Truck Broker Exclusions in Trucking Insurance Policies

Most of you are aware that most any trucking underwriter does not care for related truck brokerage operations in most any form. For most underwriters, it is grounds for declination. If the brokerage operations are a small part of the overall trucking operation, they may quote it but require that the insured seperate and put in a seperate authority the brokerage operation. The purpose is to isolate the trucking risk to just being the trucking risk- and not bear the risk of what the insured does with their brokerage operation. It is important to look at the reason why and the foundation for this underwriting position. The standard operating procedure in truck insurance underwriting is assessing the risk. Normally that is done with an application, equipment list, drivers list including date of hire, mileage reports, financials, and loss description/ loss runs. Coupled with this underwriting is to understand if there is a hired and non-owned exposure that the underwriter would be picking up if they successfully bound the policy. That is easier on small fleet policies in that they are frequently written on a scheduled auto basis- that is, the insurance carrier is only picking up coverage for units that are scheduled and, in their view, not for any vehicle hired and non-owned. For fleet policies, these are normally written on an Any-Auto symbol meaning any unit used on the insured's behalf is covered. So what the insurance underwriter does is he or she gets the total number of units each policy year and divides that into both revenue and mileage to make sure their is consistency and a similar yield per year that matches up. If there are wide variations, it probably means that the insurer is not seeing the entire equipment schedule they are exposed to- and therefore not getting the premium. One more digression before we look at brokerage operations as part of a trucking operation. Every trucker with common, contract, or hazardous material status requires a public liability filing known as an MCS-90 endorsement which proclaims that the insurance company is responsible to the general public for any vehicle, whether scheduled or insured or not, used in the insured's operations. So you can see why the insured is quite zealous to make sure they are insuring, and getting the premium, for any exposure. So what has changed as far as this concept of underwriting? Really nothing. This is the way it has always been. But have insurance companies changed? You bet. Has the trucking industry changed? You bet. Here is what happened: During the last recession, many trucking companies went out of business. To add insult to injury, even with 7.5% unemployment, there is a greater and greater scarcity in drivers. Indeed truck driving is construed to be one of the most dangerous jobs out there and the lack of workers compensation capacity to write coverage confirms how tough the job really is. So with the lower number of drivers and trucking companies, shippers of freight are having a tougher and tougher time finding truckers ready, willing, and able to haul their freight. So even though a trucker can and often does trip lease freight under their authority ( trip leasing defined as a one-off trip where a trucker arranges that another trucker hauls the freight under the originating trucker's bill of lading or authority), more and more truckers are setting up truck brokerage authority to handle loads they neither have the vehicles nor drivers to haul. Why? Well it makes sense frankly. If they have a good shipping customer, they want to tell them, " Hey, we will be your transportation solution. We will preferably haul your loads on our trucks. But if they are all on the road, our brokerage arm will arrange to have your freight hauled. We will service your business to your satisfaction." So how do they set up brokerage authority? In two ways. One they set it up as part of their common and contract authority. That is, it is under the same name as the trucking company. And trucking underwriters do not like that one bit for reasons previously mentioned. After an underwriter has gone to all the trouble of underwriting and pricng a trucking risk, to have the trucker be able to hire any carrier willy-nilly and not have any idea about their experience, type of equipment, quality of the driver,and yes loss experience is a non-starter. The second way a trucker can set up a truck broker is a completely new authority. Interestingly, it can be in the same exact name as the trucking company but it is certainly better for the truck underwriter if the name is completely different- or at least slightly different. So the upshot of all this is that the trucking insurance marketplace very quietly started putting brokerage exclusions on their commercial auto policies. That is to say, they exclude brokerage losses. Really no one has brought up there could be some coverage issues that arise out of this- that can give both heartburn and even worse, an error and omission. You will note that I have never seen a commercial auto policy define trip lease or sub-hauler. That is not to say that someone might be doing same. And on the brokerage exclusions that I have seen, truck broker operations are not defined. So a friend calls me up and tells me that he has had a loss denied due to the fact that it was a brokerage loss and for me to give him my two cents which is what it is worth. But the situation was far worse than I realized and made me think of all the uncovered losses that spell doom for those involved. The loss involved a cargo loss where the insured brokered a load and the claim was denied. In this case, the insured had common, contract, and brokerage authority all under the same name- a bad deal as previously mentioned. The load, while brokered, listed the insured as the carrier on the bill of lading. So even though the insurance carrier felt they were justified excluding the loss, and even though the insured freely admitted the load was brokered, it is clear to me the legal liabily for the loss wrests with the insured. Why? I see two reasons. First there is the DOT regulation that says " The Carrier shall issue the Bill of Lading". The carrier here was the insured even though he brokered the load. Secondly, Carmack, the federal regulation that stipulates how all cargo claims are adjudicated, states clearly that the bill of lading is the legal instrument of carriage, and therefore is the determining document as to who is liable and how they are liable. And that would be the insured. So, according to my pejorative here, the insurance company is on this loss for the insured. They may not like it- but they are on it. What is worse is what would happen if there were a liability loss where again the insured brokered the freight but it is under their bill of lading? Well in my view, the insured's insurance company would be on it again. It is clear to me that the industry has little understanding of what truck brokerage, subhauler, and trip lease exposures are out there and how they are covered or not- and it's more clear that truckers with brokerage operations are not mitigating potential loss by doing such dumb things as having the bill of name in the brokered carrier's name. Do they want their insurance carrier to be paying a loss they are not responsible for? No. But if they put their name on the bill of lading. They are doing just that. Beware of brokerage exclusions on commercial auto policies. Now you know why.

