What’s at Stake?

Knowing your carriers’ safety data, and that their documentation is up to speed every day, is a pretty new requirement for shippers.

Minimizing risks — such as incidents of freight damage, cargo theft, highway accidents, hazmat releases, and injuries to third parties — is a critical component of sound corporate governance, cost-control, and maximized shareholder confidence. And today, more than ever, shippers are exposed to legal liability arising from the conduct of their carriers.

When product is lost and harm results, or a highway accident involves a motor carrier, shippers are being held accountable and liable. The plaintiffs’ bar is becoming more aggressive pursuing claims against shippers, and courts are becoming more amenable to these claims. And, perhaps more alarming, the legal trend is a clear and steady erosion of traditional protections against this type of exposure.

Without sound risk management practices within their organization, shippers are exposed to substantial risk.

Shippers’ exposure to liability for the conduct of carriers and brokers is nothing new. Under the doctrine of vicarious liability, shippers have faced this risk for decades. Where a shipper acts as principal, and a carrier or broker acts as agent of the shipper, liability for the conduct of the carrier or broker may be attributed to the shipper. This is the essence of vicarious liability. In brief, vicarious liability will extend to a principal (here, a shipper) where the principal has the right to control the conduct of the agent (here, a carrier or broker) and the agent, acting within the scope of agency, is found negligent, reckless or liable for intentional misconduct.

Minimizing exposure to vicarious liability is well understood. Virtually every shipper is familiar with the risk management solution of hiring an independent contractor transportation specialist (a motor carrier and/or freight broker) and relying on the contractor’s expertise to reduce incidents of freight loss, damage, hazmat release, highway accidents, and so forth. Thus, as transportation managers know, reducing (virtually eliminating) exposure to vicarious liability requires (1) creating legal relationships with carriers and brokers that are expressly not principal-to-agent relationships, and (2) establishing procedures specifically designed to avoid controlling the conduct of carriers and brokers.

For decades, this solution has served to protect shippers. The fact is, however, that in light of recent court decisions, shippers may no longer rely on this solution.

Today, more than ever, shippers are being held liable for property damage or bodily injury (including wrongful death) caused by motor carriers.

Beginning in 2004, the ground shifted under the feet of shippers. From the late 19th century (in the days when actual teamsters moved freight by driving actual teams of horses) through 2004, the legal landscape was flat and featureless, the rules easy to understand. A carrier picked up freight. The carrier delivered the freight. Between those two points, the carrier, and the carrier alone, was liable for any and all property damage or bodily injury it caused. This has changed. Today, spurred by the Maryland federal court decision in Schramm v. Foster, over and over, shippers are being held liable for property damage or bodily injury (including wrongful death) caused by motor carriers. Shipper liability arises where a plaintiff can show (1) the carrier caused injury to the plaintiff’s property or person through negligence, recklessness or intentional misconduct and (2) the shipper did not exercise reasonable care or perform proper due diligence when it screened, vetted, and selected the carrier to move the shipper’s freight.

The “Duty of Reasonable Care and Due Diligence” is an independent, non-delegable legal duty imposed on shippers. It cannot be avoided by contract or passed to a carrier or broker. In order to perform due diligence and exercise reasonable care, shippers need tools to qualify and continually monitor their carriers.

Many shippers believe that rigorous indemnity provisions found in shipper-carrier, shipper-broker, or broker-carrier agreements will provide all the protection the shipper needs. Unfortunately, this is not the case.

First, more often than not, a carrier’s liability insurance will exclude indemnity for independent claims against the shipper. Although it may be termed differently by different courts, the legal doctrine that sprung from the 2004 federal court decision in Schramm v. Foster, and has been growing sharper in courts around the country, may usefully be called “negligent hiring.” In the eyes of the law, negligent hiring is an independent tort. It provides a plaintiff an independent claim against a shipper, where a shipper fails to exercise reasonable care and perform due diligence. In cases where a plaintiff brings claim against the shipper for negligent hiring (a claim independent of all claims against the carrier), more often than not, the carrier’s insurance policy will deny indemnity.

Second, even where a carrier’s liability insurance is available to a shipper, the protection it affords may provide little more than cold comfort.

Here is an example:
Let us say, the Smith Family is injured in a highway accident caused by a motor carrier. The Smith Family brings an action against the driver, carrier, and shipper. The Smith Family carries its burden, and secures a judgment for $25 million.

The jurisdiction where the Smith Family brought suit (like virtually every jurisdiction in the United States) recognizes the doctrine of Joint and Several Liability. Under Joint and Several Liability, each individual defendant is independently responsible for the entire $25 million judgment. One way or another, the court will ensure that the Smith Family’s entire $25 million judgment will be satisfied.

Let’s say that all of driver’s insurance and other assets have been exhausted, netting $5 million. Further, all of the carrier’s insurance and other assets have been exhausted, netting $10 million. In this scenario, even if the shipper has a right of indemnity against the carrier, the carrier’s assets are no longer available and the right of indemnity is of no moment. Here, the shipper stands alone as the party responsible for satisfying the Smith Family’s outstanding $10 million judgment.

The only protection available to the shipper is preemptive and that is, proof that the shipper is not liable to the Smith Family, under a theory of negligent hiring, because the shipper exercised reasonable care and performed due diligence when it screened, vetted and selected the carrier to move its freight.

That’s where we come in. Don’t take unnecessary risk. Start qualifying and monitoring your carriers today with a free trial of our risk management solution.