[Federal Register Volume 62, Number 184 (Tuesday, September 23, 1997)]
[Proposed Rules]
[Pages 49654-49663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24714]


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DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

49 CFR Part 387

[FHWA Docket No. MC-97-11]
RIN 2125-AE06


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

AGENCY: Federal Highway Administration (FHWA).

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

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SUMMARY: This action is being taken pursuant to the ICC Termination Act 
of 1995 (ICCTA), which, among other things, directs the Secretary of 
DOT to adopt regulations governing the standards to approve motor 
carriers as self-insurers. The FHWA proposes to examine the sufficiency 
of the existing requirements for self-insurance authorizations, as well 
as the need for additional fees for functions performed in addition to 
the processing of the initial application. More specifically, the FHWA 
is considering the need for fees to cover costs associated with 
processing multi-carrier applications and alterations to self-insurance 
authorizations, and for a monitoring fee to cover costs related to 
compliance responsibilities. The FHWA also requests public comment on 
the merits of continuing the self-insurance program and whether 
congressional action should be proposed to terminate the 
authorizations.

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

ADDRESSES: Submit written, signed comments to FHWA Docket No. MC-97-11, 
Room 4232, HCC-10, Office of the Chief Counsel, Federal Highway 
Administration, 400 Seventh Street, SW., Washington, DC 20590. All 
comments received will be available for examination at the above 
address from 8:30 a.m. to 3:30 p.m., e.t., Monday through Friday, 
except Federal holidays. Those desiring notification of receipt of 
comments must include a self-addressed, stamped postcard.

FOR FURTHER INFORMATION CONTACT: John F. Grimm, Office of Motor 
Carriers, (202) 366-4039 or Stanley M. Braverman, Motor Carrier Law 
Division, Office of the Chief Counsel, (202) 358-7035; Federal Highway 
Administration, 400 Virginia Ave., SW, Suite 600, Washington, DC 20024. 
Office hours are from 7:45 a.m. to 4:15 p.m., e.t., Monday through 
Friday except Federal holidays.

SUPPLEMENTARY INFORMATION:

Background

    The former Interstate Commerce Commission (ICC), in its earliest 
days of motor carrier regulation, considered applications of carriers 
seeking authority to self-insure their operations. The ICC took the 
position that self-insurance requirements should be stringent and that 
carriers availing themselves of that privilege should maintain adequate 
reserves to meet claims. Motor Carrier Insurance Protection of the 
Public, 1 M.C.C. 45, 58 (1936).
    The ICC set no rules at that time governing the qualifications for 
self-insurers, but decided to consider for approval the application of 
any carrier that could establish its ability to satisfy, ``its 
obligations for bodily-injury liability, property-damage liability, or 
cargo liability without affecting the stability or permanency of its 
business.'' Id. at 59. Motor carrier requests to self-insure which were 
approved by the ICC required the execution of insurance endorsements 
which obligated the insurance company to pay final judgments regardless 
of any policy defenses it may have against the insured. Id. at 53. The 
self-insurance was based upon deductible levels in the insurance 
policies which were authorized by the ICC. Despite the size of any 
deductible, the insurance company remained liable to the public for the 
entire amount of the policy. Although the ICC considered use of 
deductibles to be tantamount to self-insurance, the motor carrier would 
be fully insured since the insurance company remained liable for the 
entire amount of the policy. The self-insurance authorization posed no 
additional risk to the public because the insurance company would be 
required to pay a judgement, without regard to the deductible, if the 
carrier refused to pay.
    In response to an insurance crisis in the motor carrier industry in 
the mid 1980's which increased the cost of insurance coverage to 
extraordinary levels and affected its availability, the ICC began 
authorizing carriers with adequate financial resources to self-insure 
all, or part of, their required liability coverage backed by adequate 
security without the public protection provided by the traditional 
insurance company endorsement.1 The ICC recognized that 
self-insurance plans do not necessarily afford the precise level of 
protection that customary insurance plans provide since insurance 
policies cover liability for every accident within the policy limits. 
Nevertheless, the ICC began issuing self-insurance authorizations 
subject to an extensive series of conditions designed to insure that 
the public would be protected from uncompensated losses. See, No. MC-
128527, May Trucking Company (unpublished decision), served April 22, 
1986. (See Appendix to this ANPRM.). Interim rules designed to 
establish minimum criteria that motor passenger and property carriers 
must meet to qualify as self-insurers were adopted by the ICC. Ex Parte 
No. MC-178, Investigation into Motor Carrier Insurance Rates, served 
April 12, 1986 (51 FR 15008, April 22, 1986). Final rules were adopted 
which included application guidelines covering the adequacy of the 
carrier's net worth, the existence of a sound self-insurance program, a 
``satisfactory'' safety rating, and additional information the ICC 
might require. Investigation into Motor Carrier Insurance Rates, 3 
I.C.C. 2d 377 (1987) (52 FR 3814, February 6, 1987).2 The 
ICC expanded the list of methods carriers can use to demonstrate sound 
self-insurance programs to include irrevocable letters of credit and 
irrevocable trust funds. Id. at 388. In reviewing self-insurance 
applications, the ICC relied on its general powers to impose conditions 
on a case-by-case basis to insure that the public was adequately 
protected. Id. at 383. The requirement of an irrevocable trust fund or 
letter of credit in at least the amount of the self-insurance liability 
has been imposed in virtually all self-insurance authorizations.
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    \1\ The minimum financial responsibility requirements for for-
hire carriers, formerly regulated by the ICC and now by the FHWA, 
are contained in 49 CFR Part 387.
    \2\ These rules are now codified at 49 CFR 387.309 [former 49 
CFR 1043.5].
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    The ICCTA, Pub. L. 104-88, 109 Stat. 803, provides that ``[T]he 
Secretary of Transportation shall continue to enforce the rules and 
regulations of the Interstate Commerce Commission, as in effect on July 
1, 1995, governing the qualifications for approval of a motor carrier 
as a self-insurer, until such time as the Secretary finds it in the 
public interest to revise such rules.'' Section

[[Page 49655]]

104(h) amending 49 U.S.C. 31144. The revised rules must provide for the 
continuing ability of motor carriers to obtain self-insurance 
authorizations, and the continued qualification of all carriers 
conducting self-insured operations pursuant to grants issued by the ICC 
or the Secretary. Id Section 204 of the ICCTA provides that all 
regulations previously issued by the ICC continue in effect according 
to their terms until modified or terminated.

