Flames engulf a tractor-trailer and tour bus after they collided near Orland, Calif. on Apr. 10, 2014, killing 10. (AP Photo)

Current required minimum liability limits for motor carriers are insufficient to cover the costs of rare but catastrophic crashes, the Federal Motor Carrier Safety Administration (FMCSA) says, adding that it plans to develop a proposed rule to address the issue.

Industry observers acknowledge that catastrophic crashes can and do exceed current minimum limits, but wonder about the impact on rates and claims payments should those limits be raised. For its part, the FMCSA says its study did not assess potential premium increases as a regulatory cost, noting the lack of available information on underwriting and pricing practices from both insurers and motor carrier risk managers.

The study, released last month, was conducted in accordance with the Moving Ahead for Progress in the 21st Century Act (MAP-21), which President Obama signed into law July 6, 2012. The act directed the Department of Transportation secretary to issue a report to Congress on the “appropriateness of the current minimum financial-responsibility requirements for motor carriers of property and passengers…,” which the secretary delegated to the FMCSA.

The study reports that the function of insurance has been “effectively removed” in covering catastrophic crashes, as medical and other costs have increased over the years, meaning the “real value” of the minimum-liability limits has decreased. 

The current required minimum liability limits were established in the 1980s, stemming from the Motor Carrier Act of 1980 and the Bus Regulatory Reform Act of 1982. By 1985, after a phase-in period, limits for motor carriers of property (freight) were set at:

  • $750,000 for the transportation of property.
  • $5 million for the transportation of certain hazardous materials.
  • $1 million for the transportation of other hazardous materials.

For motor carriers of passengers, minimum limits were set at:

  • $5 million for vehicles with a seating capacity of 16 or more passengers.
  • $1.5 million for vehicles with a seating capacity of 15 or fewer.


The rare catastrophic claim

For most claims, these limits are adequate. The study says catastrophic crashes resulting in injury, death and/or property damages that breach the current minimum limits constitute less than 1% of all commercial motor-vehicle crashes. But the few catastrophic and severe/critical injury crashes that do occur “can far exceed the minimum levels of financial responsibility,” the FMCSA says.

And industry experts tend to agree. Steve Weisbart, chief economist for the Insurance Information Institute, says of catastrophic accidents that can surpass minimum limits: “Fortunately, they’re rare, but they do happen.”

An insurance executive with knowledge of the transportation industry says, with respect to larger passenger motor carriers, the current $5 million limit is adequate on the vast majority of claims, but he adds, “Clearly on these larger claims, the $5 million is not enough.” 

That said, raising the minimum limits will have consequences for the insurance marketplace. Weisbart says it’s unclear exactly what the net effect of those consequences will be: “There would be increased revenue [for insurers] from people now buying minimum coverage, but also increased claims for people whose claims exceed the minimum,” he says. Presumably, he adds, actuaries would price the risks differently, in which case it would “probably be beneficial to the industry, but it’s hard to tell.” 

The insurance executive, though, says last time the limits were raised in the 1980s, insurers did not immediately reflect the change in their rates, as a soft market drove competition. For the larger passenger motor carriers, he says, pricing remained as it was under the older $1 million minimum limit, and by early 1986, the combination of low rates and higher claims nearly collapsed the market for these risks.

Should limits be raised again, the executive says he believes it will again take time for insurers to react with rate increases, possibly three-to-four years as claims develop. 

When rates do increase, the executive says they could rise by 50-60%, given the new cost of limit losses (assuming the minimum limit is raised from $5 million to $10 million for larger passenger motor carriers) as well as the impact of “limits pull”—where settlement values are inherently pulled up as available limits increase.

The executive says the impact of limits pull would be felt in addition to already-rising claims severity in the current environment due to, among other factors, a “dramatic rise in surgical procedures” and an active legal environment.

A potential factor that could counter the rising cost of claims, Weisbart says, is the possibility that higher premiums will “provoke a little more interest on the part of motor carriers to identify issues that lead to accidents. And if they figure those out and implement strategies for mitigating or preventing loss, everybody’s better off.”


Chances of action in Congress

The FMCSA, in its study, says it has formed a rulemaking team to evaluate what the appropriate level of financial responsibility should be for the motor-carrier industry. The next step, the study says, will be to meet with stakeholders and develop a proposed rule.

What Congress will do after that is unclear. Weisbart says if there is pushback, for example from motor carriers who would face higher premiums, then “this might be something that takes a while to get into legislative form.”

He notes the issue doesn’t seem to have the kind of urgency that some other recent insurance issues have, in part because there is no deadline or expiration in play, as there was on the flood-insurance issue and with TRIA. 

Ultimately, Weisbart says he would not be surprised if Congress ultimately puts in place an “automatic escalator that recognizes the change in healthcare costs—the main driver of insurance payouts in these accidents—so they don’t have to do this again in 30 years.”