Starting a company as an Independent owner-operator can be difficult. The industry has a number of complex requirements that owners need to comply with at all times. One of the more confusing and expensive issues they deal with is insurance. This article provides a simple explanation of the industry and its products. It prepares you to have a more productive discussion with your insurance agent. We cover:
- When should you start looking for insurance?
- Why should you get insurance?
- Review of insurance types
- Insuring a new (or young) trucking company
- FMCSA requirements vs. Client demands
- How to pay for insurance
As a factoring company, we specialize in financing trucking companies but are not insurance experts. We want to thank Joel Baker from Truck Owner Insurance for explaining insurance to us. Joel has been a successful independent owner-operator for over 20 years and now works as a licensed insurance agent.
Disclaimer: This article is provided for information only and is not advice. We are not insurance agents. If you need advice, contact a licensed insurance agent with experience in the trucking industry.
1. When should you start looking for trucking insurance?
It’s common for drivers to launch their trucking company as quickly as possible. That is understandable, but drivers often hurry through the process and miss important steps. This leads to costly mistakes, which can derail your business. You will have a better chance of success if you follow these steps in order. Buy insurance only after these have been completed:
a) Determine which industry you will support
b) Determine the equipment needed to support the industry
c) Determine the lanes you plan to drive
d) Calculate your rates per mile
e) Calculate your costs per mile
f) Develop a plan to get loads and contracts
g) Buy your equipment
h) Establish your trucking company
2. Why should you get insurance?
Insurance is an area where many independent and leased to carrier owner-operators make a critical mistake. They try to get the least possible amount of insurance they can get. This is the cheapest strategy but may not be the wisest approach. Insurance protects you and your trucking company from certain risks. Ideally, you want to be in a position where the insurer makes you whole after an incident.
The concept of ‘making you whole’ means that you will be able to run your trucking company as if the event had not happened. However, insurance companies won’t make you whole at a value above your coverage. You may have to get insurance to be ‘in compliance’ with federal and client requirements. However, this could leave you exposed to certain risks.
a) A better strategy
A better strategy is to insure your company for the risks you are reasonably likely to face. It may also be to your advantage to exceed that level to be better protected. However, you don’t want to buy more insurance than you need. Managing this situation requires careful planning. Choose an insurance agent that knows the industry and understands the risks you face. They will educate you on what insurance can and cannot do for you. This strategy puts you in a position to make the best decision for your company.
3. Quick review of insurance types
One of the more complicated areas of insurance is understanding the types of coverage you can get. The benefit of having many options is that you can customize coverage based on your risk tolerance and budget. The drawback is that having too many options creates confusion. Here are the major products and a brief explanation of what they do.
a) Primary liability / Vehicle liability
This insurance has two components, bodily injury and property damage. The bodily injury component covers injuries to other individuals. The property component covers damage done to the property of third parties.
b) Motor truck cargo
This coverage protects the cargo if your truck gets into a problem that damages the cargo.
c) Medical payment
This covers medical claims for anyone injured by or on your truck during an accident. This coverage can be important to provide you coverage from a claim from a pedestrian or your passengers.. Coverage is provided up to the specified limit.
d) Uninsured and underinsured motorist
This insurance covers you if you get in an accident with an underinsured driver or a driver that does not have any insurance. This insurance can protect you from being forced out of business because you got into a major incident with someone with limited coverage.
e) Physical damage
Physical damage covers the costs of repairing your truck or trailer from damage from accidents, theft, etc., when you are liable for the accident. If the truck cannot be repaired, the insurance company will replace it. This coverage is important if you don’t have the resources to fix or replace your truck after a major event. Otherwise, an accident could put you out of business.
f) Reefer breakdown
This coverage is valuable if you pull reefer loads and your equipment suffers a breakdown. It also covers you if an accident damages your reefer cargo. Many shippers and brokers that provide reefer loads and contracts ask for this clause.
g) Bob tail
Also called ” non-trucking liability,” this coverage is required for leased drivers. It covers you if you get into an accident while not under dispatch. It has two components, liability and an optional physical damage component.
h) Rental reimbursement
This clause covers the cost of renting a truck while your truck is being repaired after an accident.
i) Trailer interchange
Trailer interchange provides protection when you pull a trailer under a trailer interchange agreement. Since your company does not own these trailers, they need to be protected by this clause.
j) Non-Owned Trailer
Non-Owned trailer is very similar to a trailer interchange policy. However, it can provide more flexibility in what trailers are covered. Most often, non-owned trailer coverage is preferred by both truck owners and brokers/customers over trailer interchange.
4. Insuring your first years of operation
The hardest part of getting insurance is determining what you need and can afford. You can get the policy with a valid driver’s license, a vehicle, and the funds to pay for it.
Paying for insurance is a major hurdle for new owner-operators and small fleet owners. Most insurance companies require a minimum of two years of experience before offering their plans. Only a handful of companies work with truckers with less than two years of operations. Consequently, these policies can be costly.
Independent Owner-operators can expect to pay very high rates during their first year of operations. Assuming there are no incidents, rates usually go down by the second year. Third-year rates are usually the cheapest. Keep this in mind when working out the numbers for your company. Lastly, remember that everyone’s experience is different because it’s based on their specific circumstances. An insurance agent can give you accurate information about the expected costs in your particular case.
5. FMCSA basic requirements vs. clients requirements
In most cases, the FMCSA requires owner-operators to have a minimum of $750,000 of Bodily Injury/Property Damage (BIPD) combined single limit insurance. This type of insurance is also referred to as Primary Liability. There is one catch. Most shippers and brokers usually require higher coverage than the FMCSA. They typically require a minimum of $1,000,000 of BIPD and $100,000 of Motor Truck Cargo insurance. This requirement may also vary by clients as some may have higher requirements. Keep this in mind when determining your costs per mile and the rates you will charge per mile.
6. How to pay for insurance
Paying for insurance is always a challenge for truckers. Insurance companies require a deposit of 15% – 25% to get the policy. The remainder of the policy usually has to be paid in 8 to 10 installments. The deposit is often paid from savings. The installment payments are usually paid from the revenues of the trucking company. Making these payments can be difficult during the first years of operation because of cash flow problems.
Most shippers and brokers pay invoices net 30-60 days after receipt. However, expenses such as fuel and repairs need to be paid promptly. This situation can create a cash flow shortfall and affect your ability to make important payments, such as insurance. Ideally, your company should have a cash reserve to handle these expenses. Consider using freight factoring if your company is new or growing quickly and has a low cash reserve. This solution provides advances on your slow-paying invoices. It also provides fuel advances and other benefits. To learn more, read “What is freight factoring?“
Marco Terry is the Managing Director of Commercial Capital LLC and has over two decades of experience in asset-based finance. He has worked with small and mid-sized companies across the United States, Canada, and Australia. Marco holds a Master of Science in Finance.