a carrier's insurance cover a broker?

A: First of all, the area of coverage where this would be most important would be the auto liability section, because that's where the big claims are going to happen. In the omnibus insurance clause in a trucker's liability policy, it says that anyone who might be liable for the operation of a covered auto is an insured. So do you have to be an additional insured on the trucker's policy? The answer is no.

Auto policies are not triggered by who is an insured. They're triggered by whether or not the vehicle is insured. If a broker wants to go through all the work to be an additional insured on the trucker's auto liability policy, they can do that, but it gets very complicated, especially when you have hundreds or thousands of carriers in your database.

Do you want to be an additional insured on the trucker's liability policy? That one's a little different. General liability insurance is triggered by who is an insured, but there are very few general liability claims in transportation. So do you want to be an additional insured there? You'll get some coverage in return, but again, you've got the manageability issues with all the various truckers.

It is impossible everywhere, and illegal in many states, to be an additional insured to workers' comp policies. You should never ask for that.

Being additional insured on a cargo policy is inadvisable. It messes up the claim process, because if the broker files a claim, they're going to be filing a claim against themselves. Plus, most cargo policies don’t cover any property owned or being claimed by an insured. Shippers never, ever want to be additional insured on any cargo policies.
In summary: On auto insurance, it's not necessary to be an additional insured. General liability, there's a benefit, but it's a nightmare to administer. Cargo, you don't want it. Workman’s comp, you don't want it.

Q: Should a broker get his own auto policy with primary coverage for amounts greater than the motor carrier has? For example, the shipper wants $2 million in auto liability, but the carrier has only $1 million. Can a broker get auto coverage for the $1 million shortfall?

A: No, and if brokers attempt to do that, they're fools. If the shipper tells the broker, "I want carriers with a $2 million limit," you're lying to him if you send in somebody that doesn't have $2 million. You're probably in breach of contract, too. In any event, a broker can't buy insurance for the benefit of the carrier. The shipper can't buy insurance for the benefit of the broker or the carrier, and so on. Each one of them can only insure his own business and property. So no, the broker cannot provide insurance for the carrier. And if the shipper says, "This is the level we want," then you need to find a carrier who fulfills that requirement.

Q: Do brokers need to carry workers' compensation insurance? Should they verify that carriers have workers’ comp policies?

A: A lot of people think that workers' compensation insurance is required only for hazardous employment. Workers' compensation insurance is required by all states for all employers who have two or more employees, and it doesn't matter what line of business you're in, whether your employees are clerical office workers or truck drivers. You need to have insurance. Traditionally, brokers have not been checking for workers' compensation insurance from the carriers. I think they absolutely need to do that. We have a case pending right now where a broker's in hot water. The driver is pursuing the broker for workers' comp benefits because the trucking company didn't have workers’ comp insurance. It's going to be nigh unto impossible to get them out of it.

Now I know there have been legal cases where the broker said: "The driver can’t be a presumptive employee, because that would be illegal. We're not a carrier." In one case, the workers' comp court refused that argument. So I think brokers need to start paying a whole lot more attention to this issue. They have to get evidence of each carrier’s workers' compensation insurance, or as often as they can.

If the carrier is an owner-operator or small enough that they're not required by the state to have workers' comp, then the broker needs to get a statement from the carrier to that effect. I provided a document to the TIA that brokers can use, where the carrier affirms: "I'm not subject to the workers' comp law in my state, therefore I have legally elected not to purchase it. However, should that ever change, I will make sure I follow the statute and purchase workers' comp insurance."

So if you're going to use a small carrier like that, then you need to have that on file, at least. The workers’ comp issue leads to a lot of misunderstandings, and I think it's becoming more and more important.

Q: Would you recommend that a broker always have contingent cargo insurance?

A: Yes, absolutely. The carrier’s insurance information form does not tell you what's covered and what's excluded. The trucker's policy can have peril exclusions, commodity exclusions, restrictions for unattended vehicles, restrictions for scheduled vehicles, and so on. The only way brokers can protect themselves and their shippers is to have contingent cargo insurance that will fill those gaps. There is one caveat about contingent cargo insurance policies, though: they are not all the same. You want to know the basis of coverage. Is it legal liability? If you're a broker, that might be a problem. So you need to look into the details of the policy, but yes, brokers absolutely should have contingent cargo insurance.

Q: When a broker has contingent cargo coverage, what insurance documentation does that broker need from the carrier?

A: If you're going to gather insurance information via certificates of insurance, you should always get a copy directly from the insurance agent. That’s because the driver can have a certificate sitting in his cab that was canceled months ago, or it says "for information purposes" or whatever. If the carrier wants your business, they can send you an outdated certificate and there's no way that you'd know. If you get the certificate from an insurance agent, at least you have an independent party verifying that there is insurance in place at that time.

If you're checking insurance certificates electronically, you're going to be ahead of the game. If the policy is canceled, CarrierWatch® will have the latest information because the system is downloading information from the FMCSA daily. You can also check the FMCSA web page to see if there's a cancellation pending. I think electronic certificates are the way to go. We recommend them for our clients.