Research Results Digest 295

March 2005

1—INTRODUCTION

This digest provides alternatives to con-ventional liability insurance coverage forpublic transit agencies and private motor-coach (coach) operators in response to theinsurance crisis of the early 2000s that hashad, and continues to have, a significant im-pact on the cost and availability of liabilityinsurance coverage. The digest discussesthe role of liability insurance in the passen-ger transportation industry, current insur-ance issues and impacts on public transitagencies and private motorcoach operators,alternative insurance models, and activitiesand strategies that can help to mitigate lia-bility insurance costs and availability.

Background

Public transit agencies and private coachoperators have experienced significant costincreases for both basic and excess liabil-ity coverage in recent years. In addition,the overall availability of liability insur-ance coverage has decreased. These trendsbegan as a normal, if undesired, shift in theinsurance market cycle several monthsbefore the terrorist attacks of September

11, 2001 (9/11). The events of 9/11 ap-peared to have affected both the speed andextent of the market shift and provided aneasy justification for the price changes forsome observers.

This shift is not the first time that publictransit agencies and private coach operatorshave had to deal with significantly increasedcosts for liability insurance and decreasedavailability of coverage. The constant shift-ing between easy and difficult availabilityas well as in the pricing of the insuranceproduct, known as insurance cycles, has along and well-documented history. Thiscycle is the latest and is arguably not eventhe most severe of recent insurance cycles.In the mid and late 1980s, the transporta-tion industry weathered, along with everyother business, an “insurance crisis” char-acterized by high premium rates that rose500% or more, as well as the typically as-sociated limited availability and restrictedamounts of coverage (1).

By the early 1990s, the insurance cri-sis of the mid 1980s was clearly over. Itwas replaced by a time of extended avail-ability against a backdrop of a constantdownward pressure on pricing. Liabilityinsurance costs decreased from the crisis

AVAILABILITY AND ACCESSIBILITY OF LIABILITY AND EXCESS INSURANCE FOR PUBLIC TRANSIT AND PRIVATE COACH OPERATORSThis digest provides the results of NCHRP Project 20-65(3), “Availabilityand Accessibility of Liability and Excess Insurance for Public Transit andPrivate Coach Operators.” This digest was prepared by Jack Burkert,Consultant, and Elizabeth Ellis and Sue Knapp of KFH Group, Inc., inassociation with Cambridge Systematics.

Subject Areas: IA Planning and Administration, VI Public Transit Responsible Senior Program Officer: Christopher Jenks

NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM

C O N T E N T S

1—Introduction, 1

2—Role of Liability Insurance inthe Passenger TransportationIndustry, 4

3—Impacts of Current InsuranceIssues on the PassengerTransportation Industry and ItsResponse to These Issues, 10

4—Impacts on the TravelingPublic, 16

5—Alternative InsuranceModels, 18

6—Mitigation Activities andStrategies, 23

References and Notes, 33

Bibliography, 35

years of the previous decade, and available coveragelimits increased (2).

A prevailing explanation of the causes of the cri-sis of the 1980s, as well as of the most recent insur-ance problems, points to the cyclical nature of the in-surance market: multiple forces within the financialworld can make insurance readily available, with pre-miums apparently under pressure to be reduced, as in-surers vie for market share, revenue for their invest-ment portfolios, and a free flow of cash with which toconduct their businesses (3). In this “soft” market,premiums are low and availability is high. Inevitably,as changes occur, both in investment conditions andwithin the insurance company community, a new di-rection for insurance is set. Prices for premiums in-crease, often by large percentage amounts, coveragebecomes increasingly more difficult to obtain, andhigh limits of liability are expensive and oftendropped by policyholders. The “hard” market returns.

While many forces are constantly at work withina pure financial mechanism such as insurance, somefundamentals warrant a brief overview. Insurance cy-cles are influenced by forces internal and external tothe insurance company community and the individualpolicy-issuing company. Profitability in an insurancecompany can be garnered through underwriting andthrough investment. Underwriting revenue, from pre-miums, is ideally set at rates that cover both losses andexpenses and includes a profit factor, which is an in-centive for the insurer to accept risk.

In reality, underwriting rates are seldom in precisebalance with the profit needs of the company. Instead,insurers often gain their profits through adroit activ-ity in the investment world. While largely restrictedfrom “wheeling and dealing” by the need to maintaina reliable capital base, companies can and do managetheir assets in a manner that ensures income.

Thus, as premiums decline in a soft market, un-derwriting profits are less and less possible for theinsurer. The insurer becomes more and more depen-dent upon investment income to retain profitability.So long as investment conditions are favorable inthis soft market, many companies seeking premiumrevenue for investment will keep premiums low. Buttwo factors can force insurers to react by redefiningtheir business strategy: rising underwriting losses aspremiums decline well below cost and a slackeningof investment income. Some insurers elect to simplywithdraw from those segments of the market theyfind to be less profitable; others stay in the market,but raise their prices to levels that should ensureunderwriting profitability.

Obviously, the longer any soft market persists, thelonger prices have time to decline, thus making the re-bound to underwriting profitability all the larger interms of real dollar changes. Add in an inflation fac-tor, and the premium price changes can be dramatic.In addition to this financial change, there is policy-holder perception. The longer the soft market per-sists, the longer policyholders come to expect thatlow premiums are the norm.

In the prior insurance cycle, the turning point oc-curred in late 1984, when the insurance industry ex-perienced very large losses, and at the same time in-surance companies were receiving significantly lowerreturns on their investments given declining finan-cial market conditions rates. Collected premiumswere insufficient to deal with losses, so insurancecompanies had to use some of their assets to payclaims. Insurers responded by raising premiums andreducing or eliminating coverage in some cases, cre-ating the hard market—the insurance crisis—of themid 1980s (4). That condition eased and was fol-lowed by an extended soft market, circa 1987 through2001, persisting for almost 15 years, which is longerthan was historically normal.

In the past few years, with significantly increasedcosts for liability insurance premiums and decreasedavailability for public transit agencies and privatecoach operators, questions have been raised regard-ing how the passenger transportation industry canbest cope with insurance cycles. Indeed, researchwas needed to find solutions and mitigation strate-gies. Is the industry experiencing increased risks andlosses? Are there external factors, such as the after-math of 9/11, affecting insurance? And if so, arestrategies and mechanisms available that can assistin mitigating or managing the problems as they pre-sent themselves? What are effective alternatives totraditional commercial insurance that may help pub-lic transit agencies and private coach operators meettheir insurance needs? This research study addressedthese questions, with an overall goal of investigatingthe availability and accessibility of liability and ex-cess insurance for public transit agencies and privatecoach operators.

Purpose and Overview of Digest

The stated objectives of this digest are to

• Assess insurance issues affecting the publictransit and private coach industry;

2

• Identify and detail alternative insurance modelsbeyond the traditional commercial model; and

• Document risk and loss mitigation activitiesbeing used by states and the coach industry toreduce premium exposure (best practices).

To meet these stated objectives, the study wasdesigned to

• Identify and assess the current issues affectingthe increases in premiums for basic liabilityand excess insurance coverage and relatedproblems;

• Identify factors affecting the premium in-creases and determine to what extent the in-creases are caused by industry risk and loss ex-perience or external factors affecting insurers;

• Identify differences in the current insuranceproblems by state;

• Identify and assess effective strategies beingtaken, or that can be taken, by states, publictransit agencies, and private coach operatorsto mitigate the current problems with liabilityand excess insurance coverage;

• Document any impacts on the traveling pub-lic caused by current insurance problems; and

• Research alternatives to traditional insurancemodels for public transit agencies and privatecoach operators.

The study included both primary and secondaryresearch. Primary research included several surveysto obtain current information on liability insurance,interviews with representatives of national organi-zations representing public transit agencies and pri-vate coach operator interests, and interviews with in-surance industry representatives.

Secondary research included a review of avail-able relevant documentation on insurance for thetransportation market, including federal and othersponsored research and relevant periodicals.

The surveys included the following:

• A survey of state departments of transporta-tion (DOTs) to obtain information and inputon insurance issues that transit operators arefacing in their states;

• A survey of state transit associations to obtaininformation and input on insurance issues thatassociation members are facing in their states;

• A survey of state and regional private coachassociations to obtain information and inputon insurance issues that private coach opera-tors are facing in their states or regions; and

• A survey of a sample of public transit agen-cies and private coach operators to obtainmore detailed information from the individ-ual agency/operator perspective.

The intent of these various surveys was to assessthe extent of the current liability insurance problemand its characteristics, including whether there is ageographic dimension, whether issues related to in-surance costs and availability vary by type or size ofoperator or type of service provided, and the typesof strategies that are being employed to address theproblem. The survey also asked if the state DOTs orassociations are aware of any testimony or legisla-tion introduced to address insurance issues.

Interviews were conducted with representativesof the following industry and federal organizations:

• American Public Transportation Association(APTA),

• United Motorcoach Association (UMA),• American Bus Association (ABA),• Federal Transit Administration (FTA), and • Federal Motor Carrier Safety Administration

(FMCSA).

These interviews were conducted to understandthe current liability insurance environment for pub-lic transit agencies and private coach operators fromthe perspective of nationally based organizations.Additionally, the study team probed for any studiesdone by the respective organizations on insuranceand knowledge of any testimony or legislation, at thestate and/or federal level, that had been provided orintroduced to address the insurance situation. An in-terview guide was used to structure these interviews.

Interviews also were conducted with repre-sentatives of the insurance industry, including thefollowing:

• American Insurance Association,• Insurance brokers representing two indepen-

dent entities with significant experience withthe transportation industry,

• One of the largest insurance companies cov-ering passenger transportation operators, and

• A large facilitator of captive insurance pro-grams dealing in passenger transportation.

These interviews, primarily in person, were con-ducted to understand the insurance issues from theperspective of the insurance industry. Specifically,the study team was interested in identifying the fac-tors influencing cost increases and availability issues

3

and to what extent these factors are based on indus-try risk and loss experience or forces external to thetransportation industry. Interviews with the insur-ance underwriters focusing on the transit and coachmarkets attempted to review and understand pricingstrategies and the various factors that are consideredin pricing and supply. Importantly, these interviewsalso sought information on the types of activitiesthat public transit agencies and private coach opera-tors can and should take to influence premium ratesand coverage.

2—ROLE OF LIABILITY INSURANCE IN THEPASSENGER TRANSPORTATION INDUSTRY

This chapter provides a brief background dis-cussion of liability insurance for public transit agen-cies and private coach operators, including a reviewof how it is typically handled. This background dis-cussion provides a context for the research study’sfindings on the current availability and accessibilityof liability and excess insurance coverage for thepassenger transportation industry. For more detailedinformation, please see references provided in thisdigest’s Bibliography.

Transportation Operations and Need for Insurance

By their very nature, transportation operationsare subject to many variables. The problems they en-counter, however infrequently, through errors injudgment or execution, can create damages for whichthe transportation operator can and will be held re-sponsible. These errors may be serious in nature, lead-ing perhaps to property damage, personal injury, orloss of life. Passenger transportation is even morehighly exposed to this potential because the safety ofthe traveling public who board an operator’s vehiclesbecomes largely the responsibility of the operator.

The most common mechanism that precedentand law have established to ensure that just and ade-quate compensation for aggrieved parties is availableis liability insurance. In exchange for a financial con-sideration (premium), a third party—the insuranceprovider—accepts the responsibility to ensure thatdamaged and resolved injured parties are compen-sated, up to the limits of the liability coverage it pro-vided. While there are variations in the exact processand contractual relationships, both public policy andregulation demand that the transportation operatorbe in a financial position, or contract with those who

are in a financial position, to guarantee that lossesare paid and injured parties compensated.

This insurance availability and placement of cov-erage is more than sound business practice: it is pub-lic policy and a matter of law. Financial responsi-bility must be in place. When coverage becomesproblematic—because of either availability or, to alesser degree, cost—both public and private operators,as well as their ridership and the public with whomthese operators share the highway, may be affected.

Insurance Essentials

Insurance is best understood as a financial trans-action in which pure capitalism is at work. In the in-surance industry, as in other industries, capital ismade available by investors for the purposes of in-come and growth. Insurance produces no products,no tangible items, and no services in the sense that anemployee directly acts on behalf of the customer. In-surance is first and foremost about money begetting(or losing) money. And while insurers have employ-ees and services, they could be perceived as supportto the primary function: acceptance of risk from thepolicyholder with the expectation that in the transferof premium for risk, the insurer will profit.

Generally, traditional insurance companies areestablished through financial investment. For the ma-jority of the industry, what will be termed here as thetraditional marketplace, an initial (and subsequentlycontinuing) examination and evaluation process (li-censing) is conducted by state government insur-ance officials. In a simple and very abbreviated ex-planation, key steps taken by insurers as they supplytraditional insurance to passenger transportation op-erators include the following:

• The insurer establishes rates to be chargedbased upon the insurance company’s percep-tion of the loss profile of the particular indus-try, especially that portion of the operating en-tities that the insurer seeks to cover;

• The insurer evaluates potential policyholdersthrough an underwriting process; this processcarefully examines history as a predictor of fu-ture activity, current operations, managementcompetence, driver skill and records, and otherfactors associated with the potential for loss;

• Insurers select desired risks, offer a quotation,and, if accepted, then issue an insurance pol-icy. The policy issued is a contract, one whichtransfers the financial risk of some or all of the

4

passenger transportation operations from theoperating company to the insurer; it is this ac-ceptance of risk for which the insurer receivesa premium;

• Insurers anticipate profitability through carefulselection of the operators they seek to insure,accepting policyholders who meet the insur-ers’ profile of loss history and operating crite-ria, as well as through their own skill in man-aging loss situations as they may occur; and

• Insurers further anticipate profits through in-come earned by investment of the premiumspaid to them by policyholders.

For an insurer to attain and maintain profitabil-ity, several factors must be contemplated and bal-anced to achieve desired results:

• Predictability both at an industry and individ-ual policyholder level:•• For the industry, the actual losses incurred

overall are within the expectations of theinsurer and

•• For the individual policyholder, the opera-tions and loss history of the company aregenerally within the historic profile pre-sented by the operating company;

• Stability within the environment where claimsand losses are to be managed so that the en-vironment is largely predictable and is basedon historic precedent; and

• Establishment by the insurer of the properpremiums, at levels where anticipated costsare balanced by premiums and income frominvestments.

In the passenger transportation industry, thesefundamental factors for insurer profitability are oftenelusive. An examination of industry loss profiles pro-vided by a major private sector insurer shows thatthe average cost of a casualty loss has consistentlyclimbed, at a rate much greater than inflation, overthe past 20 years. Insurers attribute this rise in claimscosts not so much to an increase in frequency of loss,but to both escalating medical costs and a deteriorat-ing climate of adverse legal verdicts. These two costescalators have largely eroded one of the fundamen-tals to insurer profitability—predictability.

Insurance Regulation and Oversight

The insurance industry is subject to significantregulation and oversight that is almost exclusively

the province of the various state governments. Ulti-mately, each state government acts independently,albeit with a degree of uniformity, with little in theway of federal intervention or control.

The regulatory environment is important to un-derstand when considering possible activities andstrategies that might be employed to mitigate the pe-riodic insurance crises that affect the transit industry.Significantly, not all insurance providers are regu-lated in the same manner; not all insurers are subjectto state regulatory control, management review, andclaim guaranty funding support. Variables related toinsurance companies’ physical presence in a state,their ultimate intentions on how they will offer cov-erage, and their financial and organizational struc-ture all affect how, and even whether, a state regu-latory body has significant jurisdiction to regulate.While the traditional insurance industry is and haslong been regulated, other types of insurance provid-ers and programs can fall outside the control andoversight of state insurance regulators. Programs suchas risk retention groups and captive insurance com-panies may find some or even all of their operationsexempted, by reason of law or physical location (e.g.,their “domicile” is an offshore location, such as theCayman Islands), from this state oversight. This ex-emption is an obvious financial advantage to the spe-cialized insurance program, but may ultimately proveto be detrimental to both stake and claim holdersshould an insurance insolvency in this alternative in-surance community ultimately occur.

Components of State Regulatory Oversight

Licensing. State regulatory oversight begins with li-censing. Insurers seeking to do significant levels ofbusiness in a state must seek licensing as a companythat has been “admitted” (i.e., admitted into the stateto do business). While an insurer may conduct somebusiness as a “non-admitted” provider, such an ap-proach is difficult at best, creating uncertainties,multiple relationships with other insurers, and coststhat can quickly make the non-admitted companynon-competitive.

The licensing of a company to do business in astate includes an examination of the nature of the in-surer’s business; the filing and review of financialstatements; and acceptance of what is, in effect, atariff that lists proposed coverage, premiums to becharged, and the process through which those pre-miums are calculated.

5

Audit procedures. State oversight continues throughaudit procedures. Regulatory oversight through au-dits is a form of consumer and taxpayer protection.These audits are most often but not exclusively con-ducted by the state listed as the insurance company’sdomicile. (The domicile state in the licensing processmay ultimately not be the state where the companyhas the greatest physical presence.) While the domi-cile state usually conducts periodic audits, other statesmay also elect to do so, sending their representativesto the insurance company home offices. This over-sight is intended to ensure that the insurance com-pany is fiscally sound, is not in jeopardy of bank-ruptcy, and will be able to pay future claims whenpresented. While other aspects of the insurers’ oper-ations may be subject to review, the audit process isone that first and foremost ensures financial stabilityof the insurance provider.

Not all states conduct their insurance review op-erations equally. While consumer protection is al-ways the avowed purpose of any insurance office,states take individualized and unique approaches tothis responsibility. Many states have extensive andcontinuing insurance company auditing procedures,others simply await the published results from otherstates’ audit programs. Indeed, even insurance li-censing may take on this same format, where somestate licenses are issued only after and in response tothe completion of the licensing process in another,more demanding state.

Guaranty fund. To ensure industrywide stabilityand ability to pay claims, state regulators also re-quire insurers to pay a portion of their revenues intoa guaranty fund, managed by the state. This guarantyfund is established to ensure that if and when any li-censed and admitted insurance company is placedinto receivership, or otherwise becomes bankrupt,the remaining liability and other claims of that in-surer can be paid. After first dissolving the remain-ing assets of the insolvent insurer, claims are thenpaid from funds made available from the insuranceindustry funded guaranty fund.

Price controls. Insurers electing to operate in a stateprovide, through the licensing process, indicatorsand guidelines for the pricing of the coverage theyare planning to offer. While this process seeminglywould manage ultimate consumer costs, the realityis that by providing broad guidelines, availability ofcredits and debits to the base amounts, and escala-tion clauses allowing pass through of rising costs,

insurers have enormous flexibility in the ultimatepremiums they charge consumers.

Assigned risk. Another and significant role of stateinsurance regulation is the establishment of the resid-ual insurance marketplace, generally known as the“assigned risk” pool. This pool and programs like itadd upward pressure on pricing for every insuranceconsumer, and, in some jurisdictions, such govern-ment programs are perceived to be so intrusive andexpensive that they lead insurance providers to with-draw and decline to do business in the state.

The assigned risk program is, in general, a man-datory insurance program in which consumers whoare unable to obtain coverage elsewhere may applyfor coverage to the state. When this request is made,the state insurance department assigns that consumerto one of the licensed and admitted insurance pro-viders in the state. This insurer then must provide in-surance coverage to the consumer, frequently at state-mandated rates. Obviously, a consumer unable toobtain coverage in the open market is likely to be apoor or difficult risk, and insurers will be the first topoint out that insuring someone both accident andliability prone is a losing proposition, no matter whatthe premium amount might be. Traditional insurersare subject to these state assignments; non-traditionalinsurance programs are typically outside the require-ments for accepting mandated policyholders.

An interesting paradox is that the assigned riskprogram in a state, in times of price swings, may be thelow cost provider of coverage. The state-establishedrates for assigned risk coverage are based on a mul-tiple of recent and typical past premiums charged inthe state for the same or similar coverage. Thus, whena sudden upward change in open market pricing takesplace, assigned risk pricing may lag. State agenciesonly periodically reevaluate the premium rates theymandate, and while the marketplace may changedaily, state rates may change quarterly or less often.Given this ability for the market to change quickly,and the state slowly, there are often periods wherethe assigned risk premium available to a consumercan be less expensive than the currently availableaverage premiums.

State Regulatory Role During Hard Insurance Markets

Under hard market conditions, where premiumlevels rise and some insurers are withdrawing from allportions of the marketplace, the states, through their

6

insurance regulatory functions, are generally hardpressed to offer meaningful relief to their consumers.

Insurers who wish to withdraw from the statemarketplace are usually able to do so, even as con-sumer complaints and state restrictions slow downtheir departure. In general, notices of non-renewal orcancellation have a 30-day (longer in some loca-tions) minimum notification period. Federal insur-ance filings also have this same 30-day warning re-quirement. However, an insurer determined to exit aline of business, such as passenger transportation,ultimately finds few barriers to departure. An an-nouncement by an insurer of non-renewal to a seriesof policyholders may provoke state inquiries and ex-aminations, but the insurer effectively can and willbe able to cease the line of business or completelywithdraw from the market.

Individual non-renewals of policies offer morepotential for a reprieve to the insurance consumer,as the filing of a complaint with the state insurancedepartment usually holds in place all aspects of theinsurance relationship in question until an inquirycan be conducted. Some states have prohibitions onmid-year cancellations, and others have restrictionson non-renewals, but overall, a notice from an in-surer indicating an intention not to renew a policy isat best hard, and more often impossible, to reverse.

Insurers have, in addition to the right to with-draw from the marketplace noted above, a high de-gree of flexibility on pricing. While initial filings atthe time of licensure may give indications of pricing,these filings have guidelines that seldom if ever re-strict an insurer from passing through to the con-sumer the rising costs of doing business. But in somecases, states may have mandatory limitations codifiedin state law that limit or otherwise restrict premiumchanges. These state restrictions on price changesmay limit what premium changes are permissible, buteven this regulatory limitation has its limits: guide-lines that control pricing can ultimately create moreproblems. Insurers unable to recoup losses or costscan, and as experience has shown, will withdraw andcompletely abandon a state and its consumers.

Thus, despite all of the management and gover-nance potential, as currently structured, the regula-tory community is unable to significantly impact andcontrol the insurance hard market. The forces at workin the hard market are global in nature, and the cur-rent tools at the disposal of regulators provide lim-ited impact.

The Insurance Cycle

The insurance cycle is one of the facts of life forboth the insurance company and the insurance policy-holder. As introduced in the preceding chapter, theinsurance market is cyclical, with rising and fallingpremium rates that are influenced by market forces,and generally undeterred by regulation, interven-tion, or apparently individual policyholder under-writing results.

Because the insurance cycle generally changes di-rection only after extended periods of time, an en-tirely new generation of passenger transportation op-erators may arise between hard markets. Confrontedwith the escalating premiums of their first hard mar-ket, despite their own stable operations, steady oreven declining loss rates, and a long-time commit-ment to an insurer, these operators learn that that thecost of premiums is largely driven by forces outsidetheir immediate and direct control. And while agood loss history is an asset to an operator seekinginsurance coverage, such a history only allows theoperator to receive the best price available in thecurrent market.

As described in the introductory chapter, the softmarket of insurance cycles exhibits declines in indus-try and individual policyholder premium rates, oftenin spite of adverse loss history and increasing costs.But when the reality of insurance company and in-dustry poor financial results sets in, the insurance in-dustry takes reactionary steps and companies raisepremium prices back to and perhaps above the high-est prices of the previous hard market. All of thisseemingly defies logic, and yet the cycles have al-ways occurred, with every expectation they will per-sist into the future. The relationship between the in-surance cycle and the financial marketplace, wherethe impact on insurance company investment incomeis greatest, is consistently noted by insurance indus-try officials. Investment income can cover under-writing loss, but only for as long as the income re-mains high or the losses remain manageable.

These cycles are driven not just by the financialmarkets. They are also driven by insurer actions, asinsurers vie for premium dollars to invest, competefor market share in anticipation of “brighter” rev-enue days tomorrow, and anticipate that their under-writers—their employees who actually select risksand set pricing—will manage to avoid both accountsin which frequent losses quickly eat up premiumdollars and accounts likely to sustain an occasionalheavy loss resulting in a multi-million dollar payout.

7

How the Passenger Transportation Industry Is Insured

The passenger transportation industry in theUnited States comprises public transit and privatecoach industries. The public transit industry com-prises two separate and distinct groups: one ownedand operated by public agencies, the other ownedand operated by private businesses often under con-tract to or in concert with government oversight. (Inpublic agencies, the equipment is purchased by stateor local jurisdictions, staff and drivers are civil ser-vants, and control is usually exercised by a quasi-governmental oversight board.) Public agencies canand perhaps should be further defined into two cat-egories: large properties (approximately 100 withthe largest vehicle counts and jurisdictions served)and smaller rural or suburban properties (literallythousands) without the broad financial shoulders oftheir larger siblings. Each of these entities has a dif-ferent insurance perspective, and thus each needs tobe treated separately.

Public Transit Industry

Public agencies. The methods of insuring risksgenerally used by public transit agencies include

• Traditional commercial insurance,• Self-insurance, and• Risk retention pools.

Purchasing commercial insurance is the mostcommonly used and widely known risk financingtool for smaller public transit properties, while self-insurance is widely used by larger transit properties(many of the large transit properties went with self-insurance in response to the insurance crisis of the1980s). The third major risk financing option, riskretention pools, are also becoming more common.As described in Chapter 5, risk retention pools in-volve a number of entities agreeing to jointly fundtheir losses; participants make contributions to thepool that, in turn, pays out losses. During the insur-ance crisis of the 1980s, some states formed poolsspecifically for transit agencies (California, Michi-gan, Virginia, Washington, and Wisconsin). Statesand local municipalities also have pools or insurancetrusts that cover broader governmental or quasi-governmental units within their jurisdiction (notconfined to transit) (5). The ability of a transit agencyto participate in state or local governmental pools isoften dictated by state law or the specific legislation

creating the pool. Transit agencies participate insuch pools regardless of size, but their participationdepends on the availability of a pool in their state ormunicipality and whether their institutional struc-ture allows them to join. Very few public transitagencies have joined captives (member-owned in-surance companies) because they require front-endinvestments and a long-term commitment. Chapter5 provides more insights into the characteristics ofcaptives.

Public transit agencies have two important con-siderations where casualty losses are concerned: theyare often in a position to invoke legislative restrictionson (1) their susceptibility to lawsuit and (2) the limitsof their liability. These agencies may also have publicfunds and the public treasury from which they maydraw financial strength, thus allowing them to self-insure. Self-insurance is generally a cost-saving mea-sure that includes the acceptance by the transit agencyof a high deductible on losses that occur. Specifically,the agency self-funds significant amounts of its ownlosses, usually beginning with the first dollar of lossupwards to perhaps $1 million, without seeking ordrawing upon the protection of an insurance pro-vider. However, beyond these levels, the large pub-lic transit properties generally obtain “excess” insur-ance from an insurance provider.

Insuring losses through excess insurance com-mencing at $500,000 or $1 million is very differentfrom seeking coverage after a $250 deductible. Thistype of high limits coverage, commencing at high lossdollar amounts and continuing to perhaps $20 millionor more, is generally available through certain spe-cialists in insurance, often companies that act as “re-insurers” themselves to other licensed primary (orlower limit) insurance providers.

Transit agencies in smaller jurisdictions are notable to participate in high limits insurance programsas easily as large properties. The financial resourcesor the willingness to accept large risks may not bepresent for these agencies to self-insure for a million-dollar loss. While a single million-dollar loss is in-timidating, the real risk to these properties and theirgovernmental owners is that several such losses couldtheoretically occur in successive weeks, resulting inhuge unanticipated payouts from the public treasury.Thus, smaller properties are more frequently found inthe traditional insurance marketplace.

Private contractors. A private business operatingon behalf of or under contract to a state or local gov-

8

9

ernment can fall into one of several categories basedupon the contract, operations, and type of serviceprovided. Obviously based on these differences, eachwill have a different perspective on insurance as abusiness problem. Private contractors can be insuredthrough government programs, adding their expo-sure to that of an existing government-owned fleet,or more likely, through a direct relationship with aninsurer who provides coverage as would be extendedto any private transportation company. Certain typesof operations will produce different perspectives to-ward insurance; for example, specialized paratransitin which the passengers tend to be more fragile willoffer a more difficult and costly insurance profilethan that of a rural, midwestern, general public tran-sit system.

From the results of the research study’s inter-views and surveys, public transit operators that arepublic agencies or part of local governmental unitsappear able to take part in state and local insurancepools—a significant cost saving. The public transitoperators with the fewest options (and those most af-fected in a hard market) are the private businessesproviding public transit under contract. These privatecontractors often cannot be part of the government-sponsored pool and, unless they are large enough toself-insure, they must purchase insurance from a thirdparty. Their insurance problems are exacerbated bytheir private status, which means that often they arenot afforded the limits on tort liability that govern-mental entities enjoy. Thus, a local community thatdecides to contract with a private business for theprovision of its public transit service may be morevulnerable to fluctuations in the insurance marketthan if it provided the service directly.

Private Coach Industry

Private coach operators serving the intercity,charter, and tour markets generally insure their risksby purchasing commercial liability insurance. Witha few exceptions, most private coach operators arenot large enough to self-insure (according to indus-try reports, 95% of the approximate 3,600 interstatecarriers nationwide have annual sales under $5 mil-lion, with the typical operator having approximately5 coaches). While not universally true, private coachoperators are generally subjected to mandates forhigher liability limits than public operators.

While some private coach operators are nowjoining pools, only a few are large enough to be in-

volved in a captive program. The rule of thumb isthat $1 million of premium is required to achieve therequired cost benefit from a single-parent captive (6).Similarly, to make participation in a multiple-parentcaptive or heterogeneous (association) captive finan-cially attractive, $500,000 of premium is required.Rent-a-captive programs (discussed in Chapter 5)can be advantageous with as little as $250,000 ofpremium, but even this level is beyond the vast ma-jority of private coach operators. And given that thecost for insurance constitutes a large portion of theoperating costs in their low profit margin business,these smaller private coach operators are the mostsusceptible to insurance market cycles.

When motor transportation of passengers wasderegulated in 1982 through the federal Bus Regu-latory Reform Act, legislators, regulators, and theindustry itself feared degradation of the industry’ssafety record. Until that time, strict entry require-ments (e.g., public convenience and necessity) hadmaintained the intercity, charter, and tour markets atperhaps 1,100 operating companies. After deregula-tion, the private intercity market was expected toand did mushroom in size. While the specific num-bers of companies doing business today vary, thereare likely 4,000 companies currently in operation,and large numbers of other bus companies have comeand gone in the intervening years.

As deregulation was being considered before pas-sage of the Bus Regulatory Reform Act, many soughtassurance for safety. The predecessor of the FederalMotor Carrier Safety Administration, the Bureau ofMotor Carrier Safety, was only marginally engagedwith the passenger transportation industry and hadfew resources, and the states provided little help.Thus, the insurance process became designated asa safety lever, one that would regulate who operatedprivate coach transportation, by making insurancecoverage available only to those companies that metwhat were presumed to be strict internal insurance in-dustry guidelines. To assist in the creation of this ap-parent insurance barrier to entry, insurance liabilitylimits were raised at that time, reaching per-incidentliability limit levels in 1982 of $1.5 million for smallcapacity (15 passengers or less) vehicles and$5.0 million for any vehicle with a larger capacity.That these limits were seemingly selected as barriersto entry rather than limits based upon perceived needseems evident: those same mandatory limits are stillin effect, unchanged, with no proposal to increasethem, 23 years later.

The anticipated role of the insurance industry asguardian of public safety failed to materialize. Eventhe perceived and anticipated barrier to entry forthose who wished to operate “on a shoestring” didnot materialize. The intensely competitive insurancemarketplace and high availability of coverage in theearly 1980s made insurance available to virtually anyenterprise wishing to provide private coach service.Even when new companies had difficulty obtainingor retaining coverage, either through their own or theactions of others, insurance coverage continued to beavailable, albeit often at higher costs, through the as-signed risk programs established in each state.

Thus, in historic terms, insurance has been read-ily available, with only infrequent interruption, sincethe advent of industry deregulation. Since deregula-tion of the private coach industry, only two times hasthe availability of insurance been restricted, andonly twice in those years (1985 and 2001–2002) hasthe industry ever been confronted with anythingother than an overall decline in premiums. Over aperiod of 20 deregulated years, then, literally a gen-eration of risk managers and insurance purchasers,as well as insurance underwriters and marketing per-sonnel, has grown accustomed to and anticipates lowor lower liability insurance premiums, with broadavailability from multiple providers.

3—IMPACTS OF CURRENT INSURANCEISSUES ON THE PASSENGERTRANSPORTATION INDUSTRY AND ITS RESPONSE TO THESE ISSUES

This chapter discusses the insurance crisis of thecurrent decade, including a synopsis of factors thatprecipitated this situation, and the issues and im-pacts that the crisis has had on the passenger trans-portation industry. This chapter also presents actionsthat the industry has taken in response to recent in-surance problems.

The Insurance Crisis of the Early 2000s

While the external market forces that influencethe insurance industry began pushing the insurancecycle into one of its periodic hard markets with thedownturn in the general economy by 2000, the in-surance crisis of the 2000s appeared to many in thetransportation industry to occur immediately after9/11. Thus, some attached a cause and effect rela-tionship to the two events, linked as they were by

huge financial losses. The terrorist attacks on thecountry became, for some, a convenient explanationfor the dramatically increased costs for insurance andmore limited availability by 2001 and 2002. Andwhile these attacks did have an enormous impact onthe financial condition of the insurance industry, theattacks were clearly not the sole cause, nor even ac-cording to most, the primary cause.

Impact of 9/11 on the Insurance Cycle

Passenger transportation liability premiums hadbegun to rise in early 2001, after almost 15 years ofsteady decline: the insurance cycle had begun toturn. However, this insurance cycle was differentfrom prior cycles: first, almost a complete genera-tion of insurance purchasers had grown up in a softmarket of easy availability and decreasing premiums;and, second, the terrorists attacks of 9/11, while notprecipitating the change in direction of pricing andavailability, exacerbated and accelerated the cycli-cal effect. While the experience of insurance pur-chasers was critical, in that their expectations wereshattered and they did not see the hard market com-ing, the second of these factors is the one that needsfurther explanation.

In the world of insurance, financial strength is themeasure not only of the insurance company’s size,but also of its ability to sustain the premium base and,ultimately, to grow by adding policyholders to itsbusiness. Insurers are restrained from providing addi-tional coverage to existing policyholders or addingnew policyholders by their ability to pay potentiallosses, that is, their financial strength. The amount ofcoverage that can be extended by a typical insurer isgenerally based on formulae and ratios that are estab-lished by the insurer, state regulators, and insurancecompany rating services. When an insurer sustainslosses that have a substantial impact on financialstrength, the result is often a need for that insurer toreduce written coverage or even to refrain from pol-icy issuance, most frequently accomplished by act-ing to withdraw from insuring less than attractivetypes of businesses.

Thus, the consequences of 9/11 included a suddenand severe shock to the financial strength of the in-surance industry. The huge losses that occurred cre-ated two requirements: an immediate need for insur-ers to restore balance between the amount of coverageextended and their new, lower financial strength anda need to begin to recover the dollar losses. Both of

10

these requirements worked to the disadvantage ofthe passenger transportation industry.

Passenger transportation’s history of decliningpremiums and rising loss costs throughout the 1990shad not been entirely unnoticed by the insurancecommunity. Thus, from an insurance perspective, alogical way to reduce coverage writings after 9/11was to eliminate unprofitable or marginal lines ofbusiness; and, in fact, insurers reduced availabilityof coverage to passenger transportation operators.And because dollar recovery was a high priority atthe insurer level and the insurance cycle had alreadybegun its upward climb, a faster pace to higher lev-els was not considered inappropriate. Interestingly,most of these forces were at work within insurancecompanies that the typical policyholder had neverheard of—the reinsurance provider. This level of cov-erage needs additional examination.

Role of Reinsurance in the Current Crisis

Insurers seldom accept the large levels of riskthat are incumbent in passenger transportation. Re-gardless of the form of coverage, when high expo-sure to loss is accompanied by high limits of liabil-ity, few insurers are willing to accept all of the riskalone. Realistically, single-loss limits of $5 millionor more can tax the financial strength of many in-surance companies. Thus, the primary insurer, thecompany that issues the policy to the passenger trans-portation operator, looks for its own insurance. Theprimary insurer will typically seek protection for it-self through the purchase of reinsurance, either onan individual risk it is accepting or through a generalreinsurance arrangement in which every policy is-sued in a specific line of business is reinsured. Theprimary insurer approaches other insurers who, fora portion of the premium paid by the policyholder,will accept the higher limits of risk.

Reinsurance is critical raw material for an insur-ance provider. Rather than accept all of the potentialrisk, the primary insurer may choose to create layersof coverage, where multiple reinsurers participate ina given policy, accepting, in successive layers, riskin return for a portion of the initial premium. Thus,in a hypothetical example, with a $5.0 million limitof liability policy, a primary insurer may actually beresponsible for casualty losses only up to $500,000;thereafter, one reinsurer may then be responsible forlosses up to $2.5 million and another for losses from$2.5 million up to the policy limit of $5.0 million.

The premium that the passenger transportation op-erator remitted to the primary insurer is then appor-tioned, under an agreed upon formula, amongst thevarious insurance providers.

These reinsurance relationships are all but invis-ible to the policyholder; only sound business prac-tices and periodic evaluation by state regulatorsplace restraints on what risks for how much pre-mium is transferred between insurers. And despitethe potential for participation of several reinsurers ina transaction, the reality is that the reinsurance com-munity of companies is a small one, where only afew companies will consider passenger transporta-tion as a class of business to reinsure. This adversereaction to passenger transportation adds to the po-tential for continuing insurance woes for the transitindustry.

The reinsurance market experienced particularlylarge losses after the terrorist attacks of 9/11. Withonly a small number of companies handling reinsur-ance, they reacted quickly to the enormous lossesthat were experienced, tightening the overall insur-ance market very rapidly. This fast response aggra-vated what had been a more gradual swing so thatthe insurance crisis seemed to hit hard right after 9/11.Ranks of the United States reinsurance market arecurrently very thin. In 1995, there were 59 reinsur-ance companies and, by 2003, there were only 29,less than half.

Current Insurance Issues and FactorsInfluencing Them

Current Insurance Issues and Their Impacts on Passenger Transportation Operators

From APTA surveys (7),project surveys, and in-terviews with federal officials and national organiza-tions, the primary insurance issues of the currentdecade include increases in premiums and decreasesin availability. Following is a review of the issuesand problems most noted during the research study.

Increased cost of insurance premiums. There is noquestion that in the early 2000s the cost of financingrisks in the public transit and private coach industriesincreased dramatically. The more the agencies andoperators were dependent on purchasing insurancefrom third party insurers for primary and/or excesscoverage, the more affected they were by the crisis.Agencies and operators that had already shifted toself-insurance programs, pools, or captive programs

11

12

were affected less, but affected nonetheless, since atleast a portion of their insurance was still purchasedon the open market. Further, even with self-insurance,the increased cost of medical care and large juryawards served to increase the losses for all.

PUBLIC TRANSIT AGENCIES. While the cost of financ-ing risks in the public transit industry did increasedramatically in the past few years, when adjustingfor inflation, the casualty and liability costs today formost public transit agencies with good loss recordsare close to what they were in 1996, before the in-surance cycle started upward.

According to the APTA surveys in June 2002and June 2003, insurance costs increased at a rapidpace in the early 2000s for all public transit modesand sizes of systems. The 2002 survey showed thatfrom 2000–2001, average premiums increased only4.2% across all types of agencies, but premiums in-creased 30.5% from 2001–2002. Based on responsesto the 2003 survey (different agencies responded),premiums rose over 50% from 2001–2002. Then in2003, the increases leveled off to 25%. Becausethese increases are not reported as premiums per ve-hicle, it cannot be said definitively that per vehiclepremiums increased this dramatically (the agenciesresponding could have increased their fleet size). Onthe other hand, the rates could have increased evenmore because the surveys do not indicate if the agen-cies changed their policies in an effort to controlcosts (by changing the deductible, etc.).

In this study’s survey, 87% of the state DOTsthat responded said that unanticipated or unwar-ranted increases in insurance premiums are a “criti-cally important” issue for the public transit agenciesin their states. According to those who responded,

• 36% said that liability premiums have in-creased 25% in the past 24 to 36 months;

• 29% said liability premiums have increased50% in the past 24 to 36 months;

• 14% said liability premiums have increased100% in the past 24 to 36 months; and

• 21% said liability premiums have increasedmore than 100% in the past 24 to 36 months.

Few of the respondents thought that the cost ofclaims or losses had increased within the transit in-dustry and most did not attribute the increase in pre-miums to operators not controlling losses effectively,although many did acknowledge the role that in-creased jury awards and overall inflation have playedin increasing the cost of insurance. There is a percep-

tion that the insurance companies increased premi-ums unnecessarily to cover their losses in their in-vestment income and the losses they incurred on 9/11.

National Transportation Database (NTD) datashow that casualty and liability costs of public transitagencies (on a per bus basis) dropped dramaticallyfrom 1996 to 2000 (8). Casualty and liability costs didincrease from 2000 to 2002 (the last date for whichdata are available) but, when adjusted for inflation,still have not met the 1996 levels (see Table 1 andFigure 1).

Losses were probably increasing for all agencies,not because of more accidents, but because judgmentsbecame higher (both out of court and jury awards).Those agencies that were self-insured or part of an in-surance pool were already paying for those increases.Agencies that were purchasing traditional insurance,where premiums were artificially low, saw large in-creases in premiums—and felt it more.

PRIVATE COACH OPERATORS. Based on the researchstudy’s interviews with national organizations andprivate coach operators, premiums for private oper-ators also increased substantially from 2000 to 2003.However, data supplied by one of the large insur-ance companies interviewed indicates that, based on2003 dollars, the average insurance premium for pri-vate coach operators was about $6,983 per bus in1986 and fell steadily in the 1990s to under $4,000per bus in 2000. Rates are currently about $6,100 perbus, which is lower than the 1986 levels.

However, these data do not say that some oper-ators were not affected more dramatically than oth-ers. While the average may be $6,100 per vehicle,based on the study’s interviews with the major coachoperator associations, the cost varies greatly by op-erator, depending on loss record, geographical loca-tion, and type of service being provided. Some op-erators, those unable to get commercial insurance intheir state’s assigned risk pool, are paying as muchas $28,000 per vehicle per year. Since insurance rep-resents a larger percentage of operating costs forsmall companies, these increases have led to somecompanies being forced out of business. The typicalsmall, private coach operator does an excellent job ofmanaging costs, better than many other small busi-nesses; however, any “bump” in costs has a greaterimpact. The increase in insurance costs after 9/11was more than a bump for many of the operators.

Decreased availability of insurance. There is alsoconsensus that the availability of insurance has been

decreasing for passenger transportation operators, interms of the number of companies willing to writepolicies and number of quotes received.

PUBLIC TRANSIT AGENCIES. According to surveys andinterviews of state DOTs, associations, and providers,insurance was less available during the hard marketperiod of this recent insurance cycle. The majority ofrespondents to the state DOT and association surveysindicated that cancellation of coverage, limited or nochoice of insurers, and insurers withdrawing from themarket are critically important issues to the publictransit systems in their state.

PRIVATE COACH OPERATORS. Respondents reportedthat some private coach operators could not get in-surance, while others had only a few companies will-ing to give them quotes.

Other liability issues raised through research studysurveys and interviews. In addition to the increasesin liability costs and decreases in availability of in-

surance, four other issues were raised during thecourse of this study:

• Operators that use non-hire, non-owned ve-hicles (volunteers) are having a hard timegetting insurance and when they do, it is veryexpensive.

• Some states have begun requiring an increasedamount of coverage. One state indicated thatit no longer has governmental immunity andcan be sued. In response, this state is requiringits public transit agencies to carry high limitson their liability. Other states indicated thatthey were increasing insurance requirementsin response to losses of 9/11. Regardless ofthe reason for the increased requirements, theeffect is an increase in the cost of premiums.

• Some governmental pools that previously al-lowed private, non-profit agencies to partic-ipate if they provided public transit under agovernmental umbrella are no longer allowing

13

Table 1 NTD data on casualty and liability expenses

Casualty and Liability Expenses per Vehicle*

Demand- Percent Motor PercentYear Responsive Change Bus Change

1996 $2,926 $6,2631997 2,962 1% 5,972 −5%1998 2,928 −1% 5,792 −3%1999 2,600 −11% 5,450 −6%2000 2,568 −1% 5,573 2%2001 2,674 4% 6,054 9%2002 3,369 26% 6,747 11%

Casualty and Liability Expenses per Vehicle* in 2004 Dollars**

Demand- Percent Motor PercentYear Responsive Change Bus Change

1996 $3,536 $7,5721997 3,501 −1% 7,058 −7%1998 3,408 −3% 6,741 −4%1999 2,960 −13% 6,206 −8%2000 2,828 −4% 6,139 −1%2001 2,864 1% 6,484 6%2002 3,551 24% 7,115 10%Overall Change 0% −6%

1996–2002

* Average for agencies reporting—reports of less than $100 per vehicle wereeliminated from the dataset.** Using average Consumer Price Index for all urban consumers.

14

them to participate. As a consequence, theseagencies have had to go to the traditional insurance market for insurance. The reasonfor this shift in policy is not clear; possiblythe private, non-profit agencies should nothave been in the pool in the first place or thestate is re-assessing the risks of allowing non-governmental units to participate.

• Some respondents indicated that the availabil-ity of excess liability insurance is the greatestproblem they face.

Factors Influencing Price and Availability

The surveys and interviews of state DOTs, stateassociations, and providers shed light on the factorsthat the industry thinks have played a part in the in-creasing costs and decreasing availability of liabil-ity insurance.

Type of entity. Private entities, especially those notcovered by the limits on liability afforded most pub-lic transit operators, have been more affected by therecent insurance crisis than have public entities. Re-

spondents noted that restrictive rules for participat-ing in municipal or other governmental insuranceconsortium may keep some public transit operatorsfrom joining.

