Financial Responsibility of Broker and Freight Forwarders May Be Changing

Financial Responsibility of Broker and Freight Forwarders May Be Changing

FMCSA submitted a proposed rulemaking and is seeking comments on changes to Broker and Freight Forwarder Financial Responsibility.

Previously, FMCSA implemented the MAP-21 requirement to increase the financial security amount for brokers from $25,000 to $75,000 for household brokers and from $10,000 to $75,000 for all other property brokers and, for the first time, established financial security requirements for freight forwarders.

Now, the agency proposes modification in five regulatory areas:

  1. Assets readily available
  2. Immediate suspension of broker/freight forwarder operating authority
  3. Surety or trust responsibilities in cases of broker/freight forwarder financial failure or insolvency
  4. Enforcement authority, and
  5. Entities eligible to provide trust funds for form BMC-85 trust fund filings

[Related: FMCSA Redefines Freight Broker and Bona Fide Agents]

Why should carriers care?

This proposed rule would benefit motor carriers as some brokers with dishonest business practices can create unnecessary financial hardship for unsuspecting motor carriers.

This is because some brokers:

  • Improperly choose to withhold payment to motor carriers for services rendered
  • Causing motor carriers to submit claims to receive payment and
  • If the claims against an individual broker exceed $75,000, the financial responsibility provider will often submit the claims to a court in an interpleader action to determine how to allocate the broker bond or trust fund

The interpleader process can be costly and time consuming for motor carriers, and generally results in motor carrier claims being paid pro rata, depending on the number of claims against the broker bond or trust fund.

So, what are these five regulatory changes that are proposed?

Assets Readily Available

The rule proposes allowing brokers or freight forwarders to meet the MAP-21 requirement to have “assets readily available” by maintaining trusts that meet certain criteria, including that the assets can be liquidated within 7 calendar days of the event that triggers a payment from the trust, and that do not contain certain assets.

Immediate Suspension of Broker/Freight Forwarder Operating Authority

The rule proposes that “available financial security” falls below $75,000 when there is a drawdown on the broker or freight forwarder’s surety bond or trust fund.

This would happen when a broker or freight forwarder consents to a drawdown, or if the broker or freight forwarder does not respond to a valid notice of claim from the surety or trust provider, causing the provider to pay the claim, or if the claim against the broker or freight forwarder is converted to a judgment and the surety or trust provider pays the claim.

FMCSA also proposes that, if a broker or freight forwarder does not replenish funds within 7 business days after notice by FMCSA, the agency will issue a notification of suspension of operating authority to the broker or freight forwarder.

Surety or trust responsibilities in cases of broker/freight forwarder financial failure or insolvency

FMCSA proposes to define “financial failure or insolvency” as bankruptcy filing or State insolvency filing.

This proposal also requires that if the surety/trustee is notified of any insolvency of the broker or freight forwarder, it must notify FMCSA and initiate cancelation of the financial responsibility.

In addition, FMCSA proposes to publish a notice of failure in the FMCSA Register immediately.

Enforcement Authority

FMCSA proposes that to implement MAP-21’s requirement for suspension of a surety provider’s authority, the agency would first provide notice of the suspension to the surety/trust fund provider, followed by 30 calendar days for the surety or trust fund provider to respond before a final Agency decision is issued.

The agency also proposes to add penalties in 49 CFR part 386, appendix B, for violations of the new requirements.

Entities Eligible to provide Trust Funds for BMC-85 Filings.

Lastly, FMCSA proposes to remove the rule allowing loan and finance companies to serve as BMC-85 trustees.

What would this cost the industry?

Brokers and freight forwarders, surety bond and trust fund providers, and the Federal Government would incur costs for compliance and implementation.

FMCSA estimates that the 10-year cost of the proposed rule would total $5.4 million.

The quantified costs of the proposed rule include:

  • notification costs related to a drawdown on a surety bond or trust fund and immediate suspension proceedings
  • FMCSA costs to hire new personnel, and
  • costs associated with the development and maintenance of the BMC84/85 Filing and Management Information Technology (IT) System

What kind of insurance coverages do brokers need?

Today, brokers need a wider variety of protection that often includes:  

  • Truck/Freight Broker Auto, General Liability Coverage – Up to $5,000,000
  • Professional (E&O) – Up to $1,000,000
  • Contingent Cargo Liability – Up to $500,000

Truck Broker Liability (TBL) is designed for truck brokers, along with trucking operations, that have brokerage authority. TBL is a hybrid primary liability policy that addresses the truck broker’s general liability arising out of the ownership and use of a truck by the motor carrier of a brokered cargo move, in compliance with a written truck brokerage agreement.

It provides bodily injury and property damage liability coverage protecting the truck broker if legal action is taken because of a truck accident involving a motor carrier to whom they brokered a load.

General Liability is designed to respond to the liability a freight broker could assume other than liability to cargo or liability as result of a vehicle being driven. For example, a freight broker might be pulled into a lawsuit if third-party trucker or warehouse personnel was injured because of cargo being unloaded from their truck.

Errors and Omissions Insurance (E&O or professional liability) is designed to protect brokers from lawsuits that claim you made a mistake in your professional services and can help cover expensive court costs or settlements.

Contingent Cargo Legal Liability is designed to protect a transportation broker or freight forwarder against the liability assumed when deciding to move cargo for others. This provides coverage when a trucker’s primary motor truck cargo policy fails to assume the responsibility for cargo loss or damage.

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