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Self-insurance helps trucking firms lower costs

Advantages include reduced collateral, control over claims


For trucking companies looking to self-insure their fleets, details of their financial bottom line and safety records are keys to their success.

The trucking industry, like several throughout the United States, has been dogged by high fuel prices and a worsening economy. Those motor carriers looking to trim costs are struggling as even fuel surcharges aren't enough to offset the rising costs of diesel. Gaining approval to self-insure a fleet by the Federal Motor Carrier and Safety Administration may be one way a struggling trucking company can cut costs by saving on its insurance premiums.

By self-insuring, a trucking company can lower traditional insurance costs by reducing collateral requirements that are needed when a large-deductible program is used. They also will have more control over their claims handling, which can help them control costs. It also should be noted that while self-insuring is what some industry experts deem as a viable option, it's not for everyone.

Midsize trucking companies with fleets between 500 and 1,500 trucks can have a hard time proving that they are financially capable of self-insuring the first $1 million in liability limits, the standard requirement of the FMCSA, according to several transportation brokers. And motor carriers with fewer than 500 units, which accounts for the bulk of the U.S. trucking industry, usually don't consider self-insurance an option.

"It's not surprising the larger motor carriers can produce a more favorable package to meet the criteria," said Jeff Toole, an attorney specializing in transportation law with Indianapolis-based Scopelitis, Garvin, Light, Hanson & Feary L.P. "The larger carriers have more resources to pull from and larger risk management programs. So, in a sense, the criterion to gain approval is somewhat self-filtering."

For a motor carrier to be approved for self-insurance according to the FMCSA guidelines, the trucking company must provide a "true and accurate statement of its financial condition and other evidence that establishes to the satisfaction of the FMCSA the ability of the motor carrier to satisfy the obligation for bodily injury liability, property damage liability or cargo liability." Further, the motor carrier has to provide claims and loss data, risk management program information and safety records.

Typical liability limits are $1 million for general goods and $5 million for hazardous materials. Excess insurance can be purchased to put over the top of the self-insured limit.

The process to approve, Mr. Toole said, can take as little as 90 days or as long as nearly two years. The key, he said, is to provide the information in an organized and accurate fashion because the scrutiny of the application will be tough.

"You need to be able to show your tangible net worth," said Mr. Toole. "The FMCSA is very interested in that and the reason is obvious: the FMCSA doesn't want to have concerns over a company's ability to pay claims."

Stan McDaniel, director of risk management for Arkansas Best Corp., a trucking company with more than 4,000 trucks, said that after years of working with a large-deductible program, the decision to become a self-insured motor carrier in 1992 was a way to simplify the company's insurance program and provide more flexibility.

"After years of putting up annual letters of credit, we decided that this was a way that we could avoid that collateral," said Mr. McDaniel, who is based at Arkansas Best's corporate headquarters in Fort Smith, Ark.

Relief from the collateral requirement of private insurers is the main reason why motor carriers decide to self-insure, said Al Howze, director of broking for Aon Corp.'s trucking practice in Little Rock, Ark.

"Letters of credit are a drain on a company's credit line and as those letters of credit build up over time, those companies start to realize there's a lot of collateral out there," Mr. Howze said.

Despite building levels of collateral, he said some trucking companies cannot afford to go through the process to self-insure. According to the FMCSA, in 2006 there were 692,997 active interstate truck and bus companies that are considered eligible for self-insurance approval.

"The list is short in terms of those motor carriers that participate in the program," Mr. Howze said. "The list is probably somewhere around 100 to 150 companies tops. The larger-tier trucking companies, your top-tier largest haulers, those are usually the ones that are approved for self insurance."

Kevin McCarron, senior vp with the transportation practice at Willis of Michigan Inc., said that while middle-tier motor carriers may not be producing the strong balance sheets they were a few years ago that would allow them the option to self-insure, a soft insurance market is still a bright spot for them.

"Really the only thankful thing for motor carriers right now is a soft insurance market," Mr. McCarron said from his office in Novi, Mich. "A hard market would typically allow a motor carrier to dive into some form of self-insurance, but a hard market could unfortunately drive some midmarket transportation groups out of business."