Operating environment. Higher premiums were re-ported in more urban environments because of higherexposure. Some respondents also mentioned moun-tain areas as having higher premiums. (Premiumsare linked to base of operation rather than to wherethe bus operates.)

Type of clientele. Higher insurance costs were re-ported for entities that transport more vulnerableclientele (elderly, disabled).

Geographic differences. Providers in states wherethe tort and liability climate is not favorable re-ported higher increases because of the litigious na-ture of the states. Areas most affected by the ter-rorist attacks of 9/11 also reported higher increasesthen the rest of the Northeast. Respondents also re-ported that states with consumer-oriented climates(e.g., Maryland and Massachusetts) are less at-

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1996 1997 1998 1999 2000 2001 2002

Year

Exp

ense

per

Veh

icle

Demand Response

Motor Bus

Figure 1 NTD casualty and liability expenses—2004 dollars.

• Becoming more aware of insurance pricingstructure.

Both anecdotal evidence and survey data indi-cate that many transit agencies are responding to thecurrent insurance crisis by adjusting insurance poli-cies to control costs. Comparing the 2002 and 2003surveys conducted by APTA shows that, during the2002 renewal cycle, transit systems were adjustingtheir coverage and deductibles and were looking foralternative ways to insure their risks. The Self-InsuredRetention (SIR) and deductible levels reported in2002 ranged from $5,000 to $5 million for multi-modal and large all-bus systems (the survey did notdistinguish between self-insured retention and de-ductible levels) and the range for small all-bus sys-tems was from $250 to $1 million. In the 2003 sur-vey, the transit systems reported higher limits witha maximum of $7.5 million for multi-modal andlarger all-bus systems and $2 million for smaller all-bus systems; systems seem to have been buyingmore coverage. Also more of the larger all-bus sys-tems seem to have been self-insuring because the de-ductibles and/or SIR are higher and more first dollarcoverage was being sought by smaller all-bus sys-tems (decreasing the deductible or SIR to 0).

Most state DOTs and associations responding tothe study surveys indicated that none or only someof the agencies in their states had attempted to con-trol premiums and losses by

• Changing internal claims administration;• Becoming more active in claims administration; • Changing their claims handling policy (for ex-

ample, increased resistance to payment);• Retaining the services of an insurance consul-

tant; and• Reducing or eliminating broker involvement

or fee.

According to the state DOTs and associations, themost common risk mitigation or loss control strategytaken by transit agencies in their states has been toraise fares to cover the increased cost, although mostindicated that only some of their agencies had re-sorted to this tactic. Other common strategies re-ported include

• Implementing a fraud deterrent program,• Adding or increasing the role of an internal

risk manager, and• Increasing safety and security programs and

loss control efforts.

15

tractive to insurers and, as a consequence, somecompanies will not write policies in those states.This refusal to insure is not a problem in a soft mar-ket because there is more competition, but it becomesan issue in a hard market.

Cost of defending claims. The respondents alsothought insurance costs had been affected dispro-portionally by the cost of defending claims, higherawards, and attorney involvement in the process.

Changes in state insurance requirements. Respon-dents reported that some state programs are requir-ing a higher coverage for passenger transportationservices.

Lack of understanding of passenger transportationby insurers. Some of those interviewed felt that in-surance companies and underwriters increased somepremiums because they lacked an understanding ofthe passenger transportation industry, particularlythe exposure and potential for losses.

Lack of understanding of insurance and risk by pas-senger transportation operators. On the other hand,some respondents felt that passenger transportationoperators, especially smaller ones, commonly un-dervalue their risk and fail to plan for losses, effec-tively underinsuring. Also some believe that manyoperators become complacent with the low prices ofa soft market and do not plan financially for in-creased prices that are bound to come when the mar-ket hardens.

Actions Taken in Response to Insurance Issues

Public Transit Agencies

State DOT and transit association surveys re-ported a number of efforts by transit agencies to con-trol the insurance costs and losses. While the respon-dents generally did not report that any one measurewas used by many or most of the agencies in theirstates, the majority reported that some operators hadattempted to control premiums and losses by

• Voluntarily changing insurance carriers, • Involuntarily changing insurance carriers, • Changing the limits or type of coverage, • Increasing their deductible, • Meeting with insurance company personnel,

and

About one-third of the state DOT respondentsreported that some public transit agencies had ceasedto operate a portion or all of their services.

Private Coach Operators

Representatives of the private coach operatorssought to control insurance costs and losses by

• Down-sizing their fleets;• Increasing liability insurance deductibles;• Eliminating coverages or reducing limits to

the extent permissible by law;• Delaying equipment purchases;• Creating “work arounds” to lower insurance

costs (for example, some operators are usingan out-of-state address for a domicile that of-fers lower rates);

• Dropping insurance all together (some opera-tors have chosen to drop their insurance cov-erage in disregard of the law);

• Improving safety (some are looking for waysto improve safety even though improvementsin loss records do not translate into reducedpremiums in the short term); and

• Staying in the assigned risk pool (sometimesinsurance is cheaper for an operator in the as-signed risk pool).

Many anecdotes report that small, private char-ter and tour operators were forced out of business byinsurance problems (confirmation is hard to obtainbecause many factors could have contributed to thedemise of private charter and tour operators in thewake of 9/11, including the loss of business andtourist trade in general).

State DOTs and Industry Associations

State DOTs and transit associations were askedwhat activities they have undertaken to assist oper-ators in their states or their members with insuranceproblems. The two primary activities undertaken bystates were to increase communications on insur-ance issues among providers and offer educationalprograms for operators. Only a few state agenciesreported other activities, such as adding an insuranceprogram, creating new types of insurance for opera-tors (9), introducing legislation or tort reform, meet-ing with insurance providers on behalf of operators,or creating a hot line for assistance. Clearly, the stateDOTs and state transit associations see their role indealing with this issue as one of education ratherthan direct intervention.

Similarly, the national associations interviewedreported that they are hampered from taking actionsince insurance regulations are so state based. Noneof the national associations has been involved in push-ing any federal insurance legislation or tort reform.

4—IMPACTS ON THE TRAVELING PUBLIC

The impacts of the current insurance crisis onthe traveling public appear to be subtler than theyhave been on the passenger transportation operators.Survey and interview information obtained throughthis research study indicate some operators raisedfares and limited or eliminated certain services be-cause of the increased costs for insurance. More sig-nificantly, there are reports of bus operators, partic-ularly private ones, that have been forced out ofbusiness because of the insurance crisis and of someprivate operators that are operating illegally withoutliability insurance.

On the positive side, the greatly increased costsfor insurance, particularly for private operators, haveengendered a new, stronger focus on safety and train-ing, as reported by a number of operators. To the ex-tent that such focus may improve safety for the trav-eling public, the impact is positive. This chapterpresents the limited information that the researchstudy obtained on the impacts of the current insur-ance crisis on the traveling public.

Impacts from the Public Transit Agency Perspective

Many of the state DOTs and state public transitassociations that responded to the survey indicatedthat the public transit agencies in their states have hadto cut services and raise fares because of increasinginsurance costs (10). Additionally, one-third of stateDOTs and 20% of state transit associations indicatedthat public transit agencies in their states have left themarket or cut service because of current problemswith liability and excess insurance coverage.

One of the state DOTs that responded to thestudy’s survey noted that safety has been affectednegatively because so much cash flow is tied upwith insurance, which does not provide any real ben-efits. This report directly contradicts reports by manyother operating entities that increased their focus onsafety in efforts to control losses. A transit associa-tion respondent reported that the increased insurancecosts have forced agencies to enact less customer-

16

friendly policies; for example, paratransit agencieschanged from door-to-door service to curb-to-curbservice, resulting in somewhat less liability for pas-senger accidents related to getting to and from thebus boarding area.

Reduced contractor competition may be anotherindirect impact for public transit operations in whichservices are contracted out to private entities. Someprivate entities have gone out of business because ofescalating costs, particularly insurance, and somemust bid much higher because of increased insur-ance costs. Because many public agencies look forlow bids when awarding transit operations contracts,private contractors that must adjust their cost struc-tures to reflect greatly increased insurance costs willbe disadvantaged. Private contractors that are able tokeep their insurance costs lower, through either al-ternative insurance models or stellar loss histories,may be better positioned to provide lower bids forpublic transit contracts.

Also, when public agencies frequently changetheir private contractors in search of lower bids in anenvironment of increasing costs, resulting to someextent from insurance, the public agency’s transitprogram and its passengers will be affected morefrequently with the typical disruptions that accom-pany changes in contractors. While such disruptionsare usually minor, they can affect a public transitprogram adversely.

Impacts from the Private Operator Perspective

Information obtained during this study indicatesthat there have been greater impacts on private oper-ators and their traveling public than on public transitagencies and their traveling public. These impactshave included increased costs for transportation,fewer operators available in markets where bus com-panies have gone out of business, and an apparentand reported increase in the number of private oper-ators that operate without insurance. However, therewere also reports of private operators that have fo-cused new attention on safety, as a way to mitigateincreased insurance costs. To the extent that suchfocus results in safer operations, it affects the trav-eling public beneficially.

Cost Increases for the Public

Private operators may be able to implement fareincreases more easily than public transit agencies.

And clearly, fares charged for charters and tours haveincreased in many cases because of increased in-surance costs. One larger operator on the East Coastindicated that it added a specific insurance sur-charge to help cover insurance costs, which doubledin 2001–2002.

Operators Going Out of Business

Interviews with representatives of the two na-tional private operator associations revealed that therehave been instances of private operators forced outof business because of the current insurance crisis.One association, with a membership total of about800, indicated that a “handful” of its members—perhaps five to ten—went out of business citing in-surance costs as a primary reason. The other associa-tion, with a slightly larger bus operator membershipbase, indicated that right after 9/11, 347 private busoperators went out of business, which representedabout 10% of registered private bus operators at thattime. While the specific role that insurance played inforcing these operators out of business is not clear,the increased costs and limited availability clearlywere detrimental to the operators’ continued business.

Uninsured Private Bus Operations

One of the clear consequences of the insurancecrisis of 2001–2002 was an increase in the numberof private bus operators that began to operate with-out liability insurance. While hard data on the extentof this trend are difficult to obtain, it was mentionedby most of the private bus industry representativesinterviewed for the study. According to those inter-viewed, the number of such operators was “proba-bly not large,” but the potential impacts on the trav-eling public and the public at large of such uninsuredbus operations are serious.

The U.S. DOT’s FMCSA, which is responsiblefor licensing private bus operators and ensuring thatthey have mandated insurance coverage, indicatedthat there were a number of high profile accidents in-volving private bus operators that had no insurancein the period leading up to and into the era of the2001 insurance crisis. These accidents, coupled withtips from legitimate private operators about unin-sured bus operators that were later verified, havegiven the FMCSA a recently acquired focus on in-surance. The FMCSA streamlined its process for re-voking the operating authority of private operatorsbased on a lack of insurance. The revocation process

17

used to take close to 3 months; it now takes an aver-age of 36 days. While some of the revocations are re-portedly purposeful (an operator voluntarily lets itsauthority be revoked as a temporary way to addressits inability to get insurance), others have been re-voked adversely. And the numbers of revocationsare up, according to the FMCSA, but isolating whatpart of the increase in revocations is from the im-pacts of the insurance crisis and what is from thestreamlined revocation process is difficult.

Also the FMCSA has moved to make its regula-tions more enforceable by creating an ability for in-spectors at roadside to check on the insurance statusof private operators they stop for other reasons.

According to the FMCSA, its data on revocationsreportedly have not shown a geographic pattern.What the data do show is the revocations have beenconcentrated within the smaller private operators.Given that 95% of the private operators are classifiedas small, the revocation pattern is not surprising.

New Focus on Safety

A positive impact on the traveling public may bea new focus on safety because of the insurance cri-sis. Several private operators noted that they had im-plemented new safety programs, such as award pro-grams and other incentives for safe drivers. Anotheroperator reported the creation of a new position inhis company to specifically address safety and train-ing. One operator on the West Coast noted that he istaking a harder look at applicants for driver positionsas well as at his current drivers, terminating severaldrivers who compromised the new higher safetystandards.

Summary

The current insurance crisis appears to have hadfewer direct impacts on the traveling public than ithas had on the passenger transportation operators,at least in the short term. Reportedly, some opera-tors raised fares and reduced services; some bus op-erators (particularly private ones) were forced outof business; and some private operators began op-erating illegally without liability insurance. How-ever, the increased cost of casualty and liability in-surance has created a stronger focus on safety andtraining; therefore, to the extent that this focus im-proves safety for the traveling public, the impact ispositive.

5—ALTERNATIVE INSURANCE MODELS

Over the past 20 years, beginning largely withthe insurance crisis of the mid 1980s, interest andparticipation in alternatives to traditional insurancehave increased. Since the last insurance crisis, in-creasing numbers of operators have moved towardsnon-traditional insurance models. According to theAmerican Insurance Association, of the passengertransportation industry’s total exposure for risk, todaya smaller percentage is insured by traditional insur-ance companies than in the past. Operators have hadto find alternatives, given their difficulties in hardmarket years; however, the movement towards al-ternatives has been somewhat different for publicoperators than for private operators.

In general, the alternatives to traditional commer-cial insurance are self-insurance, insurance pools, andcaptives. This chapter describes the function and gen-eral advantages and disadvantages of traditional in-surance and several specific, more commonly appliedinsurance alternatives.

Traditional Insurance

Traditional insurance is obtained through a com-mercial insurance company. The insurance companybecomes, through a contractual relationship, finan-cially responsible up to the policy limits for the op-erator’s losses, upon payment of a premium to theinsurance company. Support functions, such as claimshandling, are typically the responsibility of the com-mercial insurance company but may be handled bya third party administrator or by the policyholder it-self (in-house staff).

In most insurance scenarios, a premium cost isestablished as a set and predetermined cost to thepolicyholder for the year. The premium may be basedon vehicle counts, miles operated, or monetary re-ceipts. The premiums are typically paid in install-ments through the policy year at established intervals;however, some programs include advance paymentand post policy adjustments based upon actual re-sults. Most critically, premium costs are predictablewithin the policy period, and—excepting changes toconditions, fleet operations, and loss experience—premiums are anticipated not to change dramaticallyyear to year. Within the assessed premium are sumsfor loss payments, insurer expenses, governmentfees, services, and other management functions al-lowing the insurance company to manage and ad-minister the policy and to realize a profit.

18

With traditional insurance, the policyholder maydecide to cover every dollar of all of its losses. Thistype of coverage is known as first dollar coverage,as all costs associated with a claim are administeredand paid by the insurance company. A common vari-ation of this most expensive insurance format is forthe policyholder to establish a deductible, for whichthe insured is responsible for paying the specifiedamount for each claim incurred. Once a claim hasbeen submitted, the payments are shared betweenpolicyholder and insurer, with the policyholder re-sponsible for an initial portion and the insurer re-sponsible for the balance up to the policy limit. Theterm SIR is often used synonymously with deduct-ible, but there are minor distinctions. A SIR is typi-cally for larger levels of risk retention than with de-ductibles. And with a SIR, the insured typically isresponsible for claims handling, with an audit pro-vision exercised by the insurer; whereas with deduct-ibles, the insurance company handles all associatedadministrative tasks.

Advantages

• Costs for premiums are known and are stableon an annual basis. No assessments or callsfor additional funding will occur in the ab-sence of a specific action by a policyholder(e.g., a change in fleet size). This alternativemay be more suitable for smaller operatorswho have more limited operating funds or re-serves to deal with insurance costs that mayfluctuate greatly over a short period of timethrough a self-insurance model.

