Cargo Theft and Regulation Take Top Billing for Transportation Risk
The overall transportation market faces continued constriction, with load-to-truck ratios depressed while accident frequency and loss severity are both up. That means the cost of insurance in this sector is not only expensive but also hard to get. Inflation, high verdicts for liability lawsuits, ever-increasing medical costs for injured workers and victims of accidents, and cargo theft are the primary causes of high insurance premiums. Risks are compounded by a shortage of qualified drivers, fraud, and new cybercrime schemes.
Partly as a result of high insurance, maintenance, and labor costs, many freight carriers and brokers are shuttering their business. Amid unprecedented challenges, the industry saw a loss of 88,000 carriers and 8,000 brokers in 2023, according to data analytics firm CarrierOK. While motor carriers with below average risks are very attractive to insurers, those with recent claims may face double-digit increases in insurance premiums.
This report looks at some of the impetus behind insurance rates and what transportation companies can do to reduce the cost of risk.
TRENDS AND COSTS
First-quarter 2024 U.S. load-to-truck ratios for dry van, reefer, and flatbed trucking remained substantially below the five-year average, according to data from C.H. Robinson. And American Trucking Associations data on trucking tonnage in the United States indicates a “continued recessionary trend in the industry” through January of this year.
Despite these drop-offs, commercial auto insurance rates continue trending upward, though at a slower pace of increase. Truckinfo.net reported in January 2024 that insurance is one of the top four expenses for trucking companies, with large carriers paying $0.082 per mile on average in 2021 for insurance and small carriers pay $0.102 per mile.
WHAT’S DRIVING INSURANCE COSTS
Accident Frequency and Severity
Statistics for the past four years are skewed by the COVID-19 reductions in driving and the subsequent, relative increases in miles traveled in 2022 and 2023, but the overall trend in large-truck accidents over the past decade appears to be on an upward trajectory, with the National Safety Council (NSC) reporting a 49% increase in fatal crashes between 2011 and 2021, the latest national data to be disseminated. The NSC also says the number of large trucks involved in crashes with injuries grew 15% between 2016 and 2021.
Forbes Advisor scoured data from the National Highway Traffic Safety Administration, Federal Motor Carrier Safety Administration (FMCSA), and Department of Transportation (among other resources) and found that semi-trailers comprised 53% of all fatal accidents involving a large truck. Interestingly, most accidents happen when weather conditions are good and in the daytime, with only 13% occurring during bad weather and 20.4% happening at night.
The Insurance Information Institute (I.I.I.) found that claim severity in commercial auto rose 72% between 2013 and 2022, nearly trebling overall economic inflation over that period.
Replacement Cost Inflation
The I.I.I. found that commercial auto replacement costs rose 44.4% from 2019 to 2022, meaning that insurers—whose investment income had been slammed for about a decade by near-zero interest rates—have had to adjust rates to remain solvent.
Wild Growth of Verdict/Settlement Amounts
Research of trucking accident litigation between June 2020 and April 2023 done by the U.S. Chamber of Commerce’s Institute of Legal Reform revealed a mean award for plaintiffs of $27,507,334 and a median award of $759,875. Those that were settled had a mean settlement of $10,608,219 and a median settlement of $210,000. The means were driven up by a few “nuclear” verdicts, but, the Chamber says, “trucking companies and insurers alike must account for these significant risks.”
Medical Cost Increases
Annual healthcare expenditures in the United States have risen an average of about 7.5% each year since 2010, according to Statista, meaning medical payments costs for trucking-related injuries have been on the incline for more than a decade. Adding to the general inflationary trend in medical costs, the Chamber reports that a symbiotic relationship between personal injury lawyers and medical providers has developed whereby excess testing is conducted along with questionable diagnoses of accident-related musculoskeletal injuries that might better be attributed to preexisting conditions. Settling is often more financially prudent than risking a sympathetic trial verdict for the plaintiff.
Cargo Theft
Motor carriers are facing increasing threats from cargo theft, with CargoNet reporting a 57.36% increase in incidents from 2022 to 2023, for a total of 2,908 thefts. The average cargo theft in 2023 was valued at $195,000.
NOTABLE RISK FACTORS & MITIGATION
Shortages of qualified drivers, inadequate parking for long-haul truckers, and fraud are major concerns for the transportation industry. Transportation companies must take steps to prevent losses, and doing so can improve insurance pricing and terms.
Labor
A lack of qualified truckers is creating conditions that can lead to accidents and labor complaints. Training, recruitment and retention bonuses, keen inspection and monitoring of driver motor vehicle records, and use of telematics to correct errant behaviors and reward good ones are all elements of a quality safety program. It is also necessary to train drivers on work-time etiquette to avoid complaints of hostile work environments.
One note on telematics: the data collected is discoverable, so if a motor carrier isn’t acting on dashcam or telematic information to make corrections through driver training or removal, it can be more vulnerable to successful liability lawsuits.
Employment practices liability lawsuits are on the rise across all industries, and with a more diverse workforce both on the road and at loading and unloading facilities, proper treatment of all co-workers is a must. Managers also must pay attention to hours driven, ergonomic accommodations, hours of rest, pay, and independent contractor versus employee status. A new Department of Labor rule on contractor/employee classification went into effect in March and will expand the definition of “employee,” which could increase employment practices complaints and regulatory actions.