Request for Comments

    The purpose of this ANPRM is to obtain comments from motor 
carriers, insurance companies and other interested persons to determine 
whether the public is adequately protected against uncompensated 
losses.
    The self-insurance regulations require each applicant to 
demonstrate that it has established and will maintain an insurance 
program that will protect the public against all claims to the same 
extent as if the carrier maintained commercial coverage in the 
prescribed amounts. 49 CFR 387.309. In support of such a program, the 
carrier may make use of irrevocable letters of credit, irrevocable 
trust funds, reserves, sinking funds, third party financial guarantees, 
parent company or affiliate sureties, excess insurance coverage, or 
other similar arrangements. Id. The FHWA is concerned with the 
widespread use of letters of credit to support self-insurance programs 
and seeks public comment on whether these instruments provide the 
intended claims protection, especially when a carrier has terminated 
its self-insured operations and is no longer obligated to maintain this 
letter of credit as security for the claims which accrue during the 
self-insurance period. Generally, the ICC, as well as the FHWA, has 
permitted carriers to support their self-insured operations with either 
an irrevocable letter of credit or an irrevocable trust fund in the 
amount of the self-insurance liability. The FHWA requires that the 
carrier maintain the trust fund until all cognizable self-insurance 
claims are resolved. No such condition is attached to the letter of 
credit because of the nature of the instrument. Carriers can terminate 
their self-insured operations by discontinuing all operations, by 
relinquishing the self-insurance authorization and obtaining commercial 
coverage, or by violating a condition of the authorization such as 
losing the required ``satisfactory'' safety rating. In each situation, 
all cognizable self-insurance claims arising during the period of self-
insured operations cannot be identified when the operations are 
terminated. The trust fund condition is designed to protect the 
potential claimants when self-insured operations are terminated. See 
No. MC-8535, George Transfer-Application to be a Self-Insurer 
(unpublished decision), served September 24, 1986. (See Appendix to 
this ANPRM.) The letter of credit cannot provide this type of 
protection and, by its nature, is of questionable value as a back-up 
security.
    Accordingly, the FHWA solicits comments regarding the elimination 
of the use of letters of credit in support of self-insured operations 
and the requirement, in all cases, of the maintenance of an irrevocable 
trust fund which must remain in place and fully funded until all 
cognizable self-insurance claims have been resolved.
    The FHWA seeks public comment on the need to increase the amount of 
back-up collateral maintained in the letters of credit or trust funds. 
As a general rule, these instruments are executed in the amount of the 
self-insurance authorization, and adjustments to reflect additional 
claims exposure are not requested. Should additional security be 
required as the level of unpaid claims increases? Should the scope of 
the carrier's operations be considered in determining the level of 
collateral or back-up security?
    The FHWA also requests public comment on the sufficiency of the 
reporting requirements that self-insured carriers must meet with 
respect to bodily injury and property damage (BI&PD) claims. Generally, 
each carrier must submit quarterly and yearly claims handling and 
financial data. This information forms the basis of the FHWA's 
monitoring and compliance program which now is designed to insure 
compliance with the terms and conditions imposed by the FHWA. The 
compliance review, however, does not include a verification of the 
carrier's claims reserves, a function that can only be performed by a 
professional risk analyst. In the FHWA's view, the absence of this 
information may create a potential risk for claimants. Accordingly, the 
FHWA requests comments on whether a self-insured carrier should be 
required to submit a yearly certified BI&PD claims report. The report 
would indicate that the yearly claims reserves accurately represent the 
best estimate of the carrier's liability. This report could be prepared 
by the carrier's excess insurance provider or any organization 
qualified to conduct such an analysis. Comments are also solicited on 
whether the FHWA should impose such a requirement on carriers that 
obtained their authorization before the effective date of the ICCTA.
    Section 387.309 of title 49, CFR, provides that ``any self-
insurance authority granted by the Commission [now the FHWA] will 
automatically expire 30 days after a carrier receives a less than 
satisfactory rating from DOT.'' The FHWA is considering whether to 
extend that period to 45 days to enable safety inspectors time to 
evaluate the corrective measures taken by the carrier after the less 
than satisfactory rating was assigned. This would in no way alter the 
FHWA's insistence that all self-insured carriers maintain 
``satisfactory'' safety ratings. See No. MC-176440, Direct Transit, 
Inc., Authorization to Self-Insure (unpublished decision), served 
February 8, 1996. (See Appendix to this ANPRM.).

Proposed New Fee Items

    The FHWA dedicates resources to make certain that the carriers 
authorized to conduct self-insured operations are complying with the 
conditions imposed in their respective authorizations. This involves a 
thorough review of claims and financial data submitted generally on a 
quarterly and yearly basis. In some instances, the data must be 
submitted on a monthly basis. Detailed reports of these reviews are 
prepared and analyzed. In addition, where financial problems call a 
carrier's continuing ability to self-insure into question, considerable 
time is devoted to determining whether additional safeguards should be 
imposed or whether the authorization should be terminated. Any trends 
in the carrier's exposure to BI&PD claims must be scrutinized. 
Furthermore, review and analysis of the proposed certified claims 
report would add to the monitoring duties. None of the costs of these 
duties is recovered from the current application fees. Accordingly, the 
FHWA is considering a $1900 yearly monitoring fee on each carrier 
conducting BI&PD self-insured operations which represents only the 
FHWA's current estimate of the salary and overhead costs for agency 
employees to monitor compliance with the conditions in the self-
insurance authorizations.
    The FHWA solicits public comment on the need to recover costs 
associated with performing additional processing activities beyond the 
handling of a single carrier application. Considerable resources of the 
former ICC and the FHWA have been expended in dealing with multiple 
carrier applications and requests to modify outstanding authorizations 
by changing the self-insurance coverage, altering the type

[[Page 49656]]

and amount of the security coverage, or adding a carrier to the self-
insured group. In many instances, these modification requests require 
an extensive reanalysis of the carrier's financial condition if 
additional self-insurance authorization is requested. The financial 
analysis of carrier groups and their parent corporations is often 
complex and time-consuming. Detailed examination of intercorporate 
transactions as well as the asset quality of intercorporate receivables 
and debt (including covenants) must be conducted. Accordingly, the FHWA 
solicits comments on the need to assess fees in three categories: (1) 
Request for an increase in coverage, change in the letter of credit or 
trust agreement, reporting requirements or other modifications--
($2,600); (2) addition of a single carrier to an existing 
authorization--$3,400; and (3) multiple carrier applications or 
modification of applications--($400 per carrier). These costs represent 
only the salary and overhead expenses associated with the FHWA 
employees who perform these functions.
    The FHWA requests comments concerning whether continuing to permit 
motor carriers to self-insure their operations is in the public 
interest or whether congressional action should be requested to repeal 
the statute directing the Secretary to continue the self-insurance 
program. In this regard the FHWA proposes the following specific 
questions for comments:
    1. Does the self-insurance authorization jeopardize the payment of 
BI&PD and cargo claims by allowing carriers to conduct operations with 
insufficient security or collateral to guarantee payment of claims?
    2. Does the ability of large carriers to conduct self-insured 
operations create an unfair competitive advantage over smaller carriers 
which must absorb the expense of the Federal insurance requirement?
    3. Should the FHWA permit a motor carrier to conduct self-insured 
operations with less security or collateral than an insurance company 
would require?
    4. Do the savings generated by self-insured operations justify 
exposing the public to the risk of uncompensated losses resulting from 
carrier bankruptcy or termination of operations?
    5. Is it possible for the FHWA to conduct the self-insurance 
program in a manner that insures the potential claimants will not be 
placed at risk?
    6. Is the administration of a self-insurance program a proper role 
for a Federal agency?

Executive Order 12866 (Regulatory Planning and Review) and DOT 
Regulatory Policies and Procedures

    The FHWA has determined that a decision to seek termination of the 
self-insurance program would be a significant regulatory action under 
Executive Order 12866, and under the DOT's regulations, policies and 
procedures because of the substantial public interest anticipated in 
this action.
    Currently, 56 carriers have been authorized to self-insure their 
operations, 9 of which have authorizations which cover only cargo 
liability. The gross revenues generated by carriers holding the BI&PD 
authorizations range from $8,396,000 to $1,207,601,000, or an average 
of $174,345,468. These carriers are exposed to an average claims 
balance of $3,412,882. The vast majority of these carriers self-insure 
at the $1,000,000 level which corresponds to the required level of 
coverage.
    The potential economic impact of this rulemaking is not known at 
this time. Therefore, a full regulatory evaluation has not yet been 
prepared. The FHWA intends to use the information collected from 
commenters to this docket to evaluate the economic and other issues 
attendant to this regulatory action.

Regulatory Flexibility Act

    Due to the preliminary nature of this document and lack of 
necessary information on costs, the FHWA is unable at this time to 
evaluate the effects of the potential regulatory changes on small 
entities. The FHWA solicits comments, information, and data on these 
potential impacts.

Executive Order 12612 (Federalism Assessment)

    This action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 12612, and it has been determined 
that this action does not have sufficient federalism implications to 
warrant the preparation of a federalism assessment.

Executive Order 12372 (Intergovernmental Review)

    Catalog of Federal Domestic Assistance Program Number 20.217, Motor 
Carrier Safety. The regulations implementing Executive Order regarding 
intergovernmental consultation on Federal programs and activities do 
not apply to this program.

