Risky Business
The Power Only Problem or How Lending Your Trailers Can Be Lending Your Insurance
We just returned from our annual TRS MCIEF Conference in Orlando where Transportation Risk Specialists come together for continuing education through the Motor Carrier Insurance Education Foundation. One of our favorite speakers is Rob Moseley, Attorney with Smith Moore Leatherwood, representing one of the very best transportation law firms in the country. He brought up a topic on the risk of lending your trailer that I thought I'd share with all of you. If you enjoy reading about transportation law and how it can impact your company, be sure to follow him and request his Transportation Industry Newsletter for more interesting articles:
It is funny how there are unintended consequences to every action. When the Federal Motor Carrier Safety Administration began tightening regulations on hours of service, the beneficiary was the trailer manufacturing industry. Truckers responded to hours of service restrictions by trying to make the loading and unloading process more efficient through the means of a "dropped trailer."
Dropped trailers allow the shipper to load the trailer (or the consignee to unload the trailer) at a time that is convenient for them, without a driver having to sit and await the conclusion of the process. The extension of the dropped trailer was the "power only" concept.
Power only involves the logistics provider dropping a number of trailers at a particular location without knowledge or foresight as to who would actually pick the trailers up. When a trailer is ready to be picked up, the logistics provider decides whether to move that trailer with its own equipment or broker the load out to another carrier.
This means that there is always a possibility that any particular trailer would be hauled by a carrier other than the logistics provider. The dropped trailer model has greatly increased the number of trailers owned by motor carriers from 1 per power unit to almost 4 trailers per power unit, but that is a story for another day.
The power only program has brought to the forefront the issue of insurance coverage for all those extra trailers that are being pulled by carriers other than the owner of the trailer.
The owner of the trailer should clearly understand that its own insurance, including excess coverages, may ride the roads with that trailer. In other words, the trailer owner can find its risk management program in play for the actions of the driver who is in possession of the trailer.
A.Business Auto Policy
This is especially evident by trailer owners who are insured under a "business auto" policy. The business auto policy presents the broadest of borrowed trailer coverages.
The business auto policy defines "insured" as follows:
1. Who is An Insured
The following are "insureds":
You for any covered "auto."Anyone else while using with your permission a covered "auto" you own, hire or borrow except:
The owner or anyone else from whom you hire or borrow a covered "auto". This exception does not apply if the covered "auto" is a "trailer" connected to a covered "auto" you own.Your "employee" if the covered "auto" is owned by that "employee" or a member of his or her household.Someone using a covered "auto" while he or she is working in a business of selling, servicing, repairing, parking or storing "autos" unless that business is yours.Anyone other than your "employees", partners (if you are a partnership), members (if you are a limited liability company), or a lessee or borrower or any of their "employees", while moving property to or from a covered "auto".A partner (if you are a partnership), or a member (if you are a limited liability company) for a covered "auto" owned by him or her or a member of his or her household.
Anyone liable for the conduct of an "insured" described above but only to the extent of that liability.
The crucial language here is in Section 1b, which extends coverage to anyone "using with your permission a covered auto.'" Because trailers are "autos" under the policy, this means that anyone the owner lends a trailer to becomes an insured under the owner's policy as they use the trailer with permission. Thus, the business auto form provides almost unlimited coverage for the user of the trailer. This coverage would extend to any "follow form" excess policies in place as well. As a result, the use of a trailer exposes the entire tower of coverage for the actions of a driver who the owner of the trailer has never met.
The business auto form is primarily in use by non-motor carrier entities. For example, a grocery store that also operates trucks might be a good match for the business auto policy.
B. Motor Carrier Form
On the other hand, the motor carrier form is the policy of choice for most for-hire motor carriers. The motor carrier form defines "insured" with a slightly different approach than the business auto policy:
1. Who Is An Insured
The following are "insureds":
You for any covered "auto."Anyone else while using with your permission a covered "auto" you own, hire or borrow except:
The owner, or any "employee", agent or driver of the owner, or anyone else from whom you hire or borrow a covered "auto."Your "employee" or agent if the covered "auto" is owned by that "employee" or agent or a member of his or her household.Someone using a covered "auto" while he or she is working in a business of selling, servicing, repairing, parking or storing "autos" unless that business is yours.Anyone other than your "employees", partners (if you are a partnership), members (if you are a limited liability company), a lessee or borrower of a covered "auto" or any of their "employees", while moving property to or from a covered "auto."A partner (if you are a partnership), or member (if you are a limited liability company) for a covered "auto" owned by him or her or a member of his or her household.
The owner or anyone else from whom you hire or borrow a covered "auto" that is a "trailer" while the "trailer" is connected to another covered "auto" that is a power unit, or, if not connected, is being used exclusively in your business.The lessor of a covered "auto" that is not a "trailer" or any "employee", agent or driver of the lessor while the "auto" is leased to you under a written agreement if the written agreement between the lessor and you does not require the lessor to hold you harmless and then only when the leased "auto" is used in your business as a "motor carrier" for hire.Anyone liable for the conduct of an "insured" described above but only to the extent of that liability.
