Excess, Umbrella, and multi-Insurer Coverages. Deductibles and Self-insured Retention policies; Control over Safety; Insurance Pricing in 2017.

You’ll buy insurance this year for your transportation business, and perhaps  a large percentage of it will be from multiple insurers. Pricing may be an issue (see below), or your clients may require certain policy features.

Insurance policies themselves are always bilateral, not multi-lateral agreements. So, when you buy into a multi-insurer program, you should be aware of the gaps and inconsistencies that may occur. Your insurance broker is assembling a program that is complex, multi-layered, and multi-insurer. So ask a lot of questions.

Never will two insurers jointly issue one policy that will provide whole coverage to you. But although policies are not multi-lateral that does not mean they operate only individually. Excess and umbrella policies, which you may need to fulfill customer demands, refer to other policies by their nature, generally calling them the underlying coverage – and are contingent in some ways on the provisions of that underlying coverage.

A primary policy pays the first dollar of a covered claim, perhaps subject to your deductible or self-insured retention. You buy the primary and then add other policies that are excess of the primary as you deem necessary. An excess policy means the insurer only begins coverage after the pre-determined primary limits. Excess is available for just about all primary lines and there is no requirement you buy only from one underwriting company.

An umbrella policy is more of a stand-alone excess policy that offers a bit broader scope than the primary. Umbrella policies stand out over plain excess covers: like an excess policy, umbrellas provide additional amounts of cover once the primary is tapped out; but umbrellas sit more broadly, and provide cover over other types of coverage, for example, your auto or employer’s liability policies; and umbrellas can serve as primary cover outside the scope of some primaries.

Consider that excess policies “follow form” of the underlying coverage – the exact provisions of that policy – but no more. Sometimes “follow form” language takes a detour and conflicts with terms of the underlying policy, narrowing the scope with additional terms. That may be excess, but it sure ain’t what you expected.

A “DIC” policy is a stand-alone excess policy that typically drops down and serves as primary where there is a difference in policy conditions or scope, or when the underlying is exhausted. These DIC policies are often seen in D&O coverage programs.

Generally, however, excess policies attach and pick up the claim and defense when the pre-determined limits of the primary coverage are exhausted, when the primary throws in the towel.

In umbrella situations, some of the coverage may be excess to the primary, and other coverage could be first dollar.

Umbrella policies should provide additional limits over the underlying liability and, as said, they usually provide broader coverage than an Excess Liability policy.

Excess Liability policies provide additional limits over the underlying liability, but this can be more restrictive and they do not provide coverage that was unavailable to you in the underlying policy.

 What About Retentions and Deductibles? Under an SIR, the insurer generally has nothing to do with losses that do not penetrate its attachment point. The insurer may, however, require notification when a claim comes in to you or when it is perceived by you and/or the insurer the claim may pierce the attachment point. Under a deductible, however, the insurer pays every loss up to its limits, and then – in theory –  is reimbursed by you up to the amount of your deductible. In practice, however, if you can manage to do so, pay losses that are within the deductible from your pocket. Remember, numerous and frequent losses are considered more unfavorably than cat losses, and next year’s insurance looks for frequency.

Who pays Defense Costs? A policy with a deductible provision requires an insurer to investigate each claim and pay to defend it. The insurer controls the defense.

With an SIR policy, you can be in control of the defense. In theory since it’s your money up front, you can control your  own investigation, defense, and settlement of claims within the SIR. You may be better suited to investigate than the insurance adjuster. Presumably, you’ll know of the claim first. Until the SIR has been satisfied by you, or the claim is clearly going  to exceed the SIR, the insurer, in true SIR policies, has no obligation to provide or pay for the insured’s defense.

Unless the policy otherwise provides (e.g. eroding limits), the deductible relates to the damages for which the insured is indemnified, not to defense costs, so the insurer pays defense costs from the beginning. The insurer is fully responsible for defense costs regardless of the amount of the deductible, assuming there is a potential for coverage under the policy.

