SHIPPING INTERMEDIARIES

UNDERSTANDING THE PARTIES IN THE DOMESTIC TRANSPORTATION CHAIN

Prepared by IMUAs Transportation Committee

Copyright 2005 Inland Marine Underwriters Association

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

IMUA STATEMENT
The Inland Marine Underwriters Association [IMUA] is a not-for-profit association focused on the commercial inland marine insurance line of business. IMUA was organized in 1930 as a national trade association and rating bureau for all inland marine classes. In 1948 the rating bureau activities of the IMUA were transferred to the Inland Marine Insurance Bureau (now defunct) due to the 1944 US Supreme Court decision in the South-Eastern Underwriters Association case. Today, IMUA is comprised of - Members - insurance and reinsurance companies that underwrite a significant portion of the commercial inland marine insurance in the U.S. Associate Members companies or organizations that provide products and/or services to the insurance industry. IMUA is committed to advancing the educational, governmental, regulatory and technical interests of the commercial inland marine insurance industry. One of the services IMUA provides its members is the publishing of information for use by underwriters, loss control and claims specialists, and other interested parties. The topics covered by IMUA Reports, Bulletins and News Articles are intended to provide an overall awareness of the issues, hazards and exposures associated with a specific industry or inland marine class of business. Volunteer members of a technical committee of the IMUA or IMUA staff have produced this information. Committee members abide by antitrust restrictions while compiling information. It is generally not possible to treat any one subject in an exhaustive manner, nor is it IMUAs intent to do so. No warranties are made regarding the thoroughness or accuracy of the report or any part of it. Nothing in this report should be interpreted as providing definitive guidance on any question relating to policy interpretation, underwriting practice, or any other issues in insurance coverage. IMUA does not prescribe to its members how to make underwriting or claims decisions, nor does it require that analysis follow any particular format.

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

Members of the IMUA Transportation Committee who participated in writing this paper Frank Oleskiewicz Chair Liz Batan James Cunningham Bruce Dalrymple Sharon Direso Jean Gardner Elizabeth Thiesing Richard Volpitta David Webster

TABLE OF CONTENTS Page INTRODUCTION IDENTIFICATION BY NAME Motor carrier Freight forwarder Truck or freight broker Shippers agent Case studies ADDENDUM 4 4 5 5 8 10 11 14

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

INTRODUCTION This report is a complete rewrite and update of a previously released IMUA Report entitled Shipping Intermediaries originally released in May 1986. A shipping intermediary can best be described as a person or organization which acts as a middleman between the shipper and the carrier. Although shipping intermediaries have long been used in the transportation industry, understanding their nature, and insuring the liability of shipping intermediaries can best be described as an area of confusion and misunderstanding. With the termination of the Interstate Commerce Commission, and ever evolving transportation techniques, understanding the nature of the various types of entities that fit within the broad definition of a shipping intermediary can be somewhat daunting. The purpose of this report is to provide information which can assist the underwriter in understanding and assessing the nature of the exposures inherent in the submissions being offered to them. Understanding the nature of shipping intermediaries, the services each provides and how they operate is a first step in the analysis of their insurance needs. IDENTIFICATION BY NAME One of the initial confusing aspects of insuring shipping intermediaries is the variety of names used to describe them. While there are common terms or trade names such as Motor Carrier Freight Forwarder Truck broker/ Freight broker Shippers agent this report will seek to provide legal definitions of the various parties, and differentiate between domestic and international entities. Using this approach, the report will establish their statutory liability as defined by the appropriate legal regime since it is the insureds liability that the underwriter is being asked to insure. One insured, calling itself a shippers agent, might operate in an entirely different manner from another insured claiming the same identification. Therefore, it is imperative for the underwriter to fully understand their clients operation, and provide the correct type of insurance coverage for that operation.

