Two topics have been dominating the conversation across California’s trucking industry in recent months: California Air Resources Board (CARB) regulations and California Assembly Bill 5 (AB5). As these laws take effect, trucking company owners and drivers are working to understand the laws’ impact on daily operations and their insurance programs (source 2).
Many people were unaware of the importance of the supply chain to our economy and its effects on our daily lives until the COVID pandemic made everyone acutely aware of the country’s complex supply chain challenges. California plays an enormous role in both the domestic supply chain and international trade. Two southern California ports, the Port of Los Angeles, and the Port of Long Beach, handle roughly 31% of all U.S. container-based imports and exports over water. With that kind of trade volume, it’s no surprise that environmental issues have emerged based on the flow of goods into and out of the Golden State.2
To lessen the environmental impact, the California Air Resources Board issued regulations to reduce emissions from trucks, buses, and tractor-trailers by requiring newer model engines. As of January 1, 2023, all drayage trucks over 26,000 lbs. must have engines from 2010 or later. Those entering the Port of Long Beach facilities must be 2014 or newer. A significant percentage of trucking companies are either small companies or owner-operators, and these CARB regulations create a significant burden for them, forcing many owners to make a substantial investment in new equipment or close their doors.2 The state has developed mobile devices that the California Highway Patrol can use to check emissions on the spot, at weigh stations, or at ports. Units out of compliance may be flagged via the Department of Motor Vehicles and their registration can be revoked.
Larger trucking companies are also feeling the impact as many employ small business owners or owner-operators to meet supply chain demands. In the past, some of them have stretched the law to misclassify employees as independent contractors to avoid the payment of taxes and Workers’ Compensation benefits. In an attempt to level the playing field, protect employee benefits and rights, and cope with emerging industries such as the gig economy, legislators in California also approved AB5.2
California’s AB5 law, popularly known as the “Gig Worker Bill” was originally signed into law by the Governor of California in September 2019. However, a preliminary injunction delayed enactment in 2020. In June 2022, the U.S. Supreme Court declined to hear the appeal, clearing the way for AB5 to take effect. At its core, the bill was passed to decide if a worker should be classified as an employee or as an independent contractor.1 It uses a three-pronged test to determine a worker’s classification. To be identified as an independent contractor, a worker must:
A. Be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B. Perform work that is outside the usual course of the hiring entity’s business.
C. Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.1
Unfortunately, owner-operators are not exempt from the law, and the trucking companies that utilize their services are at risk of incurring stiff fines and penalties for misclassification.1 These companies could choose to hire independent truck drivers as employees. But many drivers enjoy the benefits of running their own businesses as contractors versus being a company driver.1 From the trucking company perspective, as supply chain issues push up the cost of trucks, parts, and repairs, utilizing independent contractors was a means of saving costs in one of the only areas they still could.
LAW CHANGES PILE ON TOP OF OTHER INDUSTRY CHALLENGES
The trucking industry was already facing a massive issue around driver retention. Driver turnover can be as high as 300% annually for some companies, with most hovering near 100%. Drivers can be left feeling stuck between regulations and the companies they drive for as their needs are often not considered. Now that the pandemic is in the past, the cost of shipping goods is going down and truckers aren’t making as much money as they were. Most truck drivers are paid by the mile rather than by the hour, which doesn’t allow for the many hours spent loading and reloading.
While many drivers prefer to be classified as independent contractors, it means they receive no benefits, and all the expenses or risks associated with truck ownership fall on the truck driver, which often leads to a slim bottom line. The lease-purchase agreements offering drivers the chance to lease their truck from the company and eventually own it themselves often don’t generate the desired result. Many drivers are ultimately unable to complete the purchase. Leasing agreement costs along with all the fees associated with driving can lead to a driver actually owing the company money at the end of the work week. These issues point to the fact that there is a fundamental lack of value placed on truckers’ time that must be addressed to make truck driving a job employees want to stay in long-term.3
INSURANCE MARKET IMPACTS
It’s clear that the trucking industry isn’t as pliable or quick to adapt as some, so the compounding issues presented by California’s new laws are significant. The long-term impact of CARB regulations and AB5 on the insurance marketplace remain largely unknown. However, insurance carriers have recently seen policy counts rise and premium drop for larger fleets utilizing owner-operators. Many MGA/MGUs have also noticed a substantial increase in the number of binds directly related to single owner-operators hauling shorter distances. Unfortunately, many leased owner-operators were paying half of what is likely to be charged in the current environment, because they’re technically considered new ventures which increases premium. They also lose the purchasing power of a larger fleet.
Those that have typically managed owner-operators will also have to provide Worker’s Compensation coverage if they’re brought on as company employees. When hired on as employees, it puts drivers under the owner’s primary coverage, which increases insurance costs but makes the claims handling process cleaner. Companies will also incur the cost tied to hiring experts like CPAs and attorneys to confirm they are in adherence to the updated regulations.
With California’s high cost of living and the further pressure on wages produced by these law changes, the trucking industry has started to see an exodus of truckers from California. Because demand remains high to pick up loads outside the state, many are choosing to work elsewhere. Some are taking it as an opportunity to leave trucking behind altogether. The used truck market is busy, and it’s generally easy to sell newer model rigs. While CARB regulations inspire drivers to try to sell older units, that can be difficult as most are likely to sell to drivers in Arizona, Nevada, or Oregon who would also be operating in the Golden State. This almost forces them to sell on consignment. For those that seek to upgrade, unit pricing is extremely high, resulting in higher total insured values (TIV) and limit requests of $200K - $250K per unit. However, many carriers are unwilling to raise limits that high.
