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Supply Chain News: New Upward Pressure on Trucking Rates, as Insurance Premiums Soar


"Nuclear" Verdicts in Tens of Millions of Dollars Causing Insurers to Leave Market, Rates to Soar

Oct. 25, 2016
SCDigest Editorial Staff

Rates for truckload shipping continue to move in shippers' favor, with the Cass Linehaul Index, which measures US per mile rates before accessorials, fuel surcharge and other fees falling in September for the seventh consecutive month - the first time there has been a streak that long since the recession year of 2009.

That's good news for shippers after a long stretch of rapidly rising rates, driven by modest increases in tonnage and discipline on the part of carriers in terms of not adding capacity, a strategy made easier by the continuing driver shortage.

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In 2014, truckload carrier Landstar settled with the widow of a man killed in 2007 after one of its drivers ran a stop sign and hit his pickup truck for giant $42 million.

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But as Mike Regan of TranzAct Technologies said during a panel discussion moderated by SCDigest's Dan Gilmore at last week at the annual MHI conference in Tucson, AZ, many variables are still in general likely to push rates higher, and that if US economic growth ever gets back to 3% it could bring capacity shortages and rapidly rising rates very quickly.

In the meantime, one force is alrady acting to push rates back up even as for now carrier supply is exceeding demand: rapidly rising insurance premiums, as a series of "nuclear" verdicts against carriers or fleets operated by shippers has scared insurance providers away.

That even as deaths in accidents involving trucks continues to fall, down 20% over the last decade, and many of those smaller number of fatalities not the fault of the truck driver.

But a series of cases where accident victims or their families were awarded tens or even hundreds of millions of dollars has shaken insurance providers, making it more difficult for them to assess their financial exposure, and causing several providers to leave the market. All of these factors are pushing insurance rates way up, which will ultimately be reflected in rising rates for moving freight.

The high profile case was the 2014 accident involving a Walmart truck that injured several people, including comedian Tracy Morgan, and killed another man. The children of the man who died received $10 million in a settlement, while Morgan and Walmart settled separately for an undisclosed amount, but which surely was above seven-figures.

As recently reported in the Wall Street Journal, the changing award dynamics have led Zurich Insurance Group and one major business unit of American International Group (AIG) to drop coverage of most for-hire fleets earlier this year. For now, both insurers still cover private fleets operated directly by retailers, wholesalers, and manufacturers, and other units of AIG still provide such coverage to carriers.

The two firms had been two of the biggest underwriters in the trucking industry. As Zurich, part of AIG and others have left the market, remaining insurers have hiked premiums anywhere from 10% to 30% this year alone.

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"When they pulled out, it really triggered a panic," Mark Brockinton, a broker with Aon who works with large trucking companies, told the Wall Street Journal relative to AIG's retreat from the market. "Some of these verdicts I think caught them flat-footed."

Federal law requires trucking companies to cover drivers up to $750,000 per accident. Many self-insure up to around $1 million, then buy layers of outside insurance to protect against awards or settlements above that level.

Insurance Premiums for Trucking Firms have Soared


The average US trucking company spent about 9.2 cents per mile on premiums in 2015, up 44% in two years, and that was before this year's major hikes, according to the American Transportation Research Institute (ATRI), an industry research group. While insurance costs are still small compared to the roughly 40 cents per mile spent on fuel and 50 cents per mile paid out to drivers, the increases stand out as diesel prices have fallen and current profit margins are thin in the face of lower per mile rates.

In a call in July with analysts, Joey Hogan, CEO of Chattanooga, Tenn.-based trucking company Covenant Transportation Group went so far as to say some small fleets "won't be able to survive long-term" if the trend continues.

Then just this month, Covenant' warned its third-quarter earnings would disappoint, in part because its insurance costs rose $1.7 million just in Q3.

The Wall Street Journal says large accident settlements and verdicts became more common starting around 2011, although settlement amounts often aren't disclosed as part of the agreement with victims, and thus aren't easily tracked. But Aon says there have been at least six cases topping $20 million this year alone, the most since 2012.

Part of the reason for that a tactical shift among attorneys representing those injured by truckers. Lawyers have moved away from focusing on the culpability of individual drivers and are instead looking for signs that companies have violated safety regulations or had unsafe practices across their fleets. That approach can open a company up to millions of dollars in punitive damages.

For example, in one "nuclear" verdict, in 2013 a Texas jury awarded $281 million to the family of a man struck and killed by a truck's drive shaft that had detached and smashed through the tractor's windshield. The jury found the vehicle hadn't been properly maintained. The judgment was later reduced to $105 million and then settled for an undisclosed amount, but was certainly representative of the much higher awards that the industry hadn't seen until recent years.

In 2014, truckload carrier Landstar settled with the widow of a man killed in 2007 after one of its drivers ran a stop sign and hit his pickup truck for giant $42 million.

The Wall Street Journal says Landstar is self-insured up to $5 million per accident and had relied for two decades on AIG to cover damages between $5 million and $25 million. Now, Landstar has had to cobble together a policy backed by six underwriters to replace AIG's coverage. The company's CEO has said premiums jumped 20% overnight and have more than doubled for that tier of coverage in the last five years.

It seems likely the trend in awards and rising premiums as a result are likely to continue, which in the end will force an increasing in shipping rates to cover the additional costs.

What is your take on what is happening with insurance rates for trucking? Are rates hikes for moving freight simply inevitable as a result? Let us know your thoughts at the Feedback section below.


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