Qualifications of Motor Carriers To Self-Insure Their Operations and Fees To Support the Approval and Compliance Process

DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

49 CFR Part 387

[FHWA Docket No. MC-97-11]

RIN 2125-AE06

Qualifications of Motor Carriers To Self-Insure Their Operations

and Fees To Support the Approval and Compliance Process

AGENCY: Federal Highway Administration (FHWA).

ACTION: Advance notice of proposed rulemaking (ANPRM); request for

comments.

-----------------------------------------------------------------------

SUMMARY: This action is being taken pursuant to the ICC Termination Act

of 1995 (ICCTA), which, among other things, directs the Secretary of

DOT to adopt regulations governing the standards to approve motor

carriers as self-insurers. The FHWA proposes to examine the sufficiency

of the existing requirements for self-insurance authorizations, as well

as the need for additional fees for functions performed in addition to

the processing of the initial application. More specifically, the FHWA

is considering the need for fees to cover costs associated with

processing multi-carrier applications and alterations to self-insurance

authorizations, and for a monitoring fee to cover costs related to

compliance responsibilities. The FHWA also requests public comment on

the merits of continuing the self-insurance program and whether

congressional action should be proposed to terminate the

authorizations.

DATES: Comments must be received on or before November 24, 1997.

ADDRESSES: Submit written, signed comments to FHWA Docket No. MC-97-11,

Room 4232, HCC-10, Office of the Chief Counsel, Federal Highway

Administration, 400 Seventh Street, SW., Washington, DC 20590. All

comments received will be available for examination at the above

address from 8:30 a.m. to 3:30 p.m., e.t., Monday through Friday,

except Federal holidays. Those desiring notification of receipt of

comments must include a self-addressed, stamped postcard.

FOR FURTHER INFORMATION CONTACT: John F. Grimm, Office of Motor

Carriers, (202) 366-4039 or Stanley M. Braverman, Motor Carrier Law

Division, Office of the Chief Counsel, (202) 358-7035; Federal Highway

Administration, 400 Virginia Ave., SW, Suite 600, Washington, DC 20024.

Office hours are from 7:45 a.m. to 4:15 p.m., e.t., Monday through

Friday except Federal holidays.

SUPPLEMENTARY INFORMATION:

Background

The former Interstate Commerce Commission (ICC), in its earliest

days of motor carrier regulation, considered applications of carriers

seeking authority to self-insure their operations. The ICC took the

position that self-insurance requirements should be stringent and that

carriers availing themselves of that privilege should maintain adequate

reserves to meet claims. Motor Carrier Insurance Protection of the

Public, 1 M.C.C. 45, 58 (1936).

The ICC set no rules at that time governing the qualifications for

self-insurers, but decided to consider for approval the application of

any carrier that could establish its ability to satisfy, ``its

obligations for bodily-injury liability, property-damage liability, or

cargo liability without affecting the stability or permanency of its

business.'' Id. at 59. Motor carrier requests to self-insure which were

approved by the ICC required the execution of insurance endorsements

which obligated the insurance company to pay final judgments regardless

of any policy defenses it may have against the insured. Id. at 53. The

self-insurance was based upon deductible levels in the insurance

policies which were authorized by the ICC. Despite the size of any

deductible, the insurance company remained liable to the public for the

entire amount of the policy. Although the ICC considered use of

deductibles to be tantamount to self-insurance, the motor carrier would

be fully insured since the insurance company remained liable for the

entire amount of the policy. The self-insurance authorization posed no

additional risk to the public because the insurance company would be

required to pay a judgement, without regard to the deductible, if the

carrier refused to pay.

In response to an insurance crisis in the motor carrier industry in

the mid 1980's which increased the cost of insurance coverage to

extraordinary levels and affected its availability, the ICC began

authorizing carriers with adequate financial resources to self-insure

all, or part of, their required liability coverage backed by adequate

security without the public protection provided by the traditional

insurance company endorsement.1 The ICC recognized that

self-insurance plans do not necessarily afford the precise level of

protection that customary insurance plans provide since insurance

policies cover liability for every accident within the policy limits.

Nevertheless, the ICC began issuing self-insurance authorizations

subject to an extensive series of conditions designed to insure that

the public would be protected from uncompensated losses. See, No. MC-

128527, May Trucking Company (unpublished decision), served April 22,

1986. (See Appendix to this ANPRM.). Interim rules designed to

establish minimum criteria that motor passenger and property carriers

must meet to qualify as self-insurers were adopted by the ICC. Ex Parte

No. MC-178, Investigation into Motor Carrier Insurance Rates, served

April 12, 1986 (51 FR 15008, April 22, 1986). Final rules were adopted

which included application guidelines covering the adequacy of the

carrier's net worth, the existence of a sound self-insurance program, a

``satisfactory'' safety rating, and additional information the ICC

might require. Investigation into Motor Carrier Insurance Rates, 3

I.C.C. 2d 377 (1987) (52 FR 3814, February 6, 1987).2 The

ICC expanded the list of methods carriers can use to demonstrate sound

self-insurance programs to include irrevocable letters of credit and

irrevocable trust funds. Id. at 388. In reviewing self-insurance

applications, the ICC relied on its general powers to impose conditions

on a case-by-case basis to insure that the public was adequately

protected. Id. at 383. The requirement of an irrevocable trust fund or

letter of credit in at least the amount of the self-insurance liability

has been imposed in virtually all self-insurance authorizations.

---------------------------------------------------------------------------

\1\ The minimum financial responsibility requirements for for-

hire carriers, formerly regulated by the ICC and now by the FHWA,

are contained in 49 CFR Part 387.

\2\ These rules are now codified at 49 CFR 387.309 [former 49

CFR 1043.5].

---------------------------------------------------------------------------

The ICCTA, Pub. L. 104-88, 109 Stat. 803, provides that ``[T]he

Secretary of Transportation shall continue to enforce the rules and

regulations of the Interstate Commerce Commission, as in effect on July

1, 1995, governing the qualifications for approval of a motor carrier

as a self-insurer, until such time as the Secretary finds it in the

public interest to revise such rules.'' Section

[[Page 49655]]

104(h) amending 49 U.S.C. 31144. The revised rules must provide for the

continuing ability of motor carriers to obtain self-insurance

authorizations, and the continued qualification of all carriers

conducting self-insured operations pursuant to grants issued by the ICC

or the Secretary. Id Section 204 of the ICCTA provides that all

regulations previously issued by the ICC continue in effect according

to their terms until modified or terminated.

Request for Comments

The purpose of this ANPRM is to obtain comments from motor

carriers, insurance companies and other interested persons to determine

whether the public is adequately protected against uncompensated

losses.

The self-insurance regulations require each applicant to

demonstrate that it has established and will maintain an insurance

program that will protect the public against all claims to the same

extent as if the carrier maintained commercial coverage in the

prescribed amounts. 49 CFR 387.309. In support of such a program, the

carrier may make use of irrevocable letters of credit, irrevocable

trust funds, reserves, sinking funds, third party financial guarantees,

parent company or affiliate sureties, excess insurance coverage, or

other similar arrangements. Id. The FHWA is concerned with the

widespread use of letters of credit to support self-insurance programs

and seeks public comment on whether these instruments provide the

intended claims protection, especially when a carrier has terminated

its self-insured operations and is no longer obligated to maintain this

letter of credit as security for the claims which accrue during the

self-insurance period. Generally, the ICC, as well as the FHWA, has

permitted carriers to support their self-insured operations with either

an irrevocable letter of credit or an irrevocable trust fund in the

amount of the self-insurance liability. The FHWA requires that the

carrier maintain the trust fund until all cognizable self-insurance

claims are resolved. No such condition is attached to the letter of

credit because of the nature of the instrument. Carriers can terminate

their self-insured operations by discontinuing all operations, by

relinquishing the self-insurance authorization and obtaining commercial

coverage, or by violating a condition of the authorization such as

losing the required ``satisfactory'' safety rating. In each situation,

all cognizable self-insurance claims arising during the period of self-

insured operations cannot be identified when the operations are

terminated. The trust fund condition is designed to protect the

potential claimants when self-insured operations are terminated. See

No. MC-8535, George Transfer-Application to be a Self-Insurer

(unpublished decision), served September 24, 1986. (See Appendix to

this ANPRM.) The letter of credit cannot provide this type of

protection and, by its nature, is of questionable value as a back-up

security.