Compliance, Safety, and Accountability (CSA) changes- Are you and your clients able to keep up?

CSA continues to confound all stakeholders involved in the supply chain. There appears to be a change a month. The truth is CSA is unfair. While this is a purely conjectural statement, it should be noted that CSA is attempting to raise the bar on truck road safety- and that is a good thing. The challenge is that its strategy to raise the bar is to establish a better measurement system for looking at roadside inspection data and driver experiences. The reason why it is unfair is that so many truckers are "not rated" and so it penalizes those truckers who are rated- who might be actually worse than those that are not rated. Until ALL carriers are rated we will never know. The other challenge is that the only way a carrier can clean up his score is to get a clean inspection- so they have to try and get inspected when nothing is wrong. Does not seem to make sense, does it? And to add insult to injury, they keep changing things. I have to look at that as good since the system needs improvement. What people need to stop doing is saying it is irrelevant and any carrier that is approved to operate by DOT is viewed as safe. I can tell you plaintiff's lawyers, trial courts, and the insurance industry- other ancillary stakeholders in the supply chain do not view it that way at all. An insurance underwriter, rightly or wrongly, has established their own benchmarks that they feel their defense attorneys can successfully defend. So keep your eye on CSA, and look at who is doing what. So what changed this time? Our friends at the Central Analysis Bureau said there were the following changes to CSA this past month. They are: 1)The Cargo-Related BASIC is now aligned with the Hazardous Materials (HM) Compliance BASIC 2)The Vehicle Maintenance BASIC has been strengthened by including cargo and load securement violations that were previously in the Cargo-Related BASIC 3)CSA now counts intermodal equipment violations found during drivers’ pre-trip inspections 4)CSA is now trying to align speeding violations to be consistent with current speedometer regulations that require speedometers to be accurate within 5 mph 5)The Fatigued Driving BASIC is no more. The name has been changed to the Hours-of-Service (HOS) Compliance BASIC to more accurately reflect violations contained within the BASIC 6)CSA is now aligning the severity weight of paper and electronic logbook violations equally on the SMS for consistency purposes. The change applies to the prior 24 months of data used by the SMS and all SMS data moving forward. Keep your eyes open for CSA changes so you can help your clients. We will be looking at for changes as well. Some folks say change is good. Let's hope so.

Fiscal Cliff Averted for Trucking?

Sorry to be out of touch for a while. My friends at CAB got some very interesting information from GE Capital: GE Capital’s sixth market survey of chief financial officers of 500 U.S. middle-market companies reports that 79% of transportation CFOs expect to increase staff in the next 12 months. Trucking CFO's saw the largest increase in credit availability across all industries - a 35 percent increase and up 12 points from the previous survey. Transportation CFO's also indicate that 67% will increase equipment purchases. The greatest business opportunities are expected to focus on increasing average revenue-per-loaded-mile and increasing tonnage volume from existing customers. So that means trucking insurance carriers and their agents should be the beneficiaries. It would also seem to state that whatever driver shortage issues are out there, the CFO's of trucking companies feel they will avert the problem or simply be giving existing drivers better equipment. Sounds all good...

More Brokerage in Trucking

The Central Analysis Bureau obtained a report from Transport Capital Partners that the use of brokers by truckers as a way to solicit freight is on the increase. Approximately 33% of motor carriers used freight brokers in February, up from 11% at the same time last year. What is really interesting is that 34% of large carriers with at least $25 million in annual revenue used brokers compared to 28% of smaller carriers. It used to be construed that truckers who used truck brokers were getting paid less, and more involved in irregular route business- thus creating a worse insurance risk. That now is simply not the case. Truck Brokers are here to stay.....

