The Dilemma
If you have participated in the third-party logistics sector as a shipper, broker, or carrier, you have likely seen the short-sighted transportation services agreement, which unnecessarily leverages brokers and carriers to accept defense and indemnity over issues that are not their responsibility. One version portends to “protect” the shipper with useless and counter-efficient insurance requirements and indemnity provisions that do not equitably provide for the parties’ roles. Moreover, many of such conditions work to the disadvantage of the shipper.
The Fundamental Roles of the Parties.
Shipper. The Shipper typically sells a product that must be transported safely and efficiently to a beneficial owner/consignee by motor carrier. Except for hazardous materials or food products, the shipper is not regulated in their choice of transport mode or in whether they use a third-party broker or ship directly with a motor carrier. With either choice, the prudent shipper has insurance options and usually insures all loss or damage to product, and commercial liability possibilities which might accrue by either shipping through the services of a broker or directly with a motor carrier. (This option by the shipper to properly insure their exposure from shipping their product is important to the further issues considered herein below).
Broker. Because of the need for capacity management, shippers now ship over seventy percent of their goods by utilizing one or more of the 20,000 registered property brokers (“truck brokers”) in the U.S.
A truck broker is,
“a person, other than a motor carrier or an employee or agent of a motor carrier, that as principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation.” 49 U.S.C. §13102(2).
As such, a broker “arranges” or brokers trucks to provide transportation of the shipper’s lading. The broker never takes possession of such shipments, nor do they control the trucks or personnel who provide the transportation. Brokers are prohibited from controlling either motor carrier equipment or personnel, for in doing so, they might be construed by the common law to be a carrier rather than a broker (emphasis mine).
In performing all such services, the broker’s duty of care owed to the shipper is to exercise due care in selecting an appropriate carrier.
[T]he duty of care applicable to a broker “is to exercise due care in selecting an appropriate carrier.” Chubb Grp. of Ins. Companies v. H.A. Transp. Sys., Inc., 243 F. Supp.2d 1064, 1071 (C.D. Cal. 2002) Stated differently, a broker’s obligation to the shipper is “limited to arranging for transportation with a reputable carrier” (citations omitted).
Needless and Ineffective Leveraging of Brokers with Unnecessary Contract Requirements.
Given the statutory definition of a broker and the common law duty they have to shippers, it is essential to realize that the law holds the broker accountable for how they go about selecting carriers and whether they perform all their duties according to appropriate statutes and regulations. Should they fail in these duties, resulting in damages proximately caused to the shipper, the common law imposes upon them “legal liability” or “equitable indemnity” exposure.
However, the law does not impose upon them the duty to contract with shippers for contractual liability beyond their recognized duties and insurable legal exposure. The broker has no duty to protect against negligent acts by the carrier, their employees, or other parties who might participate in the shipment over which the broker has no control. Further, should the broker accept such responsibility for the negligence of the carrier and their employees, it is generally uninsurable as outside their common law duty and insurable interest.
By way of example, should the broker fail to use reasonable care in selecting a carrier, and it resulted in damages to the shipper, the broker would be potentially liable to the shipper for such damages, which are insurable. It is reasonable for the shipper to require in their contract with the broker that the broker indemnify them for such negligence. This is a scenario of duty by the broker, breach of that duty, resulting in damages proximately caused by the broker; and, as such, a proper example of where the common law or equitable indemnity would hold the broker responsible. As such, it is a reasonable fact pattern for the shipper to require indemnity from the broker should such negligence on the part of the broker occur.
However, as further discussed below, it is contrary to the shipper’s and broker’s interest for shippers to attempt to leverage the broker into accepting responsibility for control of motor carrier equipment or personnel. And having no such control, it is inappropriate for the shipper to impose upon the broker an unreasonable indemnity provision for damages to the shipper, completely out of the control of the broker. Such an indemnity obligation would ordinarily be uninsurable, since it is a contractual duty contrary to the broker’s common law duty.
So shipper’s counsel has accomplished nothing, other than an economic Hobson’s choice for the broker, by holding brokerage business in front of the broker in exchange for agreeing to provisions such as,
…indemnify and defend all persons related, directly or indirectly, to broker’s services, for all damages of any kind whatsoever arising out of, or occurring in connection with the transportation services performed by broker.
Striped of its legalese, what does such language even mean? That broker would be responsible for an unavoidable accident over which he had no control, or damage caused by the shipper in loading the load for which the broker has arranged a carrier? If so, shipper’s counsel is asking the broker to defend a claim for damages over which he has no control, or legal liability, and would ultimately be found not to be liable, after spending hundreds of thousands in legal defense. What purpose does this serve when any potential liability for the shipper could better be managed with appropriate shipper commercial liability or cargo insurance?