Accordingly, the FHWA solicits comments regarding the elimination

of the use of letters of credit in support of self-insured operations

and the requirement, in all cases, of the maintenance of an irrevocable

trust fund which must remain in place and fully funded until all

cognizable self-insurance claims have been resolved.

The FHWA seeks public comment on the need to increase the amount of

back-up collateral maintained in the letters of credit or trust funds.

As a general rule, these instruments are executed in the amount of the

self-insurance authorization, and adjustments to reflect additional

claims exposure are not requested. Should additional security be

required as the level of unpaid claims increases? Should the scope of

the carrier's operations be considered in determining the level of

collateral or back-up security?

The FHWA also requests public comment on the sufficiency of the

reporting requirements that self-insured carriers must meet with

respect to bodily injury and property damage (BI&PD) claims. Generally,

each carrier must submit quarterly and yearly claims handling and

financial data. This information forms the basis of the FHWA's

monitoring and compliance program which now is designed to insure

compliance with the terms and conditions imposed by the FHWA. The

compliance review, however, does not include a verification of the

carrier's claims reserves, a function that can only be performed by a

professional risk analyst. In the FHWA's view, the absence of this

information may create a potential risk for claimants. Accordingly, the

FHWA requests comments on whether a self-insured carrier should be

required to submit a yearly certified BI&PD claims report. The report

would indicate that the yearly claims reserves accurately represent the

best estimate of the carrier's liability. This report could be prepared

by the carrier's excess insurance provider or any organization

qualified to conduct such an analysis. Comments are also solicited on

whether the FHWA should impose such a requirement on carriers that

obtained their authorization before the effective date of the ICCTA.

Section 387.309 of title 49, CFR, provides that ``any self-

insurance authority granted by the Commission [now the FHWA] will

automatically expire 30 days after a carrier receives a less than

satisfactory rating from DOT.'' The FHWA is considering whether to

extend that period to 45 days to enable safety inspectors time to

evaluate the corrective measures taken by the carrier after the less

than satisfactory rating was assigned. This would in no way alter the

FHWA's insistence that all self-insured carriers maintain

``satisfactory'' safety ratings. See No. MC-176440, Direct Transit,

Inc., Authorization to Self-Insure (unpublished decision), served

February 8, 1996. (See Appendix to this ANPRM.).

Proposed New Fee Items

The FHWA dedicates resources to make certain that the carriers

authorized to conduct self-insured operations are complying with the

conditions imposed in their respective authorizations. This involves a

thorough review of claims and financial data submitted generally on a

quarterly and yearly basis. In some instances, the data must be

submitted on a monthly basis. Detailed reports of these reviews are

prepared and analyzed. In addition, where financial problems call a

carrier's continuing ability to self-insure into question, considerable

time is devoted to determining whether additional safeguards should be

imposed or whether the authorization should be terminated. Any trends

in the carrier's exposure to BI&PD claims must be scrutinized.

Furthermore, review and analysis of the proposed certified claims

report would add to the monitoring duties. None of the costs of these

duties is recovered from the current application fees. Accordingly, the

FHWA is considering a $1900 yearly monitoring fee on each carrier

conducting BI&PD self-insured operations which represents only the

FHWA's current estimate of the salary and overhead costs for agency

employees to monitor compliance with the conditions in the self-

insurance authorizations.

The FHWA solicits public comment on the need to recover costs

associated with performing additional processing activities beyond the

handling of a single carrier application. Considerable resources of the

former ICC and the FHWA have been expended in dealing with multiple

carrier applications and requests to modify outstanding authorizations

by changing the self-insurance coverage, altering the type

[[Page 49656]]

and amount of the security coverage, or adding a carrier to the self-

insured group. In many instances, these modification requests require

an extensive reanalysis of the carrier's financial condition if

additional self-insurance authorization is requested. The financial

analysis of carrier groups and their parent corporations is often

complex and time-consuming. Detailed examination of intercorporate

transactions as well as the asset quality of intercorporate receivables

and debt (including covenants) must be conducted. Accordingly, the FHWA

solicits comments on the need to assess fees in three categories: (1)

Request for an increase in coverage, change in the letter of credit or

trust agreement, reporting requirements or other modifications--

($2,600); (2) addition of a single carrier to an existing

authorization--$3,400; and (3) multiple carrier applications or

modification of applications--($400 per carrier). These costs represent

only the salary and overhead expenses associated with the FHWA

employees who perform these functions.

The FHWA requests comments concerning whether continuing to permit

motor carriers to self-insure their operations is in the public

interest or whether congressional action should be requested to repeal

the statute directing the Secretary to continue the self-insurance

program. In this regard the FHWA proposes the following specific

questions for comments:

1. Does the self-insurance authorization jeopardize the payment of

BI&PD and cargo claims by allowing carriers to conduct operations with

insufficient security or collateral to guarantee payment of claims?

2. Does the ability of large carriers to conduct self-insured

operations create an unfair competitive advantage over smaller carriers

which must absorb the expense of the Federal insurance requirement?

3. Should the FHWA permit a motor carrier to conduct self-insured

operations with less security or collateral than an insurance company

would require?

4. Do the savings generated by self-insured operations justify

exposing the public to the risk of uncompensated losses resulting from

carrier bankruptcy or termination of operations?

5. Is it possible for the FHWA to conduct the self-insurance

program in a manner that insures the potential claimants will not be

placed at risk?

6. Is the administration of a self-insurance program a proper role

for a Federal agency?

Executive Order 12866 (Regulatory Planning and Review) and DOT

Regulatory Policies and Procedures

The FHWA has determined that a decision to seek termination of the

self-insurance program would be a significant regulatory action under

Executive Order 12866, and under the DOT's regulations, policies and

procedures because of the substantial public interest anticipated in

this action.

Currently, 56 carriers have been authorized to self-insure their

operations, 9 of which have authorizations which cover only cargo

liability. The gross revenues generated by carriers holding the BI&PD

authorizations range from $8,396,000 to $1,207,601,000, or an average

of $174,345,468. These carriers are exposed to an average claims

balance of $3,412,882. The vast majority of these carriers self-insure

at the $1,000,000 level which corresponds to the required level of

coverage.

The potential economic impact of this rulemaking is not known at

this time. Therefore, a full regulatory evaluation has not yet been

prepared. The FHWA intends to use the information collected from

commenters to this docket to evaluate the economic and other issues

attendant to this regulatory action.

Regulatory Flexibility Act

Due to the preliminary nature of this document and lack of

necessary information on costs, the FHWA is unable at this time to

evaluate the effects of the potential regulatory changes on small

entities. The FHWA solicits comments, information, and data on these

potential impacts.

Executive Order 12612 (Federalism Assessment)

This action has been analyzed in accordance with the principles and

criteria contained in Executive Order 12612, and it has been determined

that this action does not have sufficient federalism implications to

warrant the preparation of a federalism assessment.

Executive Order 12372 (Intergovernmental Review)

Catalog of Federal Domestic Assistance Program Number 20.217, Motor

Carrier Safety. The regulations implementing Executive Order regarding

intergovernmental consultation on Federal programs and activities do

not apply to this program.