Truck Fatalities Worse- Expect Higher Loss Costs and Therefore Market Hardening

It's an 18% jump in trucking fatalities in one year. Imagine how that translates to the higher incidence of injury claims.

In a press release issued Friday, the Truck Safety Coalition says truck crash fatalities rose to nearly 4000 in 2010, from 3,380 casualties in 2009. Citing testimony on November 30 from Federal Motor Carrier Safety Administration Administrator, Anne Ferro, before a House Oversight and Government Reform Subcommittee on the pending truck driver hours of service(HOS) reforms, TSC says the new data supports the position of safety groups, families of truck crash victims,and labor. Those groups have been urging the U.S. Department of Transportation and the Obama Administration to issue a safer truck driver HOS rule to reduce driver fatigue. "This newly released data proves that the 'Trucking Industry Emperor' has no clothes. We already knew that there were no facts or evidence whatsoever that linked the current HOS rule and the recent improvements in truck crash and fatality data. Now it's time for the Obama Administration to do the right thing and protect innocent motorists and truck drivers," said Joan Claybook, Chair of Citizens for Reliable and Safe Highways. The TSC has joined with Advocates for Highway and Auto Safety and other safety groups in sending a letter today to the Office of Management and Budget's Office of Information and Regulatory Affairs Administrator, Cass Sunstein, disputing phony claims by the ATA and urging a new, safer HOS rule.

So if you think the trucking business is going to stay away from further regulation, think again. If you don't think the trucking insurance will be hardening, think twice.

Diminution in Value- The Property versus Cargo Claims Comparative

I saw an interesting article in an FC&S bulletin on a property insurance claims precedent and I could not help but feel there is the need to relate it to cargo insurance-specifically for auto haulers.

Truckers are signing contracts with shippers that expose them and their insurers to claims that are covered and not covered. One of those big issues is "diminution in value". Especially in cases where retail goods or cars are being hauled, any loss where an insurer repairs or replaces the property being claimed, will result in a diminution of value. That means, you can not sell it for what you could have prior to the loss.

Many insured's and their shippers assume property and cargo are furnishing replacement cost insurance. While it could be endorsed by a naive underwriter, it does not happen.

So what is the property legal precedent on diminution of value? Read below:
Diminution in Value Damages Not Covered in Loss Payment Options
The United States District Court handled a dispute between the insured and the insurer over whether the property policy provided coverage for a diminished value claim. This case is Royal Capital Development, LLC v. Maryland Casualty Company, 2010 WL 5105157 (N.D.Ga.).
Maryland Casualty Company issued an insurance policy to Royal Capital that covered the insured's real property. During the policy period, the floor tiles developed cracks (allegedly the result of construction work performed on adjacent property). The insured submitted a claim and the insurer paid for the damages. However, a dispute arose over the amount of the payment.
Royal Capital submitted a claim that included diminution in value. The insurer paid an amount it contended constituted the full amount claimed for the cost of repairing the property, including investigation costs and legal costs incurred to minimize the loss. The insurer said that diminution in value damages are not covered under the payment option selected by the insured and such damages were not supported by factual evidence. The insured said that the building sustained foundational and structural damages and this resulted in a diminution of value to the property that should be covered as direct physical loss to the building.
The U.S. District Court found that the matter boiled down to simple policy interpretation, using the insurer's choice of payment as a guide. The plain language of the policy does not cover diminution of value damages because the insurer selected a loss payment method that provides only for the cost of repairing or replacing the lost or damaged property. The court went on to state that the policy granted the insurer the right to choose one of four separate calculation methods to determine the amount of direct physical loss or damage; these options are distinct and mutually exclusive. Because the insurer elected to pay the insured the cost of repairing or replacing the los or damaged property, the insured cannot now argue that it is also entitled to diminution of value damages in addition to the monies it has already received. The policy's coverage grant is specific.
The court granted the insurer's motion for summary judgment.
FC & S additional sidebar note: Because the insurer had the option as to how to pay for the loss, and because a plain reading of the policy shows that diminution of value damages are not meant to be included in the option selected by the insurer, the insurer was entitled to summary judgment. Moreover, absent policy language that includes economic damages or diminution of value in the scope of direct physical loss or damage, this court (like most courts) did not choose to gratuitously expand the coverage granted under the terms of the policy.

Do you think you can see a comparison with cargo insurance. You bet.

So help your truckers not agree to diminution of value contracturally with any shipper. They won't find coverage for it.