Paperwork Reduction Act

    This action, if promulgated, would, in all likelihood, impact 
existing collection of information requirements for the purposes of the 
Paperwork Reduction Act of 1995 (49 U.S.C. 3501-3520). Because of the 
potential changes, existing Office of Management and Budget (OMB) 
approvals may require amendment or new approvals may need to be 
obtained. Requiring an annual BI&PD claims report should not 
appreciably add to the existing paperwork burden because the carriers 
are currently required to submit the claims information. However, a 
certification requirement will likely increase the costs associated 
with the preparation of the claims report.

National Environmental Policy Act

    The agency has analyzed this action for the purpose of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) and has 
determined that this action would not have any effect on the quality of 
the environment.

Regulation Identification Number

    A regulation identification number (RIN) is assigned to each 
regulatory action listed in the Unified Agenda of Federal Regulations. 
The Regulatory Information Service Center publishes the Unified Agenda 
in April and October of each year. The RIN number contained in the 
heading of this document can be used to cross reference this action 
with the Unified Agenda.

List of Subjects in 49 CFR 387

    Commercial motor vehicles, Hazardous materials transportation, 
Highways and roads, Insurance, Motor carriers, Motor vehicles safety, 
Penalties, Reporting and recordkeeping requirements, Surety bonds.

    Issued on: September 11, 1997.
Gloria J. Jeff,
Acting Administrator.

Appendix

[The Appendix to this ANPRM should include the full text of the 
following three cases: (1) No. MC-128527, May Trucking Company 
(unpublished decision), served April 22, 1986; (2) No. MC-8535, 
George Transfer-Application To Be A Self-Insurer (unpublished 
decision), served September 24, 1986; and (3) No. MC-176440, Direct 
Transit, Inc., Authorization to Self-Insure (unpublished decision), 
served February 8, 1996].

Interstate Commerce Commission

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

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

    Decided: April 16, 1986.

    Subject to certain conditions, applicant authorized to self-
insure bodily injury and property damage liability.

[[Page 49657]]

Summary of Decision

    In this decision, the Commission is granting the application of 
May Trucking (May) to self-insure, under 49 U.S.C. 10927 and 49 
C.F.R. 1043.5(a), its bodily injury and property damage liability 
subject to certain conditions.\1\
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    \1\ The Commission's grant of this authority does not release 
May from its obligation to meet the financial responsibility 
regulations of the Department of Transportation (DOT). In this 
regard, we take official notice of May's recent filing with the DOT 
requesting a waiver of DOT's requirements to allow the carrier to 
self-insure.
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Background

    In an application filed September 30, 1985, May Trucking Company 
(May) requested that the Commission allow it to act as a self-
insurer for bodily injury and property damage (BI&PD) claims. No 
protest were filed. In a decision served December 9, 1985, May's 
application was denied by a majority of the Commission,\2\ without 
prejudice to refiling by the carrier. On December 30, 1985, May 
filed a Petition to Reopen, requesting that the Commission vacate 
the prior decision and approve the application for self-insurance.
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    \2\ Although the prior decision is styled as also denying May's 
application to self-insure its cargo liability, May takes clear in 
the Petition to Reopen that it does not request such authority. 
May's Petition to Reopen, P. 7, note 3.
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    May's initial application and supplemental petition reveal that, 
as an irregular route common carrier of general commodities, it 
operates 275 tractors (175 of which are leased from owner-
operators), and 550 trailers. It specializes in the transportation 
of frozen vegetables, dry grocery products, boxed meat, dairy 
products and paper goods and handles no highly hazardous materials. 
Its headquarters facility and terminal is located at Payette Idaho. 
It also has a terminal at Salem, Oregon, and one planned at Salt 
Lake City, Utah. The only direct employees of May are the Management 
and Administrative personnel. An unspecified number of company 
drivers are employees of Drivers' Employment Services, a wholly-
owned subsidiary.\3\ May is currently rated ``satisfactory'' by the 
Department of Transportation, Federal Highway Administration. As 
pertinent, May presently has a $3,000 deductible public liability 
policy and processes its own claims for collision and property 
damage liability under $5,000. In addition, United States National 
Bank of Oregon (National Bank) has established a $1 million credit 
line in the name of May which it indicates is dedicated to fund 
liability claims brought against the applicant.
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    \3\ May's 1984 Annual Report filed with the Commission fails to 
identify this company as an affiliate. However, we will require 
applicant to file information on any affiliate whose business is 
supportive of the operations of May trucking.
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    As of December 31, 1984, May's financial statements reflect 
total assets of $9.0 million, including $5.2 million in current 
assets, of which $628,000 was reported as cash or cash equivalents. 
Its current liabilities amounted to $4.0 million and its total 
stockholders' equity was $3.4 million. (During 1984 it retained 
after-tax earnings of $700,000, bringing its retained earnings 
balance to $3.4 million). Its freight revenue in 1984 was $32.3 
million out of its $41.2 million operating revenue, while its 
operating expenses amounted to $40.1 million. This yielded $1.0 
million in operating earnings and net earnings of $700,000.
    While not a part of the application, the quarterly financial 
report (QFR) filed by May for the fourth quarter 1985, shows that 
for 1985, the carrier generated a net operating profit of $172,000, 
down sharply from the operating profit it reported for the twelve 
months of 1984. The year to year decline in operating profit was 
due, in part, to a $501,000 or 50 percent increase in insurance 
expense. The fourth quarter 1984 and fourth quarter 1985 insurance 
expense increase of $291,000 accounted for the bulk of the annual 
increase of $501,000. May's reported net income of $419,000 for 1985 
was achieved largely on the strength of a gain on the disposition of 
non-operating assets. May's QFR report also shows that, as of 
December 31, 1985, it has a balance of $8,000 in its cash account 
and had total stockholder equity of $3.8 million.
    From September 1980 to September 1981, May had excess insurance 
limits extending to $15 million. From 1981 to September, 1984 the 
carrier had coverage to $25 million, at which time it increased its 
excess limits to $30 million. From 1980 through 1985, May's claims 
handled by insurance companies averaged $390,000 per year. In only 
two of those years, 1980-1 and 1983-4, did claims against it exceed 
$500,000.\4\ Its 1984-5 claims handled by the insurance company 
amounted to $354,000. The average amount, in round numbers, of each 
claim, by year, was 1980-1, $23,000; 1981-2, $8,000; 1982-3, 
$10,000; 1983-4, $16,000; and 1984-5, $7,000. From the number of 
claims reported, it appears that few required a payout in excess of 
$25,000 and that none required a payment of more than $50,000. May 
states that none of its claims for the period September 1980-
September 1985 required resort to its ``umbrella'' policies (i.e. 
coverage exceeding the $500,000 limit of its primary insurance 
during that time).
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    \4\ Our analysis of the figures provided by May indicates that 
the aggregate claims against the carrier never exceeded $500,000 in 
any given calendar year. The figures submitted by May are based on a 
non-calendar year used by the carrier's insurance company.
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    In its original application, May proposed to pay its liability 
claims from the $1 million line of credit maintained with National 
Bank. Despite the carrier's favorable loss history, its safety 
program, and its high credit rating, May's proposal was still 
considered inadequate to protect the public in certain key respects.
    Specifically, the Commission rejected May's application for the 
following reasons. First, among other things, its proposed line of 
credit was revocable and, therefore, provided little protection for 
the public above May's ability to meet claims from current revenues. 
Also, May's proposal included no provisions for meeting obligations 
in the event of catastrophic occurrences. In the initial decision, 
the Commission set forth some guidance for any carrier seeking self-
insurance authorization. The Commission indicated that any future 
application by May should include: a self-retention feature related 
to the carrier's recent claims experience; acceptable insurance to 
meet multiple occurrences above the self-insured retention levels; 
an irrevocable trust fund (also related to the carrier's claims 
experience), and information to allow the review of the retention 
levels, the carrier's loss adjustments, and loss reserves. Any 
future application was also to provide for periodic submission of 
statements of account, including profit and loss figures. May's 
Petition to Reopen addresses those specific concerns. In the 
Petition to Reopen May's offers to tie any authorization to self-
insure to the carrier's maintenance of a minimum net worth. Further, 
May offers to convert the $1 million line of credit into an 
irrevocable line of credit. We believe that with May's suggested 
changes (and additional conditions that we will impose) May's 
application provides adequate protection to the public and should be 
granted.

