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Recent Ruling Increases Shipper Liability

More Stringent Due Diligence Required When Hiring a Motor Carrier
May 15, 2006

Already facing a shortage of quality motor carriers, a federal court decision compounded problems inherent in the motor carrier industry by opening the door to liability for shippers and brokers who fail to use "reasonable means" to do background checks on motor carriers before they are retained. In Schramm v. Foster, 341 F.Supp.2d 536 (D.M. 2004), the court allowed a case to go to a jury to determine whether a company was negligent in hiring a trucker who caused an accident that seriously injured two people. In doing so, Schramm imposed new due diligence requirements on anyone hiring a motor carrier.

Current Wisconsin Law
The current law in Wisconsin is that shippers are not liable for "negligent hiring" of trucking companies involved in motor vehicle accidents, barring a contractual provision otherwise. The same was true in Maryland before Schramm. But that may be changing. Wisconsin has already found brokers in other industries liable for negligent hiring and one Seventh Circuit case has recognized a negligent hiring claim against a trucking broker. The door has been opened to the possibility of increasingly burdensome background check requirements on trucking companies hired by Wisconsin shippers and, if Schramm is any indication, these obligations will be coming soon.

There is no reported Wisconsin decision holding a shipper, broker or third-party logistics provider liable for the negligent hiring of a trucking company involved in a motor vehicle accident. However, the following court decisions have opened the door for such claims:

1. In Chapman v. Mutual Service Casualty Insurance Company, 35 F.Supp.2d 699 (E.D. Wis. 1999), the federal court for the Eastern District of Wisconsin held that a broker can be liable for the acts of a trucking company it hires:

One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care. -Noting that when there is a "retention of a right of supervision that the contractor is not entirely free to do work in his own way," Chapman opened the door for liability for anyone retaining a level of control over carriers, such as: pick-up and delivery deadlines, bill of lading/invoice procedures, trailer condition requirements, insurance requirements, and accessorial/fuel charges. Chapman concluded that liability can be imposed on anyone having "expertise in selecting trucking companies."

2. Targeting shippers, the Seventh Circuit Court of Appeals upheld an Indiana case applying liability for negligent hiring. In Stone v. Pinkerton Farms, Inc., 741 F.2d 941 (7th Cir. 1984), the Seventh Circuit held that a shipper has a duty to exercise ordinary care in selecting a competent trucking company and that a failure to do so could constitute negligence. While Stone ultimately found no negligence because the shipper inquired into the qualifications of the trucking company and learned that the particular driver received a good recommendation from his prior employer, it applied Chapman’s "higher standard" to a shipper that did not have "expertise in selecting trucking companies."

3. In 1998, the Wisconsin Supreme Court, for the first time, recognized claims of negligent hiring, training, or supervision in the employment context. See Miller v. Wal-Mart Stores, Inc., 219 Wis.2d 250, 580 N.W.2d 233 (1998).

Each successive case brings closer and closer the possibility that a Wisconsin court will hold a shipper liable for negligently hiring a trucking company.

The Impact of the Schramm Decision
The crux of the Schramm decision was that "an employer may be held liable for negligence in selecting, instructing, or supervising [an independent] contractor." Even though Schramm concluded that the broker was not a "carrier" under federal law, "its self-proclaimed status as a ‘third-party logistics company’ providing ‘one point of contact’ service to its shipper clients is sufficient under Maryland law to require it to use reasonable care when selecting a trucker who it maintains in a stable of carriers." The language cited in Schramm is disturbingly similar to that used by the Wisconsin Court in Chapman. One can see that the Schramm decision may be used by plaintiffs to attempt to hold any entity, shipper, broker, or third-party logistics provider that hires a motor carrier responsible for any damages, injuries or loss of life resulting from that motor carrier’s operations.

If shippers are to be exposed for negligent hiring, what "reasonable care" can a shipper take to minimize its liability exposure for the negligent hiring claim? Schramm sets forth such a high level of what is to be considered "reasonable" that very few shippers, brokers or third-party logistics providers currently attain such a standard:

  1. To check the safety statistics and evaluations of the carriers with whom it contracts, available on the Safe Stat Database maintained by Federal Motor Carrier Safety Administration (FMCSA); and
  2. To maintain internal records of the persons with whom it contracts to assure that they are not manipulating their business practices in order to avoid unsatisfactory Safe Stat ratings.

While Schramm concluded that "these obligations are not onerous," it nonetheless imposes a duty upon shippers to verify the FMCSA’s safety rating for carriers!

It is not uncommon that a shipper would hire a trucking company that has not been rated by the FMCSA. In that event, the Schramm court feels it is "entirely reasonable to require firms, including third-party logistics companies, who assist newcomers with market entry, to evaluate carriers’ safety-control measures in the absence of a Department of Transportation (DOT) rating." It should be noted that the broker in Schramm required of its carrier proof of full insurance coverage, regular verification of coverage, confirmation of federal operating authority, verification of the carrier’s DOT ratings and regularly checked with carriers to ensure insurance and license information was up to date.

What should shippers do?
Schramm applied its "reasonable obligations" to anyone hiring carriers. In addition to the steps that the broker in Schramm followed, what else can shippers do to minimize the possibility that the Schramm obligations find their way into Wisconsin law?

  1. Ensure that due diligence includes verifying insurance coverage, federal operating authority, and DOT/FMCSA safety ratings when hiring a new carrier. Regularly verify that information, at least every six months.
  2. Ensure internal procedures are being followed by each staff member ensured with performing due diligence on hired carriers.
  3. Consider using a private service to obtain due diligence information, especially in the absence of a DOT/FMCSA safety rating.
  4. Consider conducting an independent investigation of carriers that do not have a DOT safety rating.
  5. Review contracts, bills of lading, and any other documentation to ensure that current and future customers are well aware that your company is not a carrier, a broker, or third-party logistics provider.
  6. Make sure contract language clearly states that the shipper is shielded from liability in the case of broker or third party logistics provider’s negligence.

Conclusion
In the near future, there is likely to be an attempt by plaintiffs’ attorneys, especially in the personal injury arena, to apply Schramm in new jurisdictions, like Wisconsin, expanding the scope of shipper and broker liability in our state. The Schramm decision did not help by placing a higher duty upon shippers to delve more deeply into a motor carrier’s operational safety practices and to maintain records. The Schramm decision should caution shippers and insurers that in the personal injury setting, especially where damages exceed the motor carrier’s insurance, that plaintiff’s attorneys will attempt recovery against shippers for a negligent supervision claim.

If you have any questions or would like additional information, please contact Ross Nova (920- 436-7667 or nova@gklaw.com) or Winston Ostrow (920- 436-7678 or wostrow@gklaw.com).

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