A Client’s Questions re Cargo Insurance

A client asks: “What is the difference between a common and contract carrier insurance-wise, specifically: (1) Is the process different in dealing with the cargo insurer for a common carrier as compared to a contract carrier? and (2) Is the dollar amount the cargo insurer is liable to pay differ for a common carrier as compared to a contract carrier?”

The quick answers to these questions are (1) the process for dealing with a cargo insurer is the same regardless whether the carrier is contract or common and (2) the scope and extent of liability of a cargo insurer depends on the terms of the insurance policy. These questions also prompt the following comments:

  • Although the ICCTA eliminated the distinction between common and contract carriers, the FMCSA nevertheless continues to issue common carrier certificates and contract carrier permits. However, the statute itself now defines a contract carrier as one that provides service under an agreement entered into under 49 USC 14101(b).
  • The ICCTA does not require either a common or contract carrier of property (excluding HHG and passenger carriers) to maintain cargo insurance. 49 USC 13906 gives the FMCSA the authority to set what types and amounts of insurance a motor carrier must maintain. However, on March 21, 2011, the FMCSA eliminated the cargo insurance requirements for all motor carriers (except for HHG and passengers). Cargo insurance requirements are now a subject of negotiation between the parties.
  • The claim filing procedures and process set out at 49 CFR Part 370 apply to carriers and claimants and not to insurance companies.
  • As indicated, 49 USC 14101(b) authorizes carriers to operate as a contract carrier by entering into a contract pursuant to that section. That contract must set out the carrier’s insurance obligation, if any.  Although the carrier may continue to be liable under the Carmack Amendment, 49 USC 14706, that statute does not require insurance to be maintained. The contract needs to spell out the carrier’s  cargo insurance requirements,but the only way to confirm that the carrier maintains the correct coverage is to obtain and read a copy of the policy itself.
  • Common carriers can, and most do, limit their liability by maintaining liability limitations in their rules tariffs or pricing guides (or whatever the carrier decides to call it), but generally do not specify the type and amount of insurance the carrier will maintain. This is not a problem if the carrier is well-established and has substantial assets; however, it is a problem if the financial wherewithal of the carrier is unknown. In that  circumstance, a shipper, broker or other user of a carrier’s services would be wise to enter into a contract or have a pricing agreement that spells out the cargo insurance requirement.

How Brokers Can Deal with Slow Paying Shippers

Facts.  A broker submitted several questions concerning how to deal with the deadbeat/slow pay shipper-customer. The Oregon-based broker arranged for the transportation of a shipment of furniture for a customer located in California. The shipment moved from California to a warehouse in Maryland where it was held on behalf of the owner and ultimately delivered from the warehouse to a destination in Florida. The charges were about $30,000,  but the shipper-customer has only paid about $4000, although it has made numerous representations that payment would be forthcoming. The owner of the California shipper-customer signed a credit application that contained a personal guaranty, but he did not provide his DOB or SSN.

Questions: The broker asks the following questions:

  1. Since the shipper-customer is a member of the BBB, should the broker submit a complaint to the BBB or will it be opening itself up to a possible slander claim?
  2. Can the broker seek to collect from the warehouse-consignee  in Florida?
  3. Who can the broker file a lawsuit against?
  4. Can the broker take this to court since some small payments have been made?

Responses:

First, I do not recommend that the broker file a complaint with BBB.  In my 36+ years of practicing law, I have never been involved in, or even heard of, a situation where a complaint to BBB was used as a tool to collect past due charges.

Second, the broker may be able to collect from the warehouse-consignee, but that depends on what the bill of lading states. If the shipment was marked “collect” and/or if “section 7” was initialed by the shipper, then the consignee is primarily liable. The broker needs to look carefully at how the warehouse-consignee was designated. Is there any notation on the bill of lading stating on whose behalf the warehouse was receiving the shipment? If so, then that is your actual consignee.  Regardless, the broker might want to send a demand letter to the warehouse-consignee simply to see if they respond and provide useful information or a way to obtain the information needed.  If the broker goes after the consignee, it will have to sue them in Maryland or Florida. If the broker has a local attorney handle the claim, he or she can retain control of the case but will have to associate with an attorney in Maryland or Florida and be admitted “pro hac vice” to represent the broker in those courts.

Assuming this shipment was “prepaid,” meaning that the shipper is liable, then I recommend that the broker file a lawsuit here in Oregon against the California shipper and its owner to recover the amount owed. The credit application filled out and signed by the owner should be enough to establish jurisdiction here in Oregon, both against the company and him individually. The broker does not need to know the owner’s DOB or SSN to name him as a defendant. In this regard, the broker’s credit application should contain some of that boilerplate language that people often complain about. Specifically, there should be a “jurisdiction and venue” provision that states any lawsuit must be filed in Oregon in your home or a more convenient county, a “governing law” provision that states that the contract and any lawsuit will be governed by Oregon law, and an “attorney’s fee” provision that states the prevailing party is entitled to recover its attorney fees. If the broker’s credit application does not contain these provisions, it needs to be revised to add them.