Discussion

    Any decision to allow self-insurance must reflect the carrier's 
ability to absorb both known predictable losses and unpredictable 
ones. Predictability is greatest at the lower claims levels. From 
our observations and knowledge of the claims experience of self-
insured carriers the greatest frequency and predictability of losses 
for commercial auto BI&PD claims is in the $1-$10,000 range. May's 
recent claims experience fits within these limits. Each incremental 
step upward in claims typically has progressively fewer losses. 
However, to have the same degree of coverage through self-insurance 
as traditional insurance at a higher level of exposure to loss, the 
size of a motor carrier's operation must be significantly larger in 
scope. In this way we can to assured that adequate assets will be 
available to pay claims.
    Self insurance is not new. See 49 C.F.R. 1043.5. However, most 
self-insurance programs previously approved by the Commission 
provide that losses that are not predictable are transferred to 
professional risk takers by way of insurance coverage. In the past, 
motor carriers that wanted to self-insure their BI&PD liability 
negotiated deductibles or self-retention levels in their policies of 
insurance. The level of self-insurance retention depended upon the 
size of the operation and on the carrier's financial strength. Motor 
carriers handled the great bulk of their ordinary claims at the 
lower levels of losses but insured against and passed on the 
unpredictable, severe losses to the insurance industry. These motor 
carriers met our security requirements by having insurance companies 
attach an endorsement to their policies of insurance and by filing 
our prescribed certificate of insurance (so-called ``accommodation'' 
filings) on behalf of carriers. The endorsement makes the insurance 
companies liable to the public from the first dollar of liability to 
the minimum limits set by law.
    The current insurance crisis in the industry has resulted in a 
decrease in the availability

[[Page 49658]]

of commercial auto BI&PD liability insurance coverage and a 
precipitous increase in insurance costs. Many insurance companies 
have withdrawn from underwriting motor carriers' insurance, while 
others have curtailed their underwriting. The severity of the 
increased costs of BI&PD coverage has been so unprecedented that 
some carriers have gone out of business, either unwilling or unable 
to increase freight rates or to pay the increased premiums. 
Additionally, it appears that many underwriters also are refusing to 
negotiate policies with higher deductibles or are not providing 
significantly reduced premiums for policies with high deductibles. 
For example, May's insurance premiums for primary BI&PD coverage 
increased from $398,855 for the year ending September, 1985, to $2.2 
million for the year ending September 1, 1986. This increase in 
premium expense, however, is not based on any increase in losses 
paid by the insurance company. May's net profits for 1984 were only 
$700,000. Thus, it is faced with the real possibility of not being 
able to meet extraordinary insurance costs. May's history in this 
crisis is similar to many other motor carriers of property. As such, 
it presents the Commission with an example of the problem we face in 
meeting our responsibility to ensure that carriers have reasonable 
alternatives available to meet statutory security obligations, while 
not compromising our duty to ensure the existence of a safe motor 
carrier industry capable of paying all claims to the level required 
by law. See H.R. Rep. No. 96-1069, 96th Cong. 2d. Sess. 41 (1980) 
(``The purpose of [section 10927] is to create additional incentives 
to carriers to maintain and operate their trucks in a safe manner as 
well as to assure that carriers maintain an appropriate level of 
financial responsibility'').
    Accordingly, while we must continue to ensure that motor 
carriers have sufficient security for the protection of the public, 
we will consider reasonable proposals to entirely self-insure. Such 
an approach is consistent with our broad authority in section 10927 
to approve various types of security--and our obligation to promote 
a safe, efficient, and reasonably priced transportation system. 49 
U.S.C Sec. 10101. A carefully crafted proposal by a carrier to 
insure its own losses appears to be a reasonable method by which we 
can aid the industry without jeopardizing the public.
    In order for the Commission to approve a motor carrier's 
application to self-insure its BI&PD liability, we must carefully 
weight the qualifications presented by the applicant against the 
protection to the public available in our prescribed insurance and 
surety programs. The prescribed insurance and surety programs give 
the public protection from the first dollar of liability up to our 
minimum requirements of $750,000, $1 million or $5 million per 
occurrence,\5\ depending on the commodity transported.\6\ There is, 
however, no requirement that a motor carrier like May obtain so-
called ``umbrella'' coverage to cover claims exceeding its primary 
coverage. See 49 C.F.R. 1043.2(b)(2) and parallel DOT regulations at 
49 C.F.R. 387.9.
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    \5\ 49 C.F.R. 1043.1 and .2. The term per occurrence means that 
the protection of the insurance company extends to all vehicles used 
in the interstate operation of the motor carrier for each accident 
which may occur during the life of the policy for the prescribed 
minimum limits. Thus, any approval to self-insure must ensure that 
the carrier can absorb both predictable losses and unpredictable 
ones.
    \6\ May advised that it transports commodities requiring a 
minimum coverage of $1 million.
---------------------------------------------------------------------------

    In the initial application, May offered to establish a $1 
million line of credit, dedicated to paying liability claims brought 
against it. In response to the Commission's objection that the 
letter of credit, without more, did little to enhance the protection 
of the public, May has amended the line of credit in two respects. 
First, the bank which issued the line of credit has made an 
irrevocable commitment to May to maintain the credit line until 
March 31, 1988. Second, the bank has agreed with May to notify the 
Commission If the credit line is drawn upon.
    It is May's contention that these amendments to the line of 
credit significantly improve the protection being offered to the 
public. It further claims that the credit line is now for the full 
amount of financial responsibility required by the Commission.\7\
---------------------------------------------------------------------------

    \7\ This is technically incorrect, as the $1 million statutory 
requirement is per occurrence and it has not been established that 
May's proposal offers identical coverage.
---------------------------------------------------------------------------

    Moreover, May is willing to have its self-insurance conditioned 
on maintenance of at least $2 million in net worth (retained 
earnings and share-holders equity). The applicant intends to look to 
operating revenues as its first source of funds to pay liability 
claims. Its net worth, in excess of the $2 million, will function as 
its net source of funds. Finally, the $1 million irrevocable line of 
credit will be drawn upon as a last resort.\8\ Thus, May has ensured 
that substantial sums of money will be available to pay claims.
---------------------------------------------------------------------------

    \8\ May expects to pay BI & PD claims out of current earnings as 
it has in the past, thereby, obviating the need to replenish the 
funds available under its line of credit.
---------------------------------------------------------------------------

