The Moving Ahead for Progress in the 21st Century Act (MAP-21), passed in 2012, bringing big changes for freight brokers. The law is intended to hold motor carriers and drivers to a higher standard, preventing unqualified individuals from entering the industry and keeping high-risk drivers off the road. As part of that effort, the surety bond required of freight brokers was increased dramatically, from $10,000 to $75,000.
In lieu of a surety bond, freight brokers have the option of filing a BMC-85 trust fund agreement with the Federal Motor Carrier Safety Administration (FMCSA). Let’s look at the difference between the BMC-85 trust and the BMC-84 surety bond.
BMC-85 vs. BMC-84: What’s the difference?
Most freight brokers file a surety bond with the FMCSA: for a $75,000 surety bond, premiums typically run anywhere from 2-10%, or from around $1,500 to $7,500 (though premiums vary by applicant). This bond is underwritten, meaning your financial history is evaluated and your premium is based on that assessment. If you have a low credit score or are a new broker, your premium will be higher than an applicant with a high credit score and a decade of experience under their belt. However, your premium is assessed and paid annually: as you gain experience and improve your credit, it can decrease.
A BMC-85 trust agreement requires freight brokers to provide $75,000 of collateral up front, to be held in a trust for the duration of their license. The collateral is held by a bank or trust company and usually assessed an annual fee of 1-2%. Brokers can post collateral as cash or other equally liquid assets, as approved by the Secretary of Transportation—MAP-21 does not clearly define what kind of assets are acceptable.
Trusts can be more volatile than bonds because trust companies sometimes become insolvent, meaning they are unable to pay debts. Insolvency can lead to bankruptcy, which sometimes means carriers can lose their BMC-85 trust—and even for large carriers, a $75,000 loss can be a fatal blow. Further, BMC-85 trust companies are not required to be licensed by the FMCSA and do not have insolvency protection, unlike surety bond companies.
Earlier this year, the FMCSA hosted a roundtable inviting comments from industry professionals on “‘challenges’ they’ve experienced in being compensated for claims against freight forwarders and brokers due to insufficient funds.” Many in the surety industry, including the Surety & Fidelity Association of America (SFAA), felt that the ambiguity surrounding acceptable BMC-85 trust assets, and the lack of federal regulation of trust companies, might explain difficulties in receiving payment.
Many carriers and surety providers were also concerned about a BMC-85 bond or group trust offered by some trust companies. Carriers pay a premium to be part of the group trust, and premium revenue is then used to pay out any claims made. Group trusts are no longer considered to be an acceptable form of financial security by the FMCSA.
Advantages of BMC-84 Surety Bond
The most obvious advantage of the freight broker surety bond is that the broker does not have to pay the $75,000 up front—this is especially beneficial for smaller carriers. The surety company will pay out claims made on the surety bond up to its full amount—though brokers must reimburse the surety for any paid claims. If a claim is paid from your BMC-85 trust, you are also required to replenish the trust. Regardless of which form of financial security you use, you end up paying for any claims made against you, but a surety bond means that $75,000 worth of assets and/or collateral are not tied up in a trust.
A surety company will do their best to mitigate claims made on your bond—since they share liability, a claim will be more thoroughly investigated before being paid by a surety company than a trust company. Trust companies can (and often do) pay out claims after little or no investigation, because it’s not their money paying the claim—it’s yours. Even if further investigation proves a claim invalid, the process to reverse the claim and be reimbursed can take quite a while. A surety company would investigate thoroughly first, to avoid paying out a false claim, saving money for you and the surety.
Learn more about freight broker bonds
Since the passage of MAP-21, the Surety Bond Insider has covered the freight broker surety bond requirement extensively. Read about the bond, broker licensing and more: