Some recent news peaked my interest that will affect the transportation insurance industry and change some things. (Courtesy of our friends at CAB).
DEMISE OF THE BMC-32 ENDORSEMENT - To the surprise of many in the insurance and transportation industry the FMCSA has decided to do away with mandatory financial responsibility for cargo insurance for many carriers - the BMC-32 endorsement is going away. The FMCSA has issued its final rule, effective March, 2011, that certain motor carriers operating in interstate commerce will no longer be required to have an endorsement in place in order to operate. The shipping industry was directed by the FMCSA to protect itself by insuring that the carriers with whom they did business are adequately insured. Household goods carriers and household good freight forwarders will continue to be subject to the filing requirement. It is currently unknown what effect the existing filings will have, and whether insurers will be required to cancel all filings and remove the endorsement from existing policies.
BROKER LEGISLATION - This month the Motor Carrier Protection Act was introduced in the Senate. The Act is designed to change the requirements for brokers operating in interstate commerce. The proposed legislation will increase the broker bond from $10,000 to $100,000, impose stricter requirements for entities seeking broker or forwarder authority and increase penalties for violations of broker regulations
This author's take is that there will be more insurance capacity attacking motor truck cargo coverage and that financial underwriting will be looser- due to the lack of repercussions that the insurance filing had. Also, the barrier for entry and continuation as a truck broker has been raised so that smaller operations will have a much tougher time getting bonded and maintaining compliance.
What type of situations occur where a broker bond would come in play? A bond for the truck broker provides confirmation that an insured has the financial reserves to meet its payment obligations and handle unexpected financial demands from a risk incident such as a significant shipper non-payment, liability for an error and omission by an employee, liability for actions by a carrier.
Wednesday, June 30, 2010
Thursday, June 3, 2010
How are Truck Brokers Going to Access CSA 2010 Information?
At GTU, we are one of the largest writers of truck brokerage operations in the country. It is a misunderstood class of business. We are working with the trade association the Transportation Intermediaries Association to encourage best practices on behalf of their constituency. Part of our mutual challenge in this marketplace is to prove our value. We do that by offering risk management assistance, best practices that minimize risk, and offer insurance policies to cover that risk as well as we can.
While the jury is out on how the data from CSA 2010 is going to be employed, I found the article written by Rip Watson in Transport Topics to be enlightening.
Brokers Seek Fleet Safety Data to Evaluate Carrier Suitability
The federal government’s evolving Comprehensive Safety Analysis 2010 program is creating headaches for freight brokers who are trying to protect themselves from potential legal liability by picking safe motor carriers, according to industry officials.
The situation is unfolding as the Federal Motor Carrier Safety Administration makes the transition from the existing SafeStat system, which covers trucking safety compliance, to the more comprehensive CSA 2010 evaluation that begins Nov. 30.
Last month, FMCSA gave carriers their first chance to see safety performance data under the new scoring, which uses seven Behavior Analysis and Safety Improvement Categories, or BASICs. The new approach delivers at least twice as much data as SafeStat, enabling FMCSA to evaluate carrier safety better.
But there’s a catch: Only carriers can see those scores. As of now, brokers and others are barred from viewing any of the new safety data.
“We have raised the driver information issue with FMCSA and have been told that the information is private and to be used by the carrier, not for safety purposes in hiring a carrier,” said Robert Voltmann, president of the Transportation Intermediaries Association, the trade group that represents brokers.
“When we see the inevitable injury accident, we’ll have to see what attorneys and judges do with the CSA 2010 information,” Voltmann said.
The underlying problem is that brokers and shippers with deeper pockets than small carriers have been found negligent in several court cases, such as Schramm vs. Foster, a 2004 case in which a broker was found negligent for hiring a carrier that caused a severe crash.
“If a carrier is operating with a [Department of Transportation] license, on the one hand, I’d love to know I’m using safer carriers and be able to view safety data,” said Jeff Tucker, president of Tucker Company Worldwide brokerage, Cherry Hill, N.J.
