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Setting the Record Straight on Broker Liability for Loss and Damage ClaimsBy Nathaniel Saylor

In my experience, there is more bad information and misunderstanding in the industry regarding whether and to what extent a broker is liable for cargo loss and damage claims than with almost any

other topic that affects brokers. You will not find a silver bullet to cargo claim liability issues when you finish reading this article, but you may well find your­self better equipped to address the issues in your next contract negotiation, or the next time a claim lands on your desk.

I frequently hear people say that “brokers are not liable for cargo claims”. That is at best a half truth. It is true that brokers who do not operate their busi­nesses in such a way as to give claimants an argument that brokets are in fact holding themselves out as carri­ers are not liable for cargo claims pursuant to the Car­mack Amendment. Carmack is the federal statute that imposes liability' for cargo loss and damage on motor carriers and surface freight forwarders, with respect to non-exempt cargo moving in interstate commerce.

However, it is not correct to say that brokers are not liable for cargo loss and damage just because they are not liable under Carmack, To make an analogy, there is no federal statute that says a driver is liable if they hit someone else with their car, but that is not the same as saying the driver is not liable. This is America. Anyone can be liable for anything. Just as a driver can be liable under the tort laws of each state if they negligently injure someone while driving, so too might a broker be liable under various state law causes of ac­tion such as negligence, breach of contract, et cetera.

To complicate matters, a claimant’s allegations against a broker are typically state law causes of action. The specific causes of action, and even the applicable law with respect to the same cause of action can vary from state to state, from judge to judge, and from jury to jury.

It is true that brokers have had success in some instances in recent years in arguing that federal law preempts any state law that might be used to impute liability for cargo loss and damage claims on a broker. However, there is no guarantee that a court will side with the broker on this question, and in any event, preemption will generally not save a broker from any liabilities that are agreed to under contract with a shipper.

So how should a broker be addressing liability' for cargo claims? The answer depends on whether we are

talking about a signed customer contract, or the bro­ker’s default terms and conditions. If you are a broker that does not have default tenns and conditions post­ed to your website and otherwise incotporated into your relationships with customers, you are missing the single easiest way to protect your business.

Are You an Ostrich?Often, in their terms and conditions, 1 see brokets that try to avoid the issue of their own liability' for cargo loss and damage altogether—as if that “ostrich de­fense” will protect them from liability' They address the carrier’s liability for cargo loss and damage, but do not address whether and to what extent the broker might be liable.

This is a huge missed opportunity. By remaining silent with respect to its own liability, the broker in­vites the claimant to make any claim that might be available under state law. If the tenns and conditions are silent as to the broker’s liability, the liability', if any' that might be imposed is unlikely' to be capped either.

It is true that in an allegation under state law as to liability', the claimant is usually going to have to show some actual misconduct by the broker, but a negligence claim merely means that the broker failed to act as a “reasonable person”. Any claimant’s attor­ney worth their salt will be able to make an allegation of lack of reasonableness, which would at least create settlement leverage. The broker could aigue for pre­emption as well, but again, that argument is not neces­sarily guaranteed to carry the day.

For these reasons, rather than ignoring cargo claims, it has always seemed to me that brokers are in a better position if they address the issue head on in their tenns and conditions. This can be done either by expressly disclaiming liability', or by claiming liability' in instances of the broker’s negligence or breach of the agreement, but then capping the liability at an accept­able level.

The latter of those two approaches is preferable because an absolute disclaimer of liability' effectively forces the claimant’s hand in pursuing the claim by alleging conduct so egregious that a court would not allow the broker to disclaim liability. Simply put, if the broker agrees to be liable for claims it causes by its negligence, but then caps that liability' for instance, at the amount charged by the broker on the move giving rise to the claim), the broker has not only' limited the instances in which it should be found liable, but has

Continued on page 15

Transportation Intennediaries Association 13 The Logistics Journal

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Setting the Record Straight On Broker Liability for Loss and Damage ClaimsContinued from page 13 ______________

capped the amount of that liability.If the broker pays the claim at its limited amount,

the claimant now is forced to go to court. The claimant must argue that the limitation on liability should not be enforceable, which is a far less palatable proposi­tion than arguing that a complete disclaimer of liability should be overturned.

The head in the sand approach topically is not an option either for contracts. If we are talking customer contracts, courts generally find that preemption will not save a party such as a broker from contractually as­sumed liabilities. Customers typically seek to impose liability for cargo claims, more and more, by simply requiring that the broker accept direct liability under Carmack.

Even if the broker is able to avoid a cargo liabil­ity provision, it is possible that the indemnity clause, which again is typically uncapped as to amount, could be read to address claims for cargo loss and damage. However, a direct claim for cargo loss and damage by the customer against the broker might not be a true “indemnity” claim for other reasons. Once again, the broker’s best bet is typically to address cargo liability head on, and then seek to cap the liability.

Three Steps to TakeSo what is a broker to do?

First, consider whether and to what extent to ad­dress cargo liability in your default terms and condi­tions of service. As noted above, options would be to disclaim liability altogether, or to accept liability in instances of proven malfeasance, but to then cap that liability. While counterintuitive, for the reasons noted above, the latter might well be preferable.

Second, when negotiating customer contracts, see if you can negotiate a similar liability standard and if not, be sure that if you are accepting Carmack liability that the contract is clear that if you pay the claim, the carrier is not liable to the customer and that the cus­tomer assigns its claim to you.

Third, the broker’s best defense to cargo claims has always been and remains taking steps to ensure that its carriers pay claims. In this regard, it is impor­tant that the broker clarify in its terms and conditions and in customer contracts that the earners it uses wall cap their liability to minimize the potential that the broker will be sued because the loss exceeds the car­rier’s limitation.

Obviously the broker should also ensure that its carriers have contractually agreed to liability for claims, and that such liability is no less than what the broker agrees to with its customers so as to avoid gaps. How­ever, as any broker that has been in business for any

amount of time can tell you, the carrier’s acceptance of liability is cold comfort if the carrier does not have motor canier cargo liability insurance, or if that liability excludes coverage.

A discussion of the ways in which a broker should protect itself with respect to carrier insurance cover­ages is beyond the scope of this article, but in short, not all cargo policies are created equal.

Cargo policies can, and do, have numerous excep­tions to or exclusions from coverage and if die relevant policy language is not being reviewed by an expert, there are no guarantees of coverage. Brokets should work with dieir insurance professionals to ensure that the broker has insurance covering its ovm liability. Ideally, that insurance wxtuld actually insure the broker against its own liability as opposed to merely providing coverage if the carrier’s policy does not provide coverage.

In short, make sure you understand your com­pany’s potential exposure for cargo claims. Ignoring the issue does not make it go away, and could actually leave you in a worse position than if you take a measured approach to the issue.

The author, Nathaniel G. Saylor, Partner, Scope!itis, Gaivin, Light, Hanson & Peary, PC. can be reached at 435-315-3948 or nsavlor@scopelitis.com

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Transportation Intennediaries Association 15 The Logistics Journal

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