'Nuclear' Judgments Cited As Trucking Insurance Rises

'Nuclear' Judgments Cited As Trucking Insurance Rises
Comedian Tracy Morgan received a large settlement from Wal-Mart after a June 2014 accident involving one of the retailer’s drivers. The accident injured Morgan and three others and killed another man.

Two cents doesn’t seem like much, but it can be a big red number to a trucking executive.

The American Transportation Research Institute, a nonprofit arm of the American Trucking Associations, released its report on operational trucking costs in September 2016.

The ATRI showed that insurance premium costs rose from 7.1 cents per mile in 2014 to 9.2 cents in 2015.

In 2008, insurance premiums cost trucking companies an average of 5.5 cents a mile.

“Our insurance costs, our insurance premiums are going up,” said Dan Cushman, CEO of PAM Transport Inc. of Tontitown. “It is a very real factor and growing factor.”

In mid-October, The Wall Street Journal reported that two big hitters in the commercial insurance game, Zurich Insurance Group AG and American International Group Inc., had decided to stop selling coverage to for-hire trucking fleets. The reason given was so-called “nuclear verdicts” — large monetary awards given to plaintiffs involved in truck accidents either through jury decisions or negotiated settlements.

One of the most famous cases in recent memory involved comedian Tracy Morgan, who received an undisclosed but unquestionably large settlement from Wal-Mart Stores Inc. of Bentonville after the limo he was riding in was hit by a Wal-Mart driver in 2014. Another comedian, James “Jimmy Mack” McNair, was killed in the accident, and the driver faces criminal charges.

Going Nuclear

The big payouts are attention-grabbers, overshadowing the increasing safety of trucks on the road. The Federal Motor Carrier Safety Administration reported that fatal crashes involving trucks dropped 32 percent between 1980 and 2014, and nonfatal crashes dropped 74 percent.

That’s small comfort, of course, to a carrier hit with tens of millions of dollars in liability after an accident. The so-called nuclear verdicts aren’t the only reason experts believe insurance rates are rising, but they are a factor.

“A very small number of high-consequence crashes have been occurring in the past three-four years,” said Dan Murray, vice president of the ATRI. “Truck-involved fatality rate and crash rate are stable or going down; there is a small increase in the number of really severe crashes, and what that is doing is driving literally catastrophic jury awards or out-of-court settlements, a la the Tracy Morgans of the world. Those are getting diluted throughout all premiums.

“Truth be told, if I’m Carrier A and I have coverage of $3 million and I get sued for $45 million, the insurance company is going to take a far bigger hit than what they thought my average liability should be. [An insurance company] can’t go back to Carrier A and recoup all the losses, so it’ll go to Carrier A through Z and allocate all the losses. That’s happening, and it’s related to a very small number of high-consequence crashes with definitely growing jury awards.”

The state of Arkansas hasn’t had many of them; Wal-Mart is based in Bentonville, but the Tracy Morgan accident occurred on the New Jersey Turnpike. Arkansas has seen more lawsuits filed because it is a no-cap state, meaning juries aren’t limited in the amount they can award in liability to a plaintiff.

“You do see a lot more litigation,” said Bruce Munson of the Little Rock law firm Munson Rowlett Moore & Boone. “I think Arkansas has historically been behind the eight ball probably on plaintiff verdicts. I think jurors try to be very, very fair. I have not seen nuclear verdicts in the state of Arkansas. We are still a very fair and conservative-to-moderate state when it comes to verdicts.”

Munson said he has noticed attorneys from capped states, such as Texas, coming to Arkansas to develop possible civil cases. Murray said the liability standards vary from state to state, and that can have a drastic effect on insurance rates.

“Everyone talks about tort reform; if you look at premiums for good carriers, they change pretty dramatically depending on which state you’re in or have a high number of vehicle miles traveled,” Murray said. “It’s because of quote-unquote deep pockets syndrome, particularly in those states where tort law allows you to be substantially more liable for less negligence. That’s where we have seen lots and lots of lawsuits and awards come out. The good carriers, for sure, were seeing a 4-8 percent increase in premiums on average in those states where civil litigation favored the plaintiff attorneys.”

Economics 101

Rates are also going up, Murray said, because of simple economics. Many insurance companies lost money during the recession of 2008-09 and an easy way to recoup money is through rate increases.

“The Great Recession just took a bite out of everyone’s bottom line,” Murray said. “They pass on the losses. There’s a lot of marketplace-slash-Wall Street-slash-shareholder demand to maintain a certain ROI level after catastrophic claims or in the case of the Great Recession, catastrophic financial losses that have nothing to do with claims.”

Opinion is mixed on what AIG and Zurich’s departure from the commercial insurance sector will mean. One argument is fewer choices will result in the remaining insurers raising their rates, but others think the effect of the departures is overblown.

“It’s not an emergency,” said Bob Pitcher, vice president of state law for the American Trucking Associations. “Trucking is a niche market; the large insurers think it’s an easy market and find out it’s not. So they leave.”

Murray believes that Zurich and AIG will return when and if market conditions make it a profitable play again.

“The effects — catastrophic [awards] and market correction — shouldn’t change just because two major players leave the market,” Murray said. “I think they’re just riding out this particular time period. We’ve seen carriers leave the market before and come racing back when they see the dollar signs.”

Murray’s concern is the effects rate increases have on smaller carriers. If rates go up, one counterbalance is for a smaller carrier to raise its deductibles, which works in theory if there’s no accident claim to pay.

“What has me a little nervous, particularly for the little trucking companies, is they’re raising their deductibles up quite high,” Murray said. “Now when something happened, financially I’ve made it much more difficult to cover my losses and continue to operate. It’s a risk approach of: Instead of paying the premiums, I’m going to raise my deductibles and hope a safety event doesn’t occur. If it does, it’s probably going to put a whole bunch of small carriers out of business.”