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The reasons behind trucking's rising insurance rates

Oct. 22, 2020
The largest driver of increased rates right now is available insurance capacity. Distracted driving, the commercial truck driver shortage, nuclear verdicts, and litigation funding have also compounded the problem.

Over the last 10 years, commercial trucking insurance rates have skyrocketed. Despite those rate increases, however, insurance companies are experiencing losses, which means the transportation insurance industry is seeing continued deterioration and availability in capacity.

“We are in very challenged times with respect to transportation,” said Ryan Erickson, executive vice president at insurance brokerage firm McGriff, Seibels & Williams, during the American Trucking Associations (ATA) virtual Management Conference & Exhibition (MCE) on Oct. 21.

Erickson explained that 2019 marks the eighth consecutive year that the transportation-specific market sector has underperformed the overall property and casualty markets. He also pointed out that there have been underwriting losses from 2011 to 2019 .

“We’ve seen those at a time when insurers have been raising premiums significantly year over year over year,” Erickson said. “In the last three years, we have seen premiums increase dramatically; however, we are still seeing the same results. Losses are outpacing the insurance companies’ ability to capture rate. 

“The insurance industry has not been able to catch a profit, which is making it very difficult to attract capacity and capital to try and turn the market,” he added, noting that commercial fleets are seeing anywhere from 100 to 300% rate increases. “Until the industry can get out in front of this and share profitability, we are going to see much of the same.”

Property insurance rates have also been challenged for commercial fleets that have terminals in areas hit by hurricanes, hail, wildfires, and other natural disasters. It is still too soon to determine how the COVID-19 pandemic is impacting workers' compensation claims for 2020, Erickson said.

So, what are some of the key reasons as to why these rates are continuing to rise?

Contributing factors to increased rates

The largest driver in increased rates right now is available insurance capacity, Erickson explained. “Insurers that were willing to put up $5 million and $10 million layers are now looking at $2 million and $5 million layers, which is driving up costs.”

Distracted driving is an obvious reason, Erickson pointed out, leading to roughly $360,000 in injuries per year. The driver shortage is another problem.

“We have seen motor carriers lower their driver hiring standards,” Erickson explained. “Not only has that led to an increase in accidents, but the defense of accidents has been more challenging.”

Those challenges include nuclear verdicts; social inflation, societal issues, and views toward defendants; and ultimately, litigation financing, where third parties are financing litigation in return for a cut of the overall settlements.

Jeffrey Toole, a partner at Scopelitis Transportation Consulting, noted that the "reptile theory" litigation strategy, which has been around for at least 10 or more years, has received more and more attention given some of the larger verdicts related to transportation companies. It has been noted as one of the key factors that at least contributed to the increase in primary and excess premiums, Toole said.

The reptile theory litigation technique is employed by plaintiffs’ attorneys who are trying to make individual jurors in the courtroom feel personally threatened, along with their families and the community, by the commercial driver, fleet, or trucking industry as a whole.

“It is accomplished through plaintiffs’ counsel and the 'reptile lawyer' trying to scrutinize the driver and the motor carrier for purposes of identifying potential violations—it could be violating corporate policy, violating corporate safety programs, or violations of the federal motor carrier safety regulations,” Toole explained. “But what the 'reptile lawyer' is trying to do is paint the motor carrier or the industry in a way that projects placing profits over safety. 

“The ultimate goal then for the 'reptile lawyer' is to convince the jurors that there is this danger and threat, and that if you, the jury, render a large damage award or a large compensation award to the plaintiff, you can somehow diminish this danger to yourselves and the community,” he added. “That is believed to have fostered some of these large nuclear verdicts.”

The ATA has been responsive to these large verdicts and because of that, the ATA has made it a top priority to seek out tort reform. ATA has been working with state associations, motor carriers, and members of the insurance communities and insurers to foster tort reform and to combat the reptile theory and nuclear verdicts.

Broker liability coverage

Now, more than ever, there are different types of insurance policies that a transportation company may need. For instance, five to 10 years ago, broker liability insurance was not common, but it has become more and more common because plaintiffs have begun to pursue claims of negligent selection or negligent entrustment against brokerage entities, Toole noted.

“One question that we received is, ‘Do I need broker liability coverage?’ Even if you’re a motor carrier, if you’re hauling freight and in addition to that service, you’re brokering loads or brokering freight to third-party motor carriers that will haul the freight, then you may need to consider broker liability insurance,” Toole explained.

Trucking companies also ask Toole and the consultants at Scopelitis whether their regular auto liability coverage will cover liability exposure related to brokerage operations or the brokerage of loads to third-party motor carriers.

“The takeaway here is probably not,” Toole said. “Auto liability coverage will likely not extend or provide coverage or claims related to broker liability such as claims of negligence or selection of an unsafe motor carrier.”

When it comes to motor carrier liability, or auto liability, coverage is focused on the manner in which the tractor-trailer unit is being operated. Those types of claims arise out of the ownership, maintenance and use of the vehicle, and they’re related to a common automobile accident, Toole explained.

Broker liability coverage, on the other hand, is not associated with the way in which the vehicle is being operated or the acts of negligence with regard to the ownership, maintenance, or use of the vehicle. Broker liability insurance is focused on the decision making at the time the load is brokered.

“Did the broker entity select an unsafe motor carrier to haul the load? If so, that is the act of negligence that broker liability insurance is designed to respond to,” Toole noted. “That’s why considering a policy of broker liability insurance is important.”

Risk management strategies

A risk management alternative to commercial insurance can reduce costs or at least reduce the premium. Toole pointed to two strategies—using a risk retention group (RRG) or a risk purchasing group (RPG).

An RRG involves a group of transportation-related companies banding together to form their own insurance company under the Liability Risk Retention Act, the federal act allowing the formation of a risk retention group. It’s owned by its members, and it only insures its members, Toole explained. He added that RRG is limited in the type of insurance that it can issue and the types of claims that it can cover.

“Generally, third-party liability coverage is the only coverage RRG can insure,” he said. “That includes things such as auto liability, commercial general liability, brokerage, and cargo. It would not include coverages for physical damage or property coverage.”

RRG can result in reduced premiums and savings, assuming that a good safety program is also implemented. One potential downside is that RRGs are not subject to guarantee funds, so if the group becomes financially unstable or actuarially is unable to pay losses, the members can ultimately be self-insuring their liability claim, Toole noted.

An RPG is not an insurance company and it does not retain risk like a risk retention group, but it is a grouping of members in the same industry, Toole pointed out. In the context of the transportation industry, it may be several motor carriers that band together to purchase insurance on a group basis. That could lead to premium savings and premium reductions.

Some of the benefits associated with RPGs include avoiding fictitious grouping laws and sidestepping some state laws that preclude purchasing auto liability group coverage. In the context of an RRG, there is no need for a fronting insurer, so carriers can avoid the costs associated with fronting fees, Toole said.

Overall, details from this MCE education session on insurance offered a snapshot of ATA’s National Accounting & Finance Council’s (NAFC) guide titled, “Finding Affordable Insurance for a Trucking Business in the Hard Insurance Market.” The document will be released in full at the NAFC Conference on Nov. 18.  

About the Author

Cristina Commendatore

Cristina Commendatore was previously the Editor-in-chief of FleetOwner magazine. She reported on the transportation industry since 2015, covering topics such as business operational challenges, driver and technician shortages, truck safety, and new vehicle technologies. She holds a master’s degree in journalism from Quinnipiac University in Hamden, Connecticut.

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