Commercial trucking is extremely important to the US economy and its citizens. In fact, if the $700 billion dollar trucking industry stopped, so would our country. Within 24 hours we would have hospitals without supplies, service stations without fuel, and no US mail and package delivery. After day one food shortages begin and assembly lines stop. In 72 hours, banks run out of money, container ships back up in ports, and garbage starts piling up. By the end of the month, much of the US would be without food and clean water.
An industry so vital to this country must be doing well, right? Wrong.
More than 800 commercial trucking companies closed their doors in just the first three quarters of 2019 – a trend continuing into 2020. Operating ratios in the capital-intensive trucking business are notoriously tight averaging only around 12-15% in profit. Cost increases are squeezing those numbers even more. One particular expense adding pressure: commercial liability insurance.
Caution: Headwinds Ahead
In 2018, truck insurance premiums rose 12% on average. For many small fleets, which comprise most for-hire carriers, the increase was closer to 20-30%.
In addition to the increases affecting almost all general liability insurance policyholders, trucking faces an extra problem: nuclear judgements. These are jury awards exceeding $10 million against trucking companies.
In the last five years, more than 300 cases resulted in awards of more than $1 million. Between 2012 and 2015, just 12 cases equated to a total of $900 million in nuclear verdicts. A Georgia court in 2019 awarded $280 million in a lawsuit for a fatal truck-car collision, the largest judgement against a commercial trucking company on record. Between 2012 and 2020 the average verdict increased from $2.6 million to $17 million.
That is more than many insurance companies are willing to cover. Two of the biggest insurers, Zurich and AIG, exited the for-hire trucking sector altogether. Other insurance providers are following suit or increasing premiums beyond what many companies can absorb profitably. Insurance giant Aon estimates that $250 million of capacity dried up by mid-2019 with some higher-level coverage prices increasing up to 300%.
Federal legislation is compounding the issue. In an effort to create safer roads, the proposed INVEST Act includes a requirement for carriers to hold $2 million in liability coverage (as of this writing), an increase from the Federal Motor Carrier Safety Administration’s current requirement of $750,000. This move will increase price pressures on both carriers and insurers even further.
Traveling through Rough Terrain
Companies wanting to stay on the road in a tough insurance market have limited options:
- Join larger fleets – owner-operators can lease their equipment to larger fleets rather than operating under their own Department of Transportation authority. They lose some independence but gain access to the fleet’s insurance buying power.
- Invest in safety features – companies can invest in new safety technologies such as inward and outward facing cameras or speed limiters. The features do increase capital expenditures and overhead but help prevent accidents. Many insurance companies now consider these safety investments a minimum requirement for coverage.
- Increase driver qualifications – many companies require six months of clean driving to hire a professional driver. Increasing that to 12-plus months is likely to improve safety performance but compounds the existing 61,000 driver shortage plaguing the industry today.
- Captive – more companies can form or join a captive, which is a form of self-insurance backed by an insurance company. Captives offer coverage when other insurers will not but require significant time, capital, and labor.
- Settle lawsuits – rather than fighting it out in court, trucking companies can choose to settle even when they believe the law is on their side. This means more out-of-pocket costs, but the current economic climate may incentivize individuals to accept lower offers rather than pursuing long court battles.
- Cut expenses – this is perhaps the most detrimental action, but also highly likely. In a down economy, companies will run their equipment longer, cut management staff, and compromise on costly safety features. They also may choose to insure for the FMCSA minimum rather than the $1 million industry standard. More claims will occur causing the insurers’ loss ratio to rise. The long-term result is even less insurance capacity and higher costs over time.
Going the Wrong Direction
So, what does this mean for the economy as a whole?
Commercial trucking companies able to stay in business will not absorb higher insurance costs alone. Look around your home and office. Class 8 trucks delivered 70% of everything you see – all of which is going to cost more.
If company closures continue, you can say goodbye to those two-day deliveries. In fact, you will wait longer for all purchases as manufacturers and retailers compete for trucking capacity. This will be a huge hit to the 80% of US communities that rely solely on trucking for goods deliveries.
Unemployment will increase as 1 in 16 Americans work in the trucking industry.
And unfortunately, more trucking companies will compromise on safety or let their insurance lapse altogether. That creates less safe conditions for each of the 274 million cars and trucks on the road today.
Move into the Fast Lane with myCOI
The good news is that myCOI is helping manage the risk of trucking. Whether it is a logistics company hiring thousands of carriers annually to haul freight or a general contractor bringing a for-hire carrier onsite for materials delivery, myCOI keeps them protected. Our software tracks and manages carriers’ certificates of insurance. The platform monitors coverage thresholds, tracks expiration dates, and ensures every carrier has active insurance before their wheels start turning. myCOI goes the extra mile so your carriers safely can too.