Safety rating system brings insurance nightmare for some operators

Api Dogan had no idea when he purchased 10 late-model motorcoaches in March 2018 that he would spend the next year in insurance hell. Or that he would lose hundreds of thousands of dollars and nearly go bankrupt—all of which could have been avoided.

Dogan, owner of Infinity Transportation Management in Chicago, is among a small percentage of motorcoach operators who lose their liability insurance after their safety rating is downgraded from “satisfactory” or “no rating” to “conditional” by the Federal Motor Carrier Safety Administration.

Cancellation or non-renewal of an operator’s insurance by one of the six standard insurance companies that offer motorcoach policies pretty much shuts the operator out of the standard insurance market until it can get its rating back to satisfactory. Such operators are forced into the secondary insurance market where companies are willing to write policies for carriers with conditional ratings. In return they charge exorbitant rates that can raise an operator’s premiums five-fold.

“Just off the top of my head, I’d say about five percent lose their satisfactory ratings,” said Tom Foley of Transportation Insurance Brokers, which specializes in finding insurance policies for motorcoach operators.

Foley said it is “not as uncommon as one would think” for operators to lose their insurance because of safety rating downgrades stemming from crashes or a pattern of violations discovered during a compliance review.

“That means it is pretty tough to get insurance for years, until you get your rating back,” he said.

Violations that can lead to a conditional rating include commercial driver’s license standard violations, inadequate levels of financial responsibility, the use of unqualified drivers, improper use and driving of motor vehicles, unsafe vehicles operating on the highways, failure to maintain accident registers and copies of accident reports, the use of fatigued drivers and inadequate inspection, repair and maintenance of vehicles.

Ken Presley, the United Motorcoach Association’s vice president of industry relations and chief operating officer, said the key to avoiding a conditional rating is to stay in compliance with federal regulations, avoid crashes and work with competent insurance brokers and consultants both before and after problems occur.

“Using the Safety Management Cycle as a template, should you discover internal compliance controls are inadequate, one of the many tried-and-true consultants can often help you to quickly get back on track,” Presley said. “It’s a much better use of a consultant’s time to assist keeping you in compliance than trying to get things back on track after you have received a rating downgrade to ‘conditional.’”

Presley advised operators that have incurred a catastrophic loss or a series of smaller crashes to “deal with it now and don’t wait 45 days before your insurance renewal date only to find out your insurer is non-renewing your insurance and you are out of time and options.”

In Dogan’s case, he worked with an insurance broker with no experience in conditional ratings and a consulting company that was unable to get his rating upgraded. His problems began when, shortly after the 10 coaches were delivered to Infinity and before they were placed in service, the U.S. Department of Transportation showed up to conduct a safety inspection. The USDOT inspectors failed eight of the motorcoaches because they had air leaks in their brake systems, and that led to Infinity’s FMCSA safety rating being downgraded to “conditional.”

“I called my insurance agent and he made it sound like it was no big deal because we had a great safety history,” Dogan said. “He told me not to worry about it.”

But Dogan still wanted to erase the conditional rating because it could cause potential customers to avoid the operator over safety concerns. He contacted the company that sold him the buses, which agreed to hire a consultant to work on restoring Infinity’s satisfactory rating. However, after 10 months and no resolution by the consultant, Dogan got a call from his insurance agent, who told him his insurance company was not going to renew Infinity’s liability policy because of the conditional rating, leaving him 30 days to upgrade the rating or find another insurance company.

“We were going crazy,” Dogan said. “We thought we would have to shut down.”

Infinity ended up with an insurance policy from one of the companies belonging to the National Indemnity group of insurers. National Indemnity, a subsidiary of Berkshire Hathaway Inc., writes policies for operators with conditional ratings and is known for charging sky-high premiums. He went from paying $10,000 per bus to $45,000. His total premium was $1.7 million for a year, and he had to put $400,000 down.

But Dogan didn’t give up. He found another transportation consultant, CDL Consulting, which appealed Infinity’s conditional rating and within 45 days was able to get the rating upgraded.

He was lucky. Justin Seyl, certified director of safety for Chicago-based CDL, said USDOT approves only about half of upgrade requests nationally, and in some states officials are up to 15 months behind in reviewing such requests because they are understaffed, “or they say they are understaffed because they want the companies to go out of business.”

“It’s an unfair system,” Seyl said. “It’s insane what DOT and insurance companies can do to these carriers.”

Dogan also hired Foley as his broker to help find a new insurance policy. Foley managed to get Infinity a policy that reduced his premium to $15,000 per motorcoach. He is still trying to get a refund from National Indemnity.

Dogan said that since his problems, he has learned to stay in close contact with his insurance broker so there will be no more surprises.

Alan Robinson of R&W Motorcoach in Atlanta could have used that information five years ago after one of his drivers crashed his bus into the back of a tractor-trailer. It was the company’s first large insurance claim, and a month after the accident his insurance company renewed his policy, so Robinson figured everything would be fine. Then, a year later, his insurer notified him that his policy wouldn’t be renewed, something he compares to a kiss of death because standard insurance companies then won’t touch you.

He is now insured by a state-assigned risk pool, which is considered a step above National Indemnity but still expensive. Robinson’s premiums doubled on the company’s four motorcoaches.

“It’s a struggle,” he said. “I can’t hire or buy buses. But we will survive. We are doing all we can to stay in business.”

Roy Phifer of Vision Express in Montgomery, Alabama, has faced a similar struggle since one of two buses he had just purchased was stopped en route to his office. The driver didn’t have paperwork proving that the seller had inspected the bus, so Vision was given a conditional rating and lost its insurance.

The company’s premium from a secondary market insurer doubled and it had to sell two of its six buses and lay off drivers.

“If I had known that this is the game they play, I would have been more prepared,” Phifer said. “Now I’m busy keeping afloat and keeping the fleet maintained.”

Infinity, R&W and Vision are managing to stay in business, but not all operators hit by insurance increases are so fortunate. The last resort for operators who can’t find another company to insure them or who can’t afford the premium increases is to shut down.

That happens most often to small operators who can’t recover financially from a safety rating downgrade. Although no one in the industry can point to an exact number of such operators because they just quietly disappear, industry insiders estimate that as many as 20 percent of operators that get a ratings downgrade close up shop.

“I recently spoke with a guy that had a shock loss last fall,” Presley said. “His insurance company had just let him know they were non-renewing. He is a small fleet operator that has been around for years and is probably going to lose his company. Ideally he should have had his ducks in a row before the end of 2018.”

 

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