Theft Prevention
Fraudulent broker activity, theft en route, theft during loading and unloading, and driver crime are serious drains on profits and can drive up cargo insurance. A carrier’s loss record can cause major problems in securing insurance, so follow best practices at all points on the journey, paying special attention to verifying all delivery orders and change requests. Truck maintenance and driver security protocols, such as locking all doors even when in motion and parking with cargo protection in mind, are top ways to prevent theft.
Accident Avoidance
By using modern route and scheduling software, transportation companies can help drivers avoid slowdowns, heavy traffic, dangerous road conditions, and hazards (such as construction). Such software also can help drivers find alternate directions or routes as needed. Truck maintenance—especially for brakes, tires, lights, and transmissions—is key to preventing accidents, and insurers typically deem well-maintained vehicles as a lower risk.
Drug and Alcohol Testing
With drugs (6%) and alcohol (2.7%) being factors in fatal large-truck accidents in 2021, according to the most recent FMCSA data, transportation companies would be wise to test drivers regularly for substance use and abuse. Ignition interlock devices are one means to prevent over-the-limit drivers from starting their trucks. These handheld breathalyzers test blood alcohol levels and can be equipped to create a permanent record of the test for future verification purposes.
ON THE HORIZON
Certain risks are emerging for the transportation industry, including cyber threats, director and officer liabilities, and regulatory scrutiny.
Cybersecurity
Cybersecurity is a growing concern for transportation companies, largely due to the industry’s highly interconnected nature and the vast value of cargo and personnel transported. Hackers may look to reroute cargo, damage temperature-controlled loads, or misdirect payments, among other nefarious activities. For example, a February 2024 FMCSA alert highlighted fake emails telling trucking companies they need to schedule a safety audit. The link, which appeared to yield an MCS-150, duped recipients into providing PINs, EINs and Social Security numbers.
Cybercrime is usually about making money. Access to shipping information, including manifests and routes, would make theft—or, in the case of passenger carriers, kidnapping or terrorism—easier. All stakeholders from point of departure to destination need to be on heightened alert for email scams, impersonation attempts, and funds or cargo misdirection and to verify all requests and change orders.
Additionally, the potential for shutdowns of shipping systems due to ransomware or denial of service attacks merit ongoing user-access monitoring and rapid-response plans. Experts recommend network segmentation so billing, scheduling, and routing aren’t commingled, as well as endpoint anti-malware software, routing patching, data backups, and employee training and testing. Onboard telematic and communication systems should be included in company cybersecurity protocols.
Climate Disclosure Rules
While owner-operators are not affected by Securities and Exchange Commission (SEC) actions, large trucking organizations need to pay attention to the SEC’s newly adopted climate disclosure rules. That is because publicly traded entities will now have to report not only on their own generation of greenhouse gas emissions (Scope 1) but also those produced by the utilities from which they buy energy (Scope 2). Directors and officers of those companies will be held accountable for accurate reporting, and shareholders have gained new avenues for D&O lawsuits if companies turn in wrong numbers, fail to report, or don’t measure up to climate-protection claims they make.
Predatory Truck Leasing Contracts
Regulators are also looking into the transportation industry regarding predatory truck leasing contracts. A 2023 congressional mandate created the Truck Leasing Task Force under the FMCSA to put a halt to unfair financing arrangements between trucking companies and their owner-operator lessees. The task force has put out a call to owner-operators to provide copies of their leases if they believe they are victims, and it is asking motor carrier companies to clarify how their contracts deal with compensation for drayage drivers at ports and emissions reductions for port operations.
Commercial Auto Liability Insurance Minimums
Legislators continue their interest in upping commercial auto liability insurance minimums. Congress once again has a bill (HR 6884) in committee seeking to raise the minimum financial responsibility for transporting property to $5 million from the current $750,000. More than 93% of trucks over 26,000 pounds are insured for $1 million or more in liability, according to American Trucking Associations. And the OOIDA Risk Retention Group says 98.6% of its insured motor carriers carry that level of liability insurance, with the Transportation Intermediaries Association confirming that level for 80% of its carrier base.
At the state level, New Jersey is the most recent jurisdiction to weigh in with the January 2024 enactment of a $1.5 million minimum liability coverage mandate for large commercial vehicles “registered or principally garaged” in the state, to take effect in June. The application of the law to trucks registered in other jurisdictions covered by the International Registration Plan is an open question since participating trucks’ registration fees are distributed across pertinent signatory states. Insurance brokers, agents and policyholders need to pay special attention to this issue.
Liability Relief
At least one state provided some liability relief: Florida’s HB 837, which went into effect in March 2023, removes attorney-client privilege for medical treatment referrals by a claimant’s attorney, as well as any financial relationship between the law firm and medical provider, which should help clamp down on outsized personal injury liability lawsuits. It also puts more controls on what counts as legitimate medical care costs in an injury liability claim.
COMPLEX RISKS NEED SPECIALTY CARE
Whether you are transporting agricultural cargo, raw materials, finished goods, or any other product or passengers, your risks cross both property and liability lines. From reefer breakdown coverage to injury liability across state lines, IOA specializes in the transportation industry and can assist in getting appropriate limits and financial protection for owner-operators, busing companies, and motor carriers of all kinds.
We also help with safety reviews and risk management to keep losses in check and make your company more eligible for great rates and terms on insurance.