Paperwork Reduction Act

This action, if promulgated, would, in all likelihood, impact

existing collection of information requirements for the purposes of the

Paperwork Reduction Act of 1995 (49 U.S.C. 3501-3520). Because of the

potential changes, existing Office of Management and Budget (OMB)

approvals may require amendment or new approvals may need to be

obtained. Requiring an annual BI&PD claims report should not

appreciably add to the existing paperwork burden because the carriers

are currently required to submit the claims information. However, a

certification requirement will likely increase the costs associated

with the preparation of the claims report.

National Environmental Policy Act

The agency has analyzed this action for the purpose of the National

Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) and has

determined that this action would not have any effect on the quality of

the environment.

Regulation Identification Number

A regulation identification number (RIN) is assigned to each

regulatory action listed in the Unified Agenda of Federal Regulations.

The Regulatory Information Service Center publishes the Unified Agenda

in April and October of each year. The RIN number contained in the

heading of this document can be used to cross reference this action

with the Unified Agenda.

List of Subjects in 49 CFR 387

Commercial motor vehicles, Hazardous materials transportation,

Highways and roads, Insurance, Motor carriers, Motor vehicles safety,

Penalties, Reporting and recordkeeping requirements, Surety bonds.

Issued on: September 11, 1997.

Gloria J. Jeff,

Acting Administrator.

Appendix

[The Appendix to this ANPRM should include the full text of the

following three cases: (1) No. MC-128527, May Trucking Company

(unpublished decision), served April 22, 1986; (2) No. MC-8535,

George Transfer-Application To Be A Self-Insurer (unpublished

decision), served September 24, 1986; and (3) No. MC-176440, Direct

Transit, Inc., Authorization to Self-Insure (unpublished decision),

served February 8, 1996].

Interstate Commerce Commission

[Decision No. MC-128527; Service Date: April 22, 1986]

May Trucking Company--Application To Be a Self-Insurer

Decided: April 16, 1986.

Subject to certain conditions, applicant authorized to self-

insure bodily injury and property damage liability.

[[Page 49657]]

Summary of Decision

In this decision, the Commission is granting the application of

May Trucking (May) to self-insure, under 49 U.S.C. 10927 and 49

C.F.R. 1043.5(a), its bodily injury and property damage liability

subject to certain conditions.\1\

---------------------------------------------------------------------------

\1\ The Commission's grant of this authority does not release

May from its obligation to meet the financial responsibility

regulations of the Department of Transportation (DOT). In this

regard, we take official notice of May's recent filing with the DOT

requesting a waiver of DOT's requirements to allow the carrier to

self-insure.

---------------------------------------------------------------------------

Background

In an application filed September 30, 1985, May Trucking Company

(May) requested that the Commission allow it to act as a self-

insurer for bodily injury and property damage (BI&PD) claims. No

protest were filed. In a decision served December 9, 1985, May's

application was denied by a majority of the Commission,\2\ without

prejudice to refiling by the carrier. On December 30, 1985, May

filed a Petition to Reopen, requesting that the Commission vacate

the prior decision and approve the application for self-insurance.

---------------------------------------------------------------------------

\2\ Although the prior decision is styled as also denying May's

application to self-insure its cargo liability, May takes clear in

the Petition to Reopen that it does not request such authority.

May's Petition to Reopen, P. 7, note 3.

---------------------------------------------------------------------------

May's initial application and supplemental petition reveal that,

as an irregular route common carrier of general commodities, it

operates 275 tractors (175 of which are leased from owner-

operators), and 550 trailers. It specializes in the transportation

of frozen vegetables, dry grocery products, boxed meat, dairy

products and paper goods and handles no highly hazardous materials.

Its headquarters facility and terminal is located at Payette Idaho.

It also has a terminal at Salem, Oregon, and one planned at Salt

Lake City, Utah. The only direct employees of May are the Management

and Administrative personnel. An unspecified number of company

drivers are employees of Drivers' Employment Services, a wholly-

owned subsidiary.\3\ May is currently rated ``satisfactory'' by the

Department of Transportation, Federal Highway Administration. As

pertinent, May presently has a $3,000 deductible public liability

policy and processes its own claims for collision and property

damage liability under $5,000. In addition, United States National

Bank of Oregon (National Bank) has established a $1 million credit

line in the name of May which it indicates is dedicated to fund

liability claims brought against the applicant.

---------------------------------------------------------------------------

\3\ May's 1984 Annual Report filed with the Commission fails to

identify this company as an affiliate. However, we will require

applicant to file information on any affiliate whose business is

supportive of the operations of May trucking.

---------------------------------------------------------------------------

As of December 31, 1984, May's financial statements reflect

total assets of $9.0 million, including $5.2 million in current

assets, of which $628,000 was reported as cash or cash equivalents.

Its current liabilities amounted to $4.0 million and its total

stockholders' equity was $3.4 million. (During 1984 it retained

after-tax earnings of $700,000, bringing its retained earnings

balance to $3.4 million). Its freight revenue in 1984 was $32.3

million out of its $41.2 million operating revenue, while its

operating expenses amounted to $40.1 million. This yielded $1.0

million in operating earnings and net earnings of $700,000.

While not a part of the application, the quarterly financial

report (QFR) filed by May for the fourth quarter 1985, shows that

for 1985, the carrier generated a net operating profit of $172,000,

down sharply from the operating profit it reported for the twelve

months of 1984. The year to year decline in operating profit was

due, in part, to a $501,000 or 50 percent increase in insurance

expense. The fourth quarter 1984 and fourth quarter 1985 insurance

expense increase of $291,000 accounted for the bulk of the annual

increase of $501,000. May's reported net income of $419,000 for 1985

was achieved largely on the strength of a gain on the disposition of

non-operating assets. May's QFR report also shows that, as of

December 31, 1985, it has a balance of $8,000 in its cash account

and had total stockholder equity of $3.8 million.

From September 1980 to September 1981, May had excess insurance

limits extending to $15 million. From 1981 to September, 1984 the

carrier had coverage to $25 million, at which time it increased its

excess limits to $30 million. From 1980 through 1985, May's claims

handled by insurance companies averaged $390,000 per year. In only

two of those years, 1980-1 and 1983-4, did claims against it exceed

$500,000.\4\ Its 1984-5 claims handled by the insurance company

amounted to $354,000. The average amount, in round numbers, of each

claim, by year, was 1980-1, $23,000; 1981-2, $8,000; 1982-3,

$10,000; 1983-4, $16,000; and 1984-5, $7,000. From the number of

claims reported, it appears that few required a payout in excess of

$25,000 and that none required a payment of more than $50,000. May

states that none of its claims for the period September 1980-

September 1985 required resort to its ``umbrella'' policies (i.e.

coverage exceeding the $500,000 limit of its primary insurance

during that time).

---------------------------------------------------------------------------

\4\ Our analysis of the figures provided by May indicates that

the aggregate claims against the carrier never exceeded $500,000 in

any given calendar year. The figures submitted by May are based on a

non-calendar year used by the carrier's insurance company.

---------------------------------------------------------------------------

In its original application, May proposed to pay its liability

claims from the $1 million line of credit maintained with National

Bank. Despite the carrier's favorable loss history, its safety

program, and its high credit rating, May's proposal was still

considered inadequate to protect the public in certain key respects.

Specifically, the Commission rejected May's application for the

following reasons. First, among other things, its proposed line of

credit was revocable and, therefore, provided little protection for

the public above May's ability to meet claims from current revenues.

