Michael Stoll | LOGISTIQ Insurance Solutions
We see many examples of disruptive events in logistics, resulting from erroneous bookings, delivery failures, reckless or negligent behavior, failure to insure, inadequate insurance, contractual liability, fraudulent parties, cargo loss or damage, or complex personal injury litigation.
All such scenarios of “What can go wrong?” may be constructively viewed as underscoring the need to integrate sound risk management and insurance expertise in the business process. Without it, transactions that look good from a marketing and immediate revenue perspective can end up a disaster – because the unanticipated and inconvenient decides to show up – somewhat like the “Mayhem” guy on the Allstate commercial. I relate directly to this analogy as I have spent a career, including 10 years as vice president risk management (for an international multi-modal operation), dealing with scenarios “that could never happen.” Unfortunately, and almost invariably, they do.
Examples of ‘What can go wrong?’ include the provision and use of carriage equipment. A memorable scenario in my experience involved a motor carrier that received freight from the shipper, in a sealed trailer licensed for road use, for interstate delivery. The motor carrier was involved in an accident en route resulting in the fatality of a medical doctor. The ultimate damages paid were $10 million. The motor carrier in this instance had contractually indemnified the shipper under a services agreement. This shipper had a commercial auto liability policy to cover their owned vehicles and a $25 million excess policy. In brief summation, under a Declaratory Action Ruling, the Court held that (i) the shipper’s auto liability insurance policy covered their trailer and the accident, and (ii) the Court ruled that under the (typical) definition of “Who is Insured” and the prioritization of coverage language in the shippers auto insurance policy, the shipper’s insurance policies were obligated to pay approximately 70 percent of the damages – or roughly $7 million in this instance – and (iii) the motor carrier and their insurers paid the remainder (whereby the terms of the service agreement were satisfied).
This shipper could not have been more shocked – and clearly would have benefited from more proactive risk management and insurance handling expertise. It is important to note that the shipper in this example could have been any provider of licensed carriage equipment, including an equipment provider entity under common ownership with a broker.
Different scenarios of a broker providing road use licensed trailers or containers attached to chassis (equipment), to third-party motor carriers, in support of the freight broker business model, are often raised for evaluation.
With regard to the risk element of this activity, it must be considered that provision of such equipment under any auspices, constitutes a motor carrier role – not the role of freight broker1 and incurs motor carrier liability. Underscoring this consideration is that a licensed-for-road-use trailer or container bolted to a chassis, is defined under law as a motor vehicle.2 The equipment provider thereby incurs shared or primary responsibility for compliance with all pertinent statutory definitions, regulatory requirements and FMCSRs pertaining to a motor carrier. Hence, because 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, it is not protected under the enabling statute pertinent to a freight broker.1 Nor is the provision of equipment 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. An entity providing carriage equipment to motor carriers, should purchase a truck liability policy designed to cover motor carrier liability, or an alternative liability policy providing essentially the same or similar coverage.
For these reasons, I recommend that the equipment leasing/interchange activity must be placed under a separate legal entity from that of the freight broker – with separate branding, separate contracts, use of an interchange/lease agreement, and separate management, to achieve, to the extent possible, a legal partition between this equipment activity and the broker (and other) operations.
A separate but related question arises as to whether the entity providing equipment should own or lease the equipment they provide to the third-party motor carriers. There are several concerns with leasing and then sub-leasing equipment, including the following:
• The original lease agreement may prohibit “sub-leasing” of the leased equipment by the lessee. Hence, to this extent, the described business model, where the equipment is leased and then subleased, is in breach of the lease contract.
• Also, to this extent, the unethical or illegal business practices exclusion under a typical insurance policy, including a policy that may be written for this lessee would be invoked, thereby precluding any insurance coverage that may otherwise have been provided.
• For the reasons cited herein, and others related to sound business operation, the described lease/sub-lease scenario may be one to avoid.
A business strategy that does not engage risk management and insurance expertise to understand and manage the roles of involved parties, their contractual relationships and their insurance, may be problematic, involving unanticipated liability, and uninsured risk – and is likely to invite Mr. Mayhem.
Michael Stoll is vice president of LOGISTIQ Insurance Solutions, located in Redondo Beach, CA. He can be reached at firstname.lastname@example.org.
1 49 U.S.C. §13102. Definitions “(2) Broker.—The term “broker” means a person, other than a motor carrier or an employee or agent of a motor carrier, that as a 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.”
2 49 U.S. Code § 31301 – Definitions “(12) “motor vehicle” means a vehicle, machine, tractor, trailer, or semitrailer propelled or drawn by mechanical power and used on public streets, roads, or highways, but does not include a vehicle, machine, tractor, trailer, or semitrailer operated only on a rail line or custom harvesting farm machinery.”