On the other hand, Tucker added, he’s “on the fence” about whether he wants to know safety information if a plaintiff can use that information to convince a jury the broker is negligent and responsible for a highway accident.
What brokers don’t know could hurt them, a transport attorney said.
Brokers that fail to obtain carriers’ CSA 2010 scores could be exposed to suits claiming the broker should have known that data, said Tamara Goorevitz, a Baltimore attorney who specializes in representing brokers.
“What is the alternative when people ask ‘Did you even look into this?’ ” she asked. “Due diligence in my mind is to get that current score.”
Goorevitz warned that brokers must be more diligent under CSA 2010 even if they can get access to the data because the scores change monthly, while SafeStat ratings might not have changed for years.
Still another worry is that carriers rated “satisfactory” today will find that because their CSA 2010 score includes new data such as traffic violations, their rating could suffer, Tucker said.
In fact, one industry supplier, Vigillo LLC, which calculates CSA 2010 scores for its clients, found that 68% of the more than 1,500 carriers using its service had at least one BASIC score that would trigger FMCSA intervention.
David Schrader, who is senior vice president of load-board operator TransCore, said the high percentage of carriers with at least one deficient BASIC score will force brokers to decide how much risk tolerance they have.
“Brokers also will have to depend on carriers to make prudent business decisions,” Schrader said, and try to obtain CSA 2010 scores from carriers before they move a load.
FMCSA is encouraging fleets to obtain CSA score information and take appropriate follow-up action if needed.
“We strongly encourage every carrier to seize this opportunity to review their CSA 2010 data profile — and more importantly, to immediately address any deficiencies that may be revealed,” agency spokesman Duane DeBruyne said.
As of May 21, a total of 8,751 carriers had reviewed their safety data, DeBruyne said. The agency’s latest data show approximately 650,000 active trucking companies.
Other brokers are reaching out for solutions as well.
“We are taking this opportunity to reach out to our carriers and discuss CSA 2010 in general, as well as their specific rating, in order to learn more about them and how we can better work with them,” said Kerry Byrne, executive vice president of Total Quality Logistics.
“We’re also currently looking at third-party sources that may be able to provide additional data,” Byrne said. “We won’t make any final decisions on internal changes until we are confident that we have seen the final version of the regulations and determined the practical application of them.”
“We are currently in the pro-cess of determining what C.H. Robinson’s [carrier selection] criteria will be,” said Mark Walker, the broker’s senior vice president, transportation.
“Since all carriers will receive a rating in the new system, we anticipate that carriers currently in the ‘unrated’ pool will need to be especially aware of how CSA 2010 may impact them,” Walker said.
The “unrated” pool is a reference to carriers that don’t have a SafeStat rating.
“Responsible risk managers for brokers and shippers want to see compliance with the regulations and improvement in scores and ratings,” Tucker said.
While the jury is out on how the data from CSA 2010 is going to be employed, I found the article written by Rip Watson in Transport Topics to be enlightening.
Brokers Seek Fleet Safety Data to Evaluate Carrier Suitability
The federal government’s evolving Comprehensive Safety Analysis 2010 program is creating headaches for freight brokers who are trying to protect themselves from potential legal liability by picking safe motor carriers, according to industry officials.
The situation is unfolding as the Federal Motor Carrier Safety Administration makes the transition from the existing SafeStat system, which covers trucking safety compliance, to the more comprehensive CSA 2010 evaluation that begins Nov. 30.
Last month, FMCSA gave carriers their first chance to see safety performance data under the new scoring, which uses seven Behavior Analysis and Safety Improvement Categories, or BASICs. The new approach delivers at least twice as much data as SafeStat, enabling FMCSA to evaluate carrier safety better.
But there’s a catch: Only carriers can see those scores. As of now, brokers and others are barred from viewing any of the new safety data.
“We have raised the driver information issue with FMCSA and have been told that the information is private and to be used by the carrier, not for safety purposes in hiring a carrier,” said Robert Voltmann, president of the Transportation Intermediaries Association, the trade group that represents brokers.
