The broker’s bond or trust fund is always a hot topic within the world of freight brokering. But, beware, there are often several misconceptions regarding whether or not it’s required, who’s required to have it, what kind of bond or trust fund is required, and what the insurance or trust actually covers. So, let’s try to clear up some of those misconceptions.
Brief History of the Freight Broker Bond
The federal government has been requiring freight brokers to secure and maintain surety bonds or trust funds for several decades. In fact, the freight broker bond requirement dates back to 1936 and was originally established by the Interstate Commerce Commission (ICC). Of course, many things have changed within the transportation industry since 1936; to name a few: the abolishment of the ICC, the creation of the Federal Motor Carrier Safety Administration (FMCSA), the increases to the broker bond and trust fund amounts, and the FMCSA’s overhaul of operating authorities into registrations. Nevertheless, through all of these changes and more, freight brokers have continued to be required to post proof of their financial responsibility in order to be considered legal to operate by the federal government.
Any third party making arrangements of the transportation of freight within the U.S. is required, by law, to be registered with the FMCSA and listed as an active Property Broker. The current regulations mandate, as per 49 CFR 387.307, that all freight broker applicants must provide evidence of holding either a surety bond or a trust fund in the amount of $75,000 before the FMCSA will issue the freight broker license. And, active freight brokers must continue to maintain the bond or trust fund in order to ensure their freight broker license remains active. Essentially, all freight brokers must secure and maintain either a surety bond or trust fund.
Type of Bond Needed as a Freight Broker
Not only is the bond or trust fund required for all freight brokers, but the FMCSA is also very specific on the exact type of bond or trust freight broker need to obtain. The FMCSA will only accept a BMC-84 surety bond in the amount of $75,000 or a BMC-85 trust fund in the amount of $75,000. Because the type of bond or trust is so specific, it’s important that you understand that not every insurance company or every financial institution will be able to write, or provide you with, a BMC-84 or BMC-85.
What Does the Freight Broker Bond Cover?
So, what is this $75,000 BMC-84 surety bond or BMC-85 trust really covering? The freight broker’s surety bond or trust fund is held to cover past due freight invoice balances that the broker contractually owes to the carrier. Most of the loads moved within the U.S. are done so without the carrier or the broker being paid in advance of pickup or delivery. So, the broker’s service and the carrier’s service is performed and then they invoice and collect payment after the fact. The purpose of the freight broker’s bond or trust is to attempt to ensure that carriers contracted by the broker are actually paid for the loads the carriers have already delivered, invoiced the broker for, and attempted to collect. The brokers bond or trust does not cover cargo damage/loss claims or property damage/loss claims. Those claims are handled by the carrier’s Bodily, Injury, and Property Damage (BIPD) insurance and/or cargo insurance policies.
Finally, we recommend that all freight broker applicants choose their surety bond or trust fund provider wisely. The freight broker bond premiums or trust fund fees that you pay in order to obtain your bond or trust can vary greatly depending on the owner(s) personal credit and business experience and the insurance company/financial institution you choose. In addition, to your bond regular premium costs or trust fund fees, you should also consider the viability of the bonding company or financial institution itself. When bonding companies or financial institutions are underfunded, there is a risk of the entire institution collapsing in the event that there are more claims to be paid than funds available. And, along with their financial viability, you’ll also want to ensure that the company you choose has the resources to investigate and fight false claims made against your bond or trust. Before you make your decision on which BMC-84 or BMC-85 provider is right for you, we encourage you to take all of these factors into consideration.