The Extra Mile Blog


Carriers brokering without authority - What's the risk?

By jcollins on 7/28/2015

When the bill reauthorizing the nation's transport funding mechanisms became law in July 2012, much was made of the fact that it was the first multiyear funding law in seven years and that the federal government would be doling out $105 billion over the subsequent 27 months to pay for infrastructure projects.

Largely overlooked in the 1,656-page bill was language that on Oct. 1 changes forever how truck freight is laded, brokered, and transported. To some, it smacks of trucking reregulation. To others, it brings clarity and accountability to a business lacking in both. For those who make their nut moving freight, it reshapes the decades-old operation of property brokerage, which is a $300 billion-a-year business.

On that date, the federal government makes it more expensive for brokers to do business, enforces strict rules on what brokers and truckers can and can't do, and levies stiff fines for noncompliance. The law also forces shippers to be more vigilant in how they tender their goods for transport.

First off, there is the higher cost of brokering. Anyone seeking a broker's license will have to post a $75,000 surety bond, which ensures a carrier will be paid if a broker fails to do so. The more than seven-fold jump in the bond's original $10,000 ceiling has drawn the ire of smaller brokers, who argue it will drive many independents out of business and concentrate activity in the hands of larger brokers, a claim the main broker trade group, the Transportation Intermediaries Association (TIA), denies. The Association of Independent Property Brokers and Agents filed suit July 16 in federal district court in Ocala, Fla., to block the provision.

That may not cause a major problem, however. A survey released July 11 by Portland, Ore.-based consultancy DAT of 250 major truckers and brokers said two-thirds have already purchased the higher bond. Of those who hadn't, 79 percent said they were either shopping for the bond or intended to do so, DAT said. Only 3 percent said they didn't plan to buy the higher bond.

The big changes come elsewhere in the law. As of Oct. 1, a trucker can no longer take possession of freight from another trucker or a broker, a long-held and fairly common practice known as "double-brokering." A trucker cannot broker freight without a brokerage license, and that authority must be completely separate from the trucking operation. The trucker showing up at a shipper's dock must be the same carrier whose name appears on the bill of lading. If not, a shipper must create a new bill with the new trucker's name and identification number, and pay just the new carrier. Truckers can accept cargo only with their own equipment.

An exception to all of this is the so-called interline agreement, where the origin trucker accepts the load, drives a certain distance, and then tenders the goods to another trucker. In practice, however, such operations are rare because of the time and cost involved in transferring loads and because carriers are reluctant to give up revenue.

Brokers, meanwhile, can no longer take physical control of cargo and can only arrange the transportation for their shipper clients. A broker must ensure the trucker with which it has arranged the transaction is the carrier appearing at the shipper's dock. A broker cannot insure the cargo, except as a contingency, meaning its coverage would kick in if a carrier's policy fails, a rare occurrence. A broker cannot appear on the bill of lading as a carrier. In essence, the law transforms a broker into a shipper and strips it of any carrier-related functions.

As for shippers, they need to know that a trucker can no longer accept their freight for brokering purposes, and that a broker or a third-party logistics (3PL) company cannot physically touch the goods. Neither party can be on the bill of lading in the "carrier" section. A broker or 3PL can appear on the bill's section marked "3PL" and can receive freight bills.

The penalties for violating the laws are not cheap. The federal government can levy a maximum fine of $10,000 per load on the guilty party.

Experts said the law stops a trucker from holding itself out as the freight hauler, only to switch roles—unbeknownst to the shipper—into that of a broker. "If a carrier does not move the freight, it will have to disclose to the shipper that it is acting in another capacity ... No secrets can be kept," said Robert Mucci, a commercial risk management specialist with Worcester, Mass.-based Wolpert Insurance Agency Inc.

Mucci said the law would prevent a trucker who agreed to haul a load from claiming after the fact that it was not liable for a lost or damaged shipment because it was merely acting as a broker. Because the Federal Motor Carrier Safety Administration (FMCSA), a Department of Transportation sub-agency that oversees truck safety, will issue unique registration numbers to each party for their specific authority, "there will be a Berlin-type wall separating broker-arranged shipments from 'subcontracted' shipments," he said.

David G. Dwinell, who owned his first truck in 1958 and today instructs brokers on, among other things, how to avoid liability issues, called the law a "get-out-of-jail-free card" for well-run brokers who operate their business without controlling drivers' actions and who are not in possession of the cargo.

Dwinell called the provisions a prime example of well-intentioned legislative overreach. He said the elimination of double-brokerage wipes out an important source of revenue for a trucker, especially if it has too much business for its own fleet to move and needs to farm out excess loads. Over the years, truckers came to view the practice of double-brokerage as "their sacred right," he said.

Dwinell said the language was essentially crafted by the American Trucking Associations, the Owner-Operator Independent Drivers Association (OOIDA), and the TIA to protect their respective interests, and called it a stab at backdoor reregulation. He said the provisions would add friction to the trucking supply chain, deprive truckers of business, and invite more extensive safety enforcement by the states.

Truckers, Dwinell said, will bear the biggest burden. "The net effect of this will be incalculable," he said. When asked about the cost, he replied, "write the word 'billion,' pick a number out of the air, and put it in front."

The language is the culmination of several years of legislative wrangling designed to clean up a corner of the shipping world that sometimes operates in the shadows. Supporters say the provisions establish clear functional lines among the various players. It gives shippers peace of mind that the carrier on its bill of lading will be the same one that shows up to haul its freight, they say. And it curtails the sleazy act of "churning," where a trucker without brokerage authority grabs freight from a load board, gets an advance from the shipper or broker, flips the load to another carrier, and then disappears, leaving the second carrier empty-handed. Roughly one-quarter of owner-operators have had trouble at one point or another collecting from brokers or other intermediaries, according to OOIDA estimates. In some cases, the truckers never get paid, the trade group said.

The language in the law "spell[s] out responsibilities and protect[s] all involved," Robert A. Voltmann, TIA's president and CEO, wrote in May. "We believe that whoever hires a truck is responsible for paying for that truck."

Voltmann said truckers who rebroker freight without proper licensing expose themselves to a legal nightmare called "vicarious liability," where a company can be held responsible for accident-related damages even if it wasn't directly involved in the incident.

In recent years, the plaintiffs' bar has focused on the potential liability in carrier-to-carrier relationships to win big settlements for accident victims. By contrast, brokers who are properly licensed and who demonstrate robust carrier selection procedures have been, to some extent, insulated from legal exposure, Voltmann said. "Why would a carrier not avail [itself] of these protections?" he wrote.

Jett McCandless, founder and CEO of CarrierDirect, a Chicago-based firm that consults for carriers and 3PLs, said the law will deter low-rent truckers and brokers that, out of desperation, engage in behavior beyond the scope of the law and its ethics. Double-brokerage, he said, leaves shippers vulnerable to actions they have no visibility into or control over. "All of the controls they have in place, all of the reasons they did the procurement, go out the window," he said.

McCandless said the new rules would go a long way toward removing the bad actors and, by extension, make the business cleaner and the roads safer. "It legitimizes the space," he said.

Voltmann said it's high time truckers operating in brokerage be required to have separate broker authority and the bond that accompanies it. "Brokerage is not a hobby. It's a profession with certain responsibilities, including protecting other people's money," he said. "The majority of money touched by a broker, whether that broker is asset-based or nonasset-based, belongs to other people."

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