Reviewing Broker Contracts

In establishing a broker business, every broker will have to learn to manage the details of contracts with motor carriers and suppliers. Once a contract is in place, however, the broker will not want to give much thought to negotiating changes. Why spend time and money on a new contract when the old one seems to be doing the job?

Besides, once a new contract is in place, the broker will have to deal with a series of administrative headaches that could have been avoided if things had been left well enough alone.

Unfortunately for the broker, as time goes by, sticking with old contract forms is likely to become problematic. Eventually, the contract will describe a business relationship that no longer exists. For example, I recently saw a contract that included language describing that the contract was under the jurisdiction of the Interstate Commerce Commission. That’s the federal regulatory body that went out existence in 1995.

Although it may be difficult to predict the useful life of a broker-carrier contract, in a dynamic industry, we can all agree that any contract referencing the ICC simply is too old.

For the broker, a contract, whether with an insurance company or a motor carrier, should protect the broker from legal liabilities affecting its operations. Brokers revising their contracts need to look for new exposures that were not previously identified in the agreement.

Insurance is an integral part of the broker’s risk management program. The insurance industry has developed new products to respond to legal exposures of concern to brokers. For example, “contingent cargo coverage” is now available to protect the broker from liability if the carrier defaults on its obligation to pay cargo claims. If the broker is concerned about that exposure, it can purchase the coverage.

In addition, the insurance industry now has adopted the Motor Carrier Coverage Form for its liability insurance. Accordingly, some details of the carrier’s liability insurance policies may have changed. Although the changes are more technical than they are dramatic, they can affect coverage and other related issues applicable to a motor carrier agreement. The broker and the carrier should know whether the insurance provided by the carrier is under the earlier Truckers Coverage Form or under the MCCF.

There are some specific exposures for the broker to consider in thinking about a new contract.

As anyone involved in the broker business must know, brokers have become targets for plaintiff’s attorneys and big-dollar auto liability claims. Accordingly, brokers need to have contracts with their carriers to provide appropriate protection against these claims. In addition to the usual liability claims, claims against brokers include liability theories such as “negligent entrustment,” “negligent hiring,” “vicarious liability” and others.

The point is, if the broker is in any way involved, the broker will be part of the lawsuit. As far as the broker-carrier contract is concerned, the broker needs to include commitments from the carrier to provide insurance, to assume responsibility for defending the claim, and to indemnify the broker for the broker’s costs of any claim.

Some broker-carrier contracts go into extensive detail describing the indemnification obligations. Some states have limited the scope of the indemnification of the shipper.

In preparing the broker-carrier contract, the broker should determine whether there is an advantage to the broker to be named as additional insured on the carrier’s liability policy, or whether an additional insured endorsement will only create more confusion.

As the business continues to become more sophisticated, so will the contracts and other legal concerns. The brokers need to keep pace with issues.

Robert Spira is an attorney with Yormick & Associates in Cleveland specializing in transportation law. Contact him at rspira@yormicklaw.com.

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