Expect to pay 3 percent to 5 percent of your truck’s value for damage insurance premiums.
THIS ARTICLE IS FROM the 2006 edition of the Overdrive Partners in Business manual, co-written by American Truck Business Services, presenter of the Partners in Business seminars. The program is sponsored by Freightliner Trucks and Castrol. The next seminar will be during the Mid-America Trucking Show, March 22-24, 2007, in Louisville, Ky. To order a manual, call (800) 633-5953, Ext. 1135. Visit this site for more excerpts and program information.
After the truck payment, truck insurance is an owner-operator’s biggest fixed cost, one that must be paid on time whether a truck is running hard or parked. Without adequate insurance, an accident or cargo claim could mean financial ruin.
COST OF PROTECTION
Insurance expenses can add up quickly, which is why many owner-operators budget their premiums a year in advance. Your age, your driving record, the age and condition of your equipment, the commodities you haul, the lanes you run, and state requirements all affect insurance costs, but an owner-operator with a new truck and his own authority is likely to pay each year:
- $5,000 for $1 million in primary liability insurance to cover damage or injury done to others in case of accident while you’re under dispatch.
- $2,400 for physical damage insurance to cover damage done to your truck and trailer in case of accident.
- $1,000 for cargo insurance to cover damage to or theft of the load you’re hauling.
- $450 for $1 million in non-trucking-use liability insurance.
All that insurance totals about $9,000 per year, assuming a safe driving record.
Leased owner-operators generally carry just as much truck insurance as an independent, but pay for less of it themselves. The leased operator should make sure the lease agreement specifies what he is not responsible for (typically primary liability and cargo insurance) and what he is responsible for (typically physical damage and non-trucking liability insurance).
Many fleets charge the owner-operator for liability and cargo insurance, usually by taking a percentage of all settlements, but other fleets absorb it as part of the cost of doing business. Some fleets require drivers of smaller trucks to handle their own primary liability, especially in courier or delivery applications.
Owner-operators shopping for insurance can look to trucking-specific insurance agencies or truck dealers. Shop around before you buy.
Some leased owner-operators buy all their insurance independently of the plans offered by their fleets. This costs more in most cases, but its advantages include more control of your coverage, a closer business relationship with your agent, and a speedier reply when you have an emergency. Independently purchased insurance is portable, so if driver and fleet part ways, the driver’s still covered en route to the next orientation. Before you can be assigned a load, of course, you’ll have to show your carrier proof that you have all the coverage it requires.
If you are an independent, you are required by federal law to have a minimum of $750,000 liability coverage. This is to protect you in case of a major accident in which you are at fault. You may want to consider higher coverage, at least $5 million, since a catastrophic truck accident can cost millions of dollars.
Because primary liability insurance is the law, it’s standard in lease agreements. Remember, though, that just because your carrier is insured against damage you cause, it won’t necessarily be on your side in case of an accident. For that reason, some leased owner-operators opt to buy liability insurance independently of their carriers.
For many, however, having liability taken care of is one of the biggest advantages to leasing. Owner-operators who switch to their own authority often are surprised by how costly, complex and time-consuming liability coverage can be.
Whereas a damage policy commits the insurer to paying only the current value of the truck, a typical primary liability policy commits the insurer to paying as much as $1 million if something goes wrong. Assuming that risk earns the insurer only about $5,000 a year in premiums. Moreover, the insurance industry considers owner-operators to be higher risks than fleets.
Small wonder that the insurer, before signing that contract, wants every reassurance that nothing will go wrong. The insurer is likely to quiz an independent about the type of freight to be hauled, the region or operating radius, his background as a driver and as a business person, and regular safety and security practices. Owner-operators can help themselves by demonstrating that they have a solid business plan for the short and long term, including a daily maintenance schedule and routine safety procedures.
The law does not require physical damage insurance, but lenders do. A typical damage premium is anywhere from 3 percent to 5 percent of the truck value, or $3,000 to $5,000 for a truck worth $100,000. A bad driving record, however, can bump the cost to $8,000 a year or more, if you can still get damage insurance at all.
The most important thing to understand about a damage policy is that it will pay no more than the book value of the equipment at the time of the accident. In other words, you won’t get a new truck out of a damage claim, even if your present truck is totaled. The insurer’s preference always is to go the cheapest route, which usually is repairing the truck you have. At best, you’ll get enough to buy another truck of the same age and mileage.
