Despite the shortage of drivers, there is certainly no shortage of regulatory measures affecting the trucking industry. Last year we saw the freight broker bond go from $10,000 to $75,000 with MAP-21, the first increase in about 40 years. This year, carriers are faced with the potential of yet another increase – this time of carrier liability insurance, which is the largest fixed expense for carriers and owner-operators. Let’s take a look at the FMCSA’s proposed rule, while we wait for them to publish their official stance on Oct. 22.
Freight Broker Bond vs. Carrier Liability Insurance: The Difference
The increase of the freight broker bond was certainly met with protest from freight brokers, especially small and mid-sized ones. Many carriers and owner-operators who prefer to broker their own freight also had to file for a bond. Even freight forwarders were subject to the new requirement.
A freight broker bond is designed to protect carriers and shippers from delayed payment and unethical business practices on the part of the freight broker. Freight brokers pay a certain premium each time they renew the bond, and the same bond amount is required of everyone in the industry, no matter how big their business or how much freight they actually broker.
Carrier liability insurance, however, is affected by the size of the business. Carriers and owner-operators are required to have a certain amount of liability insurance for each truck they operate. This kind of insurance protects the carriers or owner-operators themselves, when a lawsuit or a claim arises as a result of an accident, for example.
How Big Will the Increase Be?
Just like the freight broker bond, carrier liability insurance has stayed unchanged for some time, in this case — since 1986. Currently the minimum amount is $750,000 per truck, but this April the FMCSA announced that it will be making changes.
Calling the current minimum “inadequate,” the Administration defended its intentions by citing inflation and higher medical costs. The FMCSA’s argument comes from a study mandated by the same MAP-21 legislation which raised the freight broker bond, that aimed to determine if the liability amount was still adequate.
Even back then, the FMCSA said that if the minimum insurance was corrected in accordance with inflation, today it would be $1.62 million, “but if the number had kept up with the medical consumer price index, which measures the increase annually in medical costs, carriers would be required to have $3.18 million in liability insurance.”
Is There a Conflict of Interest?
Another study, conducted by a group of trucking companies called the Trucker Alliance, reviewed 8,600 settlements in a 7-year period and found that only 90 of these settlements (about 1 percent) were settled above the $750,000 minimum. Yet, the Alliance argues, these amounts were so high that they “were enough to create an uninsured liability of 42% for the companies.”
The publication of the study was used as a way to urge the FMCSA to speed up reforms on liability insurance. However, since the Trucking Alliance is a lobbying group for several very large carriers, some suspect that this is another tactic for them to get the smaller players out of the game, because they may not be able to afford to pay for the increase. A similar concern was voiced when the freight broker bond saw a more than sevenfold increase.
Not surprisingly, the Owner-Operator Independent Drivers Association and the American Trucking Association (ATA) criticized the proposal exactly on these grounds. To counter the Trucking Alliance’s study, the ATA conducted a study of its own. By looking at almost 10 times more settlements, it found that “93.5 percent were already insured at $1 million or more,” and that “there’s only a 1.4 percent chance of a claim exceeding $500,000, and a 0.73 percent chance of a claim more than $1 million.”
What Can Be Done?
It’s not wise to underestimate the threat posed by the potential carrier insurance increase, as at this moment fleets with 6 trucks or less account for 86 percent of the entire trucking industry.
After the proposal becomes official, there will be a 60-day public comment period, so if the amounts seem too high for you, do not hesitate to voice your opinion and urge people around you to do so as well. The proposed increase will not take effect earlier than 2016, so there’s still time to take action.