In answer to question 4, the answer if yes. The shipper-customer breached its agreement with the broker and has repeatedly breached subsequent promises. The few small payments do not change that result under the facts described.

Shipper Bankruptcy: Can a Broker Sue the Consignee?

Facts:  A broker’s shipper/customer has been operating under Ch. 11 (reorganization), but recently converted the case to Ch. 7 (liquidation).

Question:  Can the broker collect its freight charges from the consignees even though they have already paid the charges to the bankrupt shipper?

Answer:   Probably, but you need to proceed with caution.

“Automatic Stay.”  The bankruptcy code provides for an automatic stay immediately upon the filing of a bankruptcy petition by a debtor. No legal proceeding may be commenced or allowed to continue once the petition in bankruptcy is filed. This also would extend to claims against assets of the bankrupt debtor. The automatic stay prohibits you from taking any action against the bankrupt debtor or the bankrupt debtor’s assets. Everything immediately becomes subject to the exclusive jurisdiction of the bankruptcy court.

However, in this case the consignees have already paid the bankrupt debtor. As a result, the action is not seeking to recover “assets of the estate” or filing any sort of claim against the bankrupt debtor. Thus, the automatic stay should not apply in the action against the consignee.

“Prepaid” vs. “Collect.”  If the bill of lading was marked prepaid, then the shipper/consignor is/was liable for the payment of freight charges. If the bill of lading was marked collect and/or the “Section 7” box was signed or other non-recourse language was indicated, then the consignee is liable for the payment of freight charges.  If the bill of lading was not marked as either prepaid or collect and there was no Section 7 or non-recourse language signed, then the default rules apply. (For more information see our previous article discussing the Oak Harbor Freight Lines v Sears Roebuck Co. case.)

“Estoppel Defense.”  Even if the bill of lading indicates that the consignee is liable for the payment of the freight charges, the consignee likely will argue that the broker/carrier is prohibited from collecting the freight charges from the consignee since the consignee should not be made to pay twice. This defense is sometimes upheld, especially when the carrier has done something that misled the consignee, such as not saying anything about payment of freight charges upon delivery or sending the bill to the shipper and not the consignee. The terms of the applicable contract, if there is one, and the normal course of dealing also will apply.

However, the estoppel defense is not always upheld, and there are an equal number of cases that have held that the carrier can collect the freight charges from the consignee even though it means the consignee will have to pay twice. The Oak Harbor v Sears case is an example–Sears was required to pay over $200,000 in freight charges twice.

Recommendation:

Care must be taken before going after a consignee after a shipper has filed bankruptcy. Legal counsel should be obtained to confirm that the automatic stay does not prohibit action, the bills of lading and transportation contracts should be reviewed for payment arrangements, and  a carefully worded demand letter should be prepared to make sure the proper analysis for liability is made and the estoppel defense thwarted at the outset.  You also need to determine what level of effort the claim amount justifies. You may find that smaller claims can be recovered, at least in part, by minimal effort with a demand letter from a lawyer and without the need for a lawsuit. On the other hand, large claims may justify further legal effort and possibly litigation.

Carrier’s Possessory Lien and Holding a Shipment Hostage

Facts:  A broker dispatched a carrier at an agreed upon rate set forth in a load confirmation. While en route a destination changed and a drop was added. The broker orally agreed to pay a higher rate. However, when the carrier made the first drop he called the broker and demanded a substantially greater amount be paid ($800) before he would make the second delivery.

Question:  Is it ever okay for a carrier to hold a shipment hostage under these circumstances?

Answer:   A carrier has a possessory lien for the agreed upon freight charges for the shipment it is transporting and has the right to be paid those freight charges before making delivery.  Since this is a possessory lien, the carrier loses it once it makes delivery.

In this case, the load confirmation set out the details of the shipment and was binding until the service requirements changed. Once the service requirements changed, the load confirmation became void as to the affected legs of the shipment. Although a new rate for the remaining legs was discussed, and maybe even agreed to verbally, it does not appear that a new load confirmation or any sort of written memo was prepared or signed confirming the new agreement.  As a result, the situation was a “broker says, carrier says” situation that the carrier took advantage of. This does not mean that the carrier was justified in doing what he did, but it highlights the need to document your agreements, which is what the carrier did when it sent an email stating that he needed an additional $800. That email appears to be the only writing regarding the subsequent agreement.

I do not believe it is ethical or moral for the carrier to do what he did, but I also do not believe you can prove that he acted illegally, that is, I do not believe he violated any law since he did not delay delivery.

