November/December 2001
Controlling vehicle insurance losses and costs can be a delicate balancing act—especially when using subcontracted vehicles. Here’show to use good information, policies, and planning as your safety net.
By Monica McNally
Monica McNally is senior vice president of Willis of New Hampshire Inc. (Rochester, N.H.), which administers RecycleGuard—the ISRI-sponsored property/casualty insurance program.
The insurance marketplace is tightening, which means that the cost of insurance is going up while the availability of companies competing for your business is going down. That, of course, leads to higher premiums.
Why are insurance costs going up? Because insurance companies have lost money in the past several years, which has increased their loss ratios. Today, in fact, loss ratios of more than 100 percent are the norm for most major insurance companies.
These loss ratios are the actual cost of claims plus the insurance companies’ expenses on top of those claims dollars. Medical costs, for instance, continue to increase, as do the costs of repairing buildings and vehicles. Even the cost of reinsurance—excess insurance that an insurance company must carry to protect itself from catastrophic claims—is rising.
Though insurance companies were able to offset some of these costs in recent years through investment income, returns from the stock/bond market have been declining. Without that investment income, insurers have little choice but to increase premiums.
Vehicular Losses
The impact of insurance company losses is especially evident in the automobile insurance market. “But don’t insurance companies make a huge profit from auto insurance?” you ask. That’s what many people think—except it isn’t true. In a recent survey, the American public estimated that only $40 out of every $100 in auto insurance premiums was paid out in claims, while the insurance companies reaped profits of $34 after other expenses.
In fact, the average insurer today pays out $81 in claims for every $100 in auto premiums collected and actually loses $4.
Clearly, there’s a large gap between perception and reality in auto insurance. And just as clearly, the recycling industry has contributed to these losses, which have occurred in both liability (third-party coverage, in which someone else files a claim against your company) and physical damage (first-party coverage, such as when you file a claim for damage to your own vehicle).
Let’s take a look at some examples of recent large claims.
Physical damage claims are more common than liability claims, and they fortunately involve lower dollar amounts and are often more preventable. Sometimes, however, they result in expensive claims, especially with vehicle rollovers.
In one incident, a scrap industry driver ran off the side of the highway and rolled, causing $56,000 in damage to the tractor and trailer plus $9,600 in cleanup costs. Another rollover accident caused $33,500 damage to the trailer.
Whereas physical damage claims generally involve your own vehicles, liability claims can involve either company-owned vehicles or nonowned/hired vehicles. They can also be much more expensive.
Bodily injury claims, for instance, generally result in higher reserves and dollars paid out. Reserves are estimates of dollars that ultimately will be paid out by the insurance company based on the facts of the claim at any particular point in time. Notably, reserves may go up or down depending on the facts that develop as the claim matures.
For example, in an accident involving a company-owned vehicle, one driver exiting a scrap facility ran over and killed a bicyclist. A reserve of $500,000 was assigned to that claim.
In another case, a driver who failed to look behind him before backing up hit a claimant, giving the person a herniated disc. A reserve of $175,000 has been posted for that claim.
Then there’s the time the driver of an insured firm changed lanes on an interstate but did not see the vehicle in the other lane. The driver of the other vehicle was killed. A $200,000 reserve has been assigned.
Another type of liability claim—for property damage—generally involves lower dollar amounts and oftentimes is easily avoided. For example, property damage claims often occur when a driver fails to do something as simple as check the height of his load. But even a simple mistake like that can cost your company. In one case, a vehicle that struck a bridge damaged the structure’s support beams at a cost of $35,020. In another, a vehicle struck an overhead door, causing $28,210 of damage to the building, plus a $68,000 “loss-of-business” claim.
The Subcontracting Situation
One area of automobile insurance that’s necessary but generally does not receive a lot of attention is nonowned or hired-car coverage. Though the premium cost for this coverage is generally minimal, claims related to this coverage can potentially involve large dollars.
This coverage applies to vehicles that are not owned by the insured company but instead are subcontracted—loaned or used under contract on behalf of the insured, with or without the use of a hired operator. Such subcontracting arrangements are popular with businesses that want to lower their direct cost of transporting materials by contracting out their driving to either independent trucking firms or owner-operators.
While subcontracting relieves your company of the direct cost of insuring tractors, don’t forget that the hired tractor is often pulling your trailer. Thus, your insurance coverage becomes “excess over” other valid or collectible insurance that may apply to the subcontractor. This means that, though the subcontractor’s policy pays first, your policy pays any costs over that, up to your policy’s limit of liability.
What does this mean to your company? Consider the following actual losses involving the use of hired vehicles.
• A subcontractor hauling scrap for a processor lost control of the vehicle while coming around a corner. The truck overturned, killing two children and seriously injuring the children’s father. The subcontractor carried $750,000 in auto limits—that is, the limit of liability provided under his policy. The subcontractor’s insurance carrier paid the $750,000 limit promptly, satisfying its liability in this case. Subsequently, the claim ended in a settlement of more than $5 million—over and above the subcontractor’s $750,000 limit. The result was that the scrap company’s insurer had to pay the $5-million-plus settlement.