“When we see the inevitable injury accident, we’ll have to see what attorneys and judges do with the CSA 2010 information,” Voltmann said.
The underlying problem is that brokers and shippers with deeper pockets than small carriers have been found negligent in several court cases, such as Schramm vs. Foster, a 2004 case in which a broker was found negligent for hiring a carrier that caused a severe crash.
“If a carrier is operating with a [Department of Transportation] license, on the one hand, I’d love to know I’m using safer carriers and be able to view safety data,” said Jeff Tucker, president of Tucker Company Worldwide brokerage, Cherry Hill, N.J.
On the other hand, Tucker added, he’s “on the fence” about whether he wants to know safety information if a plaintiff can use that information to convince a jury the broker is negligent and responsible for a highway accident.
What brokers don’t know could hurt them, a transport attorney said.
Brokers that fail to obtain carriers’ CSA 2010 scores could be exposed to suits claiming the broker should have known that data, said Tamara Goorevitz, a Baltimore attorney who specializes in representing brokers.
“What is the alternative when people ask ‘Did you even look into this?’ ” she asked. “Due diligence in my mind is to get that current score.”
Goorevitz warned that brokers must be more diligent under CSA 2010 even if they can get access to the data because the scores change monthly, while SafeStat ratings might not have changed for years.
Still another worry is that carriers rated “satisfactory” today will find that because their CSA 2010 score includes new data such as traffic violations, their rating could suffer, Tucker said.
In fact, one industry supplier, Vigillo LLC, which calculates CSA 2010 scores for its clients, found that 68% of the more than 1,500 carriers using its service had at least one BASIC score that would trigger FMCSA intervention.
David Schrader, who is senior vice president of load-board operator TransCore, said the high percentage of carriers with at least one deficient BASIC score will force brokers to decide how much risk tolerance they have.
“Brokers also will have to depend on carriers to make prudent business decisions,” Schrader said, and try to obtain CSA 2010 scores from carriers before they move a load.
FMCSA is encouraging fleets to obtain CSA score information and take appropriate follow-up action if needed.
“We strongly encourage every carrier to seize this opportunity to review their CSA 2010 data profile — and more importantly, to immediately address any deficiencies that may be revealed,” agency spokesman Duane DeBruyne said.
As of May 21, a total of 8,751 carriers had reviewed their safety data, DeBruyne said. The agency’s latest data show approximately 650,000 active trucking companies.
Other brokers are reaching out for solutions as well.
“We are taking this opportunity to reach out to our carriers and discuss CSA 2010 in general, as well as their specific rating, in order to learn more about them and how we can better work with them,” said Kerry Byrne, executive vice president of Total Quality Logistics.
“We’re also currently looking at third-party sources that may be able to provide additional data,” Byrne said. “We won’t make any final decisions on internal changes until we are confident that we have seen the final version of the regulations and determined the practical application of them.”
“We are currently in the pro-cess of determining what C.H. Robinson’s [carrier selection] criteria will be,” said Mark Walker, the broker’s senior vice president, transportation.
“Since all carriers will receive a rating in the new system, we anticipate that carriers currently in the ‘unrated’ pool will need to be especially aware of how CSA 2010 may impact them,” Walker said.
The “unrated” pool is a reference to carriers that don’t have a SafeStat rating.
“Responsible risk managers for brokers and shippers want to see compliance with the regulations and improvement in scores and ratings,” Tucker said.
Tuesday, June 1, 2010
LOC's As Premium Collateral; It's Better Than A Cash Deposit
Rob Mosely in concert with Big Truck TV looks at escrow deposits that inhibit a trucker financially. Whether a deposit is an escrow or a working deposit, the bottom line is that it needs to be explained. What Rob's article could have added is that collateral not only protects against bankruptcy, it also protects and agent and insurance company by averting the loss or earned premium- which has been uncollected in the cancellation request. See his article below:
"Protecting a Truck Insurer from an Insured’s Potential Bankruptcy: Letter of Credit as Collateral
Too often in today's economy, insurers are getting the short-end of the stick when the motor carriers they insure file bankruptcy. By the time the insured files bankruptcy - or possibly even before any financial problems arise - it is generally too late to protect your company from the effects of the insured's bankruptcy. Therefore, safeguards must be put in place beforehand in order to insulate an insurer from bankruptcy's often harsh consequences, including harmful effects on an insurer's collateral.