The shipper has also created a “be careful what you wish for because you may get it” situation. Should the shipper leverage the broker into accepting such responsibility and believe, incorrectly, that they may protect themselves by being an “additional insured” on the broker’s insurance, they will create an “insurance gap” for themselves. This is so because the additional insureds are only protected from actions by the insured for which the insured has liability under the policy.
To the extent that the broker used reasonable care in selecting a carrier, and some unavoidable accident or negligence by the carrier (the carrier is an independent contractor over which the broker may not assert control) resulted in potential damages to the shipper, the most efficient manner in which the shipper should look for equitable indemnity is by commercial liability insurance, which would ultimately be subrogated by the shipper’s insurer against the carrier.
The broker has no legal responsibility for such an occurrence and is completely out of place in that equation. Absent the broker unwisely choosing to indemnify the shipper, as a result of blatant commercial leverage by shipper’s contractual requirements, the broker would not be responsible for such culpability. And yet, the relationship of the parties and cost of defense is inordinately affected by impossible indemnity requirements sometimes required of the broker by the shipper’s overzealous and/or naïve contract requirements.
Representative Examples of Sensible and Nonsensible Indemnity Requirements.
By the analysis above, it is clear that there is common law precedent and “fair” duty for the broker to agree to indemnify the shipper for all negligent acts leading to proximately caused damages to the shipper. Thus the broker might expect to agree to indemnity provisions such as the following:
Example 1: The Broker will defend, indemnify and hold Shipper, its employees, and agents harmless from and against any and all Claims arising out of the Broker’s performance under these Conditions to the extent such Claim is directly and proximately caused by (1) the negligence or intentional misconduct of the Broker; (2) the Broker’s or its employees’ or agents’ violation of applicable laws or regulations; or (3) the Broker’s or its employees’ or agents’ failure to comply with the conditions of this Agreement.
This is a straightforward recognition of the broker’s historical duty to be responsible for its negligent acts, non-compliance with the law, or breach of the terms of the agreement, leading to damages brought upon the shipper.
However, comparing and contrasting the foregoing language with the following, gives some idea of how extreme and inappropriate some shipper-proposed indemnity provisions can be:
Example 2: BROKER shall indemnify, defend, and save SHIPPER, its employees, and agents harmless from and against, and shall pay and reimburse, any and all liability, claims, loss, costs, fines, penalties, expenses (including attorney’s fees), judgments, or demands on account or damage of any kind whatsoever, including but not limited to personal injury, property damage (other than loss or damage to cargo, which is addressed elsewhere in this Agreement), or any combination thereof, suffered or claimed to have been suffered by any person or persons, arising out of BROKER’s services provided in connection with this Agreement (emphasis mine).
In the first example of contractual language, the broker is agreeing to indemnify and defend for claims which are directly and proximately caused by a breach of the broker’s duty as recognized by the common law. The terms, “directly and proximately caused“, are terms of art, or legal terms, which give reasonable certainty to the nature of any claim for which the broker could be responsible. Proximate cause analysis is designed precisely to determine whether or not the isolated cause-in-fact will be deemed the legally responsible cause. If the cause is too far down the causal chain of events, it will not be a legally responsible cause.
Without this limiting language, the broker would be subject to defend and indemnify vague or remote claims having nothing to do with the broker’s negligence, as might be indicated in Example 2. Even without any negligence by the broker, claims have very little limit when identified by terms such as “suffered or claimed to have been suffered” and “arising out of” the services provided by the broker.
This language would mean that once the broker provides a carrier, he must defend a wrongful death suit, where someone stepped in front of the carrier without any negligence by either the carrier or the broker. Or should the shipper drop a loaded pallet on the carrier’s driver, the broker would have to defend and indemnify such damages because the incident “arose out of” the broker sending the driver to accept a load from the shipper. This is patently ridiculous and points directly to the fallacious use by the shipper of excessive economic leverage, accomplishing nothing more than unacceptable and potentially catastrophic costs to the broker.
Only a shipper who intended to use blatant economic leverage would ask a broker to agree to such nonsense, which they must know is uninsurable by the broker. And the further irony is that in loading a shipper/broker agreement with such requirements, the shipper achieves having only brokers who either don’t know what they are signing or sign such agreements with no intention or financial ability to live up to them. One only need to look at the cost of defense of such claims, even if found not to be at fault, to know that a financially responsible broker would not risk such a cost of operations in relation to the average profit margin of the broker industry.
