Insuring Their Load

While it has become significantly easier to move goods across the U.S.-Mexico border since the implementation of the North American Free Trade Agreement in 1994, some critical barriers to entry still remain.

In 2003, $19.7 billion worth of merchandise made its way across the border via U.S. and Mexican trucks at the Otay Mesa port of entry alone, an increase of 54 percent from 1999, the year the U.S. Census Bureau began distributing the data.

But despite the fact that nearly 85 percent of total merchandise trade between the two countries moves by way of trucks, there has been virtually no effort to coordinate insurance requirements or standards on either side of the border with respect to commercial vehicles or the cargo they haul.

According to David Snyder, the vice president of the American Insurance Association, an industry group in Washington, D.C., representing 435 major insurance companies, the problem with NAFTA is that it opened borders to trade but did nothing to address the insurance issues that accompany it.

Two Ounces Of Prevention

“It makes little sense that under NAFTA, an 80,000-pound truck can cross the border but a 2-ounce insurance policy can’t,” said Snyder.

There are several consequences of this lack of coordination relating to insurance standards in the United States and Mexico. First, the current system breeds insurance fraud, with carriers engaging in “policy sharing” or what amounts to the under-insurance of vehicles, according to the California Department of Insurance.

Second, it hinders the ability of U. S.-based trucking companies to effectively compete with Mexican operators, according to Armando Freire, the owner and president of Otay Mesa-based Dimex Freight Systems, Inc., which has 37 trucks and 42 employees. Dimex ships goods from San Diego to Mexico by contracting with owner-operators based in Mexico.

For trucking companies based in San Diego County such as Dimex, the absence of door-to-door insurance policies to cover their vehicles, cargo and workers on both U.S. and Mexican soil is a burden in terms of safety and cost.

Under the current system, Mexican carriers are limited to a 20- mile “commercial zone” along the U.S. border. U.S. carriers are restricted from crossing the border. Trailers with loads destined for locations beyond the zones are transferred to “drayage” carriers at border towns for transport across the border, where the loads are again transferred to a third carrier for hauling to final destinations.

Border Complications

Yet, as the U.S.-Mexico border becomes increasingly open to crossborder trucking, insurance issues will make the competitive environment for trucking companies on both sides of the border more complicated.

Freire, who also serves as the first vice president of the 2,200- member California Trucking Association, points to three areas in which greater coordination between the two countries is essential: cargo insurance, contiguous liability insurance and workers’ compensation insurance.

There is no insurance product that covers cargo as it crosses the U.S.Mexico border, according to Freire.

“If you are in the shipping business and want to ship from San Diego to Zimbabwe, you can insure that with cargo insurance. But if you want to ship something on a truck one mile south of the border, you can’t insure it,” he said.

In the United States, it is common for freight haulers to buy an annual policy, which covers a particular truck for its every trip. By federal law, motor vehicles carrying goods over state (and in this case country) lines are required to cover at least $5,000 in cargo.

This amounts to roughly $750 to $1,000 in premiums per truck each year, based on estimates by Oldwick, N.J.-based A.M. Best Co., Inc., an insurance industry analyst.

However, according to Freire, Mexican insurance companies do not yet offer cargo insurance akin to that which U.S. insurance companies offer, principally because, according to Mexican law, Mexican motor carriers bear very little liability for loss or damage to cargo. Instead, the risk is borne almost entirely by the shippers.

Although a product called “trip insurance” is available to those seeking to insure cargo in Mexico, its cost – around 3 percent to 4 percent of the cargo’s value – means it’s used only as a rare exception, according to Freire.

He said the result is that Mexican trucking companies have an inherent cost advantage compared with U.S. companies such as Dimex, which are required to carry cargo insurance on all their trucks.

“If you have to ship goods from L.A. to Tijuana, you have to insure the load two times: once from L.A. to the border, and then again to the destination in Mexico, and that’s clearly prohibitive,” he said.

For many U.S.-based carriers, Mexicobased companies are sometimes their only options. According to insurance brokers who specialize in the transportation industry, such as Allen M. Lawrence, there is very little incentive for U.S.-based insurance carriers to extend their coverage across the border.

