Will the fidelity market experience the one-two punch of lower premium volume and increased claims activity in what has traditionally been a low-risk, and growing, category? While concerned about fidelity bond customer demand in the near term..
BMC-84 Freight Broker Bonds: Invalid Claims Obscure Results
Author: Eric Weisbrot
Posted On: 04-22-2020
Freight brokers comprise a notable subset of surety bond business, as licensed brokerages are required to post some form of security in order to comply with licensing requirements. Brokers can opt for a freight broker trust or a freight broker bond to fulfill these federal requirements. However, the freight broker bond, known as BMC-84, is the more common option for licensed freight brokers, as it has less burdensome requirements from a financial perspective for brokerage businesses.
For surety professionals, it is essential to understand what a BMC-84 freight broker bond is and how it works, along with the claims process when things do not go as planned.
Defining BMC-84 Bonds
Under the current regulations set forth by the Federal Motor Carrier Safety Administration (FMCSA), any licensed freight broker or freight forwarder operating within the United States must secure a bond or fund a trust to comply with the law. The FMCSA mandates a $75,000 bond or trust based on legislation signed into law in 2013. This requirement is meant to provide some assurance to shippers and carriers that the freight brokers whom they work with will do business as agreed and in-line with federal guidelines.
The freight broker bond, or BMC-84, is the more common choice among licensed brokers, as it requires brokers to pay only a fraction of the $75,000 requirement as a bond premium. A freight broker trust, on the other hand, requires a cash, security, or collateral deposit of the full amount.
How BMC-84 Bonds Work in Practice
Throughout the freight industry, several regulations are in place to ensure safety and fair business practices among the parties involved. BMC-84 freight broker bonds are a part of this foundation laid out by the FMCSA. As with any surety bond, the BMC-84 is a contractual agreement between three distinct parties: the licensed freight broker, known as the principal of the bond; the surety company providing the bond to the broker; and the federal authority requiring a bond to be in place, known as the obligee.
In practice, the surety company providing the bond to the principal of the BMC-84 guarantees that payment for legitimate claims against the broker or brokerage business will be paid, up to the limits of the bond. However, the principal is ultimately responsible for repaying any successful claims back to the surety company. The freight broker bond, then, works as a form of extended credit to the broker, specifically meant to cover claims quickly and efficiently should they arise. Both the federal government, through the FMCSA, and individuals or businesses that contract to do business with licensed freight brokers have the ability to file claims against the BMC-84 bond.
Requirements for Obtaining BMC-84
Licensed freight brokers must go through several steps to comply with licensing rules and regulations. The first part of the process, particularly for new freight brokers, is obtaining motor carrier authority through FMCSA. This involves completing a brief application online, as well as paying a non-refundable licensing fee. Once a broker has secured his or her motor carrier authority, freight broker insurance may be necessary. It is important to note that liability insurance is not the same as a freight broker bond; both may be required as part of the licensing process.
Freight brokers also must secure a processing agent in each state they plan to operate. This individual is served claim paperwork if a claim is brought against a licensed broker. Once these pieces are in place, a broker can apply for their BMC-84 freight broker bond with a surety company. The surety company takes time to review the broker’s application, focusing on credit history and other financial aspects of the broker’s business. Because a BMC-84 bond works as a form of credit to the broker, it is imperative to review a bond applicant’s financial information closely. Those with less than ideal credit history or recent financial issues pose a greater risk to the surety company than brokers who have a clean bill of financial health.
When a BMC-84 bond is issued and payment for the bond is received, proof of the bond is submitted electronically to the FMCSA by the surety company.
Understanding Bond Claims
One of the reasons it is crucial for surety professionals to understand all the ins and outs of the BMC-84 bond revolves around claims against freight brokers. Before 2013, the bond requirement amount was set at $10,000, representing a far lower guarantee for the FMCSA and carriers and shippers working with freight brokers. The increase to $75,000 was meant to provide a greater level of security in the freight industry given that claims were, and continue to be, prevalent.
