Trailer Equipment Provided in Support of a Freight Brokerage Business Model.
Overview: We have noticed a trend where several freight brokerage clients in support of their shippers are considering “leasing” trailers and planning to have these provided for pre-loading there after making arrangement to have these leased trailers pulled by 3rd party motor carrier they contract under their freight broker authority.
It is certainly understandable that a freight brokerage operation would want to expand their services to shippers and as result make them more attractive to shipper to support the transportation of their freight.
What needs to be carefully considered here is having equipment you have leased or decide to purchase significantly expands your company’s liability exposures should accidents arise in transit with bodily injury or fatalities arise with third party.
It also must be understood there is an extremely limited number of insurance companies willing to offer any meaningful coverage for this exposure.
The issues discussed herein is intended to provide an overview of issues to consider and actions to take to reduce the exposures you could face should accidents arise in transit where 3rd parties are injured or killed.
Leasing trailers and having them on the road is outside of freight broker authority requiring you establish a separate trailer leasing company:
Concerning the risk element of this activity it must be considered that trailer equipment lease, interchange or provision of such equipment under any other auspices, constitutes a Motor Carrier role — not the role of freight Broker. Hence, the act of leasing or interchanging equipment to Motor Carriers is not part of the role defined for freight Brokers under federal Statute and Regulation, and therefore not protected under the enabling Statute pertinent to a freight Broker (See Footnote 1). Nor is this equipment provision role typically covered under insurance Policies written for Freight Brokers, as such Policies are designed to cover the liability of the Insured Party arising from their role as a freight Broker – not from the role of motor carrier.
Therefore, we recommend that the trailer leasing/interchange activity must be placed under a separate legal entity from that of the freight Broker – with separate branding, separate contracts (a Trailer Interchange/Lease Agreement), and management.
In this scenario, a freight Broker would house an equipment leasing (interchange or other equipment provision) operation under a separate legal entity (the “Entity”) for the purpose of making trailers available to third-party Motor Carriers (and as cited, intended to be supportive of the freight Broker’s business model for pre-loading with shippers).
A separate but related question also arises as to whether the separate equipment holding Entity should own or lease (and then sub-lease) the trailer equipment to the third-party Motor Carriers. In the event this Entity does not own the trailers, the operative presumption must be that this Entity would be leasing the trailers, as lessee, from a Leasing Company, and then, (in legal terms) Sub-Leasing the trailers to third-party motor carriers.
There are several issues with this leasing/sub-leasing scenario, including the following:
— The Lease Agreement will typically prohibit “sub-leasing by the lessee. Hence, to this extent, the described Freight Brokerage business model, where the trailers are leased and then subleased, they may be in breach of the Lease Contract, seek to ensure your lease from a company that own the trailer does not have this provision in their lease agreement with you.
(Footnote 1). The critical issue is that in order to comply with the Federal regulatory definition, a Freight Broker registration should be under a separate legal entity from that of the Motor Carrier in our view because;
49 C.F.R. §371.7(a) requires that “A broker shall not perform or offer to perform any brokerage service (including advertising), in any name other than that in which its registration is issued”, and 49 C.F.R. §371.7(b) states that “a broker shall not, directly or indirectly, represent its operations to be that of a carrier. Any advertising shall show the broker status of the operation.”
A broker operating under the same legal entity and registration as Motor Carrier or having equipment on the road would not be in compliance with the above regulation.
Coverage in place for freight brokerage operations will not be extended to coverage leased or owned trailers:
The reasons underwriters for freight brokerage operation won’t respond to the exposure relates to extent of liability and exposures faced by a company leasing trailers or operating as a motor carrier.
Any equipment on the road puts the owner or party leasing the trailer in the position of being viewed as a motor carrier.
A motor carrier has unlimited liability under the law as no tort reform laws limiting judgement have been passed in the US. Should they be proven the negligent party in an accident there is currently no cap in judgments which have been as high as $165,000,000 in just one accident.
