In August of this year, President Obama signed a new Highway Bill --- “Moving Ahead for Progress in the 21st Century Act” aka MAP-21. This 584 page document deals with many issues. In this installment of PARCEL Counsel we will focus on just eight pages relating to transportation brokers and freight forwarders. During the legislative process this was referred to as the “Fighting Fraud in Transportation Act of 2011”. The most controversial part of this portion of Map-21 is the increase in the amount of a broker’s surety bond from $10,000 (set in 1937) to $75,000. As a starting point, I would like to explain what a surety bond is and how it differs from insurance.
A surety bond is intended to serve as a financial guarantee whereby one entity, known as the surety, guarantees the financial performance of another, known as the principal. With regard to transportation brokers, the purpose of the bond is to provide a source of payment to carriers in the event the broker fails to do so. The surety charges the broker an annual fee for the bond. If the surety has to pay the motor carriers, the surety has the right to seek reimbursement from the principal, i.e. the broker, for the amounts paid out as the result of the failure of the broker to pay the carriers.
This is very different than when one purchases insurance. With insurance, a person pays an annual premium, however if a loss occurs the insurance company does not have the right to seek reimbursement from its insured --- that would defeat the purpose for which the person bought the insurance. With that in mind, insurance premiums are set by an insurance company so that over time the amount of premiums collected from its customers are sufficient to cover the claims paid out by the insurance company.
With respect to companies issuing surety bonds, they know that although they have the right to seek reimbursement from the broker for repayment of any amounts the surety has to pay out. It is also understood that this right is of little value since the claim against the broker would not normally arise if the broker was financially solvent. Thus, the surety companies may require collateral to secure their potential liability for paying claims against the bond. The amount of collateral required can range from none at all to 150% or more of the face amount of the surety bond depending upon the financial strength of the broker.
This aspect of a surety bond is what has caused the controversy. Shippers and motor carriers have long advocated for an increase in the bond amount. Over the years the brokerage industry has resisted this change because, amongst other things, of the fear that it would lead to the demise of smaller brokers. With the increase of the bond amount of $10,000 to $75,000, the amount of collateral that could be required becomes very significant. What small company has an extra $75,000+ in cash to post for a bond?
The new law also extends the requirement for a surety bond to freight forwarders who were not previously required to have a surety bond. My understanding of why the bonding requirement is now being extended to freight forwarders is that, if not done so, existing brokers would simply cease operating as brokers and begin operating as freight forwarders to avoid the bond requirement.
It should also be noted that although the new law has passed, it is not to become effective until one year after it was passed, that is, August, 2013. In the meantime, the Federal Motor Carrier Safety Administration (FMCSA) has been directed by Congress to write regulations to implement the provisions of the new law.
In the next installment of Parcel Counsel we will continue our analysis of the Fighting Fraud in Transportation Act of 2011…but, all for now!
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor of transportlawtexts, inc. Previous columns, including those of William J. Augello, may be found in the “Content Library” on the PARCEL website (www.PARCELindustry.com). Your questions are welcome at brent@primuslawoffice.com.In August of this year, President Obama signed a new Highway Bill ---
A surety bond is intended to serve as a financial guarantee whereby one entity, known as the surety, guarantees the financial performance of another, known as the principal. With regard to transportation brokers, the purpose of the bond is to provide a source of payment to carriers in the event the broker fails to do so. The surety charges the broker an annual fee for the bond. If the surety has to pay the motor carriers, the surety has the right to seek reimbursement from the principal, i.e. the broker, for the amounts paid out as the result of the failure of the broker to pay the carriers.
This is very different than when one purchases insurance. With insurance, a person pays an annual premium, however if a loss occurs the insurance company does not have the right to seek reimbursement from its insured --- that would defeat the purpose for which the person bought the insurance. With that in mind, insurance premiums are set by an insurance company so that over time the amount of premiums collected from its customers are sufficient to cover the claims paid out by the insurance company.
With respect to companies issuing surety bonds, they know that although they have the right to seek reimbursement from the broker for repayment of any amounts the surety has to pay out. It is also understood that this right is of little value since the claim against the broker would not normally arise if the broker was financially solvent. Thus, the surety companies may require collateral to secure their potential liability for paying claims against the bond. The amount of collateral required can range from none at all to 150% or more of the face amount of the surety bond depending upon the financial strength of the broker.
This aspect of a surety bond is what has caused the controversy. Shippers and motor carriers have long advocated for an increase in the bond amount. Over the years the brokerage industry has resisted this change because, amongst other things, of the fear that it would lead to the demise of smaller brokers. With the increase of the bond amount of $10,000 to $75,000, the amount of collateral that could be required becomes very significant. What small company has an extra $75,000+ in cash to post for a bond?
The new law also extends the requirement for a surety bond to freight forwarders who were not previously required to have a surety bond. My understanding of why the bonding requirement is now being extended to freight forwarders is that, if not done so, existing brokers would simply cease operating as brokers and begin operating as freight forwarders to avoid the bond requirement.
It should also be noted that although the new law has passed, it is not to become effective until one year after it was passed, that is, August, 2013. In the meantime, the Federal Motor Carrier Safety Administration (FMCSA) has been directed by Congress to write regulations to implement the provisions of the new law.
In the next installment of Parcel Counsel we will continue our analysis of the Fighting Fraud in Transportation Act of 2011…but, all for now!
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor of transportlawtexts, inc. Previous columns, including those of William J. Augello, may be found in the “Content Library” on the PARCEL website (www.PARCELindustry.com). Your questions are welcome at brent@primuslawoffice.com.In August of this year, President Obama signed a new Highway Bill ---