Also, May's proposal included no provisions for meeting obligations

in the event of catastrophic occurrences. In the initial decision,

the Commission set forth some guidance for any carrier seeking self-

insurance authorization. The Commission indicated that any future

application by May should include: a self-retention feature related

to the carrier's recent claims experience; acceptable insurance to

meet multiple occurrences above the self-insured retention levels;

an irrevocable trust fund (also related to the carrier's claims

experience), and information to allow the review of the retention

levels, the carrier's loss adjustments, and loss reserves. Any

future application was also to provide for periodic submission of

statements of account, including profit and loss figures. May's

Petition to Reopen addresses those specific concerns. In the

Petition to Reopen May's offers to tie any authorization to self-

insure to the carrier's maintenance of a minimum net worth. Further,

May offers to convert the $1 million line of credit into an

irrevocable line of credit. We believe that with May's suggested

changes (and additional conditions that we will impose) May's

application provides adequate protection to the public and should be

granted.

Discussion

Any decision to allow self-insurance must reflect the carrier's

ability to absorb both known predictable losses and unpredictable

ones. Predictability is greatest at the lower claims levels. From

our observations and knowledge of the claims experience of self-

insured carriers the greatest frequency and predictability of losses

for commercial auto BI&PD claims is in the $1-$10,000 range. May's

recent claims experience fits within these limits. Each incremental

step upward in claims typically has progressively fewer losses.

However, to have the same degree of coverage through self-insurance

as traditional insurance at a higher level of exposure to loss, the

size of a motor carrier's operation must be significantly larger in

scope. In this way we can to assured that adequate assets will be

available to pay claims.

Self insurance is not new. See 49 C.F.R. 1043.5. However, most

self-insurance programs previously approved by the Commission

provide that losses that are not predictable are transferred to

professional risk takers by way of insurance coverage. In the past,

motor carriers that wanted to self-insure their BI&PD liability

negotiated deductibles or self-retention levels in their policies of

insurance. The level of self-insurance retention depended upon the

size of the operation and on the carrier's financial strength. Motor

carriers handled the great bulk of their ordinary claims at the

lower levels of losses but insured against and passed on the

unpredictable, severe losses to the insurance industry. These motor

carriers met our security requirements by having insurance companies

attach an endorsement to their policies of insurance and by filing

our prescribed certificate of insurance (so-called ``accommodation''

filings) on behalf of carriers. The endorsement makes the insurance

companies liable to the public from the first dollar of liability to

the minimum limits set by law.

The current insurance crisis in the industry has resulted in a

decrease in the availability

[[Page 49658]]

of commercial auto BI&PD liability insurance coverage and a

precipitous increase in insurance costs. Many insurance companies

have withdrawn from underwriting motor carriers' insurance, while

others have curtailed their underwriting. The severity of the

increased costs of BI&PD coverage has been so unprecedented that

some carriers have gone out of business, either unwilling or unable

to increase freight rates or to pay the increased premiums.

Additionally, it appears that many underwriters also are refusing to

negotiate policies with higher deductibles or are not providing

significantly reduced premiums for policies with high deductibles.

For example, May's insurance premiums for primary BI&PD coverage

increased from $398,855 for the year ending September, 1985, to $2.2

million for the year ending September 1, 1986. This increase in

premium expense, however, is not based on any increase in losses

paid by the insurance company. May's net profits for 1984 were only

$700,000. Thus, it is faced with the real possibility of not being

able to meet extraordinary insurance costs. May's history in this

crisis is similar to many other motor carriers of property. As such,

it presents the Commission with an example of the problem we face in

meeting our responsibility to ensure that carriers have reasonable

alternatives available to meet statutory security obligations, while

not compromising our duty to ensure the existence of a safe motor

carrier industry capable of paying all claims to the level required

by law. See H.R. Rep. No. 96-1069, 96th Cong. 2d. Sess. 41 (1980)

(``The purpose of [section 10927] is to create additional incentives

to carriers to maintain and operate their trucks in a safe manner as

well as to assure that carriers maintain an appropriate level of

financial responsibility'').

Accordingly, while we must continue to ensure that motor

carriers have sufficient security for the protection of the public,

we will consider reasonable proposals to entirely self-insure. Such

an approach is consistent with our broad authority in section 10927

to approve various types of security--and our obligation to promote

a safe, efficient, and reasonably priced transportation system. 49

U.S.C Sec. 10101. A carefully crafted proposal by a carrier to

insure its own losses appears to be a reasonable method by which we

can aid the industry without jeopardizing the public.

In order for the Commission to approve a motor carrier's

application to self-insure its BI&PD liability, we must carefully

weight the qualifications presented by the applicant against the

protection to the public available in our prescribed insurance and

surety programs. The prescribed insurance and surety programs give

the public protection from the first dollar of liability up to our

minimum requirements of $750,000, $1 million or $5 million per

occurrence,\5\ depending on the commodity transported.\6\ There is,

however, no requirement that a motor carrier like May obtain so-

called ``umbrella'' coverage to cover claims exceeding its primary

coverage. See 49 C.F.R. 1043.2(b)(2) and parallel DOT regulations at

49 C.F.R. 387.9.

---------------------------------------------------------------------------

\5\ 49 C.F.R. 1043.1 and .2. The term per occurrence means that

the protection of the insurance company extends to all vehicles used

in the interstate operation of the motor carrier for each accident

which may occur during the life of the policy for the prescribed

minimum limits. Thus, any approval to self-insure must ensure that

the carrier can absorb both predictable losses and unpredictable

ones.

\6\ May advised that it transports commodities requiring a

minimum coverage of $1 million.

---------------------------------------------------------------------------

In the initial application, May offered to establish a $1

million line of credit, dedicated to paying liability claims brought

against it. In response to the Commission's objection that the

letter of credit, without more, did little to enhance the protection

of the public, May has amended the line of credit in two respects.

First, the bank which issued the line of credit has made an

irrevocable commitment to May to maintain the credit line until

March 31, 1988. Second, the bank has agreed with May to notify the

Commission If the credit line is drawn upon.

It is May's contention that these amendments to the line of

credit significantly improve the protection being offered to the

public. It further claims that the credit line is now for the full

amount of financial responsibility required by the Commission.\7\

---------------------------------------------------------------------------

\7\ This is technically incorrect, as the $1 million statutory

requirement is per occurrence and it has not been established that

May's proposal offers identical coverage.

---------------------------------------------------------------------------

Moreover, May is willing to have its self-insurance conditioned

on maintenance of at least $2 million in net worth (retained

earnings and share-holders equity). The applicant intends to look to

operating revenues as its first source of funds to pay liability

claims. Its net worth, in excess of the $2 million, will function as

its net source of funds. Finally, the $1 million irrevocable line of

credit will be drawn upon as a last resort.\8\ Thus, May has ensured

that substantial sums of money will be available to pay claims.

---------------------------------------------------------------------------

\8\ May expects to pay BI & PD claims out of current earnings as

it has in the past, thereby, obviating the need to replenish the

funds available under its line of credit.

---------------------------------------------------------------------------

We recognize that self-insurance plans will not necessarily

afford the precise level of protection that customary insurance

plans provide. In the normal situation, a carrier that is covered

for $1 million in liability will be protected up to a million

dollars for each accident. With the plan before us, however, we are

convinced that the public will be adequately protected. Indeed, with

the conditions that we will impose, May's plan should protect the

public in a manner that is functionally equivalent to the protection

provided under traditional insurance plans. We will require May to

have and maintain a ``satisfactory'' safety rating as determined by

the DOT, which is the highest possible rating. We will require the

carrier to maintain a minimum net worth. If its net worth falls

below this level, May's self-insurance authorization will

automatically be terminated, unless the carrier corrects this

situation within 30 days. The Commission will also monitor the

carrier's financial condition and claims experience and revoke

permission to self-insure should events occur that we believe could

jeopardize its ability to pay future claims. See 49 C.F.R. 1043.9.

We believe that, subject to these conditions designed to ensure the

maintenance of assets necessary to pay all claims up to the level

provided by law, May should be permitted to self-insure.

The imposition of these conditions allows the Commission to

balance the needs of the public for a high level of security and the

need of the public for an efficient, reasonably priced, and safe

transportation system. Accordingly, we will approve the application

subject to the following specific conditions.

