As a small motor carrier, you may find yourself struggling to collect payment from a freight broker for an extended period. What steps can you take?
This is a common predicament for many carriers, particularly in the wake of a freight recession impacting both freight brokers and trucking firms.
For example, Armada Transport, based in Illinois, has been chasing over $22,000 owed by Elite Transit Solutions, a third-party logistics provider that has nearly terminated its staff.
According to federal regulations, brokers and freight forwarders must maintain at least $75,000 in financial security, which carriers are entitled to claim if unpaid. This security is often backed through surety bonds, also known as freight broker bonds.
Understanding Surety Bond Cancellation
All surety bonds include a cancellation provision. Unlike typical insurance, a freight broker’s surety bond has a 30-day cancellation policy. For instance, if the bond is canceled on October 15, it remains effective for a full 30 days.
After cancellation, there is a 60-day period during which claimants can submit claims against the bond. However, what if claims exceed the bond amount?
“This often occurs when a freight broker faces financial collapse,” Weisbrot notes. “Once the claims are submitted within the 60 days, the surety will review them and honor legitimate claims on a proportional basis, rather than on a first-come, first-served basis.”
“For example, if claims total double the bond amount, each claimant would receive 50 cents on the dollar,” Weisbrot clarifies. “The greater the total claims, the smaller the payouts for each.”
This unfortunate scenario is increasingly common, especially as the transportation sector has faced recession since September of last year, leading to numerous freight broker failures this year.
Reasons Claims May Be Denied
According to Weisbrot, “We typically see up to 20 claims per day, with many being resolved.” Nevertheless, several factors could lead to the denial of claims by the surety or insurance provider.
1. Payment Is Not Yet Overdue
“Many carriers are experiencing cash flow issues similar to those of brokers and often seek immediate payment,” he states, explaining that claims may arise before actual payment is due.
2. Claim Involves Exempt Commodities
One of the foremost reasons for denial is that specific commodities are exempt under federal law, affecting the validity of many claims. Exempt items can include certain food products—like grain and eggs—that cannot be claimed.
3. Intrastate vs. Interstate Deliveries
Claims might also be rejected if the shipment is an intrastate delivery rather than an interstate one, as federal laws typically apply to interstate commerce.
4. Legitimate Disputes Exist
Weisbrot cites an example where a carrier believes a claim is valid, but the broker is withholding payment justifiably due to clauses in their agreement about late deliveries.
“In cases of disagreement, it will need to be resolved through legal channels,” he advises.
Increasing Insurance Minimums
The minimum financial requirement for brokers was raised from $10,000 to $75,000 by the Moving Ahead for Progress in the 21st Century Act (MAP-21) a decade ago, yet many argue this is insufficient.
The FMCSA has suggested revisions to financial responsibility standards for freight brokers and forwarders to tackle the issue of unpaid debts to motor carriers more effectively.