GAP INSURANCE. Since an owner-operator often owes more on a truck than it’s actually worth, thanks to depreciation, a damage settlement may not even be enough to make the rest of the payments on the totaled rig. If you’re driving a new truck or a used truck no more than five or six years old, “gap insurance” is helpful. It covers the difference between the actual book value of the truck and what you owe on the truck. For example, if the market value of your truck is $30,000, but you have a loan balance of $50,000, you would be short $20,000 to pay off the loan in the event your truck was totaled. Gap coverage would make up the $20,000 shortfall.
DAMAGE DEDUCTIBLES. Besides the premium, the other important number in a damage formula is the deductible. A deductible of $1,000 means that the policyholder agrees to pay the first $1,000 of expenses himself, before the insurance kicks in.
Ask your agent for a range of prices at various deductibles, low to high. Deductibles of $1,000 are typical. A top-of-the-line rig may have deductible options as high as $10,000. Low to moderate deductibles, however, are the best choices for an owner-operator. A high deductible is no bargain if an accident puts you out of business.
COVERAGE OF OTHER EQUIPMENT. Any truck equipment not covered in a basic damage policy – for example, tarps, binders or chains – can be added by the owner-operator at minimal cost. A basic damage policy likely won’t cover the cost of replacing a tank full of diesel that spills in an accident, or any other fluids that need replacing afterward. Boilerplate damage policies typically cover only permanent OEM-installed fixtures on the truck, not any extras added later. Qualcomm, Vorad, satellite radio, televisions, laptops – none of these is automatically covered. They can be covered for a small fee, but the insurance company has to know the items are there.
The federal government requires only $5,000 in cargo coverage, but that’s an unrealistic bare minimum. Fleets typically buy $100,000 on the owner-operator’s behalf, which is the amount mandated by many shippers. Specialty haulers can carry far more. Overdrive research shows that 5 percent of owner-operators had to use their cargo insurance in the past three years. The average claim was only $2,936, yet 25 percent of those with a claim said the expense caused financial hardship to their businesses.
The fine print in some lease agreements charges the owner-operator for any cargo losses if he’s at fault in an accident, cargo insurance or no cargo insurance. Some loads have a much higher monetary value than an owner-operator’s cargo insurance can cover. Yet 39 percent of owner-operators don’t know who’s liable for the difference if an expensive load is lost. Read your policy and find answers to these questions before an emergency occurs.
This insurance, which covers you when you’re not under dispatch, is a more precise term for what used to be called bobtail insurance. Non-trucking-use liability coverage is required by most carrier leases.
What “under dispatch” means, exactly, tends to be determined in courtrooms. Courts have held that even a bobtail trip home can be considered under dispatch, since the route is determined by where the fleet sent the driver most recently.
Sometimes the fleet’s insurance company refuses to pay a claim, arguing that the owner-operator was not under dispatch at the time, and the owner-operator’s insurance company likewise refuses to pay, saying he was indeed under dispatch. In these cases, the owner-operator is caught in the middle, and needs a good lawyer himself.
REIN IN PREMIUMS
Here are some good business practices that help put the brakes on premium increases.
DRIVE CAREFULLY. A speeding ticket in your personal vehicle will increase a truck-insurance premium and dissuade some insurers from doing business with you. Even minor offenses stay on your record for years; major offenses will stay as long as you live.
TAKE A BITE OUT OF CRIME. Be especially cautious when hauling cargo that attracts criminals, such as cigarettes, cell phones or designer clothes. Park only in lighted, secured areas, and don’t leave a truck or trailer unattended over a holiday weekend.
KEEP VALUES CURRENT. Talk to your insurance agent every year to adjust your coverage according to the changing value of your equipment.
DON’T OVER-INSURE. Being over-insured often means duplicate coverage somewhere, for example, a private policy that overlaps a fleet policy. Also, don’t buy too much coverage.
WATCH THOSE LUMPERS. Don’t leave your cargo and your trailer to the mercy of lumpers and dockworkers you don’t know. Keep an eye on what’s going on to make sure nothing’s damaged.
KNOW YOUR CARGO. Read the bills of lading. Ask questions of your dispatcher or freight broker to find out exactly what you’re hauling and for whom, in case it’s more than your cargo policy will cover.
KEEP UP YOUR PAYMENTS. If you let your insurance lapse, you’ll pay the penalty for years to come in higher premiums, even if you can find an insurer to cover you.