First, May must submit to the Commission carrier quarterly and

annual financial statements, as they become available, during the

time the self-insurance, authorization is in effect. The financial

statements (income statement, balance sheet and statement of changes

in financial position) must include a certification by an

appropriate May management official verifying the accuracy of the

information provided in the statements. Financial disclosure is also

required of affiliated companies which provide support services to

the operations of May Trucking Company. These financial statements

will provide up to date information on May's financial condition and

thus will permit the Commission to ensure, among other things, that

the net worth requirement is being maintained. In this regard, we

will insist that if, at any time, the applicant's net worth balance

falls below the $2 million minimum, this self-insurance

authorization will automatically terminate unless within 30 days

from the date of the notice, May corrects the situation or obtains

other security for the protection of the public.

Second, May must file with the Commission carrier quarterly and

annual claims reports, within two weeks of the close of the previous

quarter, during the time the self-insurance authorization is in

effect. These claims reports should detail the number, dollar amount

and nature of May's claims experience. May must also provide the

Commission with a quarterly report detailing pending court cases or

other actions which relate to or arise from the claims experience.

As with the financial statements, these claims reports must be

certified as to their accuracy by an appropriate May management

official.

Third, the carrier must notify the Commission immediately of any

pending or contingent liability claim(s) which individually exceeds

$50,000 or collectively exceed $250,000. If any of these reports or

notices of liability claims indicate that the public is being

jeopardized by May's failure to maintain an appropriate level of

financial responsibility, May's self-insurance may be revoked.

Fourth, during the time the self-insurance authorization is in

effect, May must have unrestricted access to the entire $1 million

line of credit. In addition, drawdowns from the $1 million credit

line may only be made to satisfy bodily injury and property damage

claims. The Commission must be notified immediately of the specific

purpose and amount of any May drawdown. Furthermore, we will require

that May provide, at the time of the notice of the drawdown, a plan

detailing how it proposes to respond to further liability claims.

Again, should drawdowns suggest that May's financial

[[Page 49659]]

arrangements do not adequately protect the public, we will consider

revocation of this authorization.

Fifth, the Commission must, at all times, be made aware of the

terms and conditions under which the line of credit is being made

available. In particular, the Commission must be notified no later

than 90 days prior to the effective date of any change in the terms

of the line of credit or its cancellation. Applicant is further

required to notify the Commission of the renewal of the line of

credit no later than 6 months prior to its expiration date.

Sixth, this application is granted with the express condition

that the information required will be timely filed with the

Commission. Any failure to timely file any of the information will

subject the carrier to termination of its self-insurance

authorization.

Seventh, we repeat that the Commission retains the authority to

terminate May's self-insurance authorization at any time if, after

notice and hearing, it appears to the Commission that applicant's

financial arrangements fail to provide satisfactory protection for

the public.

Eighth, the Commission retains the right to require May to

submit any additional information that it deems necessary.

Finally, the Commission has reopened Ex Parte No. MC-178,

Investigation Into Motor Carrier Insurance Rates. In that

proceeding, interim rules are adopted pending completion of notice

and comment on proposed final rules respecting many of the issues

raised in May's application. That decision is being served today.

Should any of the conditions required of May be inconsistent with

any interim or final rules adopted in Ex Parte No. MC-178, May will

be required to conform its financial arrangements to those rules.

Energy and Environmental Statement

This action will not significantly affect either the quality of

the human environment or conservation of energy resources.

It is ordered: The application is granted subject to the

conditions set forth in this decision.

(1) Applicant must submit carrier quarterly and annual financial

statements to the Commission. The statements must include a

certification by an appropriate May official verifying the accuracy

of the information provided. Disclosure is also required of

affiliated companies which provide support services for the

operations of May Trucking Company;

(2) Applicant must file with the Commission quarterly claims

reports detailing the number, dollar amount, and nature of its

claims experience and quarterly reports detailing pending court

cases which relate to or arise from the claims experience. These

reports must be certified as to accuracy by an appropriate May

official;

(3) Applicant must notify the Commission immediately of any

pending or contingent liability claim(s) which individually exceeds

$50,000 or collectively exceed $250,000;

(4) Applicant must maintain an irrevocable $1 million line of

credit and must submit, within 15 days of the service date of this

decision, a copy of any agreement with the bank covering the credit

line; and notify the Commission immediately upon any drawdown on the

line of credit; also May must have unrestricted access to the entire

line of credit and drawdowns from the line of credit may only be

made to satisfy BI & PD claims;

(5) At the time of any notification of any drawdown the

applicant will also provide the Commission with a plan detailing how

it proposes to respond to further liability claims;

(6) The applicant must notify the Commission no later than 90

days prior to the effective date of any change or cancellation of

the line of credit and must notify the Commissioner of the renewal

of the line of credit no later than 6 months prior to its expiration

date;

(7) Applicant must maintain a new worth of at least $2 million

and must notify the Commission at any time that the applicant's net

worth falls below $2 million. The applicant will have 30 days to

correct this situation or face termination of the authority to self-

insure;

(8) The Commission retains the authority to terminate May's

self-insurance authorization, at any time, if it appears to the

Commission that applicant's financial arrangements fail to provide

satisfactory protection for the public.

(9) This decision will be effective 30 days after service.

By the Commission, Chairman Gradison, Vice Chairman Simmons,

Commissioners Sterrett, Andre, and Lamboley, Commissioner Lamboley

would have granted the application subject to further clarification

and conditions. Vice Chairman Simmons and Commissioner Andre

commented with separate expressions.

James H. Bayne,

Secretary.

Vice Chairman Simmons, commenting:

Approval of May Trucking Company's self-insurance application in

today's decision is grounded in a conclusion that the May proposal

contains adequate safeguards for protection of the public. A

necessary component of those safeguards is meaningful Commission

monitoring of May's self-insurance program. At this time, I believe

the commission possesses sufficient resources to carry out this

oversight function. Depending on the number of other self-insurance

applications filed and granted, however, current resources may not

be adequate to maintain an appropriate level of oversight. If this

situation arises, I will not hesitate to seek additional resources

from Congress.

Commissioner Andre, commenting:

I am hopeful that we will be able to reduce the burden both on

self-insurers and on this agency as we further develop these self-

insurance procedures. It seems essential that the procedures be as

simple as is consistent with maintaining protection for the public.

However, I do not think it desirable to delay approval of this

application any further.

Interstate Commerce Commission

[Docket No. MC-8535; Service Date: September 24, 1986.]

George Transfer, Inc.--Application To Be a Self-Insurer

Decided: September 18, 1986.

Subject to certain conditions, applicant authorized to self-

insure bodily injury and property damage and cargo liability.

Summary of Decision

In this decision, the Commission is granting the application of

George Transfer, Inc., (hereinafter ``George Transfer'' or

``Applicant'') to self-insure its automobile BI&PD liability for

$1,000,000 and its cargo liability under 49 U.S.C. 10927 and 49

C.F.R. 1043.5(a), subject to certain conditions.

Background

George Transfer holds irregular route common and contract motor

carrier authority from this Commission to transport general

commodities throughout points in the United States. Approximately 90

percent of its traffic, however, involves the transportation of

fabricated and processed metals and metal products. The applicant

operated over 1,200 equipment units out of 29 terminals generating

$34,000,000 of operating revenue in 1985. It uses owner-operators

extensively in its motor carrier operations. Normally, they supply

the power tractors, and the carrier supplies the trailers. The

carrier's corporate headquarters is located at Parkton, Maryland.

The applicant is not owned or controlled by any other corporation.

It has two small subsidiaries, neither of which holds authority from

this Commission.\1\

---------------------------------------------------------------------------

\1\ The two subsidiaries are George International Warehouse,

Inc., which provides a warehousing service, and Marden Bros. Inc.,

which leases motor vehicles.

