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FMCSA Insurance Requirements

In April, the Federal Motor Carrier Safety Administration (FMCSA) submitted its’ required quadrennial report to Congress on the appropriateness of the current minimum financial responsibility requirements for motor carriers, brokers and freight forwarders.

FMCSA concluded that current minimum financial responsibility limits for the commercial motor vehicle industry — including the $750,000 limit for general freight carriers— are inadequate to meet the costs of some crashes, mainly because of rising medical costs.

The agency stopped short of recommending specific new limits but could have a proposal by the end of June and new limits could be published in November.

FMCSA recently engaged DOT’s John A. Volpe Transportation Systems Center to study the issue. The study, “Financial Responsibility Requirements for Commercial Motor Vehicles,” assessed the adequacy and effectiveness of those levels in meeting carrier liabilities.

The current required minimum liability limits were established in the 1980s, stemming from the Motor Carrier Act of 1980 and the Bus Regulatory Reform Act of 1982. By 1985, after a phase-in period, limits for motor carriers of property (freight) were set at:

• $750,000 for the transportation of property.
• $5 million for the transportation of certain hazardous materials.
• $1 million for the transportation of other hazardous materials.

For motor carriers of passengers, minimum limits were set at:

• $5 million for vehicles with a seating capacity of 16 or more passengers.
• $1.5 million for vehicles with a seating capacity of 15 or fewer.

The Volpe study examined whether the minimum financial responsibility requirements under 49 USC sections 31138-31139 should be raised, weighing the benefits of improved compensation for crash victims, internalization of freight and passenger transportation costs, and reductions in truck and bus-involved crashes, against costs imposed on CMV operators, the insurance industry, and other relevant considerations. Overall, the study’s findings provided preliminary support for increasing the current levels of financial responsibility.

The FMCSA study found that catastrophic motor carrier crashes resulting in injury, death and/or damages that exceed the current limits are relatively rare — less than one percent of 330,000 crashes analyzed. However, while catastrophic crashes are rare, the costs for the resulting severe injuries can exceed $1 million and current insurance limits do not adequately cover these costs, according to the report.

Truckers are split on the issue, with some accepting higher limits and others opposing them as unnecessary and a burden on smaller trucking firms. Insurers aren’t saying anything, yet anyway, while insurance brokers, noting that many truckers already buy more than the minimum limits, agree that current minimum limits are too low.

One group, the Trucking Alliance, a group of seven carriers that lobby for safety legislation on Capitol Hill, conducted its own study and found that the dollar settlements in some cases were far above the $750,000 minimum federal insurance requirement.

Other trucking groups were skeptical of the Trucking Alliance research. “It’s pretty much just garbage,” said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association (OOIDA).

Spencer cited the small number of carriers in the survey and said he believes the current requirement is adequate. “Most truckers have a minimum of $1 million (in coverage) and in the overwhelming majority of instances that’s plenty,” he said.

“We have never seen a correlation between insurance minimums and safety,” Spencer added. “What increased minimums would do is result in tremendous increases in the number of personal injury lawyers that specialize in suing trucking companies.”

The American Trucking Associations (ATA), the nation’s largest trucking group, was equally dismissive.

“ATA read the press release from these carriers, and the 3.5 page ‘study’ performed by an actuarial firm,” said Sean McNally, vice president of communications for ATA.

“FMCSA has consistently found over the same time period examined by the Trucking Alliance that the average cost of a crash involving a large truck is less than a third of the minimum limit required today,” he said.

McNally said ATA is still developing its position on the insurance requirements.

“As part of that process we are looking for all available data, including FMCSA’s upcoming study of the topic. Whenever we ultimately adopt a position, it will be data driven,” he added.

“We all know how inflation has reduced what we can get with a dollar. And nowhere is this more true than in healthcare, where the cost of hospitalization and medical treatment has skyrocketed in recent decades,” said Mike Stephenson, an Indiana personal injury attorney who represents victims of car and truck accidents. “To have financial responsibility limits the same in 2014 as they were in 1985 is hardly responsible and I’m glad the FMCSA has recognized this and will correcting it through future rulemaking,” he added.