    We recognize that self-insurance plans will not necessarily 
afford the precise level of protection that customary insurance 
plans provide. In the normal situation, a carrier that is covered 
for $1 million in liability will be protected up to a million 
dollars for each accident. With the plan before us, however, we are 
convinced that the public will be adequately protected. Indeed, with 
the conditions that we will impose, May's plan should protect the 
public in a manner that is functionally equivalent to the protection 
provided under traditional insurance plans. We will require May to 
have and maintain a ``satisfactory'' safety rating as determined by 
the DOT, which is the highest possible rating. We will require the 
carrier to maintain a minimum net worth. If its net worth falls 
below this level, May's self-insurance authorization will 
automatically be terminated, unless the carrier corrects this 
situation within 30 days. The Commission will also monitor the 
carrier's financial condition and claims experience and revoke 
permission to self-insure should events occur that we believe could 
jeopardize its ability to pay future claims. See 49 C.F.R. 1043.9. 
We believe that, subject to these conditions designed to ensure the 
maintenance of assets necessary to pay all claims up to the level 
provided by law, May should be permitted to self-insure.
    The imposition of these conditions allows the Commission to 
balance the needs of the public for a high level of security and the 
need of the public for an efficient, reasonably priced, and safe 
transportation system. Accordingly, we will approve the application 
subject to the following specific conditions.
    First, May must submit to the Commission carrier quarterly and 
annual financial statements, as they become available, during the 
time the self-insurance, authorization is in effect. The financial 
statements (income statement, balance sheet and statement of changes 
in financial position) must include a certification by an 
appropriate May management official verifying the accuracy of the 
information provided in the statements. Financial disclosure is also 
required of affiliated companies which provide support services to 
the operations of May Trucking Company. These financial statements 
will provide up to date information on May's financial condition and 
thus will permit the Commission to ensure, among other things, that 
the net worth requirement is being maintained. In this regard, we 
will insist that if, at any time, the applicant's net worth balance 
falls below the $2 million minimum, this self-insurance 
authorization will automatically terminate unless within 30 days 
from the date of the notice, May corrects the situation or obtains 
other security for the protection of the public.
    Second, May must file with the Commission carrier quarterly and 
annual claims reports, within two weeks of the close of the previous 
quarter, during the time the self-insurance authorization is in 
effect. These claims reports should detail the number, dollar amount 
and nature of May's claims experience. May must also provide the 
Commission with a quarterly report detailing pending court cases or 
other actions which relate to or arise from the claims experience. 
As with the financial statements, these claims reports must be 
certified as to their accuracy by an appropriate May management 
official.
    Third, the carrier must notify the Commission immediately of any 
pending or contingent liability claim(s) which individually exceeds 
$50,000 or collectively exceed $250,000. If any of these reports or 
notices of liability claims indicate that the public is being 
jeopardized by May's failure to maintain an appropriate level of 
financial responsibility, May's self-insurance may be revoked.
    Fourth, during the time the self-insurance authorization is in 
effect, May must have unrestricted access to the entire $1 million 
line of credit. In addition, drawdowns from the $1 million credit 
line may only be made to satisfy bodily injury and property damage 
claims. The Commission must be notified immediately of the specific 
purpose and amount of any May drawdown. Furthermore, we will require 
that May provide, at the time of the notice of the drawdown, a plan 
detailing how it proposes to respond to further liability claims. 
Again, should drawdowns suggest that May's financial

[[Page 49659]]

arrangements do not adequately protect the public, we will consider 
revocation of this authorization.
    Fifth, the Commission must, at all times, be made aware of the 
terms and conditions under which the line of credit is being made 
available. In particular, the Commission must be notified no later 
than 90 days prior to the effective date of any change in the terms 
of the line of credit or its cancellation. Applicant is further 
required to notify the Commission of the renewal of the line of 
credit no later than 6 months prior to its expiration date.
    Sixth, this application is granted with the express condition 
that the information required will be timely filed with the 
Commission. Any failure to timely file any of the information will 
subject the carrier to termination of its self-insurance 
authorization.
    Seventh, we repeat that the Commission retains the authority to 
terminate May's self-insurance authorization at any time if, after 
notice and hearing, it appears to the Commission that applicant's 
financial arrangements fail to provide satisfactory protection for 
the public.
    Eighth, the Commission retains the right to require May to 
submit any additional information that it deems necessary.
    Finally, the Commission has reopened Ex Parte No. MC-178, 
Investigation Into Motor Carrier Insurance Rates. In that 
proceeding, interim rules are adopted pending completion of notice 
and comment on proposed final rules respecting many of the issues 
raised in May's application. That decision is being served today. 
Should any of the conditions required of May be inconsistent with 
any interim or final rules adopted in Ex Parte No. MC-178, May will 
be required to conform its financial arrangements to those rules.

Energy and Environmental Statement

    This action will not significantly affect either the quality of 
the human environment or conservation of energy resources.
    It is ordered: The application is granted subject to the 
conditions set forth in this decision.
    (1) Applicant must submit carrier quarterly and annual financial 
statements to the Commission. The statements must include a 
certification by an appropriate May official verifying the accuracy 
of the information provided. Disclosure is also required of 
affiliated companies which provide support services for the 
operations of May Trucking Company;
    (2) Applicant must file with the Commission quarterly claims 
reports detailing the number, dollar amount, and nature of its 
claims experience and quarterly reports detailing pending court 
cases which relate to or arise from the claims experience. These 
reports must be certified as to accuracy by an appropriate May 
official;
    (3) Applicant must notify the Commission immediately of any 
pending or contingent liability claim(s) which individually exceeds 
$50,000 or collectively exceed $250,000;
    (4) Applicant must maintain an irrevocable $1 million line of 
credit and must submit, within 15 days of the service date of this 
decision, a copy of any agreement with the bank covering the credit 
line; and notify the Commission immediately upon any drawdown on the 
line of credit; also May must have unrestricted access to the entire 
line of credit and drawdowns from the line of credit may only be 
made to satisfy BI & PD claims;
    (5) At the time of any notification of any drawdown the 
applicant will also provide the Commission with a plan detailing how 
it proposes to respond to further liability claims;
    (6) The applicant must notify the Commission no later than 90 
days prior to the effective date of any change or cancellation of 
the line of credit and must notify the Commissioner of the renewal 
of the line of credit no later than 6 months prior to its expiration 
date;
    (7) Applicant must maintain a new worth of at least $2 million 
and must notify the Commission at any time that the applicant's net 
worth falls below $2 million. The applicant will have 30 days to 
correct this situation or face termination of the authority to self-
insure;
    (8) The Commission retains the authority to terminate May's 
self-insurance authorization, at any time, if it appears to the 
Commission that applicant's financial arrangements fail to provide 
satisfactory protection for the public.
    (9) This decision will be effective 30 days after service.

    By the Commission, Chairman Gradison, Vice Chairman Simmons, 
Commissioners Sterrett, Andre, and Lamboley, Commissioner Lamboley 
would have granted the application subject to further clarification 
and conditions. Vice Chairman Simmons and Commissioner Andre 
commented with separate expressions.
James H. Bayne,
Secretary.

    Vice Chairman Simmons, commenting:
    Approval of May Trucking Company's self-insurance application in 
today's decision is grounded in a conclusion that the May proposal 
contains adequate safeguards for protection of the public. A 
necessary component of those safeguards is meaningful Commission 
monitoring of May's self-insurance program. At this time, I believe 
the commission possesses sufficient resources to carry out this 
oversight function. Depending on the number of other self-insurance 
applications filed and granted, however, current resources may not 
be adequate to maintain an appropriate level of oversight. If this 
situation arises, I will not hesitate to seek additional resources 
from Congress.
    Commissioner Andre, commenting:
    I am hopeful that we will be able to reduce the burden both on 
self-insurers and on this agency as we further develop these self-
insurance procedures. It seems essential that the procedures be as 
simple as is consistent with maintaining protection for the public. 
However, I do not think it desirable to delay approval of this 
application any further.

Interstate Commerce Commission

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

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

    Decided: September 18, 1986.

    Subject to certain conditions, applicant authorized to self-
insure bodily injury and property damage and cargo liability.

Summary of Decision

    In this decision, the Commission is granting the application of 
George Transfer, Inc., (hereinafter ``George Transfer'' or 
``Applicant'') to self-insure its automobile BI&PD liability for 
$1,000,000 and its cargo liability under 49 U.S.C. 10927 and 49 
C.F.R. 1043.5(a), subject to certain conditions.