In an SIR policy, until the insurer becomes obligated for a loss over the SIR, the insured will pay its own defense costs. In this situation, you’re not bound to use the services  of the insurer’s stable of lawyers. You can choose.

Settlement. A policy with a deductible allows the insurer to defend and settle claims against the insured without the insured’s consent. An insurer cannot settle a claim within the SIR without the insured’s consent.

Which One Should I pick? In the current insurance climate, first-dollar coverage is a luxury we can’t afford. You should go for either a deductible or SIR policy. You’ll be more in charge  with an SIR.

This is not new. Policies with large self-insured retentions and deductibles have always been available, but if you have a better hand at managing your day-to-day risks, that is, you’re better at conducting a safe operation than an insurer, an SIR policy may be more attractive than a deductible. This is especially true if your CSA scores are well within limits and you preach and practice safety.

Your Insurance Market for 2017. With sagging growth and under-performing investments, the insurance industry is likely to continue consolidation, leaving you with fewer choices. There is an expected outflow of some 70,000 insurance workers – of all stripes – so insurers will need to attract and train workers and count more on algorithms (yes, CSA is only an algorithm, and a poorly functioning one at that).

Then there’s the uncertainty of the new Administration and its effects on domestic growth and trade. Expect increasing insurance costs this year.

Regards,

Jim Mahoney

602 900 1800

Transportation Chair

Louis & Resnick PC

 

 

 

 

Baseball has always had statistics. They’ve been studied to excess and its auditors have immense data directly related to every player. Not so with CSA BASICs.

The FMCSA built CSA and it routinely lacks the complete data tov reveal the behaviors the Agency – and insurers, and shippers – are interested in. What the Agency does instead is substitute stand-in data, or what we might call proxy data. They draw statistical correlations between a  motor carrier’s type of operations and its potential for safety. These correlations discriminate. Whereas baseball stats pour in daily for more than 6 months a year; and they can feed back inconsistencies into the model, redefining it as they progress, CSA scores are static; there is no mechanism to correct errors (let’s not even bring up dataQ appeals). Conditions and outcomes change or evolve in court somewhat closer to the truth, so must the model the penalties are based on.

CSA, cloaked as it is in a great deal of mystery, with only chance encounters delivering outsized results, relies heavily on a handful of “test” results, which is so very far from algorithmic modeling.  But yet, CSA purports to predict outcomes – i.e., crashes. These “predictions,” unfortunately, guide the discussions of shippers, DOT inspectors, and insurers.

There will always be miscalculations in CSA evaluations because the models used are just simplifications. No model can include all the world’s complexities or nuances of human behavior. Inevitably, a lot of important stuff gets left out – like communications in operations, variable ground conditions, and interactions with other parties, namely shippers and receivers.

To be frank, CSA BASICs is a toy algorithmic model that abuses truckers who all operate on the slimmest of margins. The Agency makes choices about what’s important enough to include, simplifying the world of trucking into its own version of reality, not a true life version where real life decisions and actions are and can be made every day. CSA reflects the goals and ideology that the Agency imposes onto its “safe trucking” mandate. CSA scores are opinions embedded in arbitrary mathematics. What the Agency is trying to accomplish  – saving lives – the very definition for its existence, is, of course, more than simply admirable. But by blending in arbitrary measures of “success,” the CSA model hunts down arbitrarily determined data. The CSA model itself becomes a belief, relied upon by those who serve and use the trucking industry. It has not eliminated DOT-based human bias; it’s only camouflaging its bias with its mysterious predictive math calculations.

To sum up, CSA presents three elements of false beliefs: it’s opaque; it uses false scales to measure safety, and reliance upon it definitely causes damage. When the volume of data multiplies, CSA scores-can’t decipher a meaning. They just generate more inaccuracies. Carriers are being coerced, threatened with livelihood – and no recourse exists in the system that shuts down a carrier or imposes an onorous penalty.

People  – not algorithms – still decipher meaning from events. CSA, for all its supposed magical abilities, is still not equal to a group of people who can sift through false indicators and bypass CSA’s wishful thinking.

