Key summary points
- Lower commercial auto premiums may reduce short-term costs but often result in insufficient coverage and higher deductibles.
- Gaps in coverage, such as underinsured driver liability, can increase financial risks after accidents.
- Partnering with a trusted insurance advisor helps balance cost savings with adequate protection and risk management
In today’s competitive environment, last-mile businesses are constantly looking for ways to cut costs, and insurance may seem like a prime area to save. However, if someone promises you a premium reduction of “up to 17% or more,” be cautious. Some insurance policies could leave your business exposed to significant financial risk. With commercial auto insurance costs rising nationwide, it’s critical to look beyond the price tag and understand the coverage you’re truly getting.
Potential pitfalls of low-cost commercial auto insurance
In this era of "nuclear verdicts" (outsized jury awards), robust insurance protection is more critical than ever. When buying or renewing commercial auto coverage, read the fine print for clauses and exclusions that could put your business at risk:
Driver assignment and violations
Look carefully for provisions related to drivers with less-than-perfect records. Some low-cost insurance providers assign the worst drivers to the most expensive vehicles. This not-so-transparent practice can increase premiums significantly. Request written examples to show how claim payments work under the policy. Does a claim payout differ based on a driver’s record?
Radius restrictions
To keep premiums low, insurers may restrict policies to specific operating radiuses, such as 0 to 50 miles. While this can reduce initial costs, you may not have coverage for an incident outside the insured radius. This practice leaves last-mile businesses vulnerable, especially those with fluctuating delivery ranges. Unexpected detours due to accidents or road construction could leave your business exposed.
Scheduled driver policies
Some policies require businesses to report every driver change. Failing to update driver information could result in a claim denial if a driver not listed on the schedule has an accident. Even businesses with strong administrative practices can sometimes overlook adding a driver to the policy. To reduce risk, it’s safer to have a policy that does not require drivers to be scheduled in order for coverage to respond.
Rental auto/cargo exclusions
Some insurers exclude coverage for vehicles not explicitly listed on the policy. Therefore, if you temporarily rent vehicles to handle a surge in demand, you may need to secure hired car liability, physical damage coverage, and cargo coverage specifically for those rented vehicles to ensure adequate protection.
FMCSA auto filing liability jeopardy
Be cautious when leveraging loopholes to obtain commercial authority filings with the FMCSA (Federal Motor Carrier Safety Administration) through an insurance carrier or broker unfamiliar with your business. If an insurance carrier submits an FMCSA motor carrier filing on your behalf without fully understanding any additional "for hire" or subcontractor exposures, you could face significant legal and financial risks (even if an error is unintentional). Under some policies, if a subcontractor causes an accident, the insurance company can seek repayment from the insured business, leading to unexpected financial costs.
Defense costs within policy limits
Check the policy language for a “defense within limits” clause. This means that legal expenses to defend your business in a lawsuit reduce the amount available to pay for the actual claim. For example, if you have $1 million in coverage, and legal fees cost $300,000, only $700,000 remains to settle the claim. Instead, you want the insurer to provide and pay for the defense without any cap and without applying defense costs against your liability limit.
Policy cancellation due to high activity
Some insurance providers will cancel policies if there are too many endorsements, such as adding or removing vehicles, within a policy period. This is problematic for businesses with fluctuating fleets or rental vehicles. Note: It can be difficult to find replacement insurance after a cancellation.
Aggregate limits
Some policies come with aggregate limits on non-owned and hired vehicles, meaning the total payout over the course of the policy is capped. A business with multiple claims can quickly reach this cap, leaving it without coverage for additional claims during the policy term and potentially in violation of customer contracts that mandate such coverage.
Penny-wise, pound-foolish: Don’t reduce your umbrella coverage
Reducing umbrella coverage may seem like a viable way to trim costs, but it exposes you to immense risk. Umbrella policies serve as extra layers of liability protection if you exhaust the limits of your primary insurance policies, such as auto or general liability. This coverage is particularly valuable in cases of high-cost claims, which have become more common.
Your primary policies might cover only a fraction of a severe claim. If your delivery driver causes a major accident involving multiple injuries, the medical, legal, and other expenses can easily surpass the limits of your primary auto policy. Without umbrella coverage, you would be responsible for any remaining costs, draining your financial resources.
Buyer beware: Look at your expenses and risks holistically
Budgets are tight, margins are slim, and you're under pressure to stay profitable. However, cutting back on insurance coverage is akin to playing with fire. In the long run, a low-cost policy can expose your business to hidden liabilities, restrictive coverage, and unforeseen costs.
Here’s the most important takeaway: Insurance premiums are only one component of the overall cost of risk. The restrictions and exclusions in a policy represent another source of potential costs that can far outweigh any premium savings. Restrictions and exclusions can mean you’re “going bare” (without coverage for certain scenarios). So, you need to ask yourself, “Are we O.K. self-insuring this risk? Or do we need insurance to protect our bottom line?”
Want to learn more?
Connect with the Risk Strategies Transportation team at transportation@risk‐strategies.com.
