Covering Liability Gaps: Best Contracting Practices for Freight Brokers

Brokers do not always enjoy the leverage to dictate contract terms with their shippers (to put it as diplomatically as I can). Let us be real, often shippers are heavy handed with their contract terms, and they only tolerate minimal contract negotiations. So, what should you do as a broker?

Focus on Covering Your Liability Gaps. (1) Know the risks you care about the most, (2) know your carrier agreement, (3) know your carriers’ insurance and your insurance, (4) know what the shipper is demanding, and (5) know what risks in #1 are exposed in #2-4 – know your gap – so you can prioritize your negotiations accordingly.

1. Know the risks you care about the most. Everyone’s risk tolerance is different. Know your risk tolerance when it comes to personal injury claims in motor vehicle accidents and slips and falls. Know your risk tolerance in cargo claims, delay/service penalties, payment terms/credit risk/billing rights, and so on. The contract language you will agree to largely depends on what you are good at as a brokerage, and your corresponding risk tolerances. For example, a shipper may have a form contract for all its business units. One of those units may have high value goods, but you are not serving that business unit. And you know your Operations team is really disciplined and will avoid all loads from the high value business unit. If you have confidence in your team’s discipline, then you may have more risk tolerance to agree to a cargo liability cap of $500,000. If you do not have that confidence, you may not tolerate such a high cap.
2. Know your carrier agreement. When you review the shipper’s agreement, compare it to what is in your carrier agreement. If your carrier agreement holds the carrier to the same standards to which your shippers holds you, then you have a smaller liability gap.
3. Know your carriers’ insurance and your own. Review the shipper’s insurance requirements – both those they require from you, and those they require from your carriers. Compare those to what you and your carriers have, in terms of types of insurance, exclusions, dollar amounts, and administrative requirements. Do you have enough insurance, do your carriers, can you get your carriers to provide more? If not, how much will it cost to cover the gaps? Can you pass those expenses along to the shipper?
4. Know the shipper’s requirements, and practices. Even if you cannot negotiate the contract terms, review the requirements nonetheless and ask questions to help figure out a way to minimize your own risks. For example, if your shipper will not agree to a cargo liability cap, will they disclose the cargo values at load tender so you can price/reject accordingly?
5. Once you have reviewed the shipper’s agreement for #2-4, analyze it against your risk tolerances in #1.

The goal is always to figure out how to say yes to contracts and more business, but to do so with eyes wide open so if there is room to negotiate terms, you can prioritize covering your biggest gaps with the negotiations, and you can prioritize internal adjustments to manage contract risks operationally or through pricing. Building strong contract review practices will help you get more comfortable with the business risks by at least giving you strength in knowledge of the risks and giving you more confidence in knowing when a customer’s risk demands are simply to much for you to manage and tolerate.