Truck insurers, especially those involved with "fronting policies," captives, or high dollar deductibles necessarily insist on collateral to secure the insured's obligations. This collateral can be found in several forms, including equipment, cash, or a letter of credit. A recent opinion issued in S-Tran Holdings, Inc. v. Protective Ins. Co., Delaware Bankruptcy Court, Adversary No. 07-51341, 2009 WL 3185771 (Del. 2009), suggests that one potential safeguard against bankruptcy is to require a standby letter of credit as collateral from the insured.
What is a standby letter of credit?
A standby letter of credit is essentially a guarantee of payment by the shipper's bank. Insurer's customer, Motor Carrier, must go to its bank and apply for a standby letter of credit. Upon approval of Motor Carrier's application, Motor Carrier's bank then sends the letter of credit to Insurer as collateral for Motor Carrier's obligations under the insurance policy. Upon the occurrence of a default of Motor Carrier, Insurer may contact Motor Carrier's bank to "draw down" on the letter of credit for cash.
Why is a letter of credit better than any other collateral?
Motor Carriers might prefer to put up cash, equipment, or other property as collateral. However, from the Insurer's perspective, a letter of credit might be preferred because it lacks all of the issues associated with liquidation of equipment (e.g. valuation, finding a buyer, etc.); a letter of credit is much more easily convertible to cash than would be equipment or other tangible property. Of course, if liquidity is the primary concern, why not have Motor Carrier simply put up a cash deposit as collateral? S-Tran Holdings demonstrates why.
In S-Tran Holdings, the bankrupt debtors were related entities, S-Tran Holdings, Service Transport, Inc., and Dixie Trucking Company, Inc. (collectively "Service Transport"), which were primarily motor carriers. Prior to the bankruptcy, as a condition for issuing various insurance policies, Service Transport's insurance company had required it to put up two forms of collateral: (i) a cash deposit and (ii) a letter of credit. When Service Transport allegedly defaulted under the agreements, the insurance company drew on the letter of credit and held the proceeds. Once the bankruptcy was filed, Service Transport sued the insurance company for turnover of the proceeds of the letter of credit, as well as breach of contract. The turnover claim, in other words, meant that Service Transport wanted to require the insurance company to give the letter of credit proceeds back to the bankruptcy estate so that a determination could be made as to how the letter of credit proceeds should be distributed. The Court held, in part, in favor of the insurance company, determining that the letter of credit and the proceeds therefrom are not part of the bankruptcy estate. On the other hand, the cash deposit was part of the bankruptcy estate, and therefore, subject to turnover.
How does all of this apply to you as a Truck Insurer?
In the example laid out above, if Motor Carrier is in bankruptcy and disputes monies owed to Insurer under the policy, then depending on the collateral, Motor Carrier (or its trustee) may have a right to control the collateral (i.e. the "stake') during the litigation. If the collateral is cash, equipment, or other types of property, then Motor Carrier (or its trustee) will likely control the stake throughout the course of the litigation. However, if the collateral is proceeds from a letter of credit, then such proceeds are not property of the estate, and Insurer would likely have the right to hold the stake during the course of litigation. As an example, the S-Tran Holdings adversary case has been ongoing for over two and a half (2½) years, and is still ongoing. The party that is entitled to hold the stake throughout such a period would certainly have an advantage.
Therefore, if you are an insurer determining what you will require as collateral in order to issue a policy, consider a letter of credit rather than cash or other collateral. If the insured later files bankruptcy, you just might be glad that you did."