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

MOTOR CARRIER In common language, what most people call a trucker or trucking company is actually a motor carrier that is sometimes shortened to just carrier. 49 USC 13102(12) defines motor carrier as "a person providing motor vehicle transportation for compensation." The pertinent regulation, 49 C.F.R. 390.5, expands the definition to include: ... a for-hire motor carrier or a private motor carrier. The term includes a motor carrier's agents, officers and representatives as well as employees responsible for hiring, supervising, training, assigning, or dispatching of drivers and employees concerned with the installation, inspection, and maintenance of motor vehicle equipment and/or accessories. For purposes of subchapter B, this definition includes the terms employer and exempt motor carrier. A very good place to find more information about U.S. Department of Transportation motor carrier licensing requirements, form description authorities subject to filing and filing fees is the following hyperlink: http://www.fmcsa.dot.gov/factsfigs/licensing/registr.htm FREIGHT FORWARDER There are two types of freight forwarders domestic and international. For the purpose of this paper, we will focus on the domestic freight forwarder although we will briefly mention aspects of the international type as well. As the United States Supreme Court explained in Chicago, Milwaukee, St. Paul. & P.R. Co. v. Acme Fast Freight, 336 U.S. 465, 484 69 S.Ct. 692 (1949), there are essentially two different types of freight forwarders: The term freight forwarder was originally applied to persons who arranged for the transportation by common carrier of the shippers goods. The forwarder did not necessarily consolidate the individual consignments into carload lots, and its duties, as agent of the shipper, went no farther than procuring transportation by the carrier and handling the details of the shipment. Forwarders of this type charged fees for their services, which the shipper paid in addition to the forwarding charges of the carrier utilized for the actual transportation.
(212) 233-0550 Fax (212) 227-5102 HTTP://www.imua.org

14 Wall Street, Suite 820, NY, NY 10005

Later, a different type of forwarder service was offered. This forwarder packed up the less-than-carload shipment at the shippers place of business and engaged to deliver it safely to its ultimate destination. The freight forwarder charged a rate covering the entire transportation and made its profit by consolidating the shipment with others in carload quantities to take advantage of the spread between carload and less-than-container rates. It held itself out not merely to arrange with the common carrier for the transportation of the goods, but rather to deliver them safely to the consignee.

It is only this second type of freight forwarder which is governed by the Interstate Commerce Act. An entity cannot be held liable in the absence of negligence if it was not acting as a common carrier or a freight forwarder. Travelers Indemnity Co. v. Alliance Shippers, Inc., 654 F. Supp. at 842 (summary judgment granted where Plaintiff could not show that Defendant satisfied the criteria for being a freight forwarder consolidating shipments and performing break-bulk distribution operations) ; Travelers Indemnity Co. v. SS "Hanjin Kwangyang", 1995 U.S. Dist. LEXIS 13020, at *6 (Third party Plaintiff did not satisfy burden of proof in establishing entity was a freight forwarder). Fireman's Fund Ins. v. USA Truck, Inc., 1991 U.S. Dist. LEXIS 4908, at 6-7 (N.D. Cal. 1991) (Plaintiff did not satisfy burden of proof in establishing entity was a freight forwarder); Chemsource, Inc. v. Hub Group, 1996 U.S. Dist. LEXIS 9208, at * 8-11 (N.D. Ill 1996), aff'd, 106 F.3d 1358 (7th Cir. 1997) (same); Interamerican Logistics, Inc. v. CSX intermodal Inc., 1996 U.S. Dist. LEXIS 4501 (N.D. Ill. 1996) (setting forth what is necessary to establish an entity is a freight forwarder).

The general framework for the definition of a freight forwarder is provided by the Surface Transportation Act and the D.O.T. regulations. The Carmack Amendment, which concerns liability of carriers under receipts and bills of lading, is applicable to common carriers and freight forwarders alike. Pursuant to 49 U.S.C. 13102(8), a freight forwarder is defined as follows: (8) "freight forwarder" means a person holding itself out to the general public (other than as a pipeline, rail, motor, or water carrier) to provide transportation of property for compensation and in the ordinary course of its business --

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

(A) assembles and consolidates, or provides for assembling and consolidating, shipments and performs or provides for break-bulk and distribution operations of the shipments; (B) assumes responsibility for the transportation from the place of receipt to the place of destination; and (C) uses any part of the transportation a carrier subject to the jurisdiction under this subtitle. According to the US DOT/Federal Motor Carrier Safety Administration, a freight forwarder assumes responsibility for the cargo from origin to destination and usually takes possession of the cargo at some point during the transportation. Freight forwarders must register with the FMCSA by filing Form OP-1 and demonstrate proof of cargo insurance in an amount equal to $10,000 per occurrence. One needs to contrast the domestic freight forwarder with an international freight forwarder. An international freight forwarder is an agent for an exporter moving cargo in international trade. International Freight Forwarders provide a number of services ranging from booking space with the ocean or air carrier; completing export documentation; arranging for cargo insurance; advising on foreign port regulations; providing guidance on packing, marking or labeling; and are familiar with import rules and regulations of foreign countries and export rules of the U.S The underwriter needs to be concerned with the exposures of each type of freight forwarder domestic and international. The following are some of the typical underwriting questions that need to be investigated For the Domestic Freight Forwarder Do you fully understand the actual transportation exposure the forwarder is responsible for? Do you know what the forwarder holds itself liable for under contract? Who issues the contract of carriage? If the forwarder uses others for transportation, are certificates of insurance secured? Do you know the COPE [construction occupancy protection external exposure] information in order to underwrite any warehouse or consolidation/deconsolidation exposure? What mode(s) of transport are used for shipment? For example: Common Carrier ____%; Contract Carrier _____%; Air Carrier _____%; Railroad _____%; etc.
(212) 233-0550 Fax (212) 227-5102 HTTP://www.imua.org

