Owner Operator Insurance 101 – Lease Agreement Requirements

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In today’s ultra-competitive marketplace the stakes are higher than ever. One poor decision can prove fatal to the business aspirations of the ill-prepared entrepreneur. Careful planning and meticulous attention to detail are requisite to success. Nowhere else is this more true than in the world of the independent contractor. Without the large cash reserves associated with the corporate world, the success of the individual Owner Operator is in constant jeopardy. This article is the first in a series aimed at explaining some lesser known facts that can help you make better business decisions right from the start and build a more secure foundation for your business.

For an Owner Operator looking to break into the trucking business, it is often more economically feasible to start out running under a larger motor carrier’s operating authority. Keep in mind that not all motor carriers operate the same way, and not all motor carriers may operate with your best financial interest in mind. If you allow yourself to get caught up in “just getting signed on somewhere” and forget to read the fine print, you may be setting yourself up for failure.

When negotiating your rate per mile and reviewing your lease agreement with a motor carrier there are a few things that you should take into consideration in order to better manage your exposure to financial threats and ensure your overall profitability.

What expenses are they passing on to you, and do they use an escrow?

It is not uncommon for a motor carrier to share some or even all of the deductibles on their Auto Liability and Cargo Insurance with you, the owner operator. They can do this in one of two ways. They can either pass the responsibility for the deductibles directly on to you through your lease agreement, or they can withhold money out of your settlement in an escrow account. This means that in addition to the standard $1000 deductible you already have on your Physical Damage policy, you could also be responsible for up to $2500 each, or more, on your motor carrier’s Liability and Cargo policies. They can also escrow money above and beyond the deductible amounts for a variety of other purposes including taxes, permits or even fuel advances.

You can minimize your risk of incurring the insurance related expenses by using Deductible Buyback coverage. Deductible Buyback allows you to combine all of the deductibles you are responsible for and reduce them to one smaller amount, typically $500. Otherwise, pay attention to the use of escrow accounts and be sure to monitor how much they have held. If and when you terminate your lease, you will likely have to ask for that money back or risk losing it completely.

What insurance can they actually require you to carry and what should you carry?

The simple answer here is that they can require you to carry any coverage their risk managers see fit. Although the state you live in may not specifically require you to carry certain coverages, the motor carrier can make those requirements a provision of signing a lease agreement. You are an independent contractor choosing to enter a mutual agreement with the motor carrier. By signing the lease agreement you are saying that you understand and choose to accept their requirements, whatever those may be. The most common insurance they will require will be some sort of personal injury protection.

However, any insurance coverage that they may require you to carry is most likely aimed at reducing their exposure to the risk of you passing expenses onto them. Since these expenses would initially be yours, it is in your best business interest to carry the coverage.

The more common and more affordable form of personal injury protection is called Occupational Accident or Occ Acc. Occ Acc is similar to Workers Compensation in that it covers you or your driver for medical expenses resulting from work related injuries. A typical Occ Acc plan will carry some amount of disability coverage as well. The main difference between Occ Acc and Work Comp is that an Occ Acc policy has a specific pre-determined limit of coverage ($500K, $1 million, etc). Work Comp limits are determined by individual state statutes.

What form of liability coverage are you required to carry on yourself?

When you are leased to a motor carrier and operating your truck “in the business of trucking” you are covered by their Auto Liability coverage. Also known as Primary Liability, this coverage insures you and the motor carrier for property damage and bodily injury that you cause to another party and for which you are liable. Since your truck is a commercial vehicle designed for the business of pulling freight, Primary Liability covers it most of the time. However, since you own the truck, there will be times when you may use it for things other than “the business of trucking”. Because of this, it is important to carry a secondary form of liability coverage.

Usually referred to as “bobtail” coverage, there are actually several different forms of secondary liability coverage that can be used. Your motor carrier may require a specific form, so it’s important to understand the difference.

Non-Trucking Liability, NTL: Covers you when you are “not in the business of trucking”. It does not specify whether you are pulling a trailer or bobtail.

Bobtail Liability: Covers you when you are bobtail. It does not specify whether or not you are in the business of trucking.

Unladen Liability: Covers you when you are not loaded. Does not specify whether you are bobtail or deadhead or if you are “in the business of trucking” or not.

Note that these are all liability coverage. This is only coverage on you to pay to other people for bodily injury and property damage that you may have caused. This coverage will never pay you for damage to your own equipment. Damage to your equipment is covered by Physical Damage coverage. Most motor carriers don’t have requirements on your Physical Damage coverage, but it is still a good business decision to have it.

Understanding these different forms of coverage is extremely important to an Owner Operator when entering a lease agreement. Before signing your name on the dotted line, ask yourself the questions presented in this article and consider which of the different forms of insurance could apply to you. Investing in the right kinds of coverage early on can help you minimize your risk of facing catastrophic financial situations down the road. As evident in today’s business economy, it is better to be financially proactive and prepared than to wait for disaster to arrive.

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Source by Jake Folger