The Prevalence of BMC-84 Bond Claims
Although there is no consistent statistical data on the number of claims against licensed freight brokers, BMC-84 bonds are inherently risky. This has to do with the nature of the freight brokerage business model. Freight brokers do not physically take possession of loads, but instead, work as the intermediary between shippers and motor carriers to facilitate freight transactions. Motor carriers and shippers contract with freight brokers to complete jobs, and they expect to be paid in the timely fashion for the work performed.
Licensed brokers experience higher claim rates compared to other industries because they are responsible for paying carriers for completed work. When payment does not come as quickly as a carrier would like, their first course of action is usually to make a claim against a bond. However, many of these claims can be easily resolved, or are simply invalid. The high number of invalid claims can be linked to the fact that payments are not received as fast as a carrier thinks they should be, even if the contract has not yet ended. Motor carriers may feel as though their only recourse is a claim against a freight broker bond for non-payment, but in most cases, payment is already in the works.
Legitimate claims do take place, however. These are most common when payment is not made to carriers fulfilling these freight transactions, or when other aspects of the contract with a broker are not met. The FMCSA may also bring claims against a licensed freight broker if he or she does not comply with licensing requirements or fails to perform work in-line with current laws. These factors of doing business as a freight broker create a claim-heavy industry, whether invalid or legitimate, making the BMC-84 a crucial piece of the puzzle.
When Claims can be Filed
In most cases, claims can be made against a freight broker with a BMC-84 bond once a contract ends and payment or another aspect of that contract is not fulfilled. Claims are brought to the surety company providing the BMC-84 bond by either the carrier or the FMCSA, often within 90 days after the end of the contract term. Typically, claims cannot be filed until the end of the contract, as the broker still has time to satisfy the terms of the agreement up until that time.
Processing Bond Claims
Surety professionals receiving BMC-84 bond claims must take care to process claims in a timely fashion, but it is necessary to note that not all claims are legitimate. Carriers may file a claim too early in their work with a licensed broker, before a contract has ended, or they may bring a claim instead of having a discussion with the broker to try and remedy the issue with the contract. In some cases, a problem with payment or contract fulfillment is not intentional on the broker’s part, or it is simply an oversight that can easily be fixed. However, claims must be treated the same, regardless of the reason or intent.
When claims are made against a bond, the surety company should take the time to understand the claim details, as well as determine if it is legitimate or not. If a claim is valid, payment is made to the claimant, but the broker is ultimately responsible for repaying these claims covered by the surety company.
BMC-84 Bond Cancelations and Renewals
All freight broker bonds are in place for a one-year term once they are issued. After the initial term expires, licensed brokers renew a BMC-84 bond based on their current personal and professional financial picture. Bond premiums may decrease for brokers that have had no claims during the previous one-year term, or those who have increased their financial standing during that same timeframe. For those who have had claims against their BMC-84 bond or credit issues, the cost of the bond may increase at the time of renewal.
BMC-84 bonds are continuous, meaning they are in place so long as bond premiums are paid each renewal period. However, a freight broker bond may be canceled if a request is submitted in writing, either by the broker that is no longer in the business, or by the surety company providing the bond. Bond cancelations must be submitted by the broker to the FMCSA at least 30 days in advance.
Final Considerations for Surety Professionals
Although the BMC-84 freight broker bond carries more risk than other surety bonds in other industries, surety companies should take some solace in the fact that close review of bond applications can help mitigate risk. Freight brokers in good financial health may pose less of a risk to the surety company and to the carriers they work with, while those who have lackluster credit or minimal business experience may prove the opposite. Pricing of BMC-84 bonds based on these factors is one method of offsetting higher risk.
Additionally, surety professionals can take an active part in working BMC-84 bond claims as part of their risk mitigation strategy. Understanding the reasons behind a claim, the intent of the licensed broker, and the remedies available can help tremendously in bringing the total number of BMC-84 bond claims down over time. Licensed freight brokers need to recognize their responsibilities to their customers and the FMCSA as part of this process, and surety professionals can take a proactive role in providing this education to help reduce risk across the board.