• Traditional insurance does not require any up-front capital contribution for participation, asis true for some of the other models.

• There is no ongoing operational responsibilityor day-to-day costs for the administrative func-tions related to insurance. Neither are thereneeds for special training, internal skill de-velopment, nor claims management, as thesefunctions are all outsourced to the insurancecompany.

Disadvantages

• With the associated administrative and relatedcosts of the insurance company, premiums fortraditional insurance may be higher than nec-essary for the individual policyholder. Fur-ther, premiums will include a mark-up for the

insurer’s profit, with the result that costs, atleast in theory, can be higher over time thannon-traditional insurance.

• Premiums may change over time based on fac-tors beyond the operator’s control. For exam-ple, an operator may have had a superior safetyrecord but may still see an increase in its pre-mium costs from year to year.

• Traditional insurance may be difficult to ob-tain when the insurance market is hard, and itmay be very costly during such times.

Self-Insurance

With the self-insurance model, the passengertransportation operator pays its own losses, up tosome predetermined limit, from its available funds(usually through operating expenses or from a re-serve fund). The operator provides the initial layer ofcoverage up to the limit and then adds higher levelsof coverage through relationships with traditional in-surers, generally by purchasing excess insurance.

More specifically, the policyholder, in conjunc-tion with the insurance company, establishes layersof insurance, with each party responsible for thelosses that occur within its own layer of coverage re-sponsibility. The policyholder is typically responsi-ble for losses from the initial or first dollar, up to anagreed amount, for example, $100,000 or $250,000.From that claim level upward, a traditional or rein-surance company would take responsibility for pay-ments up to some policy limit level. Thereafter, sep-arately purchased excess or umbrella coverage mayadd financial protection from the policy limit upwardto some exceedingly high limits, perhaps $20 million.The administrative functions of insurance, certainlyincluding claims handling, can be performed by in-house staff, cooperating insurer, or a third party ad-ministration firm.

Operators will choose self-insurance when thecosts of potential losses, administrative costs asso-ciated with insurance, as well as a contingency al-lowance, are determined likely to be less than thecost for traditional insurance. However, because thenumber and seriousness of losses are not known inadvance and can only be estimated, there can be sig-nificant fluctuations in annual loss costs dependingon results. While these fluctuations are the responsi-bility of the policyholder within the self-insured layer,high dollar risks are typically transferred to a tradi-tional insurer.

19

Generally, self-insurance regulations are set bystate and differ state by state. Some jurisdictions mayimpose limitations on passenger transportation op-erators that wish to self-insure. For example, an op-erator may have to provide evidence to the state in-surance regulators that it has the financial capacityand administrative resources to self-insure. Such re-quirements for self-insurance, however, may notapply for public agencies given the legal status andfinancial backing of public entities.

Advantages

• The operator’s safety record directly corre-lates with the cost for its losses.

• The operator has more control over claims han-dling and settlement decisions.

• The operator does not have to deal with theswings of the insurance cycle, an advantagewhen the market is hard and traditional insur-ance difficult to obtain.

Disadvantages

• Costs for insurance may fluctuate greatly de-pending on actual claims costs.

• This model is generally not feasible for smalleroperators, who lack sufficient financial re-sources to handle the risk potential fluctuationof self-insurance.

Insurance Pool

Another insurance model that gained new popu-larity in the transportation industry after the insur-ance crisis of the 1980s is the insurance pool. In thisarrangement, a group of passenger transportationoperators jointly fund each other’s losses. Memberscontribute to the pool, which is then used to pay forclaims and/or purchase excess insurance. Adminis-trative functions can be handled by staff of the poolor contracted out.

Insurance pools are more common with publictransit agencies. However, the Risk Retention Act of1986, passed to address some of the problems asso-ciated with the insurance crisis of the 1980s, facili-tated the use of insurance pools by private operators.The Risk Retention Act effectively removed individ-ual state licensing and oversight from such groups.

Pools function more similarly to insurance ratherthan self-insurance. The pool member pays into thepool’s fund and receives insurance coverage. Pools

20

offer the potential for modest size operators to cre-ate purchase groups with larger premium bases, thusattracting the interest of investment-minded insur-ers. Funds from the pool are used to pay for claimsabove the pool member’s deductible, up to the pool’smaximum retention. Beyond this, the pool typi-cally purchases excess insurance, for the next layer,which applies for losses that exceed the pool’s max-imum (11). Insurance pools are able to provide someof the cost savings of self-insurance, compared totraditional insurance, but because of the group na-ture of the arrangement, is able to avoid some of theinstability that may characterize self-insurance andthe cycles of the traditional insurance market.

There are generally two ways to finance pools (12):

• In pools that are totally self-insured, pool mem-bers contribute funds for not only the costs tomeet annual losses but also the reserve fund topay for unreported losses, for losses that re-quire more than 1 year to settle, and for ongo-ing administrative costs to run the pool. Es-sentially, with pure self-insurance pools, thepool members pay for all the costs, with norisk shifted from the pool to an insurance car-rier via a reinsurance policy.

• Pools that are partially self-insured combineaspects of pure self-insurance and traditionalinsurance. With this version, a significant por-tion of the contributions from pool membersis assigned to a loss fund from which claimsare paid. In addition, reinsurance is purchasedto protect against single large claims. Reinsur-ance may also be purchased to cover claims inexcess of the cumulative dollar amount of theloss fund. These elements of the insurancepool mean that the members are less exposedto financial contributions, keeping contribu-tions less than with a pure self-insurance pool.

Current Transit Insurance Pools

Based on information from the Association ofGovernmental Risk Pools, there are currently fivestates that have transit-specific insurance pools. Manyothers have local government pools in which transitagencies may participate.

Of the current transit-specific insurance pools, theCalifornia Transit Insurance Pool (CalTIP) and theWashington State Transit Insurance Pool (WSTIP)may be the larger and more established ones. Cal-TIP, formed after the last insurance crisis in 1987, is

a joint powers insurance authority, organized specif-ically in response to the lack of liability insurancefrom commercial insurers. Originally with 12 tran-sit agency members, CalTIP now has over 30 mem-bers. CalTIP’s liability coverage program gives mem-bers different options on a deductible—from firstdollar up to a much higher $250,000. The organiza-tion self-funds, through pooled funds from mem-bers, the first $1 million of coverage (inclusive of themember’s deductible). CalTIP then purchases ex-cess insurance for its members, at a level of $4 mil-lion above the first $1 million layer of coverage.Members also have the option of purchasing twomore layers of insurance: an additional $5 million(so that they have $10 million in coverage) and an-other additional $10 million (for a total coverage of$20 million).

Transit-specific pools may offer programs to in-crease safe operations, which ultimately benefits allpool participants because accidents and claims maydecrease. WSTIP, for example, has its “best prac-tices” program, which has established standards foroperations in a number of areas. Member transit sys-tems are reviewed to assess their compliance withthe best practices and their performance in meetingthe standards. A member’s deficient areas are givenfocused attention by the member and WSTIP, whichprovides technical and financial assistance to helpthe member achieve the standards.

The Virginia Transit Liability Pool is an exam-ple of a smaller transit-specific pool. Established in1987 in response to the insurance crisis of the 1980swith six original members, the organization hasgrown to ten members. In a similar way as CalTIP,the Virginia pool offers flexible deductibles. Thepool’s board of directors, which includes represen-tation from the majority of the members given thesmall size of the organization, determined that eachmember is to have at least $10 million in coverage.With member contributions, the pool self-funds thefirst $1 million in coverage and purchases reinsur-ance to provide the remaining $9 million in cover-age. State law prohibits private entities, such as pri-vate, non-profit transit operators, from joining theVirginia Transit Liability Pool. However, publicagencies that use private contractors to operate ser-vices may be members of the pool, as the service is“owned” by and the ultimate responsibility of thepublic agency.

Local government insurance pools may also bean option for a transit operator. In Maryland, the

Local Government Insurance Trust (LGIT) includesa number of members that are transit operators, in-cluding private non-profits. However, for a privatenon-profit to be eligible to participate in LGIT, it mustbe subject to the Local Government Tort Claims Act,which establishes financial and other limits on theextent to which a local entity may be found liable.This act sets out specific criteria that must be met.Reportedly, at least one private, non-profit transitoperator that had been covered through LGIT lost itsinsurance coverage through the pool and went to atraditional insurance coverage, with its annual in-surance cost increasing almost eight-fold in 1 year.Such huge increases are very difficult for most tran-sit operators to sustain, and alternatives must besought.

Association County Commissioners of Georgiais another example of the many different state in-surance pools for local government; it provides in-surance to the public transit systems of a number ofits member counties through its Interlocal Risk Man-agement Agency. This self-insurance pool is ownedby member entities and managed by a board oftrustees who are representatives from participatingcounties. The pool began in 1987 with 14 countymembers, and now has 123 members.

In the State of Washington, the insurance prob-lems of 2001–2002 spawned a new insurance poolspecifically designed for non-profit agencies. Over a3-year period beginning in 2001, several actuarialstudies were done and state legislation was intro-duced and ultimately passed authorizing the forma-tion of the non-profit insurance pool. The Non-ProfitInsurance Program (NPIP) formally began in thesummer of 2004 with 28 members, including para-transit providers, Chambers of Commerce, Boys andGirls Clubs, and low-income housing agencies. Inless than 6 months, NPIP’s membership grew to over70 members. Such growth indicates the need for analternative insurance model for non-profit agencies,many of which were hit hard by the hard insurancemarket of 2001–2002.

An interesting variation of an insurance pool isthe Transit Mutual Insurance Corporation of Wis-consin. This company evolved through efforts of theState of Wisconsin and its public transit agencies,beginning as a joint purchasing group for insurancecomposed of more than 15 public transit systems inWisconsin. Faced with significant cost increases dur-ing the insurance crisis of the mid 1980s, the groupformed its own mutual insurance company in 1986

21

(effectively creating a captive insurance company),working with the state and its commissioner of in-surance to secure the necessary approvals for for-mation of such a private entity. Currently, all publictransit systems in Wisconsin, except for MilwaukeeCounty Transit System (which is self-insured) andtwo small public transit systems, are part of and ob-tain their insurance from the Transit Mutual Insur-ance Corporation of Wisconsin (13).

Advantages

• Costs for insurance tend to be less than com-mercial insurance, particularly over time, asthe pool does not have some of the overheadand other expenses that exist for traditionalinsurance.

• Pools have generally good cost stability, asthey spread the annual cost fluctuations thatmay characterize self-insurance among all poolmembers and are not subject to the same over-all market effects that affect traditional insur-ance companies.

• Individual pool members gain from the scaleof the program with additional services andcapabilities that might be outside their reachindividually; these services might include pur-chasing help, claims management, and losscontrol.

• Individual pool members may also benefit ifthe pool offers specific assistance to its mem-bers in techniques and best practices for im-proving transit safety and operations.

Disadvantages

• Participation requires a time commitment. Ina soft insurance market when insurance costsmay be less using traditional commercial in-surance, pool members are obligated to remainin the pool even though costs may be higher.

• Depending on how the pool is structured, addi-tional funds may be assessed, if the pooledfunds are not adequate to cover losses that havebeen anticipated under the self-insurance layer.

• If there is no insurance pool in the area, thismodel is not an option.

• Members have less control over claims han-dling and settlement decisions than with self-insurance (but more so than with traditionalinsurance).

Captive Insurance Companies

Of growing interest in the passenger transporta-tion industry is the captive insurance model. A cap-tive is a member-owned insurance company thatprovides insurance coverage to its members. Eachmember is charged a premium for an equitable shareof the group’s estimated losses as well as ongoingoperating costs. The ongoing related administrativecosts of insurance are generally handled by a captivemanagement company. Generally, such insurers arecreated by specialists in the field of captive creation,who utilize a blend of reinsurance and traditional in-surer services to form a company that has reasonableprospects for survival.

Members fund the start-up of a program, join thecompany as policyholders paying their premiums tothe captive, and then abide by the rules and stan-dards of the organization. Through ownership andrisk sharing, the perception, if not reality, is thatmore individual control is obtained for the individ-ual members. The captive must, however, obtain fi-nancial strength through relationships with moretraditional insurers; thus, the captive is still subjectto some market swings, especially in reinsurance,associated with the insurance cycle.

There are three types of captives:

• A single-parent or equity captive is owned byone large company.

• A group captive (also known as an associationcaptive or risk retention group [14]) allowstwo or more organizations to pool their finan-cial resources so that they can assume an evenhigher level of risk than any one of them couldunder an individual self-insurance program.Typically, this sharing of resources providesfor primary liability insurance, with excess in-surance purchased for catastrophic losses. Re-funds are given or assessments made to mem-bers depending on actual experience and costsfor claims. In this way, members of the cap-tive have far more control over their insurancecosts than with traditional insurance.

• A rental captive, which does not require anup-front capital investment, is a variation onthe typical member-owned captive. The cap-tive and the associated capital, regulatory, andadministrative requirements are rented or bor-rowed from an insurance company instead ofowned directly. However, members do holdsome control over the rental captive; they de-

22

23

cide on new participants, how their funds areinvested, and the services and coverage thatare provided.

Participation in a captive generally requires that amember commit to several years of active participa-tion. Given the organizational structure and require-ments, participation in a captive is not a short-term so-lution to an increased premium from a traditionalinsurance company.

Captive insurance programs were found to be al-most exclusively for the private passenger trans-portation industry (15). The requirements for front-end investment, contractual long-term participation,and liability potential seem to preclude public entityinvolvement. While not a major factor in private en-tity coverage, captive insurance programs have beenestablished, are currently operating, and seem to bemaintaining their financial health.

Many of the characteristics of captives are sharedwith insurance pools with the following differences:

• Captives require domiciles that allow their op-eration. Captives generally seek less-restrictive,tax-advantageous locales;

• Captives generally require periodic reevalua-tion of the performance of members;

• Captives are regulated more closely than in-surance pools, which may increase organiza-tional expenses when compared to pools; and

• Captives usually have formal requirementsfor capital contributions, which pools may nothave (16).

Advantages

• Captives tend to be relatively stable in termsof cost over time, compared to traditional in-surance and self-insurance, by spreading costfluctuations among the members. With self-insurance, cost changes can be large from yearto year, and traditional insurance costs tend tofluctuate with the insurance cycle, which is in-fluenced by the overall economy.

• Members have control over their insurance,and the safety records of the captive’s membersdirectly correlate with costs for the insurance.

• Members may realize a return on the under-writing profits and investment income, depend-ing on the actual losses.

• Captives may be effective in increasing stan-dards for risk management, as members exert

pressure on each other to minimize losses, andtherefore, claims and costs.

• Captive insurance programs, done well, seemto offer opportunity to transit operators to avoidthe availability crises, if not the pricing prob-lems, that periodically recur. A captive insur-ance company offers unique opportunity formembers to create the best possible insuranceclimate, with consistent, less cyclical pricingand potential for ownership benefits.

Disadvantages

• Joining a captive requires an up-front capitalcontribution, essentially an equity interest orshare of stock, which may be a hardship forsome operators.

• Membership in a captive requires a timecommitment because of the financial commit-ment up-front. It is not a short-term solutionfor insurance.

• Given that insurance costs are shared amongthe members, a major loss would affect allmembers of the captive.

• The captive insurance company has the po-tential weaknesses of inadequate capitalization.

• If operators are not granted membership selec-tively, operators with marginal safety recordscould cause negative financial consequencesfor the group as a whole.