Leasing company can be held liable as well without limitation on judgement for the negligent actions of the motor carriers pulling the trailers if it can be demonstrated they were negligent in the hiring of the motor carrier pulling their trailer.
Freight Broker authority enjoys limited liability under the law since it is subject to federal definition, as a result litigation filed against a freight broker in the State Court system is preempted by Federal law and state litigation can be dismissed as a direct result, extricating the freight broker from the litigation.
Litigation history for allegations of negligent hire has supported freight broker won’t be found liable for the action of the motor carrier if they a. confirmed the motor carrier had valid common carrier or contract carrier authority in place, b. had valid insurance in place and c. their safety rating was not unsatisfactory or conditional.
Vicarious Liability exposures present if offering trailers from freight brokerage operation:
Be aware the largest awards won in litigation related to “allegation of vicarious liability” which is directly related to “how you hold yourself out to the public”.
If an operation is providing services other than freight brokerage service it is critical you establish a separation of these services, having a trailer leasing company set up with clear communications to shipper on the nature of service provided from this company Vs the service you provide from your freight brokerage operation is an important action to take to avoid exposures to vicarious liability in litigation.
Vicarious liability judgement against a freight broker have been as high as $24,000,000.
As noted above you need to confirm to the shippers you are providing two forms of logistic service a. trailer leasing service and b. freight brokerage service.
If you attempting to bait and switch with a shipper i.e. hold yourself out as motor carrier but then actually move the freight under freight broker authority you are creating a major exposure for your operation where limited coverage if any may be in place to cover your operation.
Obtaining Coverage for the exposure of leased or owned trailers pulled by 3rd party motor carriers:
A company leasing or owning trailers that are pulled by 3rd party motor carrier has “very limited” options in purchasing physical damage coverage for the trailer, cargo insurance coverage for cargo in the leased trailer and most importantly auto liability coverage to protect the company leasing the trailers or owning the trailer pulled by 3rd party motor carriers.
There is an extremely limited number of insurance carriers providing coverage options for the exposure of leased or owned trailer pulled by 3rd party motor carriers.
Any insurance carriers that does provide meaningful coverage require minimum premium in the range of $50,000 to $70,000 annually. This makes it economically impractical to purchase the coverage unless you have a significant volume of leased or owned trailers i.e. you likely need to have 50 to 70 trailers being used to make sense purchasing the coverage?
With the above in mind you really need to proceed cautiously if you are considering providing this option to your shipper clients if you only operate a freight brokerage operation.
You should also take the following actions in our view:
- -Engage experienced legal counsel to review what you have planned and ensure the separate leasing company’s exposures as much as possible can’t affect your freight brokerage service.
- -Have the attached Uniform Intermodal Interchange and Facilities access agreement signed by all motor carrier you intend to move the owned or leased trailers with.
- -Only use Motor carriers that subscribe to and participate in the UIIA convention.
- -Ensure the motor carrier’s you have moving the own/leased trailers have physical damage coverage in place with a trailer interchange endorsement in place with a limit that is equal or greater than value of the trailer you own or lease.
- -Set up a corporate entity specifically for the leasing or ownership of trailers you intend to provide to shippers.
- -Auto liability coverage, request additional insured status under the auto liability coverage that is in place with the motor carrier both primary auto coverage and any excess or umbrella liability policies in place that sit on top of the primary auto liability coverage.
- -Keep in mind when you contract a motor carrier to pull the trailers those that have “scheduled only” auto coverage won’t have either physical damage coverage for the trailers, nor auto liability coverage nor cargo coverage in place hence the importance of only using UIIA approved motor carriers.
- -Only pursue this business model with a serious volume of trailers i.e. 50 to 70 than purchase at a minimum the auto liability coverage that is available the market providing this coverage at a cost of $50,000 to $70,000. It should be noted the market involved provides significant limits: i.e. in the $5,000,000 to $10,000,000 range.
- Understand if you purchase this auto liability coverage the insurance carrier providing this coverage have a policy warranty that only UIIA approved motor carriers are used who sign the agreement.