The Federal Motor Carrier Safety Administration requires freight brokers and freight administrators to obtain a broker surety bond. It's an essential part of the process of getting a freight broker license.
The thing is, there are so many facets to this process and many people can be confused as to what a broker surety bond actually is or what it means.
We've made this guide to clear up any misconceptions or confusions. So, if you'd like to know more – read on!
A broker surety bond is a form of insurance that protects your business against financial loss in case you fail to pay for the services provided by a carrier.
This includes paying for transportation costs incurred by a shipper when they ship their goods through your brokerage company.
If you don't have a broker surety bond, then you're putting your business at risk of losing money to carriers who may not be able to collect from you.
It works much like auto insurance does. You buy a policy with your insurer (broker) and agree to pay them back if you cause damage to someone else's property while driving under the influence of alcohol or drugs or commit fraudulent acts like not paying the trucking company on time, if at all.
In the same way, you purchase a broker surety bond which will cover you for any losses caused by your own actions.
There are three main parties involved in the agreement:
All freight brokers and freight administrators need a broker surety bond in order to operate legally.
You'll also need one if you want to work with FMCSA approved carriers. They only allow those carriers that have been bonded to provide service to customers.
This is because they want to ensure that the carrier will be paid for the services they provide. If you don't have a bond, then they won't let you use their services.
They also require a bond to protect themselves and other freight brokers and freight administrators should you ever try to defraud them or steal from them.
So, if you plan on working with carriers, then you absolutely must get a broker surety bond before you start doing business.
Getting a broker surety bond isn't too difficult. There are two ways to go about it:
Let's take a look at each option.
Bonding companies are essentially insurance providers. They offer a wide range of products and services including broker surety bonds.
Most of these companies specialize in offering freight broker surety bonds. They do this by taking applications from prospective clients and issuing policies based on the information they receive.
When you apply for a broker surety bond through a bonding company, you'll typically fill out an application online.
Once you submit the application, they'll review it and determine whether they think you qualify for coverage.
They'll usually charge a small fee for processing the application. After that, they'll issue a policy which details what kind of coverage you have and how much it costs.
You can choose between a single bond or multiple bonds depending on your needs. A single bond covers just one person or organization while multiple bonds cover several people or organizations.
Your broker surety bond will generally last anywhere from six months to five years. It depends on the type of coverage you purchased.
If you're self-insured, then you may decide to handle the risk yourself rather than relying on a third party provider.
This means that you'll be responsible for covering the cost of any damages done to another party's property.
However, there are some downsides to being self-insured. For example, you'll have to deal directly with the claims process.
It's also more expensive since you'll have to pay for your own insurance premiums as well as the cost of the damage itself.
In addition, you'll have to make sure that you're properly insured so that you don't end up paying out more money than you actually earned.
It's important to note that most states require that all freight brokers and freight administrators carry insurance. This includes both public and private carriers.
If you fail to comply with state regulations, then you could face fines or even jail time. So, make sure that you know exactly where you stand.
The premium is a percentage of the $75,000 required for the bond amount. The percentage itself will be determined by numerous factors, but it's largely down to the credit score of the freight broker – much like applying for a credit card or mortgage.
Additionally, scrutiny may include:
Rates can vary from 1.25% and rise depending on these above factors. Average credit scores can usually bag themselves a 4% or 5% rate.
This is not to say that those with bad credit cannot get a surety bond though. Bryant Surety Bonds for example offer a Bad Credit Program which works with those with poor credit to get the best possible rate.
BMC-85 is a standard used by the U.S. Department of Transportation (DOT) and its various agencies to ensure safety standards are met when transporting cargo.
The BMC-85 trust is a form of surety bond that provides protection against loss or damage to goods during transit.
It requires $75,000 up front as collateral and normally has a much lower fee than other broker bonds.
When a claim is made, the carrier must file a proof of loss within 30 days. Once this is filed, the broker will receive notice of the claim and be given an opportunity to contest it.
After the dispute has been settled, the carrier will submit a final statement detailing the costs incurred. The broker will then be notified about how much they owe in order to settle the claim.
Once the payment has been received, the broker will issue a release letter stating that the claim has been paid.
Surety bonds provide a level of security for brokers who transport goods. They protect them from financial losses due to accidents, theft or erroneous delivery.
It's a requirement for this industry, so make sure you know where you stand if you're getting into it!