The Motor Carrier Coverage Form Review versus the Trucker Coverage Form- Update

I thought it made sense to revisit the motor carrier form as this should be implemented now in all states- and it is clear that not all folks in the trucking insurance arena understand it. The attached summary pays its respects to my friends at Carolina Casualty who have done a detailed review of the forms.

A little history is in order first. The Insurance Service Office ( ISO) stopped supporting the Truckers Coverage Form ( TCF) in June of 2010 and began supporting only the Motor Carrier Coverage Form (MCCF). So it is fair to say anyone using the TCF is in an antiquated position- and it shows a lack of investment in staying current. There may be a state or two that has not adopted it but I am not aware of any.

Why the change? The MCCF is more consistent with how trucking companies do business. The TCF looked to the trucker's operating authority to determine how coverage responded. Conversely, the MCCF looks to lease agreements and in particular idemnification and hold harmless agreements that are a pervasive part of the supply chain. What is odd about the MCCF is that in its effort to stay " current", it does not recognize that many indemnification agreements between carrier and shipper have been struck down in over 20 states- and that list is growing. So it is a bit antiquated as well.

What are the differences between the TCF and the MCCF- or the business auto coverage form for the matter with respect to definitions, exclusions, and conditions? The answer is unfortunately not much. I will comment on the "big deal" about the forms below.

Eligibility is a word not often used in the insurance business but eligibility is a big deal when comparing the forms. The MCCF identifies a "motor carrier" as a organization providing transportation by auto in the furtherance ( great word) of a commercial enterprise. This is broader that the TCF which identifies a trucker as an organization engaged in the business of transporting property by auto for hire. The types of risk are determined by these definitions of motor carrier versus trucker.

So how is this broader? The MCCF can include private carriers ( not for hire)and passenger carriers. If a rancher owns his own truck and takes his cattle to market but returns with goods of others, he should have his insurance coverage written under the MCCF form. So in essence it provides a hybrid form.

One big deal is with respect to who is insured. Under the TCF the owner of a hired or borrowed auto is covered under the TCF. THe MCCF exclude the owner that is hired or borrowed by the named insured. This makes the MCCF appear worse but it actually consolidates coverage to pick up only the coverage for the named insured. It also expands who is insured to include the employee, agent, driver of the owner or anyone else from who you hire or borrow a covered auto. TCF does not embellish this at all.

The next big deal is lessor status. Lessors are an integral part of the supply chain. Under the MCCF, the lessor is an insured under the lessee's policy if the leasing agreement does require the lessor to hold the named insured harmless. So the MCCF reflects the lease obigations of the named insured. The TCF does not spell this out.

The third big deal is lessee status. Like the lessor status above, the lessee status is defined in the MCCF form. If you have a motor carrier who leases vehicles to others, the MCCF form grants the lessee the status of an insured.

The fourth big deal has to do with operating authority. This has to do with a gap respects borrowed trailers not connected to a power unit. Under the TCF, trailers that the insured hires or borrows may be excluded from coverage simply because those trailers may not be subject to an operating authority ( such as certain farm goods which are exempt). This is not material to the MCCF which does not care about operating rights and is covered.

The last big deal is the other insurance provisions. Other insurance provisions delineate who is primary and who is excess. A trucker is insured under the MCCF regardless of whether he leases autos from others or to others. However, if a lease agreement is in place and the contractural wording is clear, another motor carrier may be an insured under your policy- or that motor carrier may treat that trucker as an insured under his policy. If a trucker holds another party harmless, it is understood that his coverage will be primary. If someone else holds the trucker harmless, the insured's MCCF policy will be excess. Because there are usually always contract agreements in trucking and due to the fact that the MCCF can include another party as an insured, there is a need for higher limits in the industry. It is not surprising that more and more shipper are requiring higher limits for this very reason ( and the fact that judgements in excess of $1,000,000 are not rare at all).

So you can see the lease or contract is a big deal when determining coverage in the MCCF. As insurance agents like myself make very poor lawyers, it is important to have counsel involved in the insurance process. What lawyers do very poorly in my opinion is to delineate what is covered and what is not by insurance- so a trucker can make a business decision whether or not the risk of commerce is worth the potential insured or uninsured exposure.

While the MCCF provides an improvement to the TCF, the big differences ( or big deals as presented above) are really poorly described- and for anyone other than an insurance layman completely convuluted.

Ben's take is our industry could do a lot better - and hopefully someday we will. But I would first start with the contractural exposures before crafting a new policy and not just try to deal with the lease but the actual shipping exposures assumed by contract. There is a real need by the risk management community to identify the insurance policies that are primary and non-contributory. The MCCF does not do that. The TCF never did.