Financial Responsibility Requirements for Commercial Motor ...

1 Financial Responsibility Requirements for Commercial Motor Vehicles January 2013. FOREWORD. The minimum levels of Financial Responsibility for Commercial Motor carriers were established by Congressional legislation in the early 1980's. The question today is whether these levels should be raised, weighing the benefits of improved compensation of crash victims, internalization of freight and passenger transportation costs, and reduction of truck- and bus- involved crashes, with costs imposed on Commercial Motor vehicle (CMV) operators, the insurance industry and other relevant considerations. Affected Motor carriers are for-hire general freight and passenger carriers in interstate commerce and hazardous materials carriers. NOTICE. This document is disseminated under the sponsorship of the Department of Transportation in the interest of information exchange.

2 The United States Government assumes no liability for its contents or the use thereof. The contents of this report reflect the views of the contractor, who is responsible for the accuracy of the data presented herein. The contents do not necessarily reflect the official policy of the Department of Transportation. This report does not constitute a standard, specification, or regulation. The United States Government does not endorse products or manufacturers named herein. Trade or manufacturers' names appear herein solely because they are considered essential to the objective of this report. Technical Report Documentation Page 1. Report No. 2. Government Accession No. 3. Recipient's Catalog No. FMCSA-RRA-12-045. 4. Title and Subtitle 5. Report Date Financial Responsibility Requirements for Commercial Motor Vehicles November 2012.

3 6. Performing Organization Code 7. Author(s) 8. Performing Organization Report No. Kent Hymel, Douglass B Lee, Jonathan Pearlman, Robert Pritchard, and Lydia Rainville 9. Performing Organization Name and Address 10. Work Unit No. (TRAIS). Department of Transportation, John A. Volpe Transportation Systems Center, Cambridge, MA 02142 11. Contract or Grant No. 12. Sponsoring Agency Name and Address 13. Type of Report Department of Transportation Final Report Federal Motor Carrier Safety Administration Office of Analysis, Research, and Technology 1200 New Jersey Ave., SE 14. Sponsoring Agency Code Washington, DC 20590 FMCSA. 15. Supplementary Notes Contracting Officer's Technical Representative: Mindy Shalaby, 16. Abstract Minimum liability insurance levels and related Requirements for Motor carriers to demonstrate Financial Responsibility in case of damages from crashes were established in the 1980's by Congressional legislation.

4 These levels have not been changed since then. The question is whether these levels should be raised, weighing the benefits of improved compensation of injured third parties, internalization of freight and passenger transportation costs, reduction of truck- and bus-involved crashes, costs imposed on Commercial Motor vehicle (CMV) operators, and other relevant considerations. Affected Motor carriers are for-hire general freight and passenger carriers in interstate commerce and hazardous materials carriers. 17. Key Words 18. Distribution Statement CMV, Commercial Motor vehicle , costs, crashes, crash No restrictions reduction, fatal crash, liability insurance, Motor carriers, severe injury, cost exporting, external cost 19. Security Classification (of this report) 20.

5 Security Classification (of this page) 21. No. of Pages 22. Price Unclassified Unclassified 122. Form DOT F (8-72) Reproduction of completed page authorized. SI* (MODERN METRIC) CONVERSION FACTORS. TABLE OF APPROXIMATE CONVERSIONS TO SI UNITS. Symbol When You Know Multiply By To Find Symbol LENGTH. in inches Millimeters mm ft feet Meters m yd yards Meters m mi miles Kilometers km AREA. in square inches square millimeters mm . ft square feet square meters m . yd square yards square meters m . ac acres Hectares ha mi square miles square kilometers km . VOLUME 1000 L shall be shown in m . fl oz fluid ounces Milliliters mL. gal gallons Liters L. ft cubic feet cubic meters m . yd cubic yards cubic meters m . MASS. oz ounces Grams g lb pounds Kilograms kg T short tons (2,000 lb) mega grams (or metric ton ) Mg (or t ).

6 TEMPERATURE Temperature is in exact degrees F Fahrenheit 5 (F-32) 9 Celsius C. or (F-32) ILLUMINATION. fc foot-candles Lux lx fl foot-Lamberts candela/m cd/m . Force and Pressure or Stress lbf poundforce Newtons N. lbf/in poundforce per square inch Kilopascals kPa TABLE OF APPROXIMATE CONVERSIONS FROM SI UNITS. Symbol When You Know Multiply By To Find Symbol LENGTH. Mm millimeters inches in M meters feet ft m meters yards yd km kilometers miles mi AREA. mm square millimeters square inches in . m square meters square feet ft . m square meters square yards yd . ha hectares acres ac km square kilometers square miles mi . VOLUME. mL milliliters fluid ounces fl oz L liters gallons gal m cubic meters cubic feet ft . m cubic meters cubic yards yd.

