The Transportation Intermediaries Association (TIA) claims to offer both $100K and $250K freight broker bonds under their “Performance Certified Program”.
One would think that if a freight broker purchased a larger bond, the FMCSA would list the larger bond amount in their database. However, after reviewing bond filings of freight brokers that purchased a $250K bond, we found that only a $10K bond was being reported.
The bond is a legal document (called a bond form) guaranteeing that the bonding company will pay for claims if the freight broker is unable to. The bond form language is created by the FMCSA (obligee). What’s important to know is that like all bond forms, the FMCSA’s $10K BMC-84 bond form has “single and aggregate language” in it set to $10,000. What that means is that no single claim can exceed $10K, nor can the total of multiple claims. In other words, the FMCSA’s database is showing that the TIA’s bonding company only has $10,000 of liability.
When it comes to surety bonds, the obligee always sets the bond amount. However, bonds cannot be filed for a penny less or a penny more. So what precisely are these “Performance Certified” freight brokers paying for?
It turns out Avalon Risk Management (TIA’s insurance agency partner) does not file any $100K or $250K bonds with the FMCSA. They created their own Property Broker’s Excess Surety Bond form in the amount of $90K and $240K. In other words, they are advertising it as a single bond, but are providing two separate bonds that are not one in the same.
The form does not list a specific obligee but “cargo shippers and motors carriers” collectively. An Obligee is the party requiring the bond and is where the bond is filed. However, in this instance, no one is requiring the bond and freight brokers are seemingly unaware that it should be filed with all of their shippers and carriers. So how are claims to occur if the bond is not being filed? This begs the question whether a claim has ever been filed on the excess bond and whether or not freight brokers are paying for “coverage” that is useless.
It is inaccurate to list two separate bond guarantees as one in the same. The TIA advertises the program as a single bond. As we’ve discovered, it is not a single bond filed with the FMCSA, but a separate bond that is not filed with any government department, or possibly anywhere. However, it is a real bond, backed by an insurance carrier. Although, the insurance carrier backing excess the bond is so financially weak that it is not accepted in most instances…more on that to come.
To put this into terms most are more familiar with, a bond is actually similar to a bet. Let’s use a football game as an example. Two people are betting on a football game for $100. The first person is under the impression there is a $100 bet on the outcome of the game. However, the second person is betting $10 on the outcome of the game, but the other $90 on the coin flip at the beginning. It’s not a problem that there are multiple bets on the same game, but it is a problem if both parties are not on the same page with what the bet actually is.
A bond only has value if the insurance company is strong enough to back it up. Avalon Risk utilizes “Southwest Marine & General Insurance Company” for the $10K bond. According to A.M. Best, their outlook is “Negative”, meaning they are likely headed for a downgrade. Worst case scenario, their downward spiral continues until they no longer exist and freight brokers will be forced to purchase a replacement bond. It should be clear that this is not likely in the near future, as they do have an ‘A’ rating, but it would be wise to check in on this every year if you are one of their clients.
One might think their “excess bonds” would be placed with the same insurance carrier as the $10K bond, but that is not the case. “Lincoln General Insurance Company” is the carrier backing their $90K/$240K excess bonds. They are “Not Rated” by A.M. Best, which is unacceptable as a bond by the vast majority of obligees throughout the country. The big question is why didn’t they write the excess bonds with an A-rated carrier? My professional guess is that they couldn’t, as the surety industry as a whole does not write blanket bonds for private entities due to the risk it would pose to them and the freight brokers paying for the bond…more on that later.
It is not abnormal to place different bonds with different carriers, but one must question why an A-rated carrier could not be partnered with for the excess bonds.
While the TIA may be writing bonds for the “mega brokers” of the world, we created a surety bond for program for any sized broker, backed by a bonding company with superior strength.
If your bonding company loses its license to issue bonds, you could be forced to purchase a replacement bond immediately. With so many brokers unable to pay for the $75K bond increase, how many can afford it twice? This would surely be a hit even to larger brokers.
Many are under the impression that the bond is on file with the FMCSA and providing them some level of protection. However, the truth of the matter is quite the opposite. Not only is the bond not held by the FMCSA, but a bond by nature does not protect freight brokers. In fact, they are a potential liability. Keep in mind, when a claim arises, the bonding company will look to the freight broker for reimbursement. That is why an “indemnity agreement” is signed when a bond is issued.
The way these “excess bonds” read is that any cargo shipper or motor carrier can make a claim. Is it a good idea to provide a blanket guarantee to private companies? The surety industry as a whole certainly doesn’t think so! In fact, bonding companies throughout the U.S. do not write bonds for private companies unless a large corporation (e.g. Fortune 500 companies) is requiring the bond. Why? Small companies are usually unfamiliar with surety bonds and make a lot of invalid claims.
It may not be a wise decision to provide this blanket guarantee, but as stated above, if the bond isn’t filed anywhere, is there any real liability? Then again, if it isn’t filed anywhere, you just paid for a very expensive piece of paper.
Now that you know how the “Performance Certified” program works, you may want to get your money back. The good news is, you can! The FMCSA’s online filing system is still not able to accept anything other than a $10K bond. That means all “Performance Certified” brokers still only have a $10K bond in place. Once the FMCSA allows for a $75K filing, Avalon Risk will no doubt be increasing the FMCSA bond and lowering the excess bond. That means legally, they have yet to issue any $75K bonds to the FMCSA. If you have made payment for a new $75K bond, they are legally required to provide you a full refund if you wish to part ways with them. Once the bond is issued, premiums are fully earned, meaning no refunds. In other words, if this affects you or know someone that does, you need to act immediately.
We suggest freight brokers get a $75K bond quote with us, then compare what they got from the TIA and their lesser bonding company partners. We’ll not only set you up with a better bonding company, but whether you are a small or mega broker, we’ll save you thousands.