CSA, with great fanfare, was simply a human-derived formula deliberately wielded to impress, rather than clarify the data it receives. In the insurance world, its created a flock of underwriters who are in the rubber stamp business, formulating opinions by proxy, and which opinions become self-reinforcing. When you create models from proxies, it’s easy for users to game it to their desires.

CSA suggests it relies on its efficiencies. It feeds off data that can be counted and measured. But not necessarily fairly or accurately because that data are incomplete qualities and subjective concepts that were built into the original algorithm, and now are essentially unassailable DOT “truths.” Fairness is not calculated; instead CSA calculates great unfairness and causes collateral damage. Many truckers are not singled out  as others are, either because of the overly zealous commercial enforcements efforts in known jurisdictions, or perhaps the size (small or large) of the operation doesn’t warrant the time needed to truly gauge a safe operation.

These primitive algorithms have a real, deleterious effect on motor carriers, shutting some down; causing others to pay exorbitant insurance premiums and fines. All based on incomplete, human-biased algorithms.   Knowledgeable persons can and do a much better job at determining safe operations and crash predictability. The scores should come with an explanation that they are entirely based on opinion, innuendo, influence groups, and are not to be taken literally, as there is no scientific basis to the conclusions.

Call for help. 602 900 1800

Who’s Exempt From Overtime – the Motor Carrier Exemption

The Fair Labor Standards Act (FLSA) provides that employers must pay non-exempt employees at “one and one-half times the regular rate” for time worked in excess of forty hours per week. 29 U.S.C. § 207(a)(1). The FLSA exempts “any employee with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service” under the Motor Carrier Act (MCA). 29 U.S.C. § 213(b)(1) (“the MCA Exemption”). Mr. Williams brought this action alleging that Central Transport LLC violated the FLSA’s overtime requirements when it employed him as a “switcher” at its St. Louis terminal. He tried to make the claim into a class action suit.

The question of how Williams spent his time working for Central Transport is a question of fact; the ultimate issue of whether his work activities exempted Central Transport from paying FLSA overtime is one of law.

In United States v. American Trucking Ass’ns, 310 U.S. 534, 553 (1940), the Supreme Court rejected the contention of that all employees of interstate motor carriers were exempt, concluding that the jurisdiction to regulate maximum hours “is limited to those employees whose activities affect the safety of [motor carrier] operation.” Later, the rule was expanded that motor carrier drivers, mechanics, loaders, and drivers helpers who “perform duties which affect the safety of operation… are therefore subject to the authority conferred [by the MCA] to prescribe qualifications and maximum hours of service.” MC-2, 28 M.C.C. 125, 126 (1941).

Mr. Williams was a “city loader” by title with Central Transport. However, he also did some minimal loading of trailers that affected the motor carrier’s safe interstate operation, including balancing loads and stacking cargo “high and tight.” The 8th Circuit Court of Appeals in a decision published July 28 2016 seems to have expanded a ruling from 1947 that even randomly assigned drivers, loaders, mechanics whose operations are quite minimally in interstate commerce (“3 or 4%”) are under the MCA exemption for overtime.

FMCSA Delays Unified Registration System

The Federal Motor Carrier Safety Administration has delayed the final implementation of its Unified Registration System until Jan. 14, 2017.

Dr. Kelly Regal, FMCSA associate administrator of research and information technology, said the agency is updating its IT systems and migrating existing data to new servers, which is causing the delay from the previous implementation date of Sept. 30.

Since December, new applicants for registration have been required to use the new streamlined online form. Existing carriers were supposed to begin using the system to do their biannual updates, name changes and transfers of authority on Sept. 30, but now won’t be able to use the system until the January 2017 implementation.

California Workers’ Comp – What Ails You?

In California, where reforms were implemented in 2013, medical trends are seen as stabilizing with fewer spine surgeries and a reduction in the use of opioids. According to the State this shows that many elements of the reform effort are working. Hmmm…not so sure. When compared with other states California has the highest rate and frequency of permanent and partial disability claims and has the highest Workers’ Comp premium rates in the country. Nothing to brag about there.

