[This article draws excerpt content from two of my previous articles here on this subject: Common Fallacies of Shipper-Broker-Carrier Contracting, December 2, 2022; and, 3PL Learns Real World Cost of Agreeing to Broad Form Indemnity, January 11,2023.]
Recently, a major big-box retailer (“Shipper”) announced to intermodal and truck brokers that their existing contracts would have to be amended. A reading of the amendment reveals its one new primary purpose. Brokers must agree to defend and indemnify the Shipper for the Shipper’s own negligence or intentional acts even if only alleged in any lawsuit and never proven, and even if the Broker, or Broker’s subcontractors, are not alleged or proven to have been negligent.
The gist and purpose of such language is that the retailer/shipper is blatantly saying to all their brokers that they intend for the brokers to provide a first-dollar defense to the Shipper, and pay any judgments against the Shipper, for any load managed by the broker, even if that broker was not negligent in any manner.
This purpose is further confirmed in the rationale for the new amendment offered by the Shipper. When sending the new amendment, the Shipper says they are being sued even when, in their opinion, they have done nothing wrong, and only because they are a large company.
This rationale glaringly disregards that they are asking the far less culpable and financially incapable broker to be responsible for their defense and any liability, even when the broker has done nothing wrong or negligent, and even when the broker is proven not to have been negligent.
(Should you doubt that a Broker can be put in such a devastating financial position, please see my article here, January 11, 2023, “3PL Learns Real World Cost of Agreeing to Broad Form Indemnity.” That article reviews a case, Diamond Transp. Logistics, Inc. v. The Kroger Co., wherein a broker agrees to Kroger’s broad form indemnity, and is held liable for a $2.5 M settlement and all of Kroger’s legal defense cost, even though the broker was not found negligent. The broker then discovers that they have no insurance to cover such a judgment.)
The Shipper’s rationale further disregards the Catch-22 for the Broker who is unwise enough to agree to such a provision. Nothing will change with regard to the Shipper’s belief that they are being sued as a “deep pocket”. They are a high-profile company and will remain a potential defendant in all such suits. The primary change in such facts is that the Broker will now be responsible for the cost of defense and any liability on the part of the Shipper, even when the Broker is not negligent in any manner.
There is no logic or legal reasoning by which the Shipper is requiring such an amendment, other than pure economic leverage. The Shipper’s mandate also disregards that 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 Shipper’s own negligence, as in:
TN Code 65-15-108 – (a) A covenant, promise, agreement or understanding in or in connection with or collateral to a motor carrier transportation contract purporting to indemnify the promisee against liability for damages resulting from the negligence of the promisee, the promisee’s agents or employees, or indemnitee, is against public policy and is void and unenforceable.
In a world of financial equals, equity and fairness would not allow such a result for the blameless Broker. However, the Shipper knows that many brokers will agree to such financial leverage to get the business, even in a situation wherein one claim could bankrupt the Broker, amid a flood of legal defense costs and liability they couldn’t possibly pay.
I. What’s Wrong with this Picture?
A. The Shipper’s Strategy is Self-Defeating and a Capacity Paradox
It is unlikely that any Broker who carefully examines the risks associated with assuming such potential unlimited cost of defense, and possible liability against the Shipper, will accept such an amendment.
If so, this would mean that almost all Brokers with financial wherewithal sufficient to assume such risks, after examining risk/reward, will refuse to manage Shipper’s much needed capacity (two of the largest U.S. brokers now have an absolute policy against accepting such indemnity requirements) .
Shipper will accomplish diminishing returns and the paradox of losing such capacity, while gaining only those smaller Brokers who do not have the financial strength to provide such unreasonable indemnity requirements. The Shipper will accomplish nothing insofar as avoiding being named in such lawsuits, but will compromise and confuse primary insurance coverage, and gradually weaken their entire brokered transportation base.
This is so for a number of reasons. The Broker’s common law duty is that of using reasonable care in the selection of a carrier. This duty defines and limits their insurable risk. The risk the Broker would be assuming under Shipper’s amendment would be outside any insurance coverage they might have, because it is a “contractually assumed liability”, which is generally excluded from policy coverage without express agreement by the insurer. Such agreements are prohibitively expensive.
Without exorbitant cost, no Broker would be able to insure the risk of assuming legal defense and liability of another party, especially as large as risk would be for such a Shipper.
Such considerations of risk/reward and cost of insurance are of less significance to under-capitalized brokers who control relatively less capacity than those who are financially capable.
Some brokers will sign whatever is necessary to “get the freight moving”, but will not be financially capable of meeting the demand by the Shipper of first-dollar legal defense and/or any verdict or settlement. Thus, the capacity defeating paradox of Shipper’s amendment is achieved. They give loads to low capacity brokers who assume impossible risk, which they know they cannot fulfill, while the brokers who properly examine such risks refuse such an amendment and take their larger capacity elsewhere.
Ultimately, the Shipper has lost capacity and gained a mostly worthless agreement to defend and indemnify them for their own negligence, by a Broker who cannot meet the first demand for such defense and indemnity.
B. A More Equitable and Efficient Solution
For all the reasons stated above, the Shipper’s fundamental problem of being sued as a deep pocket has not been alleviated by such indemnity requirements within their amendment.
The problem has been exacerbated by creating the illusion of another party being responsible for their defense and liability. In the end, the Shipper will likely have to manage defense of such lawsuits on the merits, either because the attempt to shift this burden to the Broker is void as a matter of law, or because the Broker is financially incapable of such defense and is uninsured for same.
Thus, the Shipper must better understand the roles of the parties, and draft appropriate indemnity agreements.
- Broker’s Duty and Commensurate Indemnity Responsibility.
[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).
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.
2. 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.
Such terms and indemnity obligations are insurable by the Broker, since they are within the Broker’s statutory duty.
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, while achieving no real protection for the shipper.
Only a shipper who intended to use blatant economic leverage would ask a broker to agree to such nonsense, which they should 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.
II. Conclusion
The mostly useless process of defeating what could otherwise be productive, cooperative agreements between brokers and shippers with invalid, overreaching indemnity language should stop. There is an unfortunate failure to understand that such efforts create unintended consequences of useless litigation, failure to otherwise be properly indemnified, and the paradox of diminished capacity.
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.
Throughout most of my career I have advocated the language of Example 1, above,
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.
I continue to believe it is fair and comprehensive of the duties owed by the broker to the shipper. It is gaining acceptance by many of the top twenty brokers and their shippers. Attempting to do more with broad form indemnity language would be better accomplished by proper insurance of shippers’ risks outside what the law requires of the broker.
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.”