• Another claim involved a subcontractor who was returning to the processor’s facility with an empty trailer. When he tried to stop short to avoid hitting a vehicle making a left turn, the trailer jackknifed into the path of an oncoming vehicle, killing the two passengers. The subcontractor’s automobile policy had a $500,000 limit. The scrap processor’s insurer has set a reserve of $750,000 in this case. To reiterate, the final settlement could be more or less than the subcontractor’s limit plus the processor’s reserve, and the processor’s reserve will be adjusted accordingly.
• A third claim involved a subcontractor who was hauling a processor’s trailer. As the subcontractor pulled out of the yard, he was hit by another vehicle whose driver was killed. The dependents of the deceased have brought suit against the subcontractor, claiming that he did not look before exiting the yard. The subcontractor only carried $100,000 in auto limits. The processor’s insurer has set a $250,000 reserve on this claim.
Controlling Costs
What can you do to prevent these catastrophic claims?
Obviously, you generally have a greater degree of control over losses involving company-owned vehicles. The controls include hiring the proper drivers, checking their driving records periodically, providing ongoing driver training, maintaining vehicles in good condition, making sure that trailers aren’t overloaded with scrap, and adhering strictly to DOT regulations.
You have less direct control over non-owned or hired vehicles, but you should not automatically assume that you have no input or, for that matter, that you have eliminated your exposure by using subcontractors to haul your scrap. Though you may pay a small premium to cover non-owned or hired vehicles, your insurance policy does respond as excess over other valid and collectible insurance that applies to the subcontractor. And again remember that it’s usually your trailer being hauled by someone else’s tractor. So while the subcontractor’s policy will respond first, as you can see from some of these claim examples, the limits of liability insurance carried by many of the subcontractors have been low.
How can you protect your company when using subcontracted drivers?
• Make sure you have a contract in place with your subcontractors that outlines the responsibility and duty of each party. The contract should also include a “hold harmless” agreement that makes it clear that each party is responsible for their own negligence.
• Ask to be included as an insured party under the subcontractor’s policy.
• Obtain certificates of insurance or a copy of the subcontractor’s policy showing coverage with a minimum limit of liability of $2 million with an insurance carrier rated A or better by Best’s. Make sure you do this on an annual basis. (In the cases reviewed above, you can see how a $2-million limit in the subcontractors’ policies would have been a huge benefit to the processors and their insurers involved in those cases.)
• Obtain certificates of insurance showing evidence that the subcontractor has workers’ compensation insurance.
• Make sure that the subcontractor complies with DOT regulations.
• Review the safety and maintenance programs of subcontractors you use.
• Maintain the right of refusal of a particular driver and/or vehicle used by the subcontractor.
• Put tight restrictions on weight loads since overloading may cause accidents and increase the severity of an accident. Provide guidelines for methods of securing loads.
• Restrict the ability of a subcontractor to subcontract driving to another firm.
Staying Ahead
As noted earlier, insurance companies today are striving to improve their loss ratios in the automobile area. Thus, recyclers seeking auto insurance can expect tighter restrictions on underwriting standards, including a review of proper classification of vehicles based on size and distance driven, adherence to driver training and selection, and compliance with loss-control recommendations.
Fortunately, ReMA members benefit from an insurance program specifically designed for and sponsored by their association, which gives the scrap industry a more stable insurance marketplace than many other industries enjoy. And though the underlying principle of insurance requires that the many subsidize, at least in part, the losses of the few, underwriters are still trying to view accounts individually.
So what can you do to separate yourself from the pack?
First, make sure that an underwriter, sitting in an office hundreds of miles away from your operation, appreciates the steps you take to run a safe business. You can share that information by giving the underwriter a written summation of your mission statement or philosophy on conducting your business. Your agent can also send pictures of your operation to the underwriter to help differentiate your facility.
Another area that should receive increased priority is your compliance with recommendations made by the loss-control representative from your insurance carrier. Respond in writing and on a timely basis. If you don’t agree with a recommendation, explain why and suggest an alternative. In the end, complying with these recommendations may not only prevent losses, it could also save you from noncompliance with government regulators. So use the recommendations as an opportunity to improve your operation.
Remember: You do have a choice as to whom you do business with and how their business practices affect you. Protect your company, and control your costs.
After all, whenever your name is on a truck or trailer, that vehicle becomes a 40-to-55-foot-long billboard for your business rolling down the highway. •
Editor’s note: If you would like more information on becoming insured with RecycleGuardsm—the ISRI-sponsored property/casualty insurance program—have your agent contact Monica McNally at 888/225-4725. You can also visit RecycleGuard’s Web site at www.recycleguard.com for an overview of available coverages.
Controlling vehicle insurance losses and costs can be a delicate balancing act—especially when using subcontracted vehicles. Here’show to use good information, policies, and planning as your safety net.