"Protecting a Truck Insurer from an Insured’s Potential Bankruptcy: Letter of Credit as Collateral
Too often in today's economy, insurers are getting the short-end of the stick when the motor carriers they insure file bankruptcy. By the time the insured files bankruptcy - or possibly even before any financial problems arise - it is generally too late to protect your company from the effects of the insured's bankruptcy. Therefore, safeguards must be put in place beforehand in order to insulate an insurer from bankruptcy's often harsh consequences, including harmful effects on an insurer's collateral.
Truck insurers, especially those involved with "fronting policies," captives, or high dollar deductibles necessarily insist on collateral to secure the insured's obligations. This collateral can be found in several forms, including equipment, cash, or a letter of credit. A recent opinion issued in S-Tran Holdings, Inc. v. Protective Ins. Co., Delaware Bankruptcy Court, Adversary No. 07-51341, 2009 WL 3185771 (Del. 2009), suggests that one potential safeguard against bankruptcy is to require a standby letter of credit as collateral from the insured.
What is a standby letter of credit?
A standby letter of credit is essentially a guarantee of payment by the shipper's bank. Insurer's customer, Motor Carrier, must go to its bank and apply for a standby letter of credit. Upon approval of Motor Carrier's application, Motor Carrier's bank then sends the letter of credit to Insurer as collateral for Motor Carrier's obligations under the insurance policy. Upon the occurrence of a default of Motor Carrier, Insurer may contact Motor Carrier's bank to "draw down" on the letter of credit for cash.
Why is a letter of credit better than any other collateral?
Motor Carriers might prefer to put up cash, equipment, or other property as collateral. However, from the Insurer's perspective, a letter of credit might be preferred because it lacks all of the issues associated with liquidation of equipment (e.g. valuation, finding a buyer, etc.); a letter of credit is much more easily convertible to cash than would be equipment or other tangible property. Of course, if liquidity is the primary concern, why not have Motor Carrier simply put up a cash deposit as collateral? S-Tran Holdings demonstrates why.
In S-Tran Holdings, the bankrupt debtors were related entities, S-Tran Holdings, Service Transport, Inc., and Dixie Trucking Company, Inc. (collectively "Service Transport"), which were primarily motor carriers. Prior to the bankruptcy, as a condition for issuing various insurance policies, Service Transport's insurance company had required it to put up two forms of collateral: (i) a cash deposit and (ii) a letter of credit. When Service Transport allegedly defaulted under the agreements, the insurance company drew on the letter of credit and held the proceeds. Once the bankruptcy was filed, Service Transport sued the insurance company for turnover of the proceeds of the letter of credit, as well as breach of contract. The turnover claim, in other words, meant that Service Transport wanted to require the insurance company to give the letter of credit proceeds back to the bankruptcy estate so that a determination could be made as to how the letter of credit proceeds should be distributed. The Court held, in part, in favor of the insurance company, determining that the letter of credit and the proceeds therefrom are not part of the bankruptcy estate. On the other hand, the cash deposit was part of the bankruptcy estate, and therefore, subject to turnover.
How does all of this apply to you as a Truck Insurer?
In the example laid out above, if Motor Carrier is in bankruptcy and disputes monies owed to Insurer under the policy, then depending on the collateral, Motor Carrier (or its trustee) may have a right to control the collateral (i.e. the "stake') during the litigation. If the collateral is cash, equipment, or other types of property, then Motor Carrier (or its trustee) will likely control the stake throughout the course of the litigation. However, if the collateral is proceeds from a letter of credit, then such proceeds are not property of the estate, and Insurer would likely have the right to hold the stake during the course of litigation. As an example, the S-Tran Holdings adversary case has been ongoing for over two and a half (2½) years, and is still ongoing. The party that is entitled to hold the stake throughout such a period would certainly have an advantage.
Therefore, if you are an insurer determining what you will require as collateral in order to issue a policy, consider a letter of credit rather than cash or other collateral. If the insured later files bankruptcy, you just might be glad that you did."
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