California’s AB5 bill is making trucking insurance more difficult

California’s passing of its AB5 bill is proving to be problematic for both drivers and insurers, as both are having to come to the realization that contracted trucking gigs may be grinding to a halt within the state.

“The owner-operator model of trucking is heading towards a very rough period,” said Joe Nibley (pictured), vice president of Milepost.

“And even if this type of contractual work can persist in some form within California, finding insurance to back it up will be very costly and difficult.”

In an interview with Insurance Business, Nibley spoke about why the insurance implications for both independent contractors and motor carriers is grim.

“There’s going to be a big change in the insurance that they’re going to need to carry”

AB5 was first signed into law in 2019 by Governor Gavin Newsom but its implementation was held up in courts by those who opposed its provisions, mainly truckers.

The law was based off of the landmark California Supreme Court ruling Dynamex Operations West, Inc. v. Superior Court, which saw Dynamex drivers successfully argue that they were wrongfully viewed as contract workers and thus deprived of employment protections under California’s wage orders.

This ruling, which Nibley believed to have been centered on the gig economy, jeopardizes an essential element of the trucking industry, the owner-operator driver, it was stated.

“This is one person who leases themselves to a motor carrier, operating like an independent contractor,” he said.

AB5 essentially restricts and outlaws owner-operators, as they would be viewed as an employee under this bill.

While Nibley believes that disrupting the trucking industry was not a part of the plan when formulating this provision, it is causing problems for both motor carriers and owner-operators alike.

“If it was more advantageous to have these owner-operators as employees, this would have been done long ago,” he said.

Instead, if motor carriers are now being forced to hire these workers, the ramifications can be steep where it comes to insurance coverage.

“There’s going to be a big change in the insurance that they’re going to need to carry. They’re going to need to carry workers compensation insurance,” Nibley said.

“While that coverage is available, it might be one of the things that would probably deter that carrier from wanting to bring on the employees is the cost of the insurance.”

This is particularly problematic since the trucking industry is in economic stasis, which sees larger trucking companies wanting to cut costs as much as possible.

“When you are forced into a situation where in order to keep the same number of trucks and drivers, you must now have employees instead of owner operators, which means that your cost per truck or cost per person that works in your business is now higher,” Nibley said.

Stuck between a rock and a hard place

For owner-operators, the ramifications of AB5 can seem even grimmer.

Nibley believes there are three options a contractor has if a carrier cannot hire them on as an employee:

1. Quit the trucking business entirely.
2. If they want to be able to lease again, they will have to move to a different part of the country.
3. They can start their own motor carrier business.

“While the third option may seem like the most efficient, the kind of insurance needed to start a small operation is very expensive,” Nibley said.

There are not a whole lot of carriers available who are willing to provide insurance to a newly established motor carrier.

“The data is pretty clear that a brand-new trucker or brand-new motor carrier in their first year is going to have a much higher loss expectancy than a trucker who has been in business for at least one year,” Nibley said.

“The risks associated with trucking in the first year are such that a lot of carriers just say no, you need to have X number of years in business as your own motor carrier authority before we’ll even give you a quote.”

No matter how much experience a driver may have, even if they have a flawless record to match, insurers are more concerned with the amount of business experience under their belt.

“It is even more difficult now because of the unfavourable economic landscape, who would want to start up an extremely expensive business up front and not have a profitable revenue stream,” Nibley said. “Independent contractors are stuck between a rock and a hard place right now.”