However, none of the following is an "insured":
Any "motor carrier" for hire or his or her agents or "employees," other than you and your "employees":If the "motor carrier" is subject to motor carrier insurance requirements and meets them by a means other than "auto" liability insurance.If the "motor carrier" is not insured for hired "autos" under an "auto" liability insurance form that insures on a primary basis the owners of the "autos" and their agents and "employees" while the "autos" are leased to that "motor carrier" and used in his or her business.
However, Paragraph (1) above does not apply if you have leased an "auto" to the for-hire "motor carrier" under a written lease agreement in which you have held that "motor carrier" harmless.
The motor carrier form is a slight improvement over the business auto form in that there are at least some limitations on the extension of coverage to trailer users. After Section 1(e), there is a "however" section. This eliminates as insureds several classes of motor carriers. First, 1(a) eliminates as an insured any motor carrier that self-insures. The particular exclusion is somewhat ambiguous in that it identifies a motor carrier who meets its insurance requirements by "a means other than 'auto' liability insurance." This would seem to say that a fronting policy would not eliminate a motor carrier from consideration as an insured. However, it would seem that a true self-insured under the Federal Motor Carrier Safety Administration ("FMCSA") regulations would be excluded.
The next type of motor carrier that would be excluded as an insured in the permissive use of a trailer would be a motor carrier who is not insured for hired autos under section 1(b). This seems to be an attempt by the Insurance Services Office ("ISO"), the author of the policies, to include some sort of fairness concept in the extension of coverage to users of trailers. In other words, if the user of the trailer provides hired auto coverage, then the trailer owner would be an insured under the trailer user's policy. This means that if the trailer user's policy provides coverage for the trailer owner, the ISO form would seem to extend coverage to the trailer user, but if the trailer user's policy does not extend to hired autos, then the motor carrier form would not extend coverage to the trailer user.
The result of this is that, because most small carriers would not be eligible for hired auto coverage, they would, consequently, be excluded under the motor carrier form. Most larger carriers that are insured on a premium audit basis rather than a scheduled auto basis would, as a result, be eligible for this coverage.
Unfortunately, the analysis does not end there. There is a "however" to the "however." Following Section 1(b) of the "however" clause, there is another "however" clause that says that the exclusion from the definition of "insured" does not apply if the named insured has leased an auto to a for-hire motor carrier under a written lease agreement in which the named insured has agreed to hold the motor carrier using the vehicle harmless. This should be a non-issue given that it would be extremely rare for the lessor of a vehicle to agree to hold the user of a vehicle harmless. In fact, the opposite is the typical scenario. In other words, it is normally the user of the vehicle agreeing to hold the owner harmless, not the other way around. Therefore, the exception to the exception would not be generally applicable.
C. Conclusion
The "power only predicament" is seen in a number of cases in which the trailer owner's coverage was extended to an unintended beneficiary—the user of the trailer. For example, in Stan Koch and Sons v. Great West Casualty Co., 517 F.3d 1032 (8th Cir. 2008), the court dealt with this very issue. At that time, Great West had a policy form that had very broad extensions of coverage to trailer users. The court held that the trailer was a covered auto under the Stan Koch and Sons policy and that the permissive user was an insured under the Stan Koch policy. The only consolation is that the trailer owner's coverage exceeds that of the permissive user.
As a side note, Great West has changed its policy language so that they no longer provide the broad coverage to the unintended beneficiary of the trailer user. Great West Casualty Co. v. Robbins, 2016 WL 4366769 (7th Cir. 2016). (Case No. 1:15-cv-1181). In that case, Great West's trailer coverage was found not to extend to the permissive user of a trailer.
In conclusion, motor carriers and others who lend their trailers to other entities, including other motor carriers, should exercise vigilance lest their risk management structure be extended to the benefit of permissive users. Best practices would involve the trailer owner entering into a solid trailer interchange agreement with anyone pulling those trailers. Additionally, for anyone with a sizeable exposure to lending trailers to others should consider adding an endorsement to the business auto policy or motor carrier form that restricts coverage provided to the permissive user of a trailer. There may be state law limitations on the ability to completely exclude a trailer, since most state financial responsibility laws consider a trailer to be an auto that requires insurance. However, such endorsements can be carefully drawn to carve out state law requirements. It has been the experience of the author that insurance underwriters have been reluctant to write, or even entertain discussions about, such endorsements. One thing is sure, however, the power only predicament will only continue to become more prominent.
Click here to follow Rob or review the Fall 2016 print edition of the Transportation Newsletter
Shelly Benisch, TRS CIC
Commercial Insurance Solutions Inc. (CIS)
https://www.linkedin.com/in/shellybenisch
www.MyCISagent.com