I used to think that injured workers got high quality care in the Comp system. I don’t know why I thought that. Maybe because some care was better than crawling home to a bandaid. However, the focus on quality of care  – with as much oversight as we see in the health care industry – could be a way to improve patient outcomes and limit rising premiums. But insurers often see Work Comp and its mandatory coverage as a loss leader in selling other, more profitable lines. It doesn’t appear that any insurer – despite their sales puffery to their customers – really look at clinical quality at all to determine provider quality and performance.

Literally, on the Work Comp side of healthcare, there are no standards. Just overburdened claims adjusters.

Tough to Make a Buck in Trucking 

Truckload linehaul rates in June were nearly the same as the month before, but they are still below levels from a year ago, while there seems to be no end to the recent drop in rates for intermodal shipments. I expect to see a big dropoff in capacity in fresh produce reefer business as the Food Safety regs come along. Current spot reefer rates of $2.00 a mile will go up no doubt, but it’s still not going to be an easy line to make a buck.

 

Uninsurable Contract Clauses

          We all receive draft contracts from our customers with clauses that are absolutely or mostly uninsurable and often unenforceable – and many are so often throwaways. Some terms to avoid and suggested alternatives:

  • You shall defend, indemnify, and hold harmless [Customer], its officers, directors and employees from and against any and all claims, damages, causes of action, or allegations in any way arising out of or relating to Your work on the project. Your liability policies may only provide coverage, including a legal defense, for your negligence. I can count on one hand the number of times insurers have willingly picked up a defense that’s this broad.

 

  • You shall perform the services in accordance with the highest standard of care. This proposed language changes the coverage standard—it essentially requires perfect performance. Insurers are not in the business of insuring against a sure thing. Use alternative language.

 

  • You shall name [Customer] as an additional insured on all policies. Not all policies allow this – Work Comp, professional e&o, etcetera have exclusions for several reasons, including insured vs. insured battles.

 

  • You warrant that the [service, project, etc.]will comply with all laws, codes and regulations. Much more palatable: You shall make reasonable efforts to comply with applicable laws, codes, and regulations.

 

  • Then there’s the ominous clause: prevailing party shall be awarded its attorneys’ fees and costs. Delete the clause. There are no great alternatives here. Are “we” really going to go to the mattresses all the way to verdict? Negative. We want to fix anything certainly before suit and very little gets to verdict. What does “prevailing” mean in that regard?

 

  • You shall inspect the Work to ensure that it is in strict accordance with the contract documents. To the extent that this contractual language amounts to a guarantee of the Work, it is very possibly uninsurable. There is alternative language.
  • You shall report all safety hazards at the job site to Us. Sounds innocent enough, but by agreeing to this language, you are possibly taking responsibility for a duty that belongs to the Owner to protect visitors or its own employees.

 

When negotiating contracts, the argument that a clause is “not fair” may be of limited value, kinda like the playground arguments that usually fell on deaf ears. “It’s my ball. If you want to play, you gonna play by my rules.” 

It’s much more effective to point out that the Customer has as much interest as you do in having liability insurance coverage for the scope of work under the contract. That’s a valid argument and that’s easy for me to say, but sometimes difficult to get across. Many large and small legal departments review contracts by demanding these uninsurable / unenforceable terms. Rational, measured reasoning generally works out some of these problems.

Temperature controlled Food Transportation

The rule pertaining to transportation under the Food Safety Modernization Act – FSMA – is called the Sanitary Food Transportation Act – SFTA. Effective date is April 6 2017.