• Perhaps the biggest disadvantage is the lack ofa state-backed fund to pay claims unable to bepaid by the captive insurance program shouldit become insolvent. This lack creates a po-tential for the operator to be liable for lossespresumed to be insured.

6—MITIGATION ACTIVITIES AND STRATEGIES

The liability insurance problems that became ap-parent by 2001–2002 were the result of macroeco-nomics, the genesis of any insurance market swing, aswell as the economic and insurance aftermath of 9/11.That insurance cycles will continue is simple reality,but what can and should change is how the passengertransportation industry functions within this cyclicalclimate. Clearly, operators who have good safetyrecords have done much to help themselves, but thelimited impact such internal controls can have onmultiple outside forces must be recognized.

Public and private operators would be wise toexpand on intervention strategies that have beenidentified to make the passenger transportation in-dustry more attractive to the insurance industry. Ifthe passenger transportation industry is not mademore attractive, the list of companies willing to offerinsurance coverage to public and private operatorswill continue to erode, regardless of the condition ofthe insurance market. In the absence of action, in-surers, both individually and as a community, willelect to place their money and attention elsewhere,especially during high price and low availability(hard) insurance markets.

Despite the macroeconomic environment overwhich individual entities have virtually no control,operators and others such as state governments andpassenger transportation associations can performsome activities and strategies to mitigate the adverseimpacts of liability insurance cost and availability.Identification and discussion of the following activ-ities and strategies are based on research conductedin this study (including the survey of state DOTs andstate transit associations, interviews with insuranceprofessionals in traditional and alternative markets,and interviews with a range of public and privatepassenger transportation operators) and the researchteam’s experience with transportation insurance.

Activities and Strategies for Public and Private Operators

Public and private operators can help mitigate li-ability insurance cost and availability issues by ad-dressing their own day-to-day operations and theirmanagement and administration of insurance througha variety of activities. Clearly, one of the most ef-fective strategies taken by states (DOTs and associ-ations) in the past has been to assist with the creationof insurance pools or mechanisms that can extendlimitations on liability to as broad a range of pas-senger transportation operators as possible.

When asked what should be done by bus opera-tors and states, the majority of state DOTs and stateassociations supported (in order of support)

• Expanding non-traditional insurance pro-grams—62%,

• Increasing loss control efforts to reducelosses—62%,

• Being more resistant to unnecessary claimspayouts—57%,

• Providing statutory limitations to damageawards—57%,

• Limiting insurance company profits andpremiums—57%,

• Modifying equipment or vehicles to reduceclaims potential—52%, and

• Demanding governmental action to limit orcontrol large price increases—52%.

Less than a majority supported

• Reforming the state insurance regulations tobe more responsive to needs—48%,

• Enhancing tort reform to reduce costs—43%,• Expanding driver responsibility for damages

and claims—29%,• Expanding state control of or role in premium

setting and/or availability—29%,• Adding internal staff to control or manage

these costs—19%, and• Requiring insurers to maintain coverage

relationships—14%.

An interesting suggestion for cutting insurancecosts in the public transit realm involves changingthe type of operating entity to secure limits on lia-bility and/or to be eligible to participate in a gov-ernmental insurance pool. For example, in Oregon,if a community forms a transit district, the district iseligible to join the insurance pool available to pub-lic entities. In one county, the county’s insurancecosts were cut 72% by forming a district and em-ploying drivers through that district.

Based on responses to the project surveys andinterviews, mitigation activities can be grouped asfollows:

• Enhancements to risk management and losscontrol,

• Improvements to claims management, and • More proactive insurance purchasing man-

agement.

Enhance Risk Management and Loss Control

A primary component of an individual opera-tor’s insurance cost is its loss history. Efforts to en-hance risk management and improve loss controlmay be the most vital that an operator can take tohelp mitigate insurance cost increases and limitedavailability.

Premiums to be charged for insurance coverageare established through an evaluation process knownas underwriting. Underwriters are immediately con-

24

25

cerned with using an operator’s loss history, as de-tailed on loss runs, as a predictor of the future.

The market fluctuations seen during the recentinsurance crisis affected nearly every operator insome way, but within the rising tide of rates werevariations that were quite individualized. Premiumamounts and percentages of increases varied basedon how attractive an individual operator and its riskprofile were to an insurer. Thus, even in a rising rateenvironment, operators that managed their businessesto minimize risk and maximize safety and loss con-trol were generally able to mitigate, at least to somedegree, the increases that were so much a part of therenewal landscape.

Effective risk management and loss control in-clude a number of key objectives, including operat-ing at the highest degree of care to reduce risk, es-tablishing high standards that allow no compromiseto safety, hiring and retaining safe drivers (17), main-taining the fleet in a safe condition at all times, andoperating service to ensure safety at all times. Ef-forts to attain these objectives should involve the ar-ticulation and support of a comprehensive safetyprogram and an organizational and financial com-mitment for risk management and loss control, whichare ongoing functions of the organization.

Enhance risk management. Managing risk can beseen as an initial step to loss control and should in-volve a range of activities to minimize the exposureto risk through risk elimination and risk transfer.

RISK ELIMINATION. Operators should determine theviability of various levels and types of operations,eliminating unnecessary routes, schedules, and ser-vices (18). In multi-modal operations, the operatorshould analyze its loss history to determine if certainoperations are producing loss rates that are exces-sive and should be eliminated. Also, danger points(geographic locations) and at-risk travel lanes shouldbe analyzed and eliminated from operations.

RISK TRANSFER. Where higher risk operations areunable to be discontinued, operators should selectspecialized subcontractors to conduct those opera-tions. Operators should also consider leasing pro-grams to transfer the process of managing (but notthe responsibility for) maintenance and drivers tospecialists.

Improve loss control. An effective loss control pro-gram begins with standards and includes continualevaluation and analysis to ensure effectiveness.

STANDARDS. The operator must establish standards towhich it will adhere. These standards may and shouldinclude the qualifying background and experiences ofthe driver; the policies that guide its actions in hiring,supervising, and training drivers; and driver conductand performance behind the wheel and in overallmanagement practices.

Several of the national associations have specificprograms and training addressing safety that canhelp their member operators improve loss control.APTA, for example, has developed safety programsfor both rail and bus operations as well as audit pro-grams to review how well member operators addresssafety. The ABA has an active safety committeethat, among other duties, identifies best practices inthe area of safety and makes this information avail-able to member operators. The UMA has includedspecific sessions on training in recent conferences toassist its member operators. For operators that be-long to such national groups, support and assistanceare available for setting standards and helping im-prove loss control.

DRIVER SELECTION. The operator must evaluate thedriver workforce and establish and adhere to hiringpractices to ensure consistency with establishedcompany or industry safety standards.

TRAINING. Three types of training—introductory, in-service, and remedial—should be in place and includeall drivers operating the organization’s vehicles. Thetraining offered to new employees may vary, but alldrivers should be subject to periodic in-service train-ing and problem drivers should be subject to remedialevaluation and training prior to being placed back intoservice.

Drivers may be the key aspect of ensuring a safeoperation. According to one major passenger trans-portation insurance company professional, it is crit-ically important for an operator to have safe drivers,“as it is the drivers that have accidents and causeclaims, which leads to higher premiums”(19).

SUPERVISION AND OVERSIGHT. An operator must cre-ate and implement the mechanisms to fairly andthoroughly evaluate driver performance on a regu-lar and routine basis. Control of the actions of thedrivers and vehicles once they leave the operation’sfacility is an essential and, from a practical stand-point, difficult process. Yet oversight is essential ifbad or unacceptable practices are to be detectedand counteracted so that they do not create more

serious problems, which would then affect the op-erator’s insurability profile.

ANALYSIS. The operator must monitor services andmanage operations to reinforce positive results andeliminate factors producing losses. Many public tran-sit agencies establish safety committees, composedof representatives of management and drivers, tohelp monitor and analyze safety-related data as wellas to help build the agency’s commitment to safety.

COMPLIANCE. A legal operation is a minimum es-sential to ensure that the operator complies with ap-plicable state and federal laws pertaining to safetyand operations. Insurance auditors frequently focuson such compliance to ascertain insurability.

Find resources for enhancing risk management andloss control efforts. Resources and expertise avail-able to operators to ensure effective risk manage-ment and loss control efforts are a continuing issue,especially for smaller operators. The smaller privatecoach operators that saw their business and revenuefall dramatically after 9/11 may not have the finan-cial resources to devote to improving the risk man-agement and loss control functions and, given theirsize, will likely not have the expertise readily avail-able. Larger operators may have both resources andexpertise, but they must remain motivated to usethem in a continual quest for enhancing risk man-agement and loss control.

For both smaller and large operators, the fol-lowing resources are available to support risk man-agement and loss control activities:

• The major public and private operator associ-ations offer support, as discussed previously.

• Insurers may offer support. As discussed inChapter 5, some of the alternative insurancemodels including state transit insurance poolsand captives were noted as offering, in somecases, substantial support with technical assis-tance related to risk management and safety,such as on-site audits of operations to determineareas that may need strengthening and supportin improving those areas. Some of the tradi-tional insurers may also offer support services.

• Professional seminars are periodically pro-vided through industry channels, offering in-sight and guidance, that operators may attend.

• Videos, manuals, books, and other packagedprograms are available commercially.

• Professional consulting services are available.

Improve Claims Management

A second area that operators can address to helpmitigate insurance cost increases and limited avail-ability is claims management, that is, the manage-ment of processing, investigating, resolving, and, insome cases, litigating claims and their financialcost. A number of the operators interviewed spoketo issues in the claims handling process as needingimprovement.

Typically, insurers point to the cost of losses asthe largest factor in determining individual operatorpremiums. In the insurance crisis beginning in 2001,premium changes were found to vary widely. In thestudy’s surveys and interviews, some operators re-ported no substantive change; others reported mod-est increases of 6 to 8%; while others, primarily pri-vate operators, saw double digit percentage increasesfor 2 consecutive years (or more). This variation canbe attributed to a number of factors, some as seem-ingly incidental as the timing of insurance renewaldates, but based on the information obtained, opera-tors with a strong commitment to safety and with agreater degree of control over their claims seem tohave suffered somewhat less.

While the cost of losses is determined in variousways, in the past 15 or so years, a consensus hasformed that one component of increased loss costsis litigation over “torts,” defined as an injury or wrongto a person. Tort reform, which involves efforts tochange the current system for tort liability, is ad-dressed later in this chapter, as another strategy thatmay help mitigate insurance cost and availabilityproblems.

Understand claims management. Claims presentedby an aggrieved party represent the starting point ina series of steps leading to closure and/or a settle-ment with the claimant. Most frequently, presumingthe validity of the claim, the settlement that resultsis a financial one. And while the payment immedi-ately comes from the insurer, to whom the operatorhad transferred the responsibility and obligation toinvestigate and settle the claim, the money that ispaid to the claimant should not be perceived as in-surance company money. The money that is paid toa claimant is money that will ultimately have to comeback to the insurer (or the insurance community)from the individual and the community of policy-holders in the form of higher premiums. This sober-ing reality ultimately has the potential to shut downthe insurability of the bus and coach industry.

26

Balance the interests of entities involved in claims.Claims handling by insurers must strike a balancebetween good faith negotiations with the claimanton one hand and their own (and the policyholder’s)financial interests on the other. And at times this bal-ance is skewed by fears of litigation and the poten-tial for substantial jury awards for the claimant.

The process used to settle claims is subject tomultiple reviews, both internally by insurance com-pany management and externally by state insurancedepartments, acting in their role as consumer advo-cates. Insurers must be careful in their efforts, as amisstep by an insurer can result in penalties and evenlitigation over how they managed a claim. Therefore,the insurer will, as a matter of contract and as a mat-ter of business necessity, take firm and absolute con-trol of claims handling. However, interviews in thisstudy noted a number of complaints about insurancecompany claims handling, specifically that insurers’efforts were not always adequate or thorough, result-ing, reportedly, in settlements that did not seem mer-ited by the operator. Greater involvement in claimsmanagement may help mitigate such situations.

Increase involvement in claims management. An op-erator can potentially improve claims management by

• Seeking involvement and input in each step ofthe claims handling process,

• Developing a working relationship with claimspersonnel, and

• Working with the insurer to identify fraudu-lent claims.

Operators should provide input to the claims han-dling process, particularly regarding judgments ofdamage potential and valuation. Claims administra-tors will have differing degrees of skill, workload, andability to focus on claims and therefore may makepoor judgments or opt to settle a particular claim forreasons that benefit the insurer (or individual claimsadministrator) but that are not in the best interests ofthe operator. How well each of the judgments is han-dled by the insurer will have a bearing on the ultimatesettlement cost and thus will affect the later insura-bility of the operator. By providing input into the var-ious judgments of a claim, operators may be able tomitigate or avoid such situations. Note that settle-ments of large claims may be affected by litigationconcerns. Operators should be aware that, given thepotential for high jury and court awards, insurers gen-erally want to avoid litigation.

A strong working relationship with claims per-sonnel may be an operator’s most effective tool ingaining input into a claim settlement process, par-ticularly when the operator provides positive input.Regular contact, weekly perhaps, with claims per-sonnel and their superiors can create a climate wheredecisions that affect the operator and its insurabilitywill be made with all due consideration.

Claims handling is affected by fraud, and fraud-ulent claims can arise from any party to the claimstransaction. Claims personnel are trained to look forfraud and to address it through special investigationunits within their company or within the insurance in-dustry. If an operator suspects fraud, it must notify theinsurer at the outset of the claims handling process,but for such notification to be successful in identify-ing fraud, it must be accompanied by facts and evi-dence. Working in conjunction with the insurer tohelp identify and document fraud is one step that canbe taken to affirmatively address the implications offraudulent claims and ultimate cost of claims.

Become More Proactive in Insurance Purchasing Management

A third approach to helping mitigate insurancecost increases and limited availability is for an op-erator to become more proactively involved in theprocess of insurance purchasing. The process ofsearching for, applying for, and acquiring insurancecoverage is an area in which improvements and pointsof additional control are available and possible forpassenger transportation operators. In an environ-ment characterized by rapid premium increases suchas experienced in the past few years, insurers arereluctant to expose pricing early, yet potential policyholders—the operators—need adequate noticeso that they have time to mitigate the impact of un-expected insurance program changes and costs. Thisenvironment can be contrasted to the soft insurancemarket of the 1990s, when insurance was readilyavailable and the process of applying for and ac-quiring coverage was typically abbreviated.

Passenger transportation operators have limitedshort-term potential to affect insurer responses in ahard market; the low availability or absence of al-ternatives is a common element to the hard marketinsurance purchasing process. To deal with such im-pacts, one insurance broker interviewed for this studyspecifically counseled that “an insurance ‘crisis’ isonly a crisis if one is not prepared.” Being prepared

27

involves a more proactive approach to the manage-ment of insurance purchasing, including continualreview of the selection of coverage, investigation ofthe marketplace, enhancement of the insurance ap-plication, and, where appropriate, consideration ofalternatives to traditional insurance.

Professional insurance guidance through theprocess of obtaining coverage was seen by many asan important aspect of mitigating the effects of theinsurance crisis beginning in 2001. While somelarger operators were able to bring much of this re-sponsibility in house, the average operator had nosuch potential and thus was driven to employ exter-nal resource personnel such as agents (representingcompanies) and brokers (representing policyhold-ers) for guidance and advice in the determination ofneeds and the purchase of coverage.

