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Before you sign your next contract, understand the dangers of indemnity clauses

Risk transfer is an accepted financing technique usually associated with purchasing insurance to transfer the risk to an insurance company.


Risk transfer is an accepted financing technique usually associated with purchasing insurance to transfer the risk to an insurance company.

For the past several years, though, we have seen an increasing tendency amongst shippers to use risk transfer to avoid their own negligence and place it with trucking companies.

This transfer of risk is accomplished through indemnity clauses, utilizing contract language, hold harmless agreements and requests for additional insured status. These clauses are inserted into shipping contracts that carriers are required to sign if they want the business.


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Theoretically, the parties to a shipping contract enter into the agreement on equal footing and are free to accept or reject terms considered unfair or too risky. The reality is that over-capacity places trucking companies at a distinct disadvantage.

 

Shippers argue that trucking companies can increase their freight rates to compensate for the additional exposure but the reality is that many trucking companies blindly sign these contracts just to stay in business.

 

It is essential, however, that carriers recognize that unfair indemnity clauses:

 

  • create a moral hazard because shippers are not held accountable for proper loading techniques and/or their duty of care to protect persons and property on their premises.
  • hide potential loss exposure by shifting the risk to carriers who are unable to take measures preventing losses created by the shipper (sealed or pre-loaded trailers).
  • prevent carriers from pricing freight charges properly.

Indemnity clauses can also go beyond risk transfer; shippers can use them to obtain additional insurance coverage (often for coverages that they may not be able to buy themselves) without premium, legal or administrative costs.

 Trucking companies who sign these contracts have:

 

  • no certainty about the safe operations of entities who load or unload the freight
  • no guarantee that losses will be fully covered under their insurance program
  • no ability to forecast their “cost of risk” leading to no ability to calculate the return on lanes or customers
  • no protection from existing, well functioning, comparative negligence laws

 

Before signing, consider having the contract reviewed by your legal counsel for language that broadens your exposure, as well as by your insurer to identify exposures that fall outside of your coverage.

 Ultimately, government action is needed. An increasing number of US states, recognizing the inherent dangers associated with these indemnity clauses, have enacted anti-indemnification laws to level the playing field. When will the Canadian government step in to protect the trucking industry?


Truck News

Truck News

Truck News is Canada's leading trucking newspaper - news and information for trucking companies, owner/operators, truck drivers and logistics professionals working in the Canadian trucking industry.
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