  • The final rule applies to shippers, receivers, loaders, and carriers who transport food in the United States by motor or rail vehicle, whether or not the food is offered for or enters interstate commerce. An entity is subject to the regulations in several ways – a shipper can also be a loader; a freight broker can be a shipper. Contractual shifting of responsibilities is allowed – be aware of what you’re signing.
    • Transportation regulations apply to:
      • Foods transported in bulk, e.g., juice, animal feed
      • Packaged foods not fully enclosed by a container, fresh produce
      • Foods that require temperature control for safety

      Key requirements:

      • Transportation operations must be conducted to prevent food from becoming unsafe during transport, including: assuring proper temperature controls; preventing contamination by contact with non-food items or raw food, or allergens. If a shipper, loader, broker, receiver, or carrier becomes aware of a possible material failure of temperature control or other condition that may render the food unsafe during transportation, the food shall not be sold or otherwise distributed. A shipper must develop and implement written procedures – which will then, of course, be contractually transferred to brokers and motor carriers – to assure vehicles and equipment are in appropriate sanitary condition; that previous cargo does not make food unsafe; that food requiring temperature control is transported under adequate temperature control (designation of required temps on the Load Sheet and proof of temperature control at delivery).While the enforcement and effective dates are still a year out, most if not all requirements will start to be enforced by shippers. I see a number of companies gearing up and using compliance as a selling point. You can expect to see language in contracts almost immediately.
      • Small reefer carriers are most likely the first affected. One or two losses in this new environment (of very conscious receivers) will hurt too much. Cargo insurance for reefer loads has too many unscrupulous exceptions to coverage. Freight brokers will see more claims for which they will be responsible – either by contract or contingent to the absence of underlying carrier coverage.
      • The burden will fall onto the motor carrier (and by extension, the broker) to prove – via USDA inspection – that the temperature deviation or other condition did not render the food unsafe.
      • Brokers will look more often to contingent cargo insurance
      • Carriers should buy better cargo coverage; brokers must monitor those policies.

Anticipating the Governor’s signature on HB2114 this week, Arizona should have a very strong law defining independent contractors. To paraphrase:

ANY EMPLOYING UNIT CONTRACTING WITH AN INDEPENDENT CONTRACTOR MAY PROVE THE EXISTENCE OF AN INDEPENDENT CONTRACTOR RELATIONSHIP FOR THE PURPOSES OF THIS TITLE BY THE INDEPENDENT CONTRACTOR EXECUTING A DECLARATION OF INDEPENDENT BUSINESS STATUS, and by the contractor declaring the following:

… THE CONTRACTOR is operating an independent business and providing services as an independent contractor; the contractor acknowledges the absence of an employment relationship without any claim to UI benefits or other rights arising from an employment relationships; that the contracting party is not responsible to withhold any tax; the contractor is responsible for his or her tax obligations, for obtaining licensing, registrations, or other authorizations that would be necessary for rendering the contracted services.

There will be six of ten categories that the contractor acknowledges as existing in the relationship, most of which can  – or already are – in practice with our transport partners.

Perhaps the best benefit for those of us in the trenches who spend time educating courts and state agencies to the distinction between independent contractors and company employees is the explanation in the new law that “any supervision or control exercised by the employing unit to comply with any statute, rule, or code adopted by the federal government, this state …may not be considered for the purposes of determining the independent contractor or employment status of any relationship…”

This will eliminate the hang-up that judges and agencies see as indicia of employment control. Since all motor carriers and freight brokers – to some degree – are obligated to enforce drivers to adhere to FMCSR regulations for hours of service, safe operations on the road, off-duty, and in pre-trip operations, as well as in communications with dispatch personnel, customers and general safe and efficient routing, this phrase eliminates that argument.

I would recommend that each of us review and amend – slightly, but quite importantly – our ICOAs with our owner-operators so as to comply with this law. Thereafter I expect a slight learning curve in educating state agencies, Work Comp insurance underwriters, courts and, not the least, negotiating with our contractors.

But this new law – expected to be signed by Governor Ducey this week, and effective August 6th – will unburden Arizona businesses from the vestige of impossible compliance with conflicting federal and state laws, and some costly litigation efforts.

Perhaps another benefit, which was envisioned bringing this Bill to fruition, is making Arizona more attractive to businesses across the West, particularly California companies escaping burdensome – and conflicting – regulations and insurance rates.

Re-domestication efforts can be considered. There are a few boxes to check off as companies consider this, and the benefits and detriments should be considered individually.

