By: John McGlynn, Director of Transportation, Burns & Wilcox
Canada and the United States have the largest two-way trade relationship in the world. According to Statistics Canada, nearly 2.4 million commercial vehicles traveled between Canada and the U.S. in December 2019 alone, highlighting the cause and effect nature of the commercial trucking relationship between the two countries.
Unfortunately, in 2018 upward rate movement began to occur with both Primary and Excess/Umbrella coverage for many commercial trucking companies, and that trend has further accelerated in 2020. As a result, the industry is experiencing a level of volatility not seen in recent years with both rates and availability of coverage. This is particularly true for firms that ship goods to and from the U.S.
One reason for this is the escalation of costs required to repair commercial trucks that have highly technical equipment on-board, such as sensors and other tracking devices. Yet, we believe this factor will have a limited effect on premium increases. In the near-term, those costs are likely to catch up to the on-board technology, as the supply of and demand for such repair knowledge will naturally grow.
By far the more significant impact on rising premiums and availability of Transportation policies is the number of multi-million dollar legal verdicts against trucking companies, primarily in the U.S. There appears to be no end in sight to the escalation of liability insurance premiums based on the sheer volume of large verdicts.
Several Canadian insurers began restricting the percentage of miles driven by commercial trucking firms within the U.S. border, which in turn has effectively reduced the number of insurers willing to accept the risk associated with a large American liability claim. Carrier restrictions on available capacity for excess limits has forced others to adjust their policies, making it harder for commercial trucking firms to find affordable options.
A traditional primary Transportation policy for trucking companies has been $2 million with the option for an additional $3 million excess, but those minimums are increasingly rare. Further complicating the issue is a proposed amendment to the Invest in America Act now under consideration in the U.S. Congress. If passed, this amendment would increase the minimum level of financial responsibility for most carriers from the current $750,000 to $2 million U.S.
Regardless of whether this bill is signed into law, many commercial trucking firms may be forced to purchase more expensive policies with higher primary limits ranging from $5-$15 million. This is an untenable option for many companies, particularly those that ship more than 15 percent of its goods to the U.S., or for small to mid-sized companies that cannot afford to have their margins cut further. These firms may not have the buying power or clout to raise their own rates in an effort to offset these higher premiums.
Larger trucking companies may be able to make the necessary adjustments, but it will come at a financial cost. Trucking companies have already experienced consolidation in Canada as large trucking firms comprise both a higher percentage of revenue, and a higher percentage of the total number of firms in operation. As a result, market consolidation with both mergers, acquisitions and bankruptcies are all likely to continue based almost solely on the rising costs of doing business.
There is also little incentive for many plaintiffs to backpedal from their lawsuits against commercial trucking firms. We have seen 25-30 percent of plaintiff’s claims being financed in recent months, a percentage expected to rise. This financing ability gives plaintiffs more financial security and time to be aggressive in their legal approach for damages. Social inflation of accidents further hurts the industry’s perception as well.
Beyond the primary coverage, premiums for Excess liability are also experiencing material price increases within the market. Increasing premiums in the excess market for transportation has led to a recent phenomenon of many small to mid-sized companies deciding to overtly risk their financial futures by not purchasing these Umbrella policies. Commercial trucking companies are saying the cost of doing business is too high, so they are willing to gamble that their drivers will not be involved in any high-profile accidents. This of course is not advisable and even upon explaining the situation to clients, many say they have little to no choice.
These premium increases have a further trickle-down effect that eventually impact not just trucking companies, but cause higher inflation across multiple industries for the average consumer—everything from seafood and beef to consumer products and clothing. Anything shipped by truck to and from Canada could see increased prices at the consumer level because of rising costs for commercial trucking companies.
There are ways to help limit some premium increases. Every firm within the commercial market should be at the leading edge of safety compliance trends in an effort to reduce incidence of claims and provide the availability of coverage. Investing in driver training and creating a “safety first” environment will be viewed upon favorably by brokers. With trucks in Canada and the U.S. subject to roadside inspections by industry regulators such as the Federal Motor Carrier Safety Administration (FMCSA) or the provincial or state regulator, safety records are well known.
All companies should strive to have violations rates at or near zero. At the very least it should be mandatory for commercial trucking firms to have a requirement of a higher than average compliance ratio. A robust driver on-boarding and management process should be second nature and companies should consider strategies to publicly reward safe driving.
We know this is a challenging time for commercial trucking companies and the professionals at Burns & Wilcox are here to help. Despite these challenges, companies in high standing with a solid financial picture and experienced management can still thrive while securing the coverage needed for protection.
This commentary is intended to provide a general overview of the issues contained herein and is not intended, nor should it be construed, to provide legal or regulatory advice or guidance. If you have questions or issues of a specific nature, you should consult with your own risk, legal, and compliance teams.