Troubled Indemnity
By Henry E. Seaton

October 2005
Reprinted from

Q We are a broker that hired a carrier to provide service for a contract shipper. The carrier had a multi-fatality wreck, and now a claim is being made by the family of the deceased against our shipper. The shipper has turned the claim over to us under a contract provision we signed agreeing to indemnify it against all claims “arising out of” the contract. We have a commercial general liability policy, and the motor carrier we hired has the required $1 million in third-party liability coverage. Are we in trouble?

A Most truck accident suits against shippers and brokers are dismissed or settled for the motor carrier’s policy limits because of the difficulty in proving shipper or broker liability. Hopefully, you are not in trouble, but your question poses several issues.

In the absence of their own negligence, shippers have remote exposure to lawsuits of this type, yet they favor broadly worded indemnity in contracts because they frequently are viewed as deep pockets and are named in lawsuits simply because their freight was on the truck. Shippers face the same suit risk and cost of defense regardless of whether the carrier involved in the wreck was retained by it or through you. There are enough runaway jury verdicts and bad case law out there to counsel the need for future prudence in this area of contract indemnification.

In your case, you were fortunate to have commercial general liability insurance, and you need to immediately turn over the shipper’s demand for indemnity under the contract over to your insurer. Hopefully, you will be covered, and your cost of providing a defense to the shipper will be paid.

While this type of policy traditionally provided broad contractual indemnity coverage, there is a caveat. The standard insurance form used by many insurers is being changed to delete the broader “arising out of” language and to limit coverage to losses caused by the insured’s own negligent acts or omissions. This means a broker no longer can assume it is automatically covered for indemnification offered to shippers for third-party liability “caused by” the negligence of the carriers they hire.

I discourage brokers and carriers from indemnity agreements with broad “arising out of” indemnity language because it can put them in the middle of a lawsuit in which they did absolutely nothing wrong. With the change in insurance policy language, it will be increasingly difficult for small brokers to obtain adequate, affordable coverage in a sufficient amount to have complete assurance of indemnity when signing contract provisions of this type.

The risk, if remote, is very real.
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