In a long-anticipated ruling, the US Supreme Court determined in Montgomery v. Caribe Transport II, LLC et al. that freight brokers are subject to state-law negligent hiring claims and do not get the benefit of federal preemption under the Federal Aviation Administration Authorization Act for motor carrier and freight broker rates, routes, and pricing. In doing so, and applying a plain-language approach, the Court found that that Act’s exception from preemption for state-level safety regulatory authority over motor vehicles was inapplicable to brokers and the services they provide, making negligent hiring claims available to plaintiffs.
It can be argued how, and to what extent, this decision will change the industry. The Court’s refusal to provide a “get out of jail free” card to freight brokers who do not use reasonable due diligence in selecting carriers is neither earth shattering nor particularly unexpected. The industry has known for years that it has an obligation to undertake proper due diligence, as evidenced by prior case law, shipper requirements, the numerous data firms that have popped up to aid freight brokers with carrier-selection diligence, and the compliance and vetting capabilities of the brokers themselves. In that sense, the decision merely confirms practices already in place.
In fact, to paraphrase an amicie curia brief cited by Justice Kavanaugh, if a freight broker can be held liable for unsafe carrier use, then it will be incentivized to use safe carriers. Further, the decision does not set any standards as to what constitutes negligence, and, as previously, that will be decided by the facts and law of each case, including the application of defenses available to the broker, none of which were limited by the Court here.
Despite this, the decision may cause an outsized market reaction. The insurance industry may use the Court’s ruling as one reason to seek higher rates on the freight broker contingent automobile liability insurance that covers brokers for the negligent hiring exposure discussed in the case. Freight brokers will likely reassess their self-insurance and self-insured retentions in a world where an increase in negligent hiring claims is a distinct possibility, though not necessarily the value of those claims. In either case, due in part to what can be expected to be an emboldened plaintiffs’ bar.
Increased insurance costs may force some smaller or underfinanced freight brokers out of the market, reducing capacity and potentially affecting the public through higher freight rates while also signaling a possible boon for asset-based carriers.
The 800-pound gorilla here, is how and if, the federal government will respond. The question of broker liability, insurance requirements, carrier vetting, and due diligence standards has largely been ignored by Congress and the USDOT/FMCSA. Just as they have with the Federal Motor Carrier Safety Regulations, the federal government can mandate baseline, industry-wide standards for diligence, and in doing so, expressly or implicitly define what constitutes negligent hiring.
The federal government could also eliminate brokers who may not truly be financially viable and cut corners by setting motor carrier-like insurance standards in the place of the largely ineffective broker bond or trust fund agreement currently required. Until the government decides to come into this arena and provide certainty, there will be no uniformity or consistency, and the court system will be the final arbiter of individual cases regardless of Montgomery.