Lawrence, the president and chief executive officer of Canoga Parkbased insurance broker Allen Lawrence & Associates, Inc., which specializes in truck insurance, said that the extent to which U.S.- based insurance companies will insure cargo being driven into Mexico is usually restricted to covering damage within 10 to 15 miles of the border.

“Beyond that area, the U.S. domestic carriers are very concerned about adjusting claims, so they are not likely to provide coverage (for cargo),” said Lawrence.

U.S.-based operators also face competitive disadvantages related to the cost of obtaining liability insurance for their trucks, which covers damage that the driver might cause to other vehicles or property in an accident.

In Mexico, liability is restricted to damage caused and not punitive damages. “In Mexico, the way it works is, you hit a car, you fix it,” said Freire.

In the United States, federal law requires trucks to carry this type of liability insurance for a minimum of $750,000 of the truck’s value, according to Lawrence. This adds up to significant costs for trucking companies based on U.S. soil.

However, different and conflicting requirements for liability insurance for commercial vehicles mean that a truck that can be insured for around $350 on a yearly basis in Mexico costs about $6,000 on the U.S. side, according to Freire.

This wide cost discrepancy allows Mexican trucking companies to further undercut U.S. companies for contracts in the commercial zone, according to Freire.

Fernando Comacho, the vice president of Otay Mesa-based trucking company Camacho Brokers, which operates trucks in the commercial zone on both sides of the border, said insuring his trucking fleet in Mexico with liability insurance costs ” peanuts” compared with what he pays in the United States.

Last year, Camacho paid $90,000 to insure his 17-truck fleet to ship goods in the United States. In addition, he estimates that he paid close to $30,000 for cargo insurance for the 11 trucks that make daily trips from Otay into the maquiladora zone of Mexican manufacturers along the border.

“I have to insure everything in the U.S.; every truck, every load of cargo. It becomes extremely expensive. But in Mexico, it’s not that way,” said Comacho.

To secure liability insurance for his trucks on the Mexican side, he uses Mexico City-based Metropolitana Insurance Co. and pays $450 per truck.

According to Comacho, while a few years ago he briefly took out policies to cover cargo in Mexico, he has since stopped the practice, as the $17,000 he paid to insure $100,000 worth of cargo was not worth the expense. Now he said he tells his customers who are importers and exporters to secure their own coverage for the goods.

An additional burden for businesses such as Camacho Brokers, which employs 16 drivers, is workers’ compensation expenses.

Freire said that in the current environment, U.S. trucking companies must have workers’ comp policies for all employees, yet Mexicobased companies rely instead on “Seguro Social” payments from the Mexican government, which cover drivers only up to the border and not beyond.

“So every single Mexican driver who enters the commercial zone legally is without workers’ comp coverage. When they get hurt on the U.S. side, we are paying for it,” said Freire.

This issue was among those that California Insurance Commissioner John Garamendi addressed in April, when he made his first trip to Mexico as a co-chairman-elect of the Tri-National NAFTA Working Group of the National Association of Insurance Commissioners to meet with Mexican and Canadian authorities.

He said his two-day trip was prompted by “the confused regulatory state” surrounding cross-border insurance that currently exists.

“Conflicting and uncoordinated insurance requirements in our three countries have a damaging impact on the flow of trade and create damaging situations for California, Mexican and Canadian motorists,” Garamendi said at a news conference preceding his trip on April 8.

In a recent phone interview, Garamendi said one of the critical problems he addressed in the meeting was that of policy sharing, or, as he put it, “cheating.” In such arrangements, trucking companies have been known to buy 10 insurance policies to share with a fleet of 20 or more, merel\y swapping photocopied certificates to pass inspection or register vehicles.

Garamendi said “this cheating remains an ongoing issue.” However, he said, “one of the most notable accomplishments of the meetings was a pledge on the part of Mexico’s Transportation Ministry, called the SCT, to make safety, inspection and accident records better available to insurance underwriters,” to ease the difficulty faced by insurance companies trying to provide liability insurance in Mexico.

Even so, the problems surrounding crossborder insurance could become more acute in the near future.