In recent years, the lines between agent and bro-ker have become more blurred, as both seek to rep-resent themselves to each party—policyholder andinsurance company—as the best conduit to the other.In addition, most income for an agent or broker isgenerated through a commission on the sale of a pol-icy: the higher the premium, the higher the cost.Often, agents or brokers are involved in multi-layerprograms to access a particular insurance provider.The more layers of brokerage between the policy-holder and the insurance company that exist, thegreater the commission that may have to be paid bya policyholder in the form of higher premiums. It isnot unusual for commissions in a broker multi-layerarrangement to reach 18% or more, thus raising pol-icyholder costs with little apparent value. Finally,agents and brokers may steer policyholders to a par-ticular insurer based upon their own business neces-sity, rather than those of the potential policyholder.While very few such agents act out of malice or indirect contravention of the policyholder’s interests,they may consider meeting certain quotas and main-taining access to a particular insurance provider tobe acceptable reasons to steer policyholders to aninsurer.

Operators must be careful that any cost savingsgained by using professional guidance is not negatedby added commissions to agents or brokers, espe-cially in multi-layer arrangements.

Select coverage. While the type and amounts of cov-erage purchased clearly have major implications forthe cost of insurance, these factors also have less un-derstood implications for the availability of coverage.

28

An operator seeking high limits of liability coverage,for example, may find obtaining such coverage diffi-cult, given availability issues and treaty and re-lationship problems among primary and reinsurancecompanies or even among reinsurers themselves.

Operators should regularly review, in conjunc-tion with professional agents as necessary, their en-tire insurance program. As one private operator thatwas interviewed for the study put it: an operatorshould increase deductibles “to whatever level thebalance sheet will bear.” This philosophy demandsat least an annual evaluation.

SET LIMITS ON LIABILITY. Operators should carefullyassess what level of liability insurance is necessary.Prior to 2001–2002, high levels of excess coverage,for example a $20 million liability policy, may havebeen chosen by operators given availability and anacceptable premium. However, such high levels maynot always be necessary. Mitigating the cost of in-surance should include a thorough appraisal of thereasons for purchasing coverage as well as the lim-its of that coverage.

DETERMINE DEDUCTIBLE. Operators should also as-sess, on a continual basis, whether first dollar cov-erage is needed or if a deductible program is moreappropriate. Operators seeking first dollar coveragemay appear to an underwriter to be too ready to trans-fer all responsibility for loss occurrences to the in-surance company. The use of deductibles can savepremium dollars if applied in a strategic manner: theoperator should first determine the level at which itslosses are predictable, evaluate its loss history overthe past 5 years, and then exclude these losses fromthe insurance policy via a deductible program. If thecosts for the predictable losses are included in thepolicy, those costs will be charged for in the pre-mium, along with any associated insurer costs andmarkups. Paying for the predictable losses via a de-ductible reduces premium and costs, and makes theinsurer responsible only for losses that occur abovethat predictable level.

Investigate the marketplace. Choosing an insurer isalways important, especially in a hard market. Whilea number of the operators interviewed for this studyindicated that they felt they had no options in thecurrent insurance crisis, for most operators this wasnot entirely the case. The insurance marketplace isconstantly changing and evolving, but is predictablein the sense that cycles do occur and options must al-ways be kept open for the hard market environment.

In choosing insurers, financial strength is criti-cal. Independent insurance company ratings are usedby policyholders, agents, and state insurance depart-ments alike to rate the capability of a company tomeet its obligations. While financial strength is a crit-ical element, it should not be the sole measure of in-surance company capability. An insurer with mini-mal experience in passenger transportation risks maybe ill equipped to manage a major loss; an insurerwho opts to employ a third party adjusting firm mayfind that costs for settling claims are reduced becauseof improved claims management.

In a typical insurance marketplace, even a hardmarket, an operator usually has a choice of agent andbroker intermediaries through which approaches andapplications to underwriting insurance companiescan be made. Few underwriting companies limit ac-cess to themselves to one or two brokers. However,nearly all of the specialized insurers in the industryprefer, and often limit, relationships to a select groupof specialized brokers. However, as the size of theoperator increases, with consequent higher premi-ums and presumably higher levels of deductibles orself-retention of risk, the list of brokers and under-writing company names typically changes. There areseveral different insurance communities, each withits own set of players and each with its own specificset of policyholder profiles. Being familiar with thesedifferent potential markets can be an asset in insur-ance hard times.

Enhance the application process. When an opera-tor seeks insurance coverage, the primary tool usedto communicate with the insurer is the application(larger entities may use a Request for Proposal orRequest for Qualifications process). Usually a stan-dardized document, the application presents the de-tails of the operator’s services. While this approachis standardized, operators can improve it to enhancethe insurers’ understanding of the operator, its peo-ple assets, and its ability to manage its operationsand risk.

Enhancing the liability insurance application hasbeen found beneficial over the long term, giving in-surers a more comprehensive understanding of theoperator and its services with an objective of mak-ing the operator a more attractive risk to insure. Bydoing so, the operator is more likely to gain a favor-able review and timely insurance quotation. Whilethis strategy is not a panacea in a hard market, it isanother way to more proactively manage the pur-chase of insurance.

Care should be taken, however, in enhancing thestandard application. If the resulting additional mate-rials are perceived burdensome by insurers, theyare less likely to be viewed favorably. Brief, bullet-pointed items seem to work best, with exhibits limitedin size and scope: eye-catching invitations to read thecontents are most effective, according to insurers.

The following list, building on a METRO Mag-azine article (20), provides guidelines for enhancingthe application:

• View the application as a marketing document,not a recitation of the obvious;

• Develop the application with great care andattention—start early on the application;

• Submit the application on time, or somewhatbefore the desired pre-renewal submission date;

• Learn the date that the insurer desires applica-tion submissions;

• Build exhibits that demonstrate the longevityand capability of the workforce;

• Describe the achievements of the drivers—short, one-line summaries work best;

• Detail the safety program and its activities;• Review losses that have occurred and what

countermeasures have been taken;• Include a summary of the results of regulatory

evaluations; and• Detail all of the history, including adverse is-

sues that should be addressed directly.

Consider alternative insurance models. An opera-tor may also consider alternatives to traditional com-mercial insurance as part of its process in improvingthe management of insurance purchasing. Chapter 5presents a number of alternatives. Not all such alter-natives are appropriate for each operator; for someoperators, alternative models may not be feasiblebecause of availability, affordability, institutionalor legal arrangements, or other reasons. However,given that the insurance cycle periodically bringshard market conditions, alternatives that mitigateagainst a hard market environment may be worthconsidering.

Consider changing organizational structure. A localcommunity contracting for public transit serviceswith a private company may consider changing itsorganizational structure to a form that is affordedtort limits on liability. This change may also allowthe public transit operator to participate in a gov-ernment insurance pool. As mentioned previously,

29

participation in a governmental pool can dramaticallyreduce insurance costs for public transit services.

Activities and Strategies for States and Other Entities

Several activities and strategies may be employedby states and other entities involved with passengertransportation liability insurance to help mitigate theissues of insurance cost and availability. As devel-oped and articulated through this research study,these activities and strategies include

• Tort reform,• Increased regulation of insurers, and• Discerning and eliminating poor risks from

the industry.

Reform Torts

As introduced earlier, insurance loss costs forpublic and private transit agencies have increased inthe past 15 years in part because of increasing costsfor settlements and judgments arising from legal ac-tions against transit agencies. Under the U.S. systemof tort liability, courts can hold an injurer liable formany different types of torts, including vehicle ac-cidents, medical malpractice, and injuries associatedwith defective products, among others (21). Althoughcompensating injured parties for damages that theyreceive in an accident may be reasonable, increas-ingly in recent years, transit agencies have becomesubject to what many consider unreasonably largetort verdicts.

A number of tort reforms affecting public tran-sit liability have been enacted on the state level, withthe most common being limits on liability, immu-nity from punitive damages, caps on non-economicdamages, and statute of limitation on claims (gener-ally 1 year to file claims) for these public agencies.According to the recent APTA surveys on insurance,one state mentioned changing the definition of con-tributory negligence (complainant must be 0% neg-ligent) and another mentioned exempting public en-tities from payment of no-fault benefits.

The influence of tort reform on passenger trans-portation casualty and liability costs has not been es-tablished. A 1994 TRB digest (22) found that juris-dictions with statutory maximums on tort recoveriesor partial governmental immunity appear to haveone-third lower percentage of tort liability (payments)relative to rider fees than transit systems that have

no such limitations. On the other hand, a 1996 studyby the U.S. DOT (23) concluded that the presence ofstatutory limits was found to reduce the number oflarge claims (over $250,000) for the study sample,but the statutory limits did not show an effect of re-ducing total tort liability payments relative to riderfees. One, perhaps unintended, consequence of im-posing limits on liability is that plaintiff awards tendto climb to that limit.

While the issue of large tort awards has been de-scribed as a general problem, the impact of exces-sive awards is more localized in nature, because theU.S. system is not centralized—each state has juris-diction over its tort law. Certain jurisdictions haveeither a history, reputation, or both as being adverseclimates in which to fight unreasonable claims andthus to offer liability insurance.

With realization of the propensity of some ju-ries to make higher than necessary or anticipatedawards to injured parties and because, many times,such awards were well outside the anticipated costsof liability payments, the insurance industry lost oneof its fundamentals to the jury awards process: it nolonger could predict with any reasonable degree ofreliability the amount that a specific type of injurymight ultimately cost. This unpredictability made in-surance companies far less prone to aggressively de-fend against claimant requests for excessive damageawards. Plaintiffs knew of this reluctance of insur-ers to go to court, and they knew of the venues wherethe defense stood little chance of success. Againstthis background, insurers were far more likely toavoid court and to settle the case. Over time, how-ever, this response has led to increasing costs forsettlements.

Tort reform as a movement in the United Stateshas a brief and uneven history. And in fact, theprocess of tort reform in the United States is reallywell over 50 separate efforts, one for each state andjurisdiction and one or more for the federal courtsystem. Unless all are addressed, the weak link inthe court system will be the target for plaintiffs.

The primary issues for reform, according to theAmerican Tort Reform Association, include venuecontrol, joint and several liability, and jury service (24):

• Some plaintiffs seek a hearing venue in friend-lier jurisdictions, those where juries are apt tobe friendlier to a plaintiff and court rules arenot as stringent or work in favor of the plain-tiff. Interstate bus operators are most at risk

30

with this issue because suits could be heard inany number of courts—in the domicile statesof the injured party or the company or in thelocation where the loss took place.

• Joint and several liability is a common lawprinciple that allows any party involved in adispute to be held responsible for the entireamount of damages, regardless of the extentof its fault in the event. In a bus loss situation,adverse parties, even if at fault, are likely to beunderinsured and the remaining financiallystrong defendant is the bus operator.

• The creation of a pool of jurors, who by theirability to represent a broad cross section ofbackgrounds, experiences, and educational lev-els, would make the jury more responsive toreasonable demands and less likely to be bi-ased in any direction.

Despite the continuing interest in tort reform toreduce or mitigate one of the underlying causativefactors in insurance pricing, very few entities or op-erators interviewed for this research study had anycurrent involvement with the process. With few ex-ceptions (New York, Washington), tort reform wasnot mentioned as an activity that might influence thedirection of insurance availability and pricing. How-ever, the process of tort reform is active in a numberof states: reforms have been and to some degree con-tinue to be enacted in many states.

The passenger transportation industry has workedtoward tort reform in the past, but such efforts seemto have slowed to a halt over time. Yet, tort reformand the consequent reduction in the costs of litigationhold much long-term promise for mitigating insur-ance costs. Although some respondents to this re-search study mentioned the need for liability limita-tions or caps and others mentioned a more workercompensation-based approach where valuations ofinjuries were predetermined, tort reform and thepromise of fair treatment seem to offer the most prac-tical promise for cost control.

Increase Regulation of Insurers

One of the strategies that might help mitigatecyclical insurance problems is increased scrutiny orregulation on insurers during the soft market of theinsurance cycle. A number of respondents to the re-search study indicated that regulators that overseethe insurance companies failed to ensure that insur-ers act responsibly in the soft market and that they

should do more to limit the insurer’s apparent “sui-cidal” pricing strategy during that period. Addition-ally, the notion that insurers themselves created theproblem by acting irresponsibly in pricing both up-ward and downward was articulated. In the words ofone respondent, “the increases are excessive and un-fair and an overreaction.”

Based on comments from a number of respon-dents through the research study, several questionscan be framed: if the cost of coverage is some amount,even an escalating one, is it not irresponsible to re-duce premiums to a point well below costs? Andfurther, if insurers announce pricing guidelines inadvance, why are those pricing guidelines ignoredrather than enforced by regulators to maintain the fi-nancial integrity of the insurance industry?

Respondents suggested that to mitigate insur-ance pricing problems in the future, a firmer stanceby regulators is needed, and if additional authorityto control the cycle is needed, it should be sought.Although preventing insurers from lowering priceswould seem anti-consumer in the short term, the long-term integrity of the insurance process seemed to be,in the minds of several respondents, more criticalthan short-term dollar savings. Some of the researchstudy respondents saw a need for universal pricing,national standards, and other approaches that lev-eled the ups and downs of insurance pricing. In theabsence of insurer restraint and earlier notificationsof pending major pricing increases, regulators wereurged to act.

Discern and Eliminate Poor Risks

Discerning and eliminating poor risks from thepassenger transportation industry is another mitiga-tion strategy that is relevant for a variety of entities—government regulators, passenger transportationindustry associations, and even the operatorsthemselves. Risk-prone operators and their inade-quate or even unqualified drivers pose a serious riskto the industry as a whole and were noted by severalresearch study respondents. One operator’s seriousaccident affects more than the operator and othersinvolved in the particular accident. That accidentnegatively affects the entire industry—its loss record,the attractiveness of the industry to the insurancecommunity, as well as the image of the industry,which in the minds of the public is a collective indus-try. The passenger transportation industry loss record,insurance appeal, as well as its image, presumably,

31

would be affected positively if the risk-prone opera-tors and drivers were no longer a part of it. Poten-tially, this enormous challenge could be achievedthrough concerted actions by enhanced governmentregulatory efforts and the passenger transportationindustry itself.

Although no operator can ever be completelyimmune to loss potential, even a catastrophic loss,the potential for high frequency and/or high severityis generally focused in a discernable group of oper-ators. Membership in this group of loss-prone oper-ators seems not to be a function of company size, ge-ographic location, or time in operation. Althoughlarger company size carries with it additional needsfor administration and control, some larger compa-nies have achieved affirmative safety results whilesmaller companies have failed. Clearly, the com-pany’s geographic domicile location, and thus itsclaims and litigation climate, has an impact on thecost of losses, but being prone to loss incidents is notspecifically a function of tort environment. And fi-nally, longevity is no assurance of safety: new com-panies with effective management and safety con-scious drivers can quickly become superior risks;conversely, old line companies that rest on their lau-rels can quickly deteriorate into risky operations.

A risky-operator discernment program that fairlyand equitably enhances the profile of safe operatorsshould be beneficial. If safety and operational stan-dards were broadly established (in a manner notunlike those of APTA for its membership) and pe-riodically reviewed, there could and should be apositive impact that could spark additional insur-ance industry interest in offering coverage to whatis now an industry that includes members with a“wild west” perspective. Insurance providers rely ontheir own evaluations of transportation providers,but when additional, and more effective, mecha-nisms for evaluation exist, the potential for error ininsuring unacceptable risks is reduced. When the re-sponsibility for safety evaluation becomes sharedmore evenly and is not the sole province of the in-surance underwriter, even the most risk-averse un-derwriter may be enticed into consideration of pas-senger transportation risks.

