If you’re interested in becoming a transportation broker, it’s important to understand the requirements for a freight broker surety bond.
In this article, we’ll explain:
- What a surety bond for freight brokers is
- How it works in the industry
- The different types of surety bonds available
- How to obtain a BMC-84 bond
- How much surety bonds cost a trucking broker
So, let’s dive in and explore the world of freight broker surety bonds! And when you’re finished, be sure to read more in our ‘Freight broker job requirements’ article series:
- Freight broker license requirements
- Freight broker surety bond requirements
- How to get freight broker authority
What is a surety bond for freight brokers?
A trucking surety bond is a type of insurance policy that ensures compliance with federal and state regulations by trucking and freight companies. Required by the Federal Motor Carrier Safety Association (FMCSA) as part of a broker license for trucking, it’s also known as a freight broker bond, BMC-84 bond, or ICC broker bond.
This bond provides a financial guarantee that freight broker companies will abide by the agreements with the motor carriers and shippers.
If a broker fails to fulfill the contract, the harmed party can make a claim against the bond to recover losses.
There are three parties involved in a surety bond. They are the:
- Principal, which is the trucking company or carrier
- Obligee, in this case the FMCSA since it’s the entity that requires the bond
- Surety, which is the insurance company that provides the bond
How do surety bonds work in the trucking industry?
Here’s a simplified version of how freight broker bonds work:
- Purchase: A freight broker purchases a surety bond from a surety company or bond agency. The FMCSA requires a bond of at least $75,000, but you should also research your state’s requirements.
- Obligation: The freight broker must abide by the rules and regulations laid down by the FMCSA and any state-specific laws. These rules often involve ethical business practices, payment terms, and more.
- Claim: If the broker fails to meet the obligations (like failing to pay motor carriers or shippers), a claim can be filed against the bond. The surety company will then investigate the claim.
- Payment: If the claim is valid, the surety company pays the claimant. This means the surety company covers the financial loss suffered by the trucking company or shipper due to the broker’s actions.
- Reimbursement: Even though the surety company pays the claim, the bond principal (the broker) is ultimately responsible for repayment of the claim amount to the surety. The bond isn’t insurance for the broker; it’s a form of credit extended to ensure the broker fulfills their legal and contractual obligations.
It’s crucial to note that surety bonds are different from typical insurance. The freight broker principal has an obligation to indemnify the surety for any losses. With an insurance policy, the policyholder is not required to reimburse the insurance company for claims paid.
A surety bond, therefore, serves as a risk transfer mechanism that ensures the broker will perform their duties as required by law and contract. It provides peace of mind to shippers and motor carriers that they will be compensated if the broker fails to meet their contractual obligations.
Types of surety bonds for freight brokers
There are primarily two types of surety bonds for freight brokers. The first is the freight broker bond, also known as the BMC-84 bond. This bond provides financial protection to shippers and carriers if the broker fails to fulfill their contractual obligations.
Alternatively, brokers can opt for a trust fund agreement, also known as the BMC-85 bond. This arrangement involves setting up a trust fund with the FMCSA, serving as financial security for shippers and carriers. Both options ensure compliance with FMCSA bonding requirements and safeguard the interests of those involved in freight transportation.
Surety bond benefits
Surety bonds benefit the freight transportation industry in many ways. For instance, they offer:
- Protection for obligees: Surety bonds provide financial protection to obligees, compensating them if the bonded party fails to fulfill obligations.
- Assurance of compliance: Surety bonds guarantee that the bonded party will adhere to laws, regulations, or contractual agreements.
- Enhanced credibility: Being bonded enhances the credibility and reputation of the bonded party, signaling reliability and commitment.
- Expedited dispute resolution processing: Surety bonds include a claims process for resolving disputes, expediting resolutions and mitigating legal battles.
How to get a freight broker bond
To get a BMC 84 bond, you will need to work with a surety bond provider that is authorized to issue bonds for FMCSA compliance.
A bond broker will typically need to provide some basic information about your business, such as its legal name, address, and type of operations.
The surety bond provider will then evaluate your creditworthiness and financial stability to determine the bond premium (i.e., the cost to obtain the bond).
Once you agree to the BMC insurance bond premium, you will sign the bond agreement and pay the premium to the surety bond provider. The provider will then issue the bond and file it with FMCSA on your behalf.
You will need to maintain the bond in good standing by paying the annual premium to the bonded trucking company and complying with all FMCSA regulations.
How much does a freight broker bond cost?
The cost of a surety bond can vary depending on several factors, including the:
- BMC-84 surety bond amount
- Type of freight surety bond
- Applicant’s creditworthiness
- Freight broker bonding companies’ policies
In general, a bond premium can range from 1% to 10% of the total brokerage bond amount. Freight broker insurance costs can vary widely. It’s essential to compare quotes from different surety bond providers to get the best deal on a surety bond for trucking companies.
Don’t let surety bond requirements delay freight broker licensing
There are a lot of moving parts entailed in becoming a freight broker. Since you know what’s involved, getting a surety bond can be a relatively simple process. All you need to do now is find out about any state-specific requirements, compare a handful of freight broker bond providers, and get the ball rolling.
It takes about three to six months to become a freight broker, depending on the amount of time you can devote to learning and completing the necessary steps. Keep in mind that obtaining your license is a time-consuming and rigorous process that includes a background check and a surety bond.
Depending on your state, it can range from $100 to $1000. You should consult with relevant authorities or local transportation brokers for accurate and up-to-date cost information.
Bonded freight is freight delivered through a company that meets freight broker surety bond requirements.
Sign up for a FreightWaves e-newsletter to stay informed of all news and trends impacting supply chain careers and operations.