The further net effect for the shipper is that they lose considerable carrier capacity from those brokers who properly review their documents, and only gain those less likely to provide such capacity efficiently and with proper provision for potential liabilities.
Unnecessary Misconstrued Insurance Requirements.
Many times, in the process of contracting among shippers, brokers, and carriers, the shipper will require insurance and documentation which is sometimes just not feasible, and other times, is counter-productive. In some instances, brokers and carriers will accept the responsibility to provide such insurance or requested status (i e., “additional insured”, “loss payee”, etc.) and find some of the requirements impossible or not even in the shipper’s best interest. Often, there is no follow-up by either of the parties to ensure compliance with the contract requirements (shipper/broker and broker/carrier).
This leaves a situation where neither party knows what is properly insured after spending useless time requesting documents and status from the broker’s and carrier’s insurance, most of which is unnecessary.
The Sugar Pill Approach to Insurance Requirements.
During contracting, shippers and brokers often don’t understand the legal distinctions among requests for indemnification, additional insured status, loss payee, and the insurable interests of each of the parties. This lack of understanding, and the sometimes overzealous demands of the party with economic leverage, leads to gaps in coverage and assumptions of security not realized by the language of their respective contracts.
And yet, this potential outcome does not prevent requests for contractual assurance that the promisor will deliver on the many demands for insurance which may or may not be appropriate.
The parties to the agreements will try to meet the demands of their counterpart by requesting various contractual requirements from their insurance companies. Insurance companies will then provide the “sugar pill’ of compliance, whether appropriate or not.
By way of example,
- Additional insured status only protects against losses covered by the insurance policy, regardless of what the indemnification language requires. An insurance gap is immediately created where the shipper requires the broker to be responsible for actions or inactions outside that broker’s duty under the law and believes that they can be protected under such indemnity if they are made “additional insured” on the broker’s liability policy.
- Suppose the shipper’s purpose is to leverage the broker into accepting defense obligations which might include the shipper’s negligent actions. In that case, they ultimately fail in this objective, after much defense expense to the broker. This is so because, even if they are successful in leveraging the broker into accepting indemnification irrespective of whether the broker has legal liability, the broker’s policy will not provide such indemnification, since it is limited to damages for which the insured (the broker) has liability, even if the shipper is an additional insured on such policy.
To better understand this, assume the broker agrees to defend and indemnify, as in Example 2 above, claims of “any kind whatsoever” …”suffered or claimed to have been suffered” by any person or persons, “arising out of” BROKER’s services provided in connection with this Agreement (emphasis mine). Then assume that the shipper is an additional insured under the broker’s liability policy.
Suppose the shipper causes damages to “any person or persons” in loading the carrier. In that case, the shipper could look to the broker for defense and indemnity of such damages. That could only happen successfully if two conditions are fulfilled: The shipper must be added as an additional insured under the truck broker’s policy; and, both the shipper and broker are legally liable. If the shipper only is liable for such damages, the broker’s policy will not indemnify such shipper for their own negligence.
In forty-six states, it is against public policy for the shipper to create a contractual obligation for the broker’s policy to indemnify against the shipper’s own negligence.
And yet, the parties will spend inordinate time and attention to satisfying insurance requirements which cannot be fulfilled:
- · The shipper will needlessly request to be a “loss payee” on the carrier’s cargo insurance, when they are by definition already a loss payee as owner of the cargo transported by the carrier.
- · The shipper or broker will request that the broker be a loss payee when the broker has no insurable interest as an owner of the cargo. The broker may receive an assignment of an ownership interest in the cargo but may not be a loss payee. This would be a breach of the duty by the carrier/insurer to pay a cargo loss or damage claim to the owner of the cargo.·
- The shipper will often demand to be an additional insured on the carrier’s cargo policy. Receiving such a status may actually limit coverage, since the cargo policy is a liability policy, and an insured or additional insured cannot suffer a liability to themselves.
These fallacies and folly of contracting are primarily caused by shipper’s drafter of contracts. They either don’t understand all they are asking for; or even understanding, choose to use their economic leverage to expose the broker and carrier to potential liabilities which are not their responsibility, uninsurable, and economically catastrophic.
It is time for all parties and counsel to rid this contracting process of such excessive leveraging of what could otherwise be a successful relationship.
Developing such a new mindset might begin with the words of Nobel Prize-winning economist (and legal scholar) Oliver Williamson, “The distinguishing feature of contractual obligations (in business) is that they are not imposed by the law but undertaken by the parties.”