Background

    George Transfer holds irregular route common and contract motor 
carrier authority from this Commission to transport general 
commodities throughout points in the United States. Approximately 90 
percent of its traffic, however, involves the transportation of 
fabricated and processed metals and metal products. The applicant 
operated over 1,200 equipment units out of 29 terminals generating 
$34,000,000 of operating revenue in 1985. It uses owner-operators 
extensively in its motor carrier operations. Normally, they supply 
the power tractors, and the carrier supplies the trailers. The 
carrier's corporate headquarters is located at Parkton, Maryland. 
The applicant is not owned or controlled by any other corporation. 
It has two small subsidiaries, neither of which holds authority from 
this Commission.\1\
---------------------------------------------------------------------------

    \1\ The two subsidiaries are George International Warehouse, 
Inc., which provides a warehousing service, and Marden Bros. Inc., 
which leases motor vehicles.
---------------------------------------------------------------------------

    In support of its application, the carrier has submitted 
detailed financial statements prepared as of December 31, 1985. As 
of that date the carrier's balance sheet shows total assets of 
$12,310,290 and liabilities of $6,813,000. Current assets exceed 
current liabilities by $3,283,588. The carrier had a net worth of 
$5,497,779 as of that date. George Transfer generated total 
operating revenues of $34,776,494 in the calendar year ending 
December 31, 1985. Its net operating revenue was $761,168. It 
reported ordinary income before income tax of $509,649 and net 
income after taxes of $290,549. The operations of George Transfer 
were profitable in 1983 and 1984 as well as 1985.
    Applicant states that it is safety conscious and expends 
considerable time and resources in developing safety awareness, The 
applicant's Safety Department is headed by a Safety Manager, who 
reports to its Director of Operations. This department is 
responsible for the overall safety program of the carrier. The 
program calls for a multifaceted approach to safety. Monthly safety 
meetings of drivers are held at each of the carriers' 29 terminals. 
Spot-check inspections of vehicles and of drivers' hours-of-service 
logs are required. Vehicles are required to be inspected every 30 
days. Safe driving incentive awards are given to drivers with

[[Page 49660]]

perfect driving records. Drivers are given intensive training in 
company and Department of Transportation safety requirements. New 
driver applicants are thoroughly screened by the carrier before they 
are hired. A complete background investigation is a part of this 
screening process, including contacts with past employers, reference 
checks, and verification of safe driving records. Applicant has a 
safety rating of ``satisfactory'' from the Department of 
Transportation. (Exhibit F to the application)
    George Transfer has handled its own BI&PD and cargo liability 
claims in the past under self-retention insurance programs. If this 
application is granted, it plans to continue the same program. The 
only difference will be that an insurance company will not certify 
primary coverage with the Commission from the first dollar of 
liability.\2\ Under the carrier's claims program, all claims are 
handled expeditiously. Claims reserves are established within ten 
days of reported accidents. Any claim with a possible liability 
exceeding $50,000 is reviewed monthly by its corporate attorney. The 
applicant is ready to supply the Commission with any reports 
detailing its financial condition and claims experience as a 
condition to the grant of self-insurance authority. The applicant 
offers to maintain a minimum net worth of $2 million dollars in 
order to ensure that funds will be available to pay liability 
claims. It also proposes, as an additional safeguard to the public, 
to establish trust funds for the payment of BI&PD and cargo 
liability claims. The BI&PD liability trust will be funded in the 
amount of $1,000,000; and the cargo fund will be funded in the 
amount of $250,000. Each fund will be irrevocable and used 
exclusively for the payment of designated claims liability. The 
trust funds may only be drawn upon when the carrier certifies to the 
trustee that it does not have sufficient operating funds to satisfy 
its BI&PD or cargo liability. If drawn upon, George Transfer will 
replenish the trust funds to the required minimum amounts within 30 
days--$1,000,000 for BI&PD or $250,000 for cargo.
---------------------------------------------------------------------------

    \2\ The deductible or self-retention level is a binding 
condition between the insurance company and its motor carrier 
insured, not the public. The Commission's prescribed BI&PD and cargo 
insurance forms override the policy terms and conditions and give 
the public protection from the first dollar of liability up to the 
required minimum limits. In the case of George Transfer, the 
commodities it transports requires the carrier to maintain a minimum 
BI&PD limit of $1,000,000 per occurrence and a cargo limit of $5,000 
per vehicle, $10,000 aggregate per occurrence. 49 C.F.R. 1043.2.
---------------------------------------------------------------------------

    Applicant believes that a grant of self-insurance authority for 
its BI&PD and cargo liability is essential to its ability to 
continue profitable operations in the face of the current insurance 
crisis. Its insurance premiums for the present policy year, from May 
1986 to May 1987, total $832,000. This represents more than a 400 
percent increase over the previous policy year premiums of $201,000. 
This latter premium figure provided excess BI&PD and cargo liability 
coverage to $10,000,000. The current cost of $832,000 provides 
excess coverage only to $1,000,000. By the terms of the policy, the 
motor carrier is not permitted to handle third party liability 
claims, even though it has had eight years experience in this 
activity. It must absorb such losses up to its deductible amount and 
pay the insurance company a fee of 15 percent of the loss for 
handling the claim. The deductibles in the current policy are 
$250,000 per occurrence for BI&PD and $150,000 per occurrence for 
cargo. The applicant stresses that these increases in premiums and 
reductions in coverage have been made despite the fact that the 
carrier has paid all of its BI&PD and cargo claims over the past 
five years. Stated another way, the insurers of George Transfer have 
paid no claim under their excess policies because all losses feel 
within the motor carrier's self-retention level.
    The applicant conducted an exhaustive search for renewal 
coverage before accepting the terms of its present insurance 
company. Ten insurance companies simply made no response to the 
carrier. Several would not consider primary coverage. One offered 
coverage up to $1,000,000 at an annual premium of $2,500,000. 
Another offered the same coverage but at a premium of $3,000,000. 
Several others told the carrier that they simply refused to consider 
underwriting any motor carrier risk. The carrier estimates that it 
will save $900,000 a year in costs if is permitted to self-insure.
    The following tables provide details as to the loss experience 
of George Transfer over the past five years:

    Table I.--Automobile Bodily Injury and Property Damage Liability    
------------------------------------------------------------------------
                                     Average                            
           Policy year                claim      Number of   Total claim
                                      amount       claims      expense  
------------------------------------------------------------------------
1981-1982........................       $4,971          110     $546,828
1982-1983........................        2,420           96      232,274
1983-1984........................        3,879          105      407,274
1984-1985........................        8,219          120      986,333
1985-1986........................        3,059          105      321,181
                                  --------------------------------------
    5 year average...............        4,510          107      498,778
------------------------------------------------------------------------


                       Table II.--Cargo Liability                       
------------------------------------------------------------------------
                                     Average                            
           Policy year                claim      Number of   Total claim
                                      amount       claims      expense  
------------------------------------------------------------------------
1981-1982........................       $3,045           64     $194,939
1982-1983........................        1,880           47       88,395
1983-1984........................        1,621           60       97,245
1984-1985........................        6,283           42      263,903
1985-1986........................        4,658           38      177,015
                                  --------------------------------------
    5 year average...............        3,497           50      164,300
------------------------------------------------------------------------

Discussion

    George Transfer, we believe, has presented a strong case for 
authority to self-insure its BI&PD and cargo liability. It has more 
than adequate financial qualifications. The company has strong cash 
and working capital positions. A positive working capital position 
is important as it indicates that the carrier can meet its current 
obligations from its current assets. Furthermore, its debt to debt 
plus equity ratio is favorable. In addition, it has handled its own 
BI&PD and cargo liability claims for a number of years and is 
capable of doing so in the future under a Commission approved self-
insurance program. It also has an active and successful safety 
program, which it intends to maintain.
    In our prior decisions, we have taken a conservative approach to 
the question of permitting motor carriers to self-insure their

[[Page 49661]]

BI&PD and cargo liability.\3\ We are charge by the act to provide 
adequate security for the protection of the public. See 49 U.S.C. 
10927. Because of this, the Commission has been, and will continue 
to be, very selective in approving carriers to exercise this 
privilege.
---------------------------------------------------------------------------

    \3\ Ex Parte No. MC-5, Motor Carrier Insurance for the 
Protecting of the Public, 1 MCC 45, 58 (1936); MC-128527, May 
Trucking Company--Application to be a Self-Insurer (not printed); 
and Ex Parte No. MC-178, Investigation Into Motor Carrier Insurance.
---------------------------------------------------------------------------