As experienced drivers walk away, trucking companies are often hiring those with less experience to stem the hemorrhage of employees and stay afloat in the face of higher tax bills and fuel prices. Unfortunately, the insurance marketplace is very limited for less experienced drivers. Some carriers amended their driver acceptability guidelines to cover those with one year of driving experience or less, which can be a big gamble. Others chose not to amend programs for that increased exposure and took a wait-and-see stance.
The situation has been exacerbated by extreme competition in the trucking space, and because money is tight, bids and load prices have decreased. Those drivers with experience that are better risks ultimately end up pushed out of the market because the pay isn’t sufficient. Most truckers don’t have the means to spend tens of thousands of dollars on a new unit. Some that want to stay in the industry have leased on to a large corporation like Walmart, offering substantial annual pay and signing bonuses, which are big incentives for those with families or other life responsibilities. All of this leaves the insurance marketplace with an influx of new, more questionable risks. Some carriers that initially adjusted programs have now changed course, likely due to the negative impact on losses. Others have completely overturned their underwriting staff or increased rates, and still others lost their rating.
The regulations also complicate renewals for those that paid for a unit they may not be operating. Even if the older unit is sold, while a driver is attempting to obtain a new one there’s a potential coverage lapse. Carriers are trying to determine just how long the lapse is, which adds another level of difficulty to policy management. Where it used to be common to see long-haul routes or drivers hauling cargo to Texas from California, the marketplace is starting to see more segmented routes. Because drivers in California need quicker turnaround, there’s been a substantial increase in short-haul or local business covering less than 100 miles.
HOW AGENTS CAN HELP
Because post-pandemic wages are down, trucking companies and drivers are making difficult choices. Many attempt to save costs by purchasing minimal insurance or by filling gaps with younger drivers which can increase claim frequency and severity. Unfortunately, hollowing out an insurance program can leave the insured on the hook for paying costly claims later.
Agents should review any coverage geared toward owner-operators and evaluate how these laws impact necessary submission data. It’s also vital that insureds collaborate with knowledgeable insurance agents and brokers, attend seminars, and visit the CARB web pages offering resources and assistance in helping businesses comply. CARB recognizes the difficulties small trucking companies are facing, and the organization has launched financing programs to help these small businesses upgrade their fleets. Companies can also apply for grants to help replace older trucks. Those struggling to comply with the timelines for replacing trucks may qualify for low mileage exemptions, keeping in mind that drayage from ports and railways is strictly regulated.
When it comes to AB5, the Employment Development Department offers seminars to help business owners navigate compliance criteria and understand the distinction between employees and independent contractors. The State of California Department of Industrial Relations also provides a searchable database to help identify port trucking companies or individuals with an unsatisfied final court judgment, tax assessment, or tax lien.2
The impact of CARB regulations and AB5 will likely have a ripple effect. Some owner-operators will look to relocate outside the state of California. Nonetheless, these laws will put further pressure on California’s capacity for current activity in and around California’s ports, creating another disruption to the nation’s already stressed supply chains.1 For truckers and their insurance agents outside California, it may be wise to start preparing—because what starts on the West Coast often rapidly moves toward the East Coast. If your business depends on trucking companies in California, it’s also a good idea to stay aware of potential equipment shortages and price increases.2
Agents looking for an ally that can help clients understand the changes to their risk profiles should reach out to your local CRC Group producer. We strive to communicate proactively, ask insightful questions, leverage data, and build strong partnerships that help agents and insureds obtain the right coverage at the best possible price.
- Brian Petersen is President of Allstar Transportation Specialists and is located in their Atlanta, GA office.
- Chad Borowski is Managing Director of American Team Managers Insurance Services and is located in their Anaheim, CA office.
- Stewart Brown is a Senior Vice President and Southwest Regional Director of Transportation with CRC Group responsible for managing transportation offices in Seattle, WA, Fresno, CA, Fort Worth, TX, Dallas, TX, and Houston, TX.
ABOUT AMERICAN TEAM MANAGERS INSURANCE SERVICES
American Team Managers Insurance Services (ATM), based in Southern California, is an insurance wholesaler and MGA serving 5,000+ independent agents throughout the country. Founded in 1998 by Chris C. Micheals, ATM focuses on establishing long-term relationships with agency partners and insurance carriers. They take great pride in delivering competitive products both for the Exclusive & Non-Exclusive markets ATM serves. Learn more about ATM here.
ABOUT ALLSTAR TRANSPORTATION SPECIALISTS
Allstar Transportation Specialists is an MGA for “A” or better-rated companies committed to owner/operators and large trucking companies. With a tradition of service and integrity, Allstar continually strives to provide customers with the highest level of service by placing coverage with high quality insurance companies focused on stable underwriting, pricing, and claims programs. Learn more about Allstar here.
- Understanding the AB5 Law, Trinity: A Burris Logistics Company, July 8, 2022. https://trinitylogistics.com/understanding-the-ab5-law/
- Trucking Becomes More Challenging In California, Forbes, December 1, 2022. https://www.forbes.com/sites/forbesbusinesscouncil/2022/12/01/trucking-becomes-more-challenging-in-california/?sh=a02ed827f90c
- John Oliver on Next-day Shipping: ‘Someone Somewhere Pays the Price,’ The Guardian, April 4, 2022. https://www.theguardian.com/tv-and-radio/2022/apr/04/john-oliver-truckers-next-day-shipping-last-week-tonight-recap
- Is a Trucking Company a Good Investment?, Boss Magazine, August 18, 2022. https://thebossmagazine.com/owning-trucking- company/#:~:text=The%20average%20net%20profit%20margin,with%20your%20 eyes%20wide%20open.
- Cost of Living in California 2022, OneMain Financial, June 1, 2022. https://www.onemainfinancial.com/resources/everyday-living/cost-of-living-in-california