---------------------------------------------------------------------------

In support of its application, the carrier has submitted

detailed financial statements prepared as of December 31, 1985. As

of that date the carrier's balance sheet shows total assets of

$12,310,290 and liabilities of $6,813,000. Current assets exceed

current liabilities by $3,283,588. The carrier had a net worth of

$5,497,779 as of that date. George Transfer generated total

operating revenues of $34,776,494 in the calendar year ending

December 31, 1985. Its net operating revenue was $761,168. It

reported ordinary income before income tax of $509,649 and net

income after taxes of $290,549. The operations of George Transfer

were profitable in 1983 and 1984 as well as 1985.

Applicant states that it is safety conscious and expends

considerable time and resources in developing safety awareness, The

applicant's Safety Department is headed by a Safety Manager, who

reports to its Director of Operations. This department is

responsible for the overall safety program of the carrier. The

program calls for a multifaceted approach to safety. Monthly safety

meetings of drivers are held at each of the carriers' 29 terminals.

Spot-check inspections of vehicles and of drivers' hours-of-service

logs are required. Vehicles are required to be inspected every 30

days. Safe driving incentive awards are given to drivers with

[[Page 49660]]

perfect driving records. Drivers are given intensive training in

company and Department of Transportation safety requirements. New

driver applicants are thoroughly screened by the carrier before they

are hired. A complete background investigation is a part of this

screening process, including contacts with past employers, reference

checks, and verification of safe driving records. Applicant has a

safety rating of ``satisfactory'' from the Department of

Transportation. (Exhibit F to the application)

George Transfer has handled its own BI&PD and cargo liability

claims in the past under self-retention insurance programs. If this

application is granted, it plans to continue the same program. The

only difference will be that an insurance company will not certify

primary coverage with the Commission from the first dollar of

liability.\2\ Under the carrier's claims program, all claims are

handled expeditiously. Claims reserves are established within ten

days of reported accidents. Any claim with a possible liability

exceeding $50,000 is reviewed monthly by its corporate attorney. The

applicant is ready to supply the Commission with any reports

detailing its financial condition and claims experience as a

condition to the grant of self-insurance authority. The applicant

offers to maintain a minimum net worth of $2 million dollars in

order to ensure that funds will be available to pay liability

claims. It also proposes, as an additional safeguard to the public,

to establish trust funds for the payment of BI&PD and cargo

liability claims. The BI&PD liability trust will be funded in the

amount of $1,000,000; and the cargo fund will be funded in the

amount of $250,000. Each fund will be irrevocable and used

exclusively for the payment of designated claims liability. The

trust funds may only be drawn upon when the carrier certifies to the

trustee that it does not have sufficient operating funds to satisfy

its BI&PD or cargo liability. If drawn upon, George Transfer will

replenish the trust funds to the required minimum amounts within 30

days--$1,000,000 for BI&PD or $250,000 for cargo.

---------------------------------------------------------------------------

\2\ The deductible or self-retention level is a binding

condition between the insurance company and its motor carrier

insured, not the public. The Commission's prescribed BI&PD and cargo

insurance forms override the policy terms and conditions and give

the public protection from the first dollar of liability up to the

required minimum limits. In the case of George Transfer, the

commodities it transports requires the carrier to maintain a minimum

BI&PD limit of $1,000,000 per occurrence and a cargo limit of $5,000

per vehicle, $10,000 aggregate per occurrence. 49 C.F.R. 1043.2.

---------------------------------------------------------------------------

Applicant believes that a grant of self-insurance authority for

its BI&PD and cargo liability is essential to its ability to

continue profitable operations in the face of the current insurance

crisis. Its insurance premiums for the present policy year, from May

1986 to May 1987, total $832,000. This represents more than a 400

percent increase over the previous policy year premiums of $201,000.

This latter premium figure provided excess BI&PD and cargo liability

coverage to $10,000,000. The current cost of $832,000 provides

excess coverage only to $1,000,000. By the terms of the policy, the

motor carrier is not permitted to handle third party liability

claims, even though it has had eight years experience in this

activity. It must absorb such losses up to its deductible amount and

pay the insurance company a fee of 15 percent of the loss for

handling the claim. The deductibles in the current policy are

$250,000 per occurrence for BI&PD and $150,000 per occurrence for

cargo. The applicant stresses that these increases in premiums and

reductions in coverage have been made despite the fact that the

carrier has paid all of its BI&PD and cargo claims over the past

five years. Stated another way, the insurers of George Transfer have

paid no claim under their excess policies because all losses feel

within the motor carrier's self-retention level.

The applicant conducted an exhaustive search for renewal

coverage before accepting the terms of its present insurance

company. Ten insurance companies simply made no response to the

carrier. Several would not consider primary coverage. One offered

coverage up to $1,000,000 at an annual premium of $2,500,000.

Another offered the same coverage but at a premium of $3,000,000.

Several others told the carrier that they simply refused to consider

underwriting any motor carrier risk. The carrier estimates that it

will save $900,000 a year in costs if is permitted to self-insure.

The following tables provide details as to the loss experience

of George Transfer over the past five years:

Table I.--Automobile Bodily Injury and Property Damage Liability

------------------------------------------------------------------------

Average

Policy year claim Number of Total claim

amount claims expense

------------------------------------------------------------------------

1981-1982........................ $4,971 110 $546,828

1982-1983........................ 2,420 96 232,274

1983-1984........................ 3,879 105 407,274

1984-1985........................ 8,219 120 986,333

1985-1986........................ 3,059 105 321,181

--------------------------------------

5 year average............... 4,510 107 498,778

------------------------------------------------------------------------

Table II.--Cargo Liability

------------------------------------------------------------------------

Average

Policy year claim Number of Total claim

amount claims expense

------------------------------------------------------------------------

1981-1982........................ $3,045 64 $194,939

1982-1983........................ 1,880 47 88,395

1983-1984........................ 1,621 60 97,245

1984-1985........................ 6,283 42 263,903

1985-1986........................ 4,658 38 177,015

--------------------------------------

5 year average............... 3,497 50 164,300

------------------------------------------------------------------------

Discussion

George Transfer, we believe, has presented a strong case for

authority to self-insure its BI&PD and cargo liability. It has more

than adequate financial qualifications. The company has strong cash

and working capital positions. A positive working capital position

is important as it indicates that the carrier can meet its current

obligations from its current assets. Furthermore, its debt to debt

plus equity ratio is favorable. In addition, it has handled its own

BI&PD and cargo liability claims for a number of years and is

capable of doing so in the future under a Commission approved self-

insurance program. It also has an active and successful safety

program, which it intends to maintain.

In our prior decisions, we have taken a conservative approach to

the question of permitting motor carriers to self-insure their

[[Page 49661]]

BI&PD and cargo liability.\3\ We are charge by the act to provide

adequate security for the protection of the public. See 49 U.S.C.

10927. Because of this, the Commission has been, and will continue

to be, very selective in approving carriers to exercise this

privilege.

---------------------------------------------------------------------------

\3\ Ex Parte No. MC-5, Motor Carrier Insurance for the

Protecting of the Public, 1 MCC 45, 58 (1936); MC-128527, May

Trucking Company--Application to be a Self-Insurer (not printed);

and Ex Parte No. MC-178, Investigation Into Motor Carrier Insurance.

---------------------------------------------------------------------------

As we stated in MC-128527, May Trucking Company, supra, ``(A)

carefully crafted proposal by a carrier to self-insure its own

losses appears to be a reasonable method by which we can aid the

industry without jeopardizing the public.'' We believe that the

application by George Transfer meets these criteria. We will approve

this application subject to certain conditions necessary to ensure

that there is adequate protection for the public.

