There is a lot of appeal to becoming an owner-operator. Not only do you control your own company and set your own time, but you have the freedom of choice that others who work for companies do not have. Certainly, there is a lot involved to becoming an owner-operator. Whether it be incorporating the business, coming up with a business name, or getting all your paperwork together, it isn’t a fast process.
And now there is a new consideration: COVID-19. There were plenty of people getting ready to invest in their own trucking company when the pandemic hit. What do they do now? And if you are someone considering entering the trucking business, what considerations should you make to account for the current situation?
Believe it or not, now is not a bad time to buy a truck. Most OEMs are in the midst of offering attractive incentives to boost sales. From deferred initial payments, to reduced costs on extended warranty packages, to relaxed down payment requirements, they are pulling out all the stops.
Dealers are also sitting on a huge backlog of 2020 model year trucks. Meanwhile, they must make way for 2021 models. This presents a dilemma and an opportunity for those looking to make a purchase. With interest rates low on loans, now is also not a bad time to investigate financing a vehicle purchase or beginning a trucking operation. Still, that does not mean there are no pitfalls.
Keep an Eye on Insurance
If someone wants to start a trucking company, they need to be an owner-operator contracted to a fleet to get insurance. The problem there is that most of the insurance companies that will write a policy for a new owner-operator, they want to see that the business been incorporated for three years, have had their CVOR for a few years, that they had some kind of fleet experience with the same equipment configuration and air-mile radius.
So, what can you do? First, investigate a lease with a fleet that runs the same lanes and commodities. Premiums are simply too high for many to afford when entering the market. But how do you discern between policies? Consider the following questions:
- Is the fleet policy deductible?
- Is the premium contributory by the fleet, or borne solely by the owner-op?
- Is deductible buy-down available? Does the fleet have an alternative insurance program?
Another benefit of signing on with a fleet is the insurance is bundled with other fees and perks. This could include streamlined permitting; plates; fuel cards, and more. What do you get out of this? Also, signing with a safe fleet ensures the owner-operator gets the benefit of the lower premiums they’ve earned through their overall fleet safety performance. Still, insurance is not the only thing fledgling trucking companies need to worry about.
Legal Settlements and Nuclear Verdicts
Have you heard of “nuclear verdicts?” A nuclear verdict is defined as a jury award in which the penalty exceeds $10 million, though this is the base definition. In reality, there are several alternate definitions that are a bit more complex, depending on the circumstances. Nuclear verdicts have an appropriate name, as their effect can be akin to a nuclear bomb going off. In business terms, they can be catastrophic.
What makes nuclear verdicts totally unique? Well, nuclear verdicts are disproportionate in terms of having little to no relation to a plaintiff’s actual economic damages. This opens the window to huge verdicts that cripple companies. In a nuclear verdict, most of the award is due to punitive and compensatory damages. This results in particularly high jury awards, which can cripple companies.
Nuclear verdicts have not gone away. If anything, they have become an even more persistent theme in trucking over the past several years. Because of it, the pressure is now on motor carriers from rising insurance premiums.
Skyrocketing insurance premiums and nuclear verdicts are often cited in when a fleet goes bankrupt. In many cases, they are listed as the primary cause. In addition, the growing trend of juries awarding nuclear verdicts have forced some insurance providers to exit the trucking industry altogether. As insurance companies leave the marketplace, their competitors tighten the belts and shift strategies. Many times, this results in higher rates across the board for trucking companies.
Legal settlements and nuclear verdicts make it much harder for trucking companies to obtain affordable insurance. This is a big problem for small motor carriers and new entrants trying to make being an owner-operator work. Fortunately, trucking companies that operate with extensive safety programs, utilize technology, and invest in risk financing avoid high insurance costs.
Even more, premiums have been rising consistently for the past several years and it is hard to see where the ceiling is. This is the case even though the number of deaths and injuries from accidents involving large trucks have been declining. Today, they are down double digits from year-over-year, and we have seen this trend consistently in the data.
Tighten Up Your Operation
It is easy to get down with all the red tape involved. But rather than get upset about how unfair it seems, as yourself the following questions: How do I outsmart this market? How can I do something different so I can have a lower cost of risk than my competitor?
You need to differentiate yourself. And the big reason is nuclear verdicts. The insurance industry is grappling with the fallout of nuclear verdicts and trucking companies are in the crosshairs for big rate increases. Fortunately, there are absolutely things trucking companies can do here to take control of the situation in an uncertain environment.
Trucking companies need to look at the data and all the variables that could impact insurance rates and deductibles. In many cases, insurance companies want you to load them up with all the risk. The thing is, you’ll be paying for it when the premium comes due. This is especially true for large motor carriers, but there is often a point where you should take on some small level of risk.
In addition to partnering in lease arrangements with large carriers, small trucking companies can also use group captives or just deal with higher deductibles. If you’re managing risk the right way but have a low-deductible policy, you could get eaten up by the market. It is difficult to compete in those situations. But if you are buying a large deductible policy or self-insured but cutting corners on risk management, you’re going to pay more over the long term.
That is why it is important to ensure you are properly managing risk. As a new trucking company, even the smallest incident could put you out of business. Safety culture at any motor carrier must start at the top. And if you are an owner-operator, you are at the top. Stay on top of safety trends, know your vehicle(s) inside and out, and ensure you are complying with state laws and regulations, especially if you operate over state lines.
Consider the Fundamentals
Like starting any busines, becoming an owner-operator and working in the transportation sector requires careful planning. You need to do everything from writing a business plan to legally establishing your company and obtaining the necessary business licenses and permits. This requires quite a bit of initial setup and capital expense.
We would never advise anyone to set out creating their own trucking company until they’ve had a couple of years out on the road as a company truck driver with time under their belt. You should have a good understanding of how trucking works behind the wheel on an every-day basis. You also need to have good overall knowledge of the trucking industry and how it works.
Everything from rates to capacity should be on the table, especially in the time of COVID. The rules of the trucking industry are shifting as we move increasingly into the direction of e-commerce and virtual living. There are new protocols to follow and safety and hygiene recommendations to keep in mind. Staying safe out on the road has become more important than ever. The very future of your business could be at stake if you do not properly manage risk.
Finally, a good knowledge of the economy in general and how trucking fits in is especially important as you get your business off the ground. Keep your finger in the wind to stay on top of trends, technologies, and new regulations. Starting a new trucking company is rewarding, even in the age of COVID-19. Manage risk well and keep an eye on costs to get a good start.