7 MASS. g grams ounces oz kg kilograms pounds lb Mg (or t ) mega grams (or metric ton ) short tons (2,000 lb) T. TEMPERATURE Temperature is in exact degrees C Celsius + 32 Fahrenheit F. ILLUMINATION. lx lux foot-candles fc cd/m candela/m foot-Lamberts fl Force & Pressure Or Stress N Newtons poundforce lbf kPa kilopascals poundforce per square inch lbf/in . * SI is the symbol for the International System of Units. Appropriate rounding should be made to comply with Section 4 of ASTM E380. (Revised March 2003, Section 508-accessible version September 2009). ii TABLE OF CONTENTS. EXECUTIVE SUMMARY .. XI. 1. Review of Financial Responsibility Authority .1. 2. COST EXPORTING AND LIABILITY INSURANCE ..5. HISTORY OF TRUCKING INSURANCE REGULATION ..5.

8 Changes Since Enactment .. 5. The Problem of Undercompensated Injuries .. 6. Prevention Versus Compensation .. 6. ECONOMIC EFFICIENCY DISTINGUISHED FROM EQUITY IMPACTS ..7. Equity Impacts of Cost 7. ORIGINAL LEGISLATIVE INTENT ..8. Regulated Entities .. 8. CARRIER INDUSTRY Overextended Carriers .. 10. Inflation in Crash Costs .. 10. Current Crash Costs .. 11. Protecting the Public .. 12. CATASTROPHIC CRASH COVERAGE ..12. CALCULATION OF INSURANCE RATES ..13. Basic Insurance Concepts .. 13. Risk Update for Insurance 14. Insurance Rates for Comparable 15. Decline in Crash Frequency and Insurance 16. Market Norm .. 16. Rates for Higher 17. Insurers Sources of Revenue .. 17. Insurance Cost to the Carrier .. 18. ROLE OF THE INSURANCE INDUSTRY.

9 18. Safety Enforcement by Insurers .. 19. Insurance Industry Underwriting Analysis .. 19. The Optimal Liability 20. 3. THE EXTENT OF UNDERCOMPENSATION AND THE DISTRIBUTION OF. COST PER iii DATA Requirements AND POSSIBLE SOURCES ..23. TRUCK- AND BUS-RELATED EFFORT TO DOCUMENT Two Broad Types of Carriers at Risk .. 27. FMCSA SAFETY PROGRAMS ..29. COST PER What is the Scope of the Costs? .. 31. The Highway User Contract .. 33. Pressures for Victims to Settle 33. Delay in Payment of Claims .. 34. True Cost of Injuries .. 34. STATISTICAL MODELING USING ISO DATA ..35. HIGH-COST CRASH FREQUENCY ..36. OTHER METHODS USING FATALITIES AS THE COST FMCSA Motor Carrier Management Information System .. 38. General Estimate System (GES) .. 40. Texas Closed Claim Database.

10 40. Tractor Trailer 40. HIGH-COST CRASHES: SEVERE INJURIES ..41. Severe Injury Frequency from GES .. 41. Costs per Crash by Injury Severity .. 42. Traumatic Injury by Type .. 42. Non-Profit and Advocacy Groups .. 44. INTERVIEWS WITH INDUSTRY EXPERTS ..45. Transportation 46. Insurers .. 47. Carriers .. 47. IMPACTS OF HIGHER MINIMUMS ..48. CONCLUSIONS WITH RESPECT TO COST EXPORTING ..49. 4. ARGUMENTS AGAINST HIGHER INSURANCE Requirements ..51. SETTLEMENTS AT THE MAXIMUM INSURANCE LIABILITY ..51. Response: .. 51. BANKRUPTCY ..51. INSURANCE Requirements FAIL TO DETER RISKY CARRIERS ..52. Response: .. 52. iv RESIDUAL MARKET ..52. Inflated and Fraudulent Claims .. 53. INSURANCE RATE VOLATILITY ..54. LOSS OF BENEFICIAL SERVICE ..55. REINCARNATED CARRIERS.