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A Solution for Hard-to-Place Freight Broker Bonds

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As the CEO of DNI Insurance Company detailed in a recent in-depth Suretypedia article, the market for Freight Broker Bonds has been decimated by a punishing economic cycle and a surge of criminal fraud.

 

If you’ve attempted to obtain a Freight Broker Bond in the past six months, you’ve likely encountered higher rates, more stringent underwriting requirements and a sense of dreadful anticipation from the surety company that issuing your customer’s bond will result in a full claim.

 

Carriers are running for the hills, and the ones choosing to remain are battening down the hatches in an attempt to weather the hardening market.

 

What does this mean for you? If the rest of the industry had its way, only the upper echelon of applicants would have even a remote chance of obtaining a BMC-84 bond. This would exclude most applicants, and your customers would have difficulty securing coverage.

 

Thankfully, we’ve found a better path forward.

 

We just announced a partnership with Jet Insurance Company that provides DNI Services agents with exclusive access to a new Freight Broker Bond program that combines enhanced underwriting with the most advanced technology the surety industry has ever seen, ensuring DNI Services agents have sustainable, unique and convenient access to this hard-to-place line.

 

First Things First

 

Before diving into the meat and potatoes of why the market is hardening, let’s first refresh our memories of what exactly freight broker bonds are.

 

A Freight Broker bond, also referred to as a BMC-84 or ICC Broker Bond (if you’re old school), is a federally-required surety bond that protects motor carriers and shippers from financial harm if the broker commits fraud or otherwise fails to pay them in a timely manner.

 

49 U.S. Code Statute 13904 requires freight brokers and forwarders to register with the Federal Motor Carrier Safety Administration (FMCSA) prior to conducting business operations, and brokers/forwarders need to purchase a bond as a prerequisite to obtaining a registration.

 

A Series of Unfortunate Events

 

So what is the cause of the disruption in the freight broker market?

 

Covid

 

The impetus for the current state of the freight broker market can be traced directly to the COVID-19 pandemic. During Covid, demand for shipping services increased dramatically. However, the number of available trucks did not. What this led to is shippers relying on freight brokers to 1. Find available trucks to deliver their freight, and 2. Adequately shop quotes to ensure they are getting the best price possible.

 

The increased demand for freight brokers did not go unnoticed, as the number of newly licensed freight brokers increased by nearly 70% in 2021 versus pre pandemic levels. Surety companies were happy to bond these new applicants…at least initially.

 

Now, these same surety companies are experiencing a rapid uptick in claims on bonds that were issued to inexperienced brokers with little to no working capital who, in hindsight, were woefully ill-equipped to survive in the freight industry.

 

Fraud

 

The freight industry is also seeing a rise in the unethical practice of double-brokering, which isn’t necessarily illegal in and of itself but is being utilized by malignant criminals in conjunction with more serious crimes such as identity theft. Criminals target business owners with strong personal credit, steal their identity, open brokerages and contract with shippers only to disappear into the night after they receive payment from the shipper for a load they never actually brokered.

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A criminal can typically score well in excess of the bond’s $75,000 liability limit by employing this strategy multiple times before their bond gets canceled and their license revoked. Surety companies must pay out the bond’s full penal sum pro-rata, often leaving the legitimate carriers with thousands of dollars in unrecouped losses. Not good.

 

Mix the influx of unqualified brokers with the rampant fraud plaguing the industry, and what you’re left with is surety carriers exiting the market, rates increasing, and legitimate freight brokers being unable to secure the surety bonds needed to operate their businesses.

It Didn’t Have to be This Way

By now, you’re probably wondering how the surety industry let the market get this bad. This is a good question that can be answered with four simple words:

Lack of effective underwriting

Freight Broker Bonds are classified as “License and Permit,” and like other License and Permit bonds, surety companies largely set the underwriting guidelines to consist only of a personal credit and sometimes a business license check. However, unlike other License and Permit risks, Freight Broker Bonds have long been accompanied by well-informed claimants (truckers), creating substantial claims-handling churn. More recently, a rapid influx of unqualified applicants has entered the market along with outright criminals trying to make a quick buck at the expense of legitimate players, sending loss ratios through the roof. Needless to say, standard credit and license checks don’t cut it with these bonds.

There’s Light at the End of the Tunnel

The solution to the issues plaguing the Freight Broker Bond market is an underwriting process that properly accounts for the risks these bonds present. This includes a review of financials, database integrations, and other industry-specific criteria that allow surety companies to properly vet the qualified from the unqualified.

The good news is that we’ve already cracked the code, and through an exclusive agreement with Jet Insurance Company, we can properly underwrite Freight Broker bonds and issue these policies to your qualified customers with the same ease of use you’ve come to expect from DNI Services’s best-in-class agent technology platform.

The market for Freight Broker Bonds has hardened, but that doesn’t change the fact that your customers still need coverage. If you haven’t already, gain access to DNI Services today (it’s free and takes seconds), and let us help you navigate the current roadblocks present in the BMC-84 bond market.

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