If you’ve been following the news on the transportation bill signed into law, Moving Ahead for Progress in the 21st Century (MAP-21), you know a deadline is looming. As of October 1, 2013 all freight brokers and forwarders will be required by the federal government to supply proof of financial security in the amount of $75,000. This means you will need to secure a bond or trust fund agreement in this amount, and by this date, in order to legally operate as a licensed freight broker.
There’s been some discussion on the new $75,000 requirement but not a lot of published information to help freight brokers understand their options. At this writing, there are three alternatives available to you: a freight broker bond, a trust fund agreement and a surety group trust. Which choice is best for you?
Are Freight Broker Bonds The Best Way To Go?
Freight broker bonds, also called BMC-84 bonds, sound like insurance, but they are actually a form of surety credit to you providing the FMCSA a guarantee that you will follow their regulations. You pay an annual premium which is a percentage of the amount required for the bond. In turn, the surety promises to pay claims that may arise. The cost is based on your credit among other factors, depending on the surety backing the bond.
Due to the high volume of claims in the freight broker world, BMC-84 bonds are considered high risk and therefore not many sureties choose to handle them. Typically surety companies do not work directly with clients, so you will need to purchase a bond through a qualified surety bond agency. With the new bond increase, and resulting higher premium cost, it’s more important than ever to find a surety agency experienced with freight broker bonds who can find the best rates and program for you.
When it comes to claims, here’s where the surety bond option has a distinct advantage. In an industry known for false claims, you will have the support of surety claim specialists who work with you to investigate the legitimacy of the claim in order to avoid cancellation of your bond. If necessary, the claim is paid on your behalf; however if the claim is proven to be a violation of FMCSA regulations, you must reimburse the surety.
Trust Fund Agreement and Group Surety Trust Funds
The trust fund options can either be an individual trust fund agreement or what is known as a surety group trust fund. Both involve your money held in a trust for the duration of your license.
Let’s talk about individual trust funds first because these have long been an option accepted by the FMCSA. Also known as a BMC-85 trust fund, these require a deposit of $75,000 to an insured financial institution such as a bank or trust company. Your capital is tied up for the entire period of your registration with the FMCSA. There may even be fees associated with this account.
Claim handling where there is a trust fund agreement may result in the claim being paid before an investigation is completed. Although you will be notified of the claim, this could mean your funds will have to be restored after the fact.
The passing of MAP-21 has added a third option for freight brokers: the group surety trust fund. Think of the fund as a pool of money collected from many freight brokers to spread the $75,000 requirement. Instead of the full amount required by federal law, the pool members each deposit a portion of the required security into the trust fund. Some questions come to mind however – for instance, because financial security must be immediately available, if a large group of brokers pool funds together and only deposit a percentage of the $75,000, will there be enough reserves if many claims are filed? And what happens if the claims exceed the amount collected?
Freight Broker Bond or Trust Fund Agreement – Where to Go From Here?
No matter which direction you choose, proof of your bond or trust fund agreement must be filed with the FMCSA on time. Considering the crunch that will occur on or about October 1, look for an experienced provider; one who works largely with the product that fits your needs.
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