When starting any business, especially a family business, the main concern is usually securing enough capital. In that pursuit, however, one thing often overlooked is the protection of those assets through adequate insurance and corporate form (e.g. partnership, corporation, limited liability company). In this article, we examine a recent Illinois case highlighting the potentially devastating consequences faced by business owners when they fail to consider these things and how proposed legislation recently issued by the Federal Motor Carrier Safety Administration (FMCSA) seeks to address inadequate insurance, potentially increasing the cost of doing business for motor carriers (especially smaller carriers) while simultaneously forcing business owners to better protect themselves and their companies.
On February 11, 2007, an employee of G & G Cement Contractors (G & G) was involved in a major accident, causing serious injury to the occupant of the other vehicle, William T. Andrews. Andrews v. Gonzalez, 2014 Il. App (1st) 140342. Like many trucking and transportation companies, G & G was a general partnership owned by brothers, Dagoberto and Jose Gonzalez, the latter of whom was deceased at the time of the lawsuit. Andrews filed suit against a number of people including the employee driving the vehicle, G & G and the two brothers individually. With respect to the brothers, Andrews alleged they owned the truck driven on the day of the accident, allowed their employee to operate it and that they breached a duty to him through the negligent acts of their employee causing him injury.
Following trial, the jury returned a verdict against G & G and its employee driver, but in favor of the two brothers. Andrews was awarded $3,092,000 in damages and judgment was subsequently entered. At the time of the accident, G & G was insured under a business auto policy issued by Century National Insurance Company (CNIC). Following trial, CNIC refused to pay its policy limit ($300,000) unless Andrews would execute a full release of the entire judgment. After Andrews filed citations to discover the assets of both CNIC and Dagoberto, the court ordered CNIC to pay its policy limits and granted Andrews’ request to discover information concerning the personal assets of Dagoberto. Andrews subsequently filed suit against Dagoberto, individually, seeking to recover the unsatisfied portion of the judgment. Dagoberto sought to dismiss the action, asserting that Andrews’ claim was barred under the doctrine of res judicata. Andrews argued suit was not barred because Illinois law allows a separate action to enforce a partner’s individual liability for a partnership obligation.
The Court held Andrews could bring a second suit against Dagoberto because of his status as a general partner of G & G for the unsatisfied portion of the judgment. Unfortunately for Dagoberto, his personal assets would be at risk in the second suit.
The situation faced by Dagoberto could have been prevented had he and his brother considered the importance of corporate form and adequate insurance prior to the accident. While it is incumbent on lawyers, especially those who work with small businesses, to be vigilant on how corporate form may impact their clients as part of risk management, the FMCSA appears poised to address what is perceived by some as inadequate insurance throughout the transportation industry as it seeks to increase minimum levels of insurance for motor carriers.
On November 28, 2014, the FMCSA published an advanced notice of proposed rulemaking on financial responsibility for motor carriers, freight forwarders and brokers in the Federal Register. 49 CFR Part 387. This proposed requirement follows a finding by the FMCSA in its April 2014 report that current financial responsibility laws are inadequate to cover the losses caused in some accidents, mainly because of increased medical costs. Presently, the minimum level of insurance for interstate general freight carriers is $750,000, while the minimum level for passenger carriers with a seating capacity of 16 or more is $5,000,000.
Interestingly, the report notes that catastrophic crashes, defined as crashes resulting in claims for injury, death, and/or property damages that exceed current minimum levels of financial responsibility, are estimated to comprise less than one percent of crashes.
The FMCSA cites a review conducted by the American Trucking Associations (ATA) of current minimum insurance requirements with data from the Insurance Services Office (ISO). The ATA’s study found only 6.5 percent of insurance policies for trucks over 26,000 pounds are written at limits under $1 million dollars, while 83 percent are written at $1 million, and the remaining 10.5 percent are written at over $1 million. Further, the ATA study found there is a 1.40 percent chance of a claim exceeding $500,000, a 0.73 percent chance of a claim exceeding $1 million, and a 0.31 percent chance of a claim exceeding $2 million dollars. Based on these figures, whether $1 million in policy limits is adequate seems the real question being pondered by the FMCSA.
While it is certainly debatable whether the FMCSA, an agency with a “primary mission” to prevent fatalities and injuries, should be dictating minimum levels of insurance for motor carriers, the importance of adequate insurance cannot be understated. Unfortunately for Dagoberto Gonzalez, and others in similar situations, hard lessons about the importance of insurance and corporate form are learned the hard way. Whether the FMCSA takes action or not, risk management in the transportation industry should not be thought about as just accident prevention and training. Levels of insurance and corporate form should be subject to the same type of constant review and assessment as policies and procedures.
This article originally appeared in the Defense Research Institute's In Transit newsletter, Vol. 18, Issue 1.