Key highlights from the FMCSA study include the following:

Catastrophic motor carrier-related crashes are relatively rare. Based on limited available claims data, it was estimated that catastrophic crashes, resulting in injury, death, and/or property damages that exceed the current minimum levels of financial responsibility, comprised less than one percent of all CMV crashes (about 3,300 of 330,000 total crashes per year). The various data sources utilized to estimate the share of crashes that exceeded the insurance limits included the Insurance Services Organization, Tractor Trailer Torts, MCMIS, the National Highway Traffic Safety Administration’s General Estimates System, and the Pipeline and Hazardous Materials Safety Administration’s Hazardous Material Information System.

However, costs for severe and critical injury crashes can easily exceed $1 million. The analysis reveals that two categories of injury crash (severe and critical) yield damages of more than $1 million, in nominal terms, using the DOT’s previous estimated value of a statistical life (VSL) of $6.2 million.

Insurance premiums have declined in real terms since the 1980s. The analysis revealed the stability of insurance rates over the last three decades. Insurance rates for the same level of coverage (e.g., $750,000 or $1 million) have declined slightly on average in nominal terms, hovering around $5,000 per power unit (truck or bus). The real values (i.e., inflation adjusted) of insurance rates have also declined.

FMCSA’s study acknowledged industry research on the subject and made the following observations:

• Other organizations, such as the Pacific Institute for Research and Evaluation (PIRE), the Alliance for Driver Safety and Security, Inc. (or the Trucking Alliance), and the American Trucking Associations (ATA), are interested in and have studied the appropriateness of the current minimum insurance levels for motor carriers.

• PIRE published a report that examined the appropriateness and effectiveness of current minimum levels of financial responsibility for motor carriers of property. This report assessed the adequacy of the current minimum level of $750,000 for large trucks carrying property in interstate commerce by examining the costs and damages associated with serious large truck crashes, and found the current minimum levels are an order of magnitude too low. The report found that the estimated upper decile/quartile range for liability awards in large truck crashes involving death or catastrophic injury is $9-10 million (in 2012 dollars). The report recommended that DOT set a policy limit per crash of at least $10 million and index for inflation and productivity growth in the same manner that DOT indexes its regulatory analysis value.

• The Trucking Alliance reviewed crash settlement data that it compiled from its membership. Its March 2013 analysis showed that the current $750,000 of insurance required of many motor carriers is inadequate to cover the costs of many crashes. Member companies of the Trucking Alliance voluntarily tracked 8,692 accident settlements between 2005 and 2011. The data shows that 42 percent of the trucking companies’ monetary exposure from these settlements would have exceeded their insurance coverage, if all companies in the study had maintained the minimum $750,000 insurance requirement. According to the Trucking Alliance, 42 percent of the injury claims could have had no avenue for offsetting all medical costs. The Trucking Alliance promotes increasing the Federal minimum requirements for trucking companies.

• The ATA also conducted a review of the appropriateness of the current minimum insurance requirements with data obtained from the Insurance Services Office (ISO), an insurance advisory company. The ATA’s analysis is based on ISO data, under nondisclosure agreements, from two of the 10 largest trucking insurers that covered all their large truck (over 26,000 pounds) policies. According to the ATA, ISO’s data shows that only 6.5 percent of insurance policies for trucks over 26,000 pounds are written at limits under $1 million (not taking into account umbrella or excess coverage), while 83 percent are written at $1 million, and the remaining 10.5 percent are written over $1 million. In its analysis of the ISO data, ATA found that there is a 1.40 percent chance of a claim exceeding $500,000, a 0.73 percent chance of a claim exceeding $1 million, and a 0.31 percent chance of a claim exceeding $2 million. From 2006 to 2011, there were 85,632 reported crashes with a total of $961,591,721 in claims incurred, making the average cost per occurrence $11,229.

FMCSA has formed a rulemaking team to further evaluate the appropriate level of financial responsibility for the motor carrier industry and has placed this rulemaking among the agency’s high priority rules. FMCSA will continue to meet with the stakeholders, including impacted industries, safety advocacy groups, and private citizens, as it moves forward with developing a proposed rule, according to the report.

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