Troubled Transport: After a record profit year in 2018, many trucking companies experienced the exact opposite in 2019.
For many trucking companies, 2018 was a record year in terms of profit. However, 2019 proved to be the exact opposite — the perfect storm of major issues affecting the transportation industry, including significant overcapacity, freight rates remaining severely depressed, a harder insurance market, nuclear verdicts, and serious legislative challenges. Further, statistics from the American Transportation Research Institute (ATRI), show that, for the first time, insurance premiums ranked in the top 10 for the trucking industry’s biggest overall costs.
Here’s a closer look at these challenging trucking industry issues:
“Nuclear verdicts” refer to a verdict in excess of $10 million. In the past few years, at least seven claims and more than $100 million in settlements or verdicts have hit the transportation industry. Whether it’s a small transport operator or a major national fleet, the companies that provide insurance to the transportation industry are trying to figure out how to underwrite the transportation industry’s risks for a profit.
For example, take Schnitzer Steel Industries. In October 2019, a jury in Georgia awarded $280 million to settle with one person of a family of five people who were killed in a 2016 collision involving a truck driver for the steel company. Some reports call this the biggest verdict ever awarded against a commercial trucking company, though nuclear verdicts such as this may be the new normal until meaningful reform is addressed.
Recent legal verdicts like this have put a strain on premiums and risk transfer solutions sought by trucking companies, including those that utilize independent contractors (ICs). For example, the average verdict against a trucking company in 2012 in the southeast states of Georgia, Florida, Texas, Tennessee, Alabama and both Carolinas was around $2.6 million, according to CaseMetrix, a motor vehicle settlement and verdict database. In 2017, the average verdict skyrocketed to more than $17 million.
AB5 law in California
As brick and mortar stores have given way to ever-increasing internet commerce, there has been a bigger demand for bulk transport and “last mile” delivery services by ICs who support this new “gig” economy.
Traditional trucking companies use ICs to operate under the trucking company’s authority and not the IC’s. Thus in this scenario, ICs own and operate their own equipment and are responsible for their own insurance — except for liability — while under dispatch for the trucking company with which they are contracted. The use of ICs allows trucking companies to flex fleet sizes to meet cyclical demands, thereby helping to minimize the capital cost associated with equipment turnover costs and/or those associated with longer-term employee/employer relationships. Traditional trucking companies also utilize purchased transportation and freight forwarding strategies to meet customer needs. These relationships transfer the responsibility for liability insurance to the IC as they are operating under their own authority and not the trucking company that hired them.
In the new “gig” economy, the contractual relationship with entities operating in the courier and last-mile space that operate a smaller class of vehicles — generally less than 10,000 pounds — has likewise evolved along two paths: one where the IC is assumed to be operating under the trucking company’s authority as an extension of interstate commerce, and in others as a form of purchased transportation service.
As states like California have sought to protect “gig” economy workers from wage and hour type of abuses, employee classification issues for both methods of utilizing ICs discussed above have become the subject of controversial interpretations between State and Federal Laws governing interstate commerce and new legislation like California Assembly Bill 5 (AB-5).
CA AB-5 extends employee classification status to gig workers, which has ramifications for the trucking industry. The legislation may completely reshape how the transportation industry will look into 2020 and over the next few years. AB5 is driving some trucking companies to reshape themselves into a freight broker instead of a motor carrier. As a result, ICs that formerly served motor carriers must now incorporate, acquire their own insurance and operate as a separate entity. Some large, national trucking companies have told their contractors they have three options: move out of California, become an employee of the trucking company, or go work somewhere else. Many companies affected by AB-5 are saying they will not do business with any contractors in the state of California.
However, good news for the transport industry came late last year. On December 29, 2019, Judge Roger T. Benitez of the United States District Court for the Southern District of California granted a temporary restraining order prohibiting California from enforcing AB-5 against any motor carriers operating in the state.
Then, in early January, the California Superior Court issued a decision that AB-5 is preempted by the Federal Aviation Administration Authorization Act of 1994 (F4A). In his decision, Judge William Highberger found that AB-5 is preempted by Congress’ determination in the F4A that a uniform rule endorsing the use of non-employee independent contractors should apply in all 50 states to increase competition and reduce the cost of trucking services. The court agreed with the defendants that the “B” prong of the ABC test would not just distinguish employees from independent contractors but would effectively prohibit the use of independent contractors altogether. Citing prior case law, Highberger held that the F4A preempts any state law that affects motor carrier prices, routes and services in anything other than a “tenuous, remote or peripheral manner.”
Other states following California’s lead
Like California’s AB-5 law — but more strict — is New Jersey’s newly-introduced S4204, a bill that would not only codify the ABC test as used by New Jersey courts in the past but would adopt a stricter version of the test; thereby, making it more difficult for companies to classify workers as independent contractors. The bill is currently stalled due to outcry from opponents.
2019, as a whole, was one of the most challenging years in the trucking industry. In all, traction of excess in the marketplace is creating much higher premiums than anyone could possibly budget for one year to the next. Underwriters are shrinking capacity, increasing attachment points, and at the same time, increasing pricing dramatically, if not running from the industry altogether. Insurance carriers have the challenge of turning these issues into opportunities.