    As we stated in MC-128527, May Trucking Company, supra, ``(A) 
carefully crafted proposal by a carrier to self-insure its own 
losses appears to be a reasonable method by which we can aid the 
industry without jeopardizing the public.'' We believe that the 
application by George Transfer meets these criteria. We will approve 
this application subject to certain conditions necessary to ensure 
that there is adequate protection for the public.
    In our view, the minimum net worth requirement and the trust 
funds offered by applicant are such as will provide the type of 
protection we seek for the public. The net worth requirement will 
ensure protection against unpredictable claims. Moreover, the trust 
fund is an easily understood and easily monitored financial 
arrangement for establishing a means to compensate the public in the 
case of any accident. However, in order to ensure the protection of 
the public to the greatest extent possible we will require some 
modifications in the terms and language of the trust agreements. An 
explanation of these modifications and our rationale for these 
changes follows.
    The trustees appointed by George Transfer, Inc. are Joseph Kiel 
and T. Bernard Williams. Mr. Kiel is apparently George Transfer's 
house counsel with the responsibility for reviewing personal injury 
and property damage claims. However, Mr. Williams is not further 
identified. Although we have no reason to believe the trustees are 
not legally competent, we believe that they should be further 
identified to the extent of describing their relationship to the 
applicant and their business addresses so the Commission will know 
who will have legal title to the trust money and how they may be 
contacted.
    Similarly, we believe that the beneficiaries of the trusts 
should be more clearly designated. The reason for this designation 
is to prevent claims on the trust funds from creditors other than 
persons who have BI&PD and cargo claims.
    Generally, creditors of a beneficiary who has an interest in a 
trust can subject the beneficiary's interest in the trust to 
satisfaction of a debt. The purpose of the trust fund created here 
is the payent of BI&PD claims. As established, the trustee will 
transfer funds to George's Transfer when applicant certifies its 
inability to pay the involved claims. George's Transfer will 
presumably pay the claims with the trust funds. The arrangement may 
present a problem. The settlor's (George's Transfer) continuing 
involvement could complicate a determination as to who is the 
intended beneficiary of the trust. Additionally, it creates a 
potential for abuse because George's Transfer will actually have 
possession of the funds. Applicant's possession of the funds 
subjects them to potential attached by George Transfer's other 
creditors because of the applicant's continuing interest.
    To avoid any potential misconstruction and abuse we will require 
the applicant to revise the agreements to identify explicitly BI&PD 
and cargo claimants as the intended beneficiaries. Specifically, the 
class of beneficiaries under the cargo trust agreement should be 
more clearly defined, in paragraph 3 of the cargo trust agreement, 
``to retire claims of persons or corporations for loss and damage to 
cargo arising as a result of transportation provided by George's 
Transfer.'' Further, both the cargo trust and liability trust 
agreements should be revised to provide that payment will be made to 
such claimants directly rather than to George's Transfer. This 
should be accomplished by modifying the liability trust agreement 
(paragraph 3, line 10) and the cargo trust agreement (paragraph 3, 
lines 7-8) deleting, ``Grantor funds to meet such obligations'' and 
inserting, ``claimants identified by the Grantor sufficient funds to 
meet such obligation.''
    Moreover, in order to insure that the trust agreements will not 
be subject to attachment by George Transfer's creditors in any 
bankruptcy proceeding we will require the agreements be further 
modified (paragraph 3, line 10 in the liability trust agreement and 
paragraph 3, line 8 in the cargo trust agreement) in the following 
manner: After ``obligations'' insert: ``The payment of those funds 
to claimants is solely and exclusively for settlement of outstanding 
claims. Those claims shall be paid from the trust fund irrespective 
of the financial responsibility or lack thereof or insolvency or 
bankruptcy of the Grantor''.
    Finally, we address the issue of revocation. Each trust is 
irrevocable ``so long as the Grantor continues to insure itself.'' 
However, this construction of the trust could present a problem. For 
example, if applicant ceased to perform operations it might no 
longer be insuring itself and the trust fund would be dissolved, yet 
there might be claims outstanding against it which it would not be 
able to pay. In order to ensure that trust fund assets will be 
applied to these outstanding claims, we require the following 
language added after the first sentence in paragraph 9 of both 
agreements: ``Notwithstanding the preceding sentence, this trust 
shall not be revoked until all legally cognizable claims arising 
prior to the date Grantor ceases to insure itself have been settled. 
The purpose of this provision is to insure that these funds are 
available to reimburse claimants who present their claims within the 
time allowable by the applicable statute of limitations before 
residual funds, if any, may be returned to the Grantor upon 
termination of the trust.''
    Subject to these modifications, we will accept the applicant's 
offer to establish a trust fund in the amount of $1,000,000. We 
emphasize the fact that this trust fund will be utilized only for 
payment for liability claims. Further, we will require that 
applicant keep the Commission informed about the trust, its 
maintenance and operation, at all times. Finally, the trust fund 
will be replenished to the required minimum amount after each 
drawdown.
    Applicant seeks authority to self-insure its cargo liability as 
well as its BI&PD liability. Our insurance rules provide for this 
type of self-insurance. 49 C.F.R. 1043.5. The standard for granting 
an application for self-insurance for cargo liability is the same as 
that for BI&PD liability. Namely, that the carrier ``will furnish a 
true and accurate statement of its financial condition and other 
evidence which will establish to the satisfaction of the Commission 
the ability of such carrier to satisfy its obligation for * * * 
cargo liability without affecting the stability or permanency of the 
business of such motor carrier.''
    As demonstrated above, applicant has the ability to self-insure 
its cargo liability claims as well as its BI&PD claims. The present 
minimum security requirements for cargo is $5,000 or $10,000 for 
aggregate losses. 47 C.F.R. 1043.2(c). George Transfer's current 
self-insurance retention program has required it to pay all claims 
under $250,000 for the last five years. The claims chart reproduced 
above also shows that there have been no claims in excess of that 
amount during that period. In fact, in the last five years, George 
Transfer has not had a cargo claim exceed $40,000. Thus, in reality 
George Transfer has been self-insured for its cargo liability for 
several years. In granting its application for self-insurance with 
respect to cargo liability, we are doing nothing more than allowing 
the carrier to continue its present practice, albeit without an 
insurance company intermediary between the public and the applicant. 
The record before use shows that George Transfer has the 
qualifications necessary to self-insure its cargo liability, and we 
approve its application subject to the conditions set forth below.
    As in the case of its BI&PD liability, applicant has offered to 
establish a separate trust fund of $250,000 for the sole purpose of 
the payment of claims attributable to cargo loss or damage. This 
trust fund will be utilized in the event that George Transfer is 
unable to pay claims from operating revenues. Notably, the amount of 
this fund will equal the present coverage of George Transfer's 
existing policy. We will accept the applicant's offer to establish a 
trust fund for the payment of cargo claims subject to the conditions 
set forth above in the discussion of the liability trust fund.

Findings

    Given the carrier's financial position, its claims history and 
experience and its safety record we find that the establishment of 
these trust funds with the conditions discussed above will provide 
protection for the public. Therefore, we accept George Transfer's 
offer to establish these trust funds. We emphasize that these funds 
will be utilized only for payment of BI&PD and cargo liability 
claims. Further, we will require that applicant keep the Commission 
informed about the trusts, and their maintenance and operation, at 
all times. Finally, the trust funds will be replenished to the 
required minimum amount after each drawdown. In addition, we will 
impose the following conditions on this grant of self-insurance 
authority.
    Applicant must submit to the Commission a carrier quarterly and 
annual financial

