Indemnity in the Supply Chain

Ben Armistead | Greenwich Transportation Underwriters, Inc

WE CONTINUE TO see a poor trend in broker shipper contracts with respect to their being more onerous and risk assumptive on the part of the broker. It is clear, in consideration of the broker’s arranging transportation on behalf of the shipper, that the shipper wants the broker to assume contractually all liability for any transportation claim involving the shipper’s goods – period.

 While it makes sense for a truck broker to guarantee and indemnify for the truck brokers’ legal liability in the supply chain, it is almost impossible for a truck broker to guarantee the performance of any third party – specifically a carrier for hire. Even more, a truck broker cannot guarantee
the performance of the carrier’s insurance company.

So if the truck broker has signed a contract to guarantee the aforementioned performance, this is a recipe for failure. The truck broker will want its insurance company to assume all this contractual liability, and that rarely happens. Only a few insurers provide contractual liability for either truck broker liability or contingent auto liability. But in our view, it does not really matter per the analysis below.

Regrettably,  shippers, shippers’ counsel, truck brokers, truck brokers’ counsel, their insurance agents, and in some cases their insurance companies do not understand that if contractual liability is actually afforded, it is not expanding the terms and conditions of the policy to be broader than it already is; moreover, since most shippers require being added as an additional insured for defense and indemnity reasons, the issue becomes moot. Shippers are defended and indemnified anyway in most cases.

In broker shipper contracts, the indemnification clauses vary, and again, it is clear that shippers are looking for their shipper liability to be transferred to the truck broker. That can work effectively if only two things happen:

1)    The shipper was added as an additional insured under the truck brokers policy, and

2)    Both the shipper and broker were legally liable.

One of the challenges is that if the shipper is liable, but the truck broker is not legally liable, defense and indemnification will not happen in the truck brokers’ policy to defend and indemnify the shipper. In fact, in most broker shipper agreements, indemnification for legal liabilities are irrespective of whether the broker has legal liability, thereby creating a big coverage gap and an uninsurable liability.

But it gets worse. Due to some overzealous shipper attorney’s, we are seeing contracts that require the truck broker to be responsible and thereby assume the legal liability as a carrier. And there are two issues with that as well.

1)    The Moving America Towards Progress in the 21st Century (MAP-21) established clarity with respect to a carrier always representing themselves as a carrier to the general public and a truck broker representing themselves as a truck broker to the general public. So, it begs the issue of how a broker is supposed to assume contractually the legal liability of a carrier when it is solely responsible for acting as a truck broker in the supply chain.

2)    Better truck broker insurance can and does cover losses due to negligent hiring, negligent entrustment and vicarious liability for the carriers a truck broker hires. But it is not the intention of current truck brokerage insurance to ever cover the truck broker for carrier liability. A commercial auto policy does that, and truck broker policies are not commercial auto policies.

So again, stakeholders trying to seek coverage for shipper contracts are placing potential coverage gaps in the laps of both truck brokers and shippers. It begs the question, do the shippers really want truck brokers to be guaranteeing exposures they might be self-insuring? They indeed may.  Do they really want the truck brokers being liable for guaranteeing carrier performance they cannot control? Again they indeed may.    

Ben Armistead is a Partner at Greenwich Transportation Underwriters, Inc., CMGA, based in Brentwood, TN.

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