Arguably, this discernment and management ofrisk-prone operators should be a function of govern-ment regulatory oversight and, in some cases, is in-deed a focus of such activity; however, in many lo-cations, such oversight is minimal at best. Even injurisdictions where such oversight may theoretically

be extensive, attention is often directed toward factorsthat are only secondary causes of loss. For example,millions of dollars are spent on vehicle inspections;however, few crashes have vehicle condition as a di-rectly attributable and primary cause. Extensive ve-hicle inspection programs can and do remove unsafevehicles from operation and could direct the atten-tion of investigators toward negligent operations,but, without adequate resources, vehicle inspectionprograms will have little effectiveness.

Moreover, government regulatory oversight ofthe passenger transportation industry is limited. Whilehighly qualified personnel at both the federal andstate levels work hard to ensure safety, the organi-zations for which they work are focused largely onthe trucking industry. The bus industry, given its rel-ative size compared to the much larger trucking in-dustry, continues to lag behind other modes in re-ceiving its share of support from the regulatorycommunity. Studies that should have included busoperations excluded them (for example, driver fa-tigue studies focused almost entirely on trucking);other studies have been long delayed (for example, avoluminous truck study on crash causation was vir-tually complete before a bus study was even started).Data that should be collected to discern trends andneeds are no more available for bus operations thanfor trucking, perhaps less so. If discernment of riskis a critical role of regulatory organizations, onewould have to conclude that the regulatory commu-nity’s record of locating and eliminating unsafe andillegal bus operations is at best mixed.

Insurance also was, and to some extent still is,seen as a mechanism to discern, manage, and elim-inate accident-prone operations. At the time of in-tercity bus deregulation in 1982, insurance wasperceived as one of those forces that would ensureuniformity and safety. However, insurance is no morea barrier to operations than acquiring authority tooperate commercial vehicles has been in recent his-tory. The soft insurance market conditions of the pastled to premium-hungry but risk-unaware insurersentering the marketplace; operators that should havebeen hard to insure not only got insurance, but alsooften got premium reductions. For those operatorsthat are hardest to insure, under adverse market con-ditions, assigned risk programs are available; againany barrier to entry and operation was insignificant.

Five possible strategies for discerning poor risks,defining them as such, and isolating them from the

32

mainstream of the bus and coach industry are dis-cussed in the following paragraphs.

The first and most obvious strategy is theFMCSA’s SafeStat system (25). The dearth of datanot withstanding, this system is already in use by in-surers seeking another perspective and by the publicattempting to use safety as part of their evaluation toselect interstate operators. The database can be ac-cessed on-line from the FMCSA website (http://ai.volpe.dot.gov/SafeStat/SafeStatMain.asp). In addi-tion, the FMCSA has a brand new website (http://www.ai.fmcsa.dot.gov/Passenger/home.asp) to aidconsumers in selecting a bus company based onsafety and performance.

The Military Traffic Management Command hasbeen conducting in-depth evaluations of bus opera-tions for many years. The information collected inthis process reflects safety potentials; the process it-self has affected operations by increasing the prioritysafety is given in the individual company. This infor-mation is only recently available to the regulatorycommunity and is still not available to the public.

At least one national association has spoken fre-quently about creating a passenger carrier rating sys-tem that would recognize and recommend the ser-vices of one company over another. This process,and others like it, should have the effect of raisingthe profile of safe operations and providing the con-sumer with clear choices when considering travel bybus or coach. A universal and politically neutral rat-ing system would do much to create the needed op-erator differentiation.

Public transit agencies have a voluntary over-sight program through APTA; no such parallel seemsto exist for the private sector. APTA has developedstandardized practices for safety, which are incorpo-rated in the association’s safety programs. Audits andevaluations follow participation with recommendedpractices becoming the norm over time in participat-ing agencies. However, only peer pressure createsany impetus for action. Participation in APTA’s Sys-tem Safety Program is voluntary, but seems to bebroadly accepted as the universal standard amongparticipating members.

Insurance program relationships such as poolsand captives tend to link members in a common re-lationship in which safety and loss control are majorfactors. These programs and pools offer their mem-bers high quality safety guidance in a manner that isneither adversarial nor sporadic. Repeatedly, captiveinsurance program members extolled the safety ben-

efits of their membership and how it had positivelyaffected their operations. Such programs, extendedto include more passenger transportation operators,could create a group of high quality, trustworthy car-riers whose records would be demonstrably superiorto the remainder of the industry.

Other Activities

Several other activities and proposals arosethrough the course of interviews and surveys duringthe research study. Of these, several seemed to passthe tests of applicability, practicality, and potentialeffectiveness:

• Use state resources and personnel to helpsmaller transit agencies to achieve better safetyresults;

• Expand the concept of insurance pools to theprivate sector, allowing group purchasesthrough co-operative ventures;

• Expand federal oversight of passenger trans-portation with additional resources and per-sonnel specializing in auditing and support;

• License existing pools in some states to ex-pand their operations and do business in otherlocations; and

• Expand the functionality of SafeStat in rela-tion to private bus operators with additionalaudits and evaluations.

REFERENCES AND NOTES

1. Abacus Technology Corporation, Liability Cost andRisk Analysis Studies: Task 1: Assess Liability Ex-pense and Claim Experience for Selected Bus TransitAgencies, Office of Planning, FTA, U.S. DOT, Janu-ary 1996.

2. Kaddatz, Michael M., TCRP Synthesis 13: RiskManagement for Small and Medium Transit Agen-cies, TRB, National Research Council, Washing-ton, DC, 1995.

3. Burkert, Jack, Insurance Crisis: How Much Longer?METRO Magazine, January 2004, p. 62.

4. MacDorman and Associates, Risk Management Man-ual for the Public Transit Industry, UMTA TechnicalAssistance Program, U.S. DOT, August 1988, Vol. 1,pp. I.4–I.5.

5. Association of Governmental Risk Pools, www.agrip.org. Accessed July 14, 2004.

6. Comerica Bank, Types of Captive Companies,Captive.com, 2004, http://www.captive.com/service/comerica/cap_types_c.html. Accessed July 16, 2004.

33

7. APTA conducted insurance surveys of members inJune 2002 and June 2003. Of the approximately 400APTA member transit agencies, 96 responded (25%)in 2002 and 89 (23%) responded in 2003. In bothyears, responses were classified by Group I (multi-modal and rail systems), Group II (large all-bus sys-tems), and Group III (smaller all-bus systems).

8. The public transit industry does not have a uniformmethod for reporting casualty and liability expenses.Insurance premiums and the cost of losses are gener-ally reported in National Transportation Databaseunder Object Class 506, but the manner in which sys-tems account for other liability expenses, such as lossreserves and legal fees, varies.

9. An interesting method that one state employed wasto get authority for non-profit insurance trusts fromanother state to write insurance in that state.

10. Over 73% of the state DOTs and 80% of the statetransit associations that responded indicated thatpublic transit operators in their states have cut ser-vices because of increasing insurance costs. Simi-larly, over 73% of the state DOTs and 40% of thestate transit associations that responded indicatedthat public transit operators in their states have raisedfares because of increasing insurance costs.

11. MacDorman and Associates, Risk Management Man-ual for the Public Transit Industry, UMTA Techni-cal Assistance Program, U.S. DOT, August 1988,Vol. 2, pp. IV.10–IV.13.

12. Kaddatz, Michael M., TCRP Synthesis No 13: RiskManagement for Small and Medium Transit Agen-cies, TRB, National Research Council, Washington,DC, 1995.

13. Transit Mutual Insurance Corporation of Wisconsin.Wisconsin Department of Transportation, Racine,WI,2004, www.uwm.edu/Dept/CUTS/bench/insure.pdf.Accessed November 30, 2004.

14. An association captive is also sometimes known as arisk retention group. Formation of such groups wereauthorized under the Risk Retention Amendments of1986, which allows trade associations and other groupsof for-profit and non-profit companies to establishnational self-insurance groups, also called risk reten-tion groups. This federal law preempts state laws thatdo not allow the formation of liability risk sharinggroups and in fact, under the federal Liability RiskRetention Act, 15 U.S.C. § 3901, et seq. (LRRA), arisk retention group may write liability insurance forits members, exempt from most laws of states otherthan its state of domicile. Membership in such groups,however, is limited to entities that have similar lia-bility exposure (i.e., for transportation entities, simi-lar operations and services).

15. As noted in the discussion on insurance pools, Wis-consin public transit operators began a joint buying

group for insurance purposes in the 1980s and by1986 formed the private Transit Mutual Insurance Cor-poration of Wisconsin, a mutual insurance company.All public transit systems in the State of Wisconsinexcept the Milwaukee County Transit System (whichis self-insured) and two smaller systems are part ofand obtain insurance through the corporation.

16. MacDorman and Associates, Risk Management Man-ual for the Public Transit Industry, UMTA Techni-cal Assistance Program, U.S. DOT, August 1988,Vol. 2, pp. IV.28–IV.29.

17. According to one major insurer of private operators,the losses from and frequency of accidents on busesthat the company insures is directly proportional tothe employment rate. This insurer feels that when theemployment rate is low (or unemployment rate high),bus companies can be more selective when hiringdrivers, reducing the number of accidents and losses.

18. Several private operators that were interviewed re-ported that they have become more vigilant in the pastfew years about assessing the possibility of risk whenpresented with new business opportunities. For ex-ample, one operator reported that it is now more aptto turn away new business when there is an increasedpotential for driver fatigue, given that driver fatigueis known to increase the potential for accidents.

19. Delaney, Timothy, Controlling Bus Insurance Pre-miums, American Bus Exchange, April/May 2002,pp. 18–21.

20. Starcic, Janna, How to Get the Best Motorcoach Cov-erage in a Tough Insurance Market, METRO Mag-azine, November/December 2002, pp. 28–34.

21. Congressional Budget Office, The Economics of U.S.Tort Liability: A Primer, The Congress of the UnitedStates, October 2003.

22. Thomas, Larry W., and James B. McDaniel, TCRPLegal Research Digest 3: State Limitations on Tort Li-ability for Public Transit Operations, TRB, NationalResearch Council, Washington, DC, December 1994.

23. Abacus Technology Corporation, Liability Cost andRisk Analysis Studies: Task 1: Assess Liability Ex-pense and Claim Experience for Selected Bus Tran-sit Agencies, Office of Planning, FTA, U.S. DOT,January 1996.

24. American Tort Reform Association, Washington, DC,www.atra.org. Accessed July 28, 2004.

25. According to the website, SafeStat (short for MotorCarrier Safety Status Measurement System) is anautomated, data-driven analysis system designed bythe FMCSA. SafeStat combines current and histori-cal carrier-based safety performance information tomeasure the relative (peer-to-peer) safety fitness of in-terstate commercial motor carriers and intrastate com-mercial motor carriers that transport hazardous mate-rials. This information includes federal and state data

34

on crashes, roadside inspections, on-site compliancereview results, and enforcement history. SafeStat en-ables the FMCSA to quantify and monitor the safetystatus of individual motor carriers on a monthly basisand thereby focus enforcement resources on carriersposing the greatest potential safety risk.

BIBLIOGRAPHY

Abacus Technology Corporation, Liability Cost and RiskAnalysis Studies: Task 1: Assess Liability Expense andClaim Experience for Selected Bus Transit Agencies,Office of Planning, FTA, U.S. DOT, January 1996.

Adams, Barbara A., Clifford L. Weaver and James B.McDaniel, TCRP Legal Research Digest 8: Trans-portation Service Agreements: A Preparation andReference Guide for Transit Attorneys, TRB, NationalResearch Council, Washington, DC, August 1997.

Adams, Ross W., Issue/Assessment Paper No. 20: TortLiability and Reform for Transit Operating Agen-cies, FTA, February 29, 1992.

APTA Insurance Surveys, American Public Transporta-tion Association (APTA), Washington, DC, June2002 and June 2003.

ATRA Tort Reform Records, American Tort Reform As-sociation, July 13, 2004, and December 31, 2003.

Arnseth, Lisa, The Flip Side of Captive Insurance, BusRide, May 2004.

Burkert, Jack, Insurance Crisis: How Much Longer?METRO Magazine, January 2004.

Cohen, Peter, Risk Determines Insurance Rates, Bus Ride,May 2004.

Congressional Budget Office, The Economics of U.S.Tort Liability: A Primer, The Congress of the UnitedStates, October 2003.

Congressional Budget Office, The Effects of Tort Reform:Evidence from the States, The Congress of the UnitedStates, June 2004.

Delaney, Timothy, Controlling Bus Insurance Premiums,American Bus Exchange, April/May, 2004.

Dial, David, et al., Tort Excess 2004: The Necessity forReform from a Policy, Legal and Risk ManagementPerspective, White Paper supported by the U.S. Cham-ber of Commerce, 2004.

National Transit Database, FTA, Washington, DC,1996, Data Table Sets, 1997, 1998, 1999, 2000,2001 and 2002.

Kaddatz, Michael M., TCRP Synthesis 13: Risk Manage-ment for Small and Medium Transit Agencies, TRB,National Research Council, Washington, D.C., 2000.

KFH Group, Inc., Institute for Transportation Researchand Education and Laidlaw Transit Services, Inc.,

TCRP Report 54: Management Toolkit for Rural andSmall Urban Transportation Systems, TRB, NationalResearch Council, Washington, DC, 1999.

O’Hare, Richard, et al., TCRP Research Results Digest12: Transit Risk Manager: Risk Management Soft-ware for Bus Transit Systems, TRB, National Re-search Council, Washington, DC, September 1996.

MacDorman and Associates, Risk Management Manualfor the Public Transit Industry, Volumes 1–3, UMTATechnical Assistance Program, U.S. DOT, Washing-ton, DC, August 1998.

Maier, M. Patricia, TCRP Synthesis 36: Identifying andReducing Fraudulent Third Part Tort Claims AgainstPublic Transit Agencies, TRB, National ResearchCouncil, Washington, DC, 2000.

Myers, Gregory, The Alternative Insurance Market: APrimer, Captive.com, June 1999, www.captive.com/service/munich-american/munich_article1.html. Ac-cessed July 16, 2004. Previously published in JohnLiner Review, Fall 1996.

Reed, George L., and James B. McDaniel, TCRP LegalResearch Digest 18: Federal and State Licensing andOther Safety Requirements for Commercial MotorVehicle Operators and Equipment, TRB, NationalResearch Council, Washington, DC, December 2001.

Starcic, Janna, How to Get the Best Motorcoach Cover-age in a Tough Insurance Market, METRO Maga-zine, November/December 2002.

Thomas, Larry W., and James B. McDaniel, TCRP LegalResearch Digest 3: State Limitations on Tort Liabil-ity for Public Transit Operations, TRB, National Re-search Council, Washington, DC, December 1994.

Websites

www.captive.com, Captive.com, Southington, CTwww.iii.org, Insurance Information Institute, New

York, NYwww.rims.org, Risk and Insurance Management Soci-

ety, New York, NYwww.aiadc.org, American Insurance Association, Wash-

ington, DCwww.agrip.org, Association of Governmental Risk Pools,

Prague, OKwww.apta.com, American Public Transportation Associ-

ation, Washington, DCwww.naic.org, National Association of Insurance Com-

missioners, Kansas City, MOwww.atra.org, American Tort Reform Association, Wash-

ington DC

35

These digests are issued in order to increase awareness of research results emanating from projects in the Cooperative Research Programs (CRP). Personswanting to pursue the project subject matter in greater depth should contact the CRP Staff, Transportation Research Board of the National Academies, 500Fifth Street, NW, Washington, DC 20001.

Transportation Research Board500 Fifth Street, NWWashington, DC 20001