[[Page 49662]]

statements, as they become available, during the time the self-
insurance authorization is in effect. The financial statements 
(income statement, balance sheet and statement of changes in 
financial position) must include a certification by an appropriate 
management official verifying the accuracy of the information 
provided in the statements. These financial statements will provide 
up to date information on the carrier's financial condition.
    Further, applicant must file with the Commission carrier 
quarterly and annual claims reports, within two weeks of the close 
of the previous quarter, during the time the self-insurance 
authorization is in effect. These claims reports should detail the 
number, dollar amount and nature of George Transfer's claims 
experience. As with the financial statements, these claims reports 
must be certified as to their accuracy by an appropriate management 
official.
    Additionally, the carrier must notify the Commission immediately 
of any pending or contingent liability claim(s) which individually 
exceeds $50,000 or collectively exceed $250,000. If any of these 
reports or notices of liability claims indicate that the public is 
being jeopardized by the carrier's failure to maintain an 
appropriate level of financial responsibility, George Transfer's, 
self-insurance may be revoked.
    Moreover, the Commission must, at all times, be made aware of 
the terms and conditions under which the trust agreements are 
operating. In particular, the Commission must be notified no later 
than 90 days prior to the effective date of any change in any of the 
terms of the trust or its cancellation.
    The application is granted with the express condition that the 
information required will be timely filed with the Commission. Any 
failure to timely file any of the information will subject the 
carrier to notice of termination of self-insurance authorization.
    Finally, the Commission retains the authority to terminate 
applicant's self-insurance authorization at any time if, after 
notice and hearing, it appears to the Commission that applicant's 
financial arrangements fail to provide continued satisfactory 
protection for the public.
    It is ordered: The application is granted subject to the 
conditions set forth in this decision.
    (1) Applicant must submit carrier quarterly and annual financial 
statements to the Commission. The statements must include a 
certification by an appropriate applicant official verifying the 
accuracy of the information provided. Financial disclosure is also 
required of affiliated companies which provide support services for 
the operations of the motor carrier.
    (2) Applicant must file with the Commission quarterly claims 
reports detailing the number, dollar amount, and nature of its 
claims experience and quarterly reports detailing pending court 
cases which relate to or arise from the claims experience. These 
reports must be certified as to accuracy by an appropriate carrier 
official;
    (3) Applicant must maintain a net worth of at least $2 million 
dollars and must notify the Commission at any time that the 
applicant's net worth falls below $2 million dollars.
    (4) Applicant must establish a trust fund in the amount of 
$1,000,000 for the payment of BI&PD liability claims and one in the 
amount of $250,000 for the payment of cargo liability claims as set 
forth in Exhibits ``G'' & ``H'' attached to its application and as 
modified in this decision. The trust funds must be irrevocable and 
used only for the payment of its BI&PD or cargo liability. If drawn 
upon, applicant must contribute to the trust fund, within a period 
of 30 days after the date on which the trust funds are used to 
retire claims, sufficient cash to increase the BI&PD trust fund to 
the $1,000,000 minimum. or the cargo trust fund to the $250,000 
minimum. The executed trust fund agreements, must be submitted 
within 15 days of the service date of this decision. Any changes in 
their terms must be given prior approval by the Commission. 
Furthermore, any draw down on these funds and failure to replenish 
within 30 days must be reported immediately to the Commission, along 
with an explanation as to how it proposes to respond to further 
BI&PD or cargo claims.
    (5) Applicant must notify the Commission immediately of any 
pending or contingent BI-PD liability claim(s) which individually 
exceeds $50,000 or collectively exceed $250,000; and any pending or 
contingent cargo liability claims which exceed $50,000 individually 
or $100,000 collectively.
    (6) The Commission retains the authority to terminate George 
Transfer's self-insurance authorization, at any time, if it appears 
to the Commission that applicant's financial arrangements fail to 
provide satisfactory protection for the public.
    (7) This decision will be effective 30 days after service.

Energy and Environment Statement

    This action will not significantly affect either the quality of 
the human environment or the conservation of energy resources.

    By the Commission, Chairman Gradison, Vice Chairman Simmons, 
Commissioners Sterrett, Andre and Lamboley.
Noreta R. McGee,
Secretary.

Federal Highway Administration

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

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

    Decided: February 8, 1996.

    By decision of the former Interstate Commerce Commission 
(Commission) served May 25, 1995, Direct Transit Inc. (Direct) was 
authorized to self-insure its bodily injury and property damage 
(BI&PD) liability subject to certain conditions. The self-insurance 
authorization was activated on August 1, 1995. As a result of a 
safety audit conducted by the Federal Highway Administration (FHWA), 
Direct was notified that it was assigned an ``Unsatisfactory'' 
safety rating effective January 12, 1996.
    Section 1043.5(a)(3) of Title 49 of the Code of Federal 
Regulations governing qualifications for a self-insurer, provides in 
part:
    Any self-insurance authority granted by the Commission will 
automatically expire 30 days after a carrier receives a less than 
satisfactory rating form the U.S. Department of Transportation 
(DOT).
    Direct's self-insurance authorization will expire automatically 
on February 11, 1996.
    By virtue of the ICC Termination Act of 1995, P.L. 104-88, the 
responsibility for making determinations regarding the self-
insurance program and all authorizations pursuant thereto was vested 
in the Secretary of Transportation, and subsequently by delegation, 
in FHWA.
    By a petition filed February 6, 1996 with FHWA, Direct seeks a 
waiver of the automatic termination provision and an emergency 
extension of its self-insurance authorization for a period of 30 
days or until it is issued a ``Satisfactory'' safety rating, 
whichever occurs first.
    In support of its petition, Direct contends that the automatic 
termination provision is inappropriate and will simply penalize the 
carrier by increasing its insurance premiums. While acknowledging 
that the ``Satisfactory'' safety rating requirement is justifiable 
in most circumstances, the carrier claims nonetheless that the 
public is protected and that it is not in the public interest to 
invoke the automatic termination rule in this instance. Direct 
maintains that automatic termination should apply only to a 
``withering and desperate carrier''. (Petition at 7).
    Direct's arguments are groundless and disturbing. In developing 
the self-insurance requirements, the Commission recognized the 
possibility that ``Unsatisfactory'' or ``Conditional'' ratings 
militate against allowing an applicant to self-insure because such 
ratings indicate operations that might result in a higher than 
average claims experience or the potential for substantial 
liability, both of which could adversely affect a carrier's ability 
to indemnify claimants. Investigation Into Motor Car. Insurance 
Rates, 3 I.C.C. 2nd 377,379 (1987). The Commission further noted, 
``It is also consistent with our intent that safe operations serve 
as the touchstone for any self-insurance authorization.``Id. at 384. 
The 30-day expiration provision was implemented because ``a 
diminution in a carrier's safety status would warrant immediate 
reexamination of self-insurance authority.'' Id. at 385.
    Direct, having begun self-insured operations only several months 
ago, has too short a track record to trumpet the success of its 
program and can hardly profess that the public will be protected 
based on that meager record. The Commission's self-insurance 
requirements were imposed ``to guarantee that a carrier can meet its 
financial responsibility to the public''. Id. at 380. Carriers that 
conduct unsafe operations cannot make such guarantees. The issue 
before me concerns the relationship between unsafe operations and 
self-insurance. I reject Direct's contention that the payment of 
premiums for additional commercial insurance coverage is a relevant 
factor. I also note that the circumstances surrounding this matter 
do not appear to justify the eleventh-hour filing of Direct's 
petition.
    It should come as no surprise that FHWA, the agency charged with 
ensuring safe

[[Page 49663]]

operation of commercial vehicles on our Nation's highways, will 
continue to insist that all carriers operating with self-insurance 
authority maintain ``Satisfactory'' safety ratings. Nevertheless, I 
will authorize an extension of the self-insurance authorization to 
March 7, 1996 for the sole purpose of conducting another compliance 
review of the carrier's operations.
    Direct should understand that failure to obtain a 
``Satisfactory'' safety rating during the extension period will not 
provide support for a further extension. Accordingly, the carrier 
should begin the process of securing commercial insurance coverage 
in the event its self-insurance authorization terminates.
    It is ordered: 1. A waiver of the automatic 30-day period for 
expiration of petitioner's self-insurance authority and an extension 
of the self-insurance authorization until March 7, 1996, is hereby 
granted.
    2. The terms and conditions of the self-insurance authorization 
activated August 1, 1995, will remain in effect throughout the 
extension period.
    3. As of 12:01 A.M. on March 8, 1996, in the absence of the 
issuance of a ``Satisfactory'' safety rating, Petitioner's self-
insurance authorization will terminate without further order of the 
FHWA.
    4. A copy of this decision is to be filed in Docket No. MC-
176440 and all sub numbers thereunder.
    5. This decision is effective when served.

    By the Federal Highway Administration.
John F. Grimm,
Director, Office of Motor Carrier Information Analysis.
[FR Doc. 97-24714 Filed 9-22-97; 8:45 am]
BILLING CODE 4910-22-P-M