Recommendations:

Again, this problem could have been avoided with a comprehensive contract. The contract could have addressed this problem and provided that in no event will the carrier refuse to deliver any shipment because of a rate dispute or other disagreement. The contract could contain a provision that imposed liability on the carrier for interest, attorney fees and possibly forfeiture of any other freight charges owed.

If you find yourself in this sort of position, you also could pay the demanded amount “under protest,” which would have to be noted in writing via fax, email or some other means. If you delivered payment to the carrier by check, the check should state “paid under protest” on the memo line. This preserves your right to file a civil lawsuit against the carrier, probably in small claims court, although you could also make a claim for “conversion,” which essentially is the civil counterpart to criminal theft.

Can Brokers Legally Offset Freight Loss and Damage Claims?

Facts:  A broker states that offsetting freight loss and damage claims against freight charges owed is a common everyday occurrence. However, the broker recently posted  three shipments on a load board and arranged for a single carrier to transport all three shipments.  Shipment number 1 was delivered without problem. However, there was a claim on shipment number 2 that exceeded the amount of freight charges owed for that shipment. The broker therefore offset the claim amount against the freight charges on both shipment numbers 1 and 2.  The carrier then refused to pickup and transport shipment number 3 and, further, filed a complaint with the load board charging the broker with improper offsetting. The load board ruled in the carrier’s favor and reduced the broker’s rating, which is causing other carriers to refuse to work with the broker. Despite arguing the issue at length, the load board won’t reverse its decision.

Question:   Is offsetting legal or illegal?  Is the load board right or wrong in upholding the carrier’s complaint and reducing the broker’s rating?

Answer:   Offsetting is legal, but the load board likely was correct and justified in upholding the carrier’s complaint and reducing the broker’s rating.

First, a little history. Prior to enactment of the Transportation Industry Regulatory Reform Act (“TIRRA”) in 1994, all regulated motor carriers were bound by the “filed rate doctrine.”  That doctrine required carriers to publish and file their tariffs with the Interstate Commerce Commission (“ICC”) and to strictly apply and enforce the provisions of the tariff. The primary purpose of the filed rate doctrine was to prevent and prohibit discrimination between similarly situated shippers. Thus, small shippers were entitled to receive the same rates as large shippers in the same industry.

Offsetting was a means for carriers to rebate and discriminate between shippers, so in 1937 the ICC adopted Administrative Ruling 65 which required a shipper to pay freight charges in full before filing a loss or damage claim. The ICC affirmed Administrative Ruling 65 in 1978 in Administrative Ruling 128. (It should be noted that although offsetting was prohibited between carriers and shippers informally, if and when  a case was in court in formal litigation, claims for offset were allowed to be made since the court was not bound by the ICC’s Administrative Rulings. Rather, the law and rules applicable to the court proceeding governed.)

As a result of TIRRA, the filed rate doctrine no longer applies to motor carriers (except household goods carriers). This means that offsetting is legal but, as discussed below, should be used in a reasonable manner with discretion.

However, even though offsetting is legal, the load board may be justified in upholding the carrier’s complaint and reducing the broker’s rating.  The broker does not state what justification the load board gave for its decision, but I suspect it had nothing to do with the legality or illegality of offsets in transportation. Rather, I suspect that the justification is found in the load board’s contract terms and conditions it requires all participants to agree to before being allowed to join. These terms and conditions are set forth on a screen when you go to join, and you must check the “I ACCEPT” box before being allowed to participate. So, the question is, what did the load board’s terms and conditions provide? More specifically, what did the broker agree to?

The load board used by this broker contains broad terms and conditions. However, because I am not a member and do not qualify to become a member, I was unable to search all areas of the website and the various programs, including those for complaints by carriers against brokers and vice-versa. However, I was able to find specific terms and conditions  on other load board websites that specifically state that “offsetting is not allowed.”  Thus, I believe that the broker got caught up in the load board’s contract terms and conditions and it rules and policies applicable to particular issues, including offsets.

Recommendations:

It is critical for brokers to have  comprehensive Broker-Carrier Contracts executed by each carrier used. Similarly, it is critical for shippers to have comprehensive Shipper-Transportation Provider Contracts with each carrier, broker and freight forwarder used.   If the broker or shipper, as the case may be,  plans on applying offsets, the contract should have specific provisions allowing offsets and further setting forth a reasonable procedure to be followed. The provision should allow the affected party a reasonable amount of time to investigate, adjust and process a claim before applying the offset. A broker or shipper runs the risk of paying tariff penalties, interest and attorney fees to the carrier if it improperly applies an offset. An offset is valid only if the carrier is liable under the Carmack Amendment or the provisions of the contract. Shippers and brokers are not allowed to unilaterally declare a loss and offset for some arbitrary amount without first giving the carrier and, in some cases, the broker, its “day in court.”

If there is a valid contract that authorizes offsets between the parties, then that contract should override any general provision in a load board’s terms and conditions or policies. The contract reflects the specific agreement between the parties to allow offsets.