In our view, the minimum net worth requirement and the trust

funds offered by applicant are such as will provide the type of

protection we seek for the public. The net worth requirement will

ensure protection against unpredictable claims. Moreover, the trust

fund is an easily understood and easily monitored financial

arrangement for establishing a means to compensate the public in the

case of any accident. However, in order to ensure the protection of

the public to the greatest extent possible we will require some

modifications in the terms and language of the trust agreements. An

explanation of these modifications and our rationale for these

changes follows.

The trustees appointed by George Transfer, Inc. are Joseph Kiel

and T. Bernard Williams. Mr. Kiel is apparently George Transfer's

house counsel with the responsibility for reviewing personal injury

and property damage claims. However, Mr. Williams is not further

identified. Although we have no reason to believe the trustees are

not legally competent, we believe that they should be further

identified to the extent of describing their relationship to the

applicant and their business addresses so the Commission will know

who will have legal title to the trust money and how they may be

contacted.

Similarly, we believe that the beneficiaries of the trusts

should be more clearly designated. The reason for this designation

is to prevent claims on the trust funds from creditors other than

persons who have BI&PD and cargo claims.

Generally, creditors of a beneficiary who has an interest in a

trust can subject the beneficiary's interest in the trust to

satisfaction of a debt. The purpose of the trust fund created here

is the payent of BI&PD claims. As established, the trustee will

transfer funds to George's Transfer when applicant certifies its

inability to pay the involved claims. George's Transfer will

presumably pay the claims with the trust funds. The arrangement may

present a problem. The settlor's (George's Transfer) continuing

involvement could complicate a determination as to who is the

intended beneficiary of the trust. Additionally, it creates a

potential for abuse because George's Transfer will actually have

possession of the funds. Applicant's possession of the funds

subjects them to potential attached by George Transfer's other

creditors because of the applicant's continuing interest.

To avoid any potential misconstruction and abuse we will require

the applicant to revise the agreements to identify explicitly BI&PD

and cargo claimants as the intended beneficiaries. Specifically, the

class of beneficiaries under the cargo trust agreement should be

more clearly defined, in paragraph 3 of the cargo trust agreement,

``to retire claims of persons or corporations for loss and damage to

cargo arising as a result of transportation provided by George's

Transfer.'' Further, both the cargo trust and liability trust

agreements should be revised to provide that payment will be made to

such claimants directly rather than to George's Transfer. This

should be accomplished by modifying the liability trust agreement

(paragraph 3, line 10) and the cargo trust agreement (paragraph 3,

lines 7-8) deleting, ``Grantor funds to meet such obligations'' and

inserting, ``claimants identified by the Grantor sufficient funds to

meet such obligation.''

Moreover, in order to insure that the trust agreements will not

be subject to attachment by George Transfer's creditors in any

bankruptcy proceeding we will require the agreements be further

modified (paragraph 3, line 10 in the liability trust agreement and

paragraph 3, line 8 in the cargo trust agreement) in the following

manner: After ``obligations'' insert: ``The payment of those funds

to claimants is solely and exclusively for settlement of outstanding

claims. Those claims shall be paid from the trust fund irrespective

of the financial responsibility or lack thereof or insolvency or

bankruptcy of the Grantor''.

Finally, we address the issue of revocation. Each trust is

irrevocable ``so long as the Grantor continues to insure itself.''

However, this construction of the trust could present a problem. For

example, if applicant ceased to perform operations it might no

longer be insuring itself and the trust fund would be dissolved, yet

there might be claims outstanding against it which it would not be

able to pay. In order to ensure that trust fund assets will be

applied to these outstanding claims, we require the following

language added after the first sentence in paragraph 9 of both

agreements: ``Notwithstanding the preceding sentence, this trust

shall not be revoked until all legally cognizable claims arising

prior to the date Grantor ceases to insure itself have been settled.

The purpose of this provision is to insure that these funds are

available to reimburse claimants who present their claims within the

time allowable by the applicable statute of limitations before

residual funds, if any, may be returned to the Grantor upon

termination of the trust.''

Subject to these modifications, we will accept the applicant's

offer to establish a trust fund in the amount of $1,000,000. We

emphasize the fact that this trust fund will be utilized only for

payment for liability claims. Further, we will require that

applicant keep the Commission informed about the trust, its

maintenance and operation, at all times. Finally, the trust fund

will be replenished to the required minimum amount after each

drawdown.

Applicant seeks authority to self-insure its cargo liability as

well as its BI&PD liability. Our insurance rules provide for this

type of self-insurance. 49 C.F.R. 1043.5. The standard for granting

an application for self-insurance for cargo liability is the same as

that for BI&PD liability. Namely, that the carrier ``will furnish a

true and accurate statement of its financial condition and other

evidence which will establish to the satisfaction of the Commission

the ability of such carrier to satisfy its obligation for * * *

cargo liability without affecting the stability or permanency of the

business of such motor carrier.''

As demonstrated above, applicant has the ability to self-insure

its cargo liability claims as well as its BI&PD claims. The present

minimum security requirements for cargo is $5,000 or $10,000 for

aggregate losses. 47 C.F.R. 1043.2(c). George Transfer's current

self-insurance retention program has required it to pay all claims

under $250,000 for the last five years. The claims chart reproduced

above also shows that there have been no claims in excess of that

amount during that period. In fact, in the last five years, George

Transfer has not had a cargo claim exceed $40,000. Thus, in reality

George Transfer has been self-insured for its cargo liability for

several years. In granting its application for self-insurance with

respect to cargo liability, we are doing nothing more than allowing

the carrier to continue its present practice, albeit without an

insurance company intermediary between the public and the applicant.

The record before use shows that George Transfer has the

qualifications necessary to self-insure its cargo liability, and we

approve its application subject to the conditions set forth below.

As in the case of its BI&PD liability, applicant has offered to

establish a separate trust fund of $250,000 for the sole purpose of

the payment of claims attributable to cargo loss or damage. This

trust fund will be utilized in the event that George Transfer is

unable to pay claims from operating revenues. Notably, the amount of

this fund will equal the present coverage of George Transfer's

existing policy. We will accept the applicant's offer to establish a

trust fund for the payment of cargo claims subject to the conditions

set forth above in the discussion of the liability trust fund.

Findings

Given the carrier's financial position, its claims history and

experience and its safety record we find that the establishment of

these trust funds with the conditions discussed above will provide

protection for the public. Therefore, we accept George Transfer's

offer to establish these trust funds. We emphasize that these funds

will be utilized only for payment of BI&PD and cargo liability

claims. Further, we will require that applicant keep the Commission

informed about the trusts, and their maintenance and operation, at

all times. Finally, the trust funds will be replenished to the

required minimum amount after each drawdown. In addition, we will

impose the following conditions on this grant of self-insurance

authority.

Applicant must submit to the Commission a carrier quarterly and

annual financial

[[Page 49662]]

statements, as they become available, during the time the self-

insurance authorization is in effect. The financial statements

(income statement, balance sheet and statement of changes in

financial position) must include a certification by an appropriate

management official verifying the accuracy of the information

provided in the statements. These financial statements will provide

up to date information on the carrier's financial condition.

Further, applicant must file with the Commission carrier

quarterly and annual claims reports, within two weeks of the close

of the previous quarter, during the time the self-insurance

authorization is in effect. These claims reports should detail the

number, dollar amount and nature of George Transfer's claims

experience. As with the financial statements, these claims reports

must be certified as to their accuracy by an appropriate management

official.

Additionally, the carrier must notify the Commission immediately

of any pending or contingent liability claim(s) which individually

exceeds $50,000 or collectively exceed $250,000. If any of these

reports or notices of liability claims indicate that the public is

being jeopardized by the carrier's failure to maintain an

appropriate level of financial responsibility, George Transfer's,

self-insurance may be revoked.