 

A knowledgeable Lloyd’s broker once told me that the U.S. property and casualty market was but a boil on the rump of the worldwide insurance industry, meaning that while we in the U.S. transportation industry continually postulate on why and how to attract underwriters, our laser-like focus on insurance rates is a bit misguided; our rates are more dependent on the world reinsurance market and its focus on disasters, natural and man-made.

Reinsurance prices will continue to fall this year as competition for customers from hedge funds and other sources of alternative capital send premiums to their lowest in four years, according to Swiss Re AG.

“Price reductions have slowed down but there’s still pressure,” Edouard Schmid, the head of the property & specialty unit at the world’s biggest reinsurer, said in an interview in Zurich. “Having many years without large losses and an oversupply of traditional and alternative capital it’s more difficult for us to charge the prices we used to see for this protection.”

Swiss Re’s Property & Casualty unit posted a 22.2 percent return on equity for 2015, according to its earnings statement. That compares with a 4.7 percent ROE from the Stoxx 600 banking index in the same period, according to data compiled by Bloomberg.

           Hedge funds, sovereign wealth funds and other providers of alternative capital set aside $72 billion for reinsurance last year, a 12 percent increase from 2014, even as allocations from traditional capital fell 4 percent to $493 billion, according to research by Aon Plc. That led to price cuts when policies were renewed on April 1, according to reinsurance broker Willis Re Inc.

Lower than normal claims will indeed draw competitors. So you certainly benefit by watching your CSA scores and fixing your Safety Management Plan, especially in light of the FMCSA plan to expand their ability to monitor poor safety performers. Consider altering the term of your policy, if you see indicators of premium moving south.

Global insured losses from natural catastrophes and man-made disasters in 2015 fell to $37 billion, compared with an average of $62 billion over the previous 10 years, so there should be more capacity entering the U.S. transportation market, with underwriters backed by serious capital taking a flyer at our business.

Nonetheless, a few opportunities do exist despite the overall reinsurance market’s predominance on rates: be safe (have a Safety Management Plan and follow it); correct CSA errors via DataQ (not surprisingly, many DOT violations on DVERs are incorrect – e.g., DOT officers often do not understand the 100 air mile exemption to HOS regulations and violate and criminally charge drivers without legal basis); intervene very early in liability, Comp, and cargo incidents: many can be kept small and out of your loss runs.

 

Some say that an Additional Insured endorsement covers the additional insured as though he has been provided his own separate insurance policy. Another common view is that an AI endorsement covers the additional insured, but not for his own negligence.

There is one very good reason that neither of these views is correct: they are both overly gross generalizations. The only correct answer to the question is, “It depends on the language of the endorsement.” It also depends on how much attention a court pays to that language. There are cases that recite AI endorsements word-for-word, and then go off and miss completely any realistic interpretation.

AI endorsements can be divided into two categories: ISO language and specially drawn manuscripted endorsements. ISO endorsements apply coverage to the additional insured for liability “arising out of” the named insured’s work, operations, or premises.

The majority of cases interpreting this phrase found it is not necessary for the named insured’s acts to have caused the accident; instead, it is usually enough that the named insured’s employee was simply present at the scene in connection with performing the named insured’s business, even if the cause of the injury was the negligence of the additional insured.

In Georgia Pacific v Swift Transportation, however, both the trial court and appellate court (after GP unsuccessfully appealed) said that although an additional insured can be covered for its own negligence, there was nothing in the contract to require such coverage. The parties’ contract set forth various risks assumed by Swift Transportation and obligated Swift to obtain an insurance policy to cover the risks incident to the agreement. But Swift wrote the contract so that there was nothing within to indicate an agreement that Swift would obtain insurance against GP’s own negligence.  Neither the indemnity agreement nor the additional insured endorsement expressly stated an intention to indemnify the additional insured against its own negligence. The Court concluded that the most reasonable construction of the additional insured provision was that it was intended to assure performance of the parties’ indemnity agreement, not more.

The moral of the story is: don’t be too quick to sign away on contracts you sincerely want. Contract writing and negotiations are important for large and small transportation business , even when going up against the big guys in shipping.

 

…More on contract drafting and best practices in another blog.

Regards,

Jim