This is a guest post from Eric Weisbrot from JW Surety Bonds to provide a little more clarification on bond options for brokers with the new requirements.
In the freight broker industry where fraud is unfortunately a common occurrence, federal regulations offer protection to all parties through proof of financial responsibility, among other requirements. If you are a licensed freight broker, you likely know that the requirement to maintain your authority has been increased from $10,000 to $75,000, causing panic throughout the industry.
As several options for the financial security requirement are available, it is imperative you fully understand the upsides and downsides of each.
What Options Are Available?
The FMCSA currently requires freight brokers to file proof of a BMC-84 surety bond or BMC-85 trust fund. Either will satisfy the requirement to operate legally and ensures payments to shippers or motor carriers should the broker fail to carry out their contract.
With the highway bill Moving Ahead for Progress in the 21st Century (MAP-21), financial security choices for brokers have been expanded to include a group surety trust fund, an option that allows freight brokers to pool deposits together in a trust fund.
What is a Freight Broker (BMC-84) Bond?
A freight broker bond serves as a guarantee to the parties involved that the broker will follow FMCSA regulations and that potential claims will be paid for. Form BMC-84 is filed with the FMCSA as proof that you have met financial responsibility requirements. With a freight broker bond, you pay a percentage of the bond amount as premium to a surety company, who may require collateral as well, to guarantee you and back your bond to the full amount mandated by law.
What is a BMC-85 Trust Fund?
With the new requirement, the BMC-85 trust fund is $75,000 of your money placed with a financial institution, held in escrow as long are you are licensed. Once you have identified a bank, trust company or other insured institution, you deposit full collateral in a trust fund. Not only are these funds tied up for the duration of your business and drawn upon in the vent of claims, there are also fees assessed to maintain the account.
What is a Group Surety Trust Fund?
A third option is the group surety trust fund, where a number of brokers and forwarders pool deposits on the required $75,000 and place with a financial institution. Group trust funds may be attractive to those brokers who cannot qualify for a surety bond, or can qualify but only with unattractive terms such as high premium or a cash collateral requirement.
Having many brokers participate in a pool sounds good as it spreads the cost to the group, but in reality this format increases the risk to its members. Reserves will likely fall short of potential claims if the group is very large. For example, if 100 brokers deposited $4,000 each, there would be $400,000 in the pool. But with the $75,000 bond requirement, the collective liability is $7.5 million.
In fact, the Transportation Intermediaries Association (TIA) has requested clarification of the group trust fund option from the FMCSA, as they see the pooled trust as a potential risk to the industry in that sufficient assets may not be readily available to pay claims.
Also a concern is that the group trust fund appears to be a form of self-insurance that groups high-risk applicants from a high-risk industry, who at the same time are trying to pay expenses, turn a profit themselves, and still be in the position to pay claims.
Compare the Freight Broker Bond, Trust Fund and Group Trust Options
The most notable difference between the BMC-84 bond and the BMC-85 trust fund is found in your bank account. A surety bond premium is only a percentage of the full amount of the bond. This premium is paid annually, but allows your cash to be available rather than secured in a trust account.
When it comes to claims, with a BMC-84 bond, the surety company is there to pay damages because your bond is a form of credit to you. Surety companies have experienced claim specialists who will investigate on your behalf and try to avoid cancellation. This is very important to you because of the regular occurrence of false claims in the freight broker industry.
With a BMC-85 trust fund, claims are often immediately settled with your cash from the trust fund with no initial investigative period. After claims are reviewed, payment may be adjusted after the fact.
As for the group trust fund, if you have a choice between a surety trust pool and an actual surety bond at the same cost, the surety bond is the best choice; you’ll have the financial backing of an insurance carrier with a set amount of reserves where only your claim activity can negatively affect your business.
How to Get the $75K Bond
Until recently, all freight broker bond programs required one or all of the following, collateral, personal/business financials and strong credit. JW Surety Bonds has negotiated a new program for the $75K Freight Broker Bond to help the small to midsize brokers stay in business.
- No collateral required
- Approval even with bad credit
- No personal or business financials required
- Bond rates for this exclusive market cannot be beat
- Online approval in 5 minutes
If you feel the surety bond is the best option for you, visit our website to apply and get an instant approval.