Moreover, the Commission must, at all times, be made aware of

the terms and conditions under which the trust agreements are

operating. In particular, the Commission must be notified no later

than 90 days prior to the effective date of any change in any of the

terms of the trust or its cancellation.

The application is granted with the express condition that the

information required will be timely filed with the Commission. Any

failure to timely file any of the information will subject the

carrier to notice of termination of self-insurance authorization.

Finally, the Commission retains the authority to terminate

applicant's self-insurance authorization at any time if, after

notice and hearing, it appears to the Commission that applicant's

financial arrangements fail to provide continued satisfactory

protection for the public.

It is ordered: The application is granted subject to the

conditions set forth in this decision.

(1) Applicant must submit carrier quarterly and annual financial

statements to the Commission. The statements must include a

certification by an appropriate applicant official verifying the

accuracy of the information provided. Financial disclosure is also

required of affiliated companies which provide support services for

the operations of the motor carrier.

(2) Applicant must file with the Commission quarterly claims

reports detailing the number, dollar amount, and nature of its

claims experience and quarterly reports detailing pending court

cases which relate to or arise from the claims experience. These

reports must be certified as to accuracy by an appropriate carrier

official;

(3) Applicant must maintain a net worth of at least $2 million

dollars and must notify the Commission at any time that the

applicant's net worth falls below $2 million dollars.

(4) Applicant must establish a trust fund in the amount of

$1,000,000 for the payment of BI&PD liability claims and one in the

amount of $250,000 for the payment of cargo liability claims as set

forth in Exhibits ``G'' & ``H'' attached to its application and as

modified in this decision. The trust funds must be irrevocable and

used only for the payment of its BI&PD or cargo liability. If drawn

upon, applicant must contribute to the trust fund, within a period

of 30 days after the date on which the trust funds are used to

retire claims, sufficient cash to increase the BI&PD trust fund to

the $1,000,000 minimum. or the cargo trust fund to the $250,000

minimum. The executed trust fund agreements, must be submitted

within 15 days of the service date of this decision. Any changes in

their terms must be given prior approval by the Commission.

Furthermore, any draw down on these funds and failure to replenish

within 30 days must be reported immediately to the Commission, along

with an explanation as to how it proposes to respond to further

BI&PD or cargo claims.

(5) Applicant must notify the Commission immediately of any

pending or contingent BI-PD liability claim(s) which individually

exceeds $50,000 or collectively exceed $250,000; and any pending or

contingent cargo liability claims which exceed $50,000 individually

or $100,000 collectively.

(6) The Commission retains the authority to terminate George

Transfer's self-insurance authorization, at any time, if it appears

to the Commission that applicant's financial arrangements fail to

provide satisfactory protection for the public.

(7) This decision will be effective 30 days after service.

Energy and Environment Statement

This action will not significantly affect either the quality of

the human environment or the conservation of energy resources.

By the Commission, Chairman Gradison, Vice Chairman Simmons,

Commissioners Sterrett, Andre and Lamboley.

Noreta R. McGee,

Secretary.

Federal Highway Administration

[Docket No. MC-176440; Service Date: February 8, 1996]

Decision; Direct Transit, Inc. (North Sioux City, SD); Authorization To

Self-Insure

Decided: February 8, 1996.

By decision of the former Interstate Commerce Commission

(Commission) served May 25, 1995, Direct Transit Inc. (Direct) was

authorized to self-insure its bodily injury and property damage

(BI&PD) liability subject to certain conditions. The self-insurance

authorization was activated on August 1, 1995. As a result of a

safety audit conducted by the Federal Highway Administration (FHWA),

Direct was notified that it was assigned an ``Unsatisfactory''

safety rating effective January 12, 1996.

Section 1043.5(a)(3) of Title 49 of the Code of Federal

Regulations governing qualifications for a self-insurer, provides in

part:

Any self-insurance authority granted by the Commission will

automatically expire 30 days after a carrier receives a less than

satisfactory rating form the U.S. Department of Transportation

(DOT).

Direct's self-insurance authorization will expire automatically

on February 11, 1996.

By virtue of the ICC Termination Act of 1995, P.L. 104-88, the

responsibility for making determinations regarding the self-

insurance program and all authorizations pursuant thereto was vested

in the Secretary of Transportation, and subsequently by delegation,

in FHWA.

By a petition filed February 6, 1996 with FHWA, Direct seeks a

waiver of the automatic termination provision and an emergency

extension of its self-insurance authorization for a period of 30

days or until it is issued a ``Satisfactory'' safety rating,

whichever occurs first.

In support of its petition, Direct contends that the automatic

termination provision is inappropriate and will simply penalize the

carrier by increasing its insurance premiums. While acknowledging

that the ``Satisfactory'' safety rating requirement is justifiable

in most circumstances, the carrier claims nonetheless that the

public is protected and that it is not in the public interest to

invoke the automatic termination rule in this instance. Direct

maintains that automatic termination should apply only to a

``withering and desperate carrier''. (Petition at 7).

Direct's arguments are groundless and disturbing. In developing

the self-insurance requirements, the Commission recognized the

possibility that ``Unsatisfactory'' or ``Conditional'' ratings

militate against allowing an applicant to self-insure because such

ratings indicate operations that might result in a higher than

average claims experience or the potential for substantial

liability, both of which could adversely affect a carrier's ability

to indemnify claimants. Investigation Into Motor Car. Insurance

Rates, 3 I.C.C. 2nd 377,379 (1987). The Commission further noted,

``It is also consistent with our intent that safe operations serve

as the touchstone for any self-insurance authorization.``Id. at 384.

The 30-day expiration provision was implemented because ``a

diminution in a carrier's safety status would warrant immediate

reexamination of self-insurance authority.'' Id. at 385.

Direct, having begun self-insured operations only several months

ago, has too short a track record to trumpet the success of its

program and can hardly profess that the public will be protected

based on that meager record. The Commission's self-insurance

requirements were imposed ``to guarantee that a carrier can meet its

financial responsibility to the public''. Id. at 380. Carriers that

conduct unsafe operations cannot make such guarantees. The issue

before me concerns the relationship between unsafe operations and

self-insurance. I reject Direct's contention that the payment of

premiums for additional commercial insurance coverage is a relevant

factor. I also note that the circumstances surrounding this matter

do not appear to justify the eleventh-hour filing of Direct's

petition.

It should come as no surprise that FHWA, the agency charged with

ensuring safe

[[Page 49663]]

operation of commercial vehicles on our Nation's highways, will

continue to insist that all carriers operating with self-insurance

authority maintain ``Satisfactory'' safety ratings. Nevertheless, I

will authorize an extension of the self-insurance authorization to

March 7, 1996 for the sole purpose of conducting another compliance

review of the carrier's operations.

Direct should understand that failure to obtain a

``Satisfactory'' safety rating during the extension period will not

provide support for a further extension. Accordingly, the carrier

should begin the process of securing commercial insurance coverage

in the event its self-insurance authorization terminates.

It is ordered: 1. A waiver of the automatic 30-day period for

expiration of petitioner's self-insurance authority and an extension

of the self-insurance authorization until March 7, 1996, is hereby

granted.

2. The terms and conditions of the self-insurance authorization

activated August 1, 1995, will remain in effect throughout the

extension period.

3. As of 12:01 A.M. on March 8, 1996, in the absence of the

issuance of a ``Satisfactory'' safety rating, Petitioner's self-

insurance authorization will terminate without further order of the

FHWA.

4. A copy of this decision is to be filed in Docket No. MC-

176440 and all sub numbers thereunder.

5. This decision is effective when served.

By the Federal Highway Administration.

John F. Grimm,

Director, Office of Motor Carrier Information Analysis.

[FR Doc. 97-24714 Filed 9-22-97; 8:45 am]

BILLING CODE 4910-22-P-M