14 Wall Street, Suite 820, NY, NY 10005

What types of commodities are generally transported? What is the radius of operation? Do the shipments go to high cargo theft cities, or to Mexico or Canada? Who are their major customers? What has been the loss history for the past five (5) years?

For the International Freight Forwarder Is the forwarder licensed by the Federal Maritime Commission [FMC] to handle ocean cargo? Is the forwarder registered with the International Air Transportation Association [IATA] to handle international air cargo? Is the forwarder familiar with the product or commodity; how to package and ship effectively? Do they have a network of overseas agents? Do they carry E & O insurance, and in what amount?

To this latter point, freight forwarders (export shipments) and custom brokers (import shipments) are vulnerable to actions brought against them by their clients due to errors made in handling shipments. Some example of the types of claims that may be encountered include Misdirected freight Improper release of merchandise Failure to pay duties and custom charges Incorrect insurance coverage either in the form of wrong limits or improper insuring terms and conditions TRUCK or FREIGHT BROKER By contrast, 49 U.S.C. 13102(2) defines broker as "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 (emphasis added)." The following are common legal definitions of entities that fall under this category (a) "Broker" means a person who, for compensation, arranges, or offers to arrange, the transportation of property by an authorized motor carrier. Motor carriers, or persons who are employees or bona fide agents of carriers, are not brokers within the meaning of this section when they arrange or offer to arrange the
14 Wall Street, Suite 820, NY, NY 10005 (212) 233-0550 Fax (212) 227-5102 HTTP://www.imua.org

transportation of shipments which they are authorized to transport and which they have accepted and legally bound themselves to transport. (b) "Bona fide agents" are persons who are part of the normal organization of a motor carrier and perform duties under the carrier's directions pursuant to a preexisting agreement which provides for a continuing relationship, precluding the exercise of discretion on the part of the agent in allocating traffic between the carrier and others. (c) "Brokerage" or "brokerage service" is the arranging of transportation or the physical movement of a motor vehicle or of property. It can be performed on behalf of a motor carrier, consignor, or consignee. (d) Non-brokerage service" is all other service performed by a broker on behalf of a motor carrier, consignor, or consignee. Taken together, the definitions demonstrate that an entity which has federal authority to act as a motor carrier or freight forwarder, and which assumes responsibility for transporting property in interstate commerce, will not be heard to argue later that it acted only as a broker with regard to that shipment. See CGU Int'l Ins., PLC v. Keystone Lines Corp., 2004 WL 1047982 at *2 (N.D. Cal. May 5, 2004): The difference between a carrier/freight forwarder and a broker is often blurry. The crucial distinction is whether the party legally binds itself to transport, in which case it is considered a carrier. See 49 C.F.R. 371.2(a). That is, if the entity accepted responsibility for ensuring delivery of the goods, regardless of who actually transported them, then it may qualify as a carrier/freight forwarder. If however it merely agreed to locate and hire a third party to transport the machines, then it was acting as a broker. In other words, a carrier/freight forwarder can not avoid carrier liability simply by brokering a load which it agreed to accept. Unlike a common carrier or contract carrier, a freight broker is not subject to liability under the Carmack Amendment, and so cannot be held liable for damage to cargo unless negligence can be proven. Since a freight broker is only licensed to arrange for transportation by a motor carrier for compensation, it can not be held responsible as a carrier of property. Courts have ruled that verifying a carriers operating authority and confirming that the carrier had insurance is sufficient to meet reasonable care standards for a freight broker.

