Whose loss is it anyway?

by David Bradley

Imagine a carrier who dispatches a tractor to pick up a trailer at a shipper’s loading dock. The trailer is sealed for security reasons and the driver merely hooks on and proceeds towards the delivery point. Happens thousands of times a day in our industry, eh? Now imagine that en-route, the truck rolls due to improper loading by the shipper.

The load and truck are destroyed; the driver seriously injured. Several passenger vehicles are also damaged in the process and several lawsuits arise. In court, the motor carrier is absolved of all responsibility. The shipper is shown to be negligent.

However, the contract between the shipper and the motor carrier includes a clause that indemnifies the shipper against all liability and transfers that liability to the carrier, which must then rely on its own insurance coverage and reserves. The impact on the carrier can be catastrophic.

Over the past few years there has been a growing trend, particularly amongst large shippers and third-party logistics providers (3PLs), of including an indemnification clause in their freight contracts. I was reminded of this recently when I was provided with a number of examples of contracts containing this sort of clause that some of our supposed “partners” want carriers to sign.

Initially, the trend towards indemnification clauses started in the US where historically, and as a matter of law, the negligent operator of a commercial motor vehicle was always responsible for injury, loss of life, and damages arising from the negligent operation of the commercial motor vehicle by the driver and/or operator. It was just a matter of time before the big US-based multi-nationals starting bringing the practice to Canada.

Motor carriers are obliged to carry general liability insurance to protect not only those injured, or the property damages incurred as a result of the motor carrier’s negligent operation of the vehicle, but also to protect the motor carrier from the damages claimed against it and its own losses.

The amounts claimed against motor carriers for negligence arising out of a motor vehicle accident have escalated very substantially, and awards given, particularly by juries, now regularly run into the millions of dollars. Some motor carriers have faced situations where they do not have in place the level of substantial insurance coverage to meet a catastrophic event claim.

Allegations of negligence made against the shipper could include a number of factors which may have caused or contributed to the accident – ie., improper loading; negligent selection of a substandard carrier; setting unreasonable delivery times, etc.

The shipper may even become the primary target of the claim against a motor carrier, particularly where the dollars sought are beyond the motor carrier’s insurance or financial resources. More and more, the common claimant reaction has been to expand the number of parties named in the suit to include the shipper, broker, vehicle manufacturer, the government, etc., all with a view to finding the deepest pockets.

Not surprisingly, shippers began to look for ways to protect themselves. Motor carrier transportation contracts had for many years provided for indemnification of the shipper by the motor carrier where a claim (which was the result of the carrier’s negligence) was brought against the shipper. Shippers began to expand coverage of the carrier’s indemnification covenant to protect the shipper against any and all claims. In recent years, the indemnity expanded to protect the shipper against all or any claims made against the shipper out of an event that occurred during the course of the carrier’s performance of the contract of carriage – even though the claim might have arisen out of the sole negligence of the shipper itself.

Risk management initiated by the motor carriers’ customer in the US through indemnification by the motor carrier has arrived in Canada, and it will continue to grow much as it has in the US and will increasingly saddle Canadian motor carriers with a new and very onerous risk of additional litigation and significant claims.

There are various potential solutions to this problem. Two are not considered to be very helpful: Carriers can refuse to sign-off on indemnification clauses. That is the best way to protect your company, but we all know that is often easier said than done.

The shipper is usually a large entity (compared to even the largest carriers) with all the leverage. The trucking industry is composed mainly of very small business entities. With so much competition, carriers are pressured to “take it or leave it.”

If they won’t move the freight, someone else will. At the very least, carriers should have their contracts reviewed by their legal advisors and insurers. If you get caught in one of these situations you could pursue a remedy through the courts, but for the reasons outlined above and the huge expense likely associated with taking a large shipper to court, this is not a particularly useful course of action for the motor carrier industry as a whole.

Over time in the US, it was demonstrated that the only useful protection from an onerous indemnification obligation was through legislation. While the federal government in the US does not have jurisdiction in the area of motor carrier contractual indemnification, the states have stepped in to fill the breach.

A few months ago, Massachusetts became the 35th US state to pass an “anti-indemnification” law to nullify and make unenforceable any clause in a freight contract that indemnifies the shipper/3PL against liability for its own negligence. South Dakota, Minnesota, Alabama, and Hawaii also enacted similar statutes during 2012. Such laws reduce carrier exposure and allow for more equitable loss shifting or loss allocation.

There is currently no anti-indemnification law in Canada focused on indemnification conditions in a motor carrier transportation contract.

The Canadian legal landscape is, of course, different from the US, and in order to address this matter in Canada, coordinated action is required by both the federal and provincial governments. CTA and the provincial associations are jointly calling upon governments to amend the federal and provincial statutes and regulations covering the conditions of carriage in order to annul clauses in freight contracts, which indemnify shippers/3PLs from liability for their own negligence.

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