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

10

The Underwriter needs to be concerned with the exposures related to Freight Brokers. The following are typical questions the underwriter will want answers to: Does the submission fit the above definition? What is the scope of operation? Does the freight broker have regular customers? If so, who are they? What are the usual commodities handled? What motor carriers does the truck or freight broker use? Is a Broker Agreement with each Common Carrier used? Does the truck or freight broker assume any contractual liability for the movement of goods? Whose Bill of Lading do shipments travel under? How many Common Carriers are used on a regular basis? Are the Carrier(s) pre-qualified? What percentages of Common Carriers are: Motor _____%; Railroad _____%; Air _____%? Are Certificates of Insurance [COI] obtained from the Carriers? Are the COIs updated on a regular basis or at least annually? Are Motor Truck Cargo Policies reviewed for any restrictive endorsements? Does the freight broker annually verify operating authority and insurance coverage for the carriers it uses? What is the loss experience over the last 5 years? SHIPPERS AGENT As a general matter, a shippers agent is not a carrier, freight forwarder, or broker. Shippers agents generally arrange for the transportation of truckload or container load shipments. Shippers agents often provide services related to warehousing or loading and unloading. Shippers agents have been referred to as the travel agents for cargo. Shippers agents and freight forwarders are often viewed as similar in job function. However a freight forwarder issues a bill of lading and assumes carrier liability. A shippers agent simply makes arrangements for shipping contracts to be entered upon with the actual carriers whose responsibility it is to move the goods and the actual custom's broker whose responsibility is to arrange for the importing of goods. When making transportation arrangements for, or implementing instructions on behalf of a shipper or consignee, the shippers agent is liable only for its own direct negligence and cannot be held vicariously liable for the errors and omissions and omissions of others, which includes custodial carriers, down line agents, draymen, etc. This distinction is recognized in the law. Chicago, Milwaukee, St. Paul & Pacific Railroad v. Acme Fast Freight (1948) 336 U.S. 465.
14 Wall Street, Suite 820, NY, NY 10005 (212) 233-0550 Fax (212) 227-5102 HTTP://www.imua.org

11

Industry standards find that many shippers agents will limit their liability. A standard limitation of liability found in some insurance policies reads as follows Limitation of Liability for Loss, etc. (a) The Customer agrees that the Company shall only be liable for any loss, damage expense or delay to the goods resulting from the negligence or other fault of the Company; such liability shall be limited to an amount equal to the lesser of fifty dollars ($50.00) per entry or shipment or the fee(s) charged for the services, provided that, in the case of partial loss, such amount will be adjusted pro rata; CASE STUDIES Scenario One Flintstone Trucking, Inc., picked up a load of candy from Apple Foods at Mechanicsburg, PA, for transportation to Tamco in Youngstown, OH. The bill of lading specified that the load was to be picked up on Friday, August 18, 2000, and that it was to be delivered on Monday, August 21st at 1:30 pm. The bill of lading, which identifies the carrier as ABC Trucking., requires the load to be refrigerated to between 55 and 60 degrees Fahrenheit. At ABCs request, Flintstone picked the load up on Friday. Flintstone's driver took the vehicle to ABC's facility in Bethel, PA, where ABC's mechanics serviced the tractor. The service was performed at Flintstone's request and expense. Bethel is further away from Youngstown than is Mechanicsburg. The loaded trailer was stolen from ABC's yard over the weekend. Apple has presented a claim to ABC for $79,669.70. ABC has presented Apple's claim to Flintstone. ABC holds common, contract and broker authority under MC- 999999. Flintstone has only common carrier authority under MC-222222, which it received on January 7, 1999. ABC and Flintstone entered into a Broker-Carrier Agreement, dated January 9, 1999, pursuant to which Flintstone was to perform transportation services for ABC as a contract carrier. The Agreement erroneously recites that Flintstone has contract carrier authority. Flintstone owns ten vehicles, some of which are leased to another carrier, and the rest of which are used to carry loads for ABC. The ABC vehicles, which are marked with Flintstone's name, may be used for other business, but in practice are used only for ABC's business. The insured [ABC] stated that they use Flintstone's authority when hauling ABC's loads. Despite the intentions of the parties, there is a possibility that this load was carried by ABC under its authorities and that Flintstone leased its vehicle and driver to ABC to perform the transportation service. A broker is defined in the Interstate Commerce Act as follows:

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

12

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. (49 U.S.C. 13102(2)). Although this statutory definition of a broker precludes a motor carrier from acting as a broker, dual authorities, to act as both a carrier and a broker were issued to ABC. A regulation of the Federal Highway Administration with respect to brokers, 49 U.S.C. 371.2(a), resolves the conflict arising out of dual authorities as follows: Motor carriers, or persons who are employees or bona fide agents of carriers, are not brokers within the meaning of this section when they arrange or offer to arrange the transportation of shipments which they are authorized to transport and which they have accepted and legally bound themselves to transport. By operation of this statute and regulation, ABC, despite its intention to act as a broker, could not be a broker if it accepted and legally bound itself to transport Apples cargo. A transportation provider who has dual authorities, to act as a broker and as a carrier, is liable to the shipper as a carrier if it holds itself out to the shipper to be responsible for the transportation service. If ABC was acting as a carrier as a matter of law, then whether Flintstone is a carrier or an agent is more difficult to determine. An argument can be made that ABC would have had to lease Flintstone's vehicle to perform the service. 49 C.F.R. 376.11(a) provides that an authorized carrier can perform authorized service in a vehicle it does not own only if it leases the vehicle in conformity with the regulation. A lease will be presumed if a lease is required by the regulations. There is case law which also concludes that both parties are carriers and there would be primary liability on the part of both carriers. Scenario Two Acme Forwarding is a licensed freight forwarder under docket No. FF9438. Acme has been engaged by various companies to provide transportation of goods from California to Iowa. Acme Forwarding in turn engages LostWay Trucking to perform the transportation. LostWay picks up the shipments from the various customers on March 17, 2004. A bill of lading is issued to each customer. The bill of lading, which is the standard domestic straight bill of lading, lists Acme Forwarding as the carrier. The driver simply signs his name.

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org

13

As the name implies, the LostWay driver gets lost, permanently. The shipments never arrive at destination. The customers each present a claim to Acme Forwarding. Acme Forwarding, in turn, presents each of the claims to Lost Way. Further investigation reveals that Acme Forwarding does not maintain any tariff or rules or rates. LostWay, on the other hand, has a tariff which limits its liability to .50 cents per pound, a substantial reduction in the claim. Acme Forwarding, as a regulated freight forwarder is liable to each of its customers for the actual loss suffered. Acme Forwardings right of recovery against LostWay is, however, limited, to the .50 cents per pound. Scenario Three Details of a claim in which the insured has separate authorities; one of a Broker and the other of a Freight Forwarder. Insured, Bambi Management & Consultants, Inc. (broker) was hired to transport load on behalf of the shipper; this account also has Freight Forwarder Authority under the name of Bambi Transportation. Depending under which authority the load is being carried, the liability of the insured could change. Documents were issued under both names for the shipment, further confusing the issue. The question becomes... Does the customer reasonably believe that the insured was acting as a carrier in this case (strict liability) or did they know that Bambi was perhaps a broker (negligence) concerning this shipment? It was determined that the insured was acting in the capacity of a FF for this shipment and the loss was paid. Recovery is being sought against the trucker. Scenario Four In another instance for this same account, Insured (Bambi Management & Consultants, Inc.) hired trucker, Rocky's Carriers to haul load of shoe accessories for shipper, Sharon's Household & Body Care. In this instance, they were acting in the capacity of a Broker. However, because policy provides indemnification even on those losses wherein insured was acting as a broker, the loss was paid and recovery is now being sought against the responsible trucker. One question that could be asked. "if the policy was not endorsed to cover the insured's liability as a 'broker' but only that of a motor carrier/freight forwarder, would this loss have been covered? Scenario Five What is the effect of a carrier who brokers himself and doesn't have Broker Authority? In this instance, Patti's Express (role unknown) booked this shipment with Consuela's Lumber Transport, Inc. who supposedly moved the shipment under their authority and
14 Wall Street, Suite 820, NY, NY 10005 (212) 233-0550 Fax (212) 227-5102 HTTP://www.imua.org

14

insurance. Consuela then assigned this load to a 'contracted' carrier. The contractor, Eric Peeples has his own equipment and operates under his own authority & has his own insurance policy. The load ($100K) was involved in an accident in Colorado. One machine damaged at approx $59K. To evaluate the insured's exposure, we have requested: Bill of Lading, Contract with Patti's Express, if any; Contract with 'driver', if any; Confirmation of insured's authority (They have no broker authority under the MC#000000). However, the insured indicated that they have several divisions. If this load was carried by a valid, insured carrier, the shipper can perhaps look to that policy for payment. As a matter of fact, the 'contracted' carrier's insurance company has an active file on this one. Again, if the insured was acting in the capacity of a broker and we have a Motor Truck Cargo LL policy only,( no Contingent Broker coverage) would coverage apply? The question again arises, did the shipper know under what capacity the load was being carried?

ADDENDUM National Customs Brokers and Forwarders Association of America 1200 18th Street, NW Suite 901 Washington DC 20036 (202) 466 0222 www.ncbfaa.org

14 Wall Street, Suite 820, NY, NY 10005

(212) 233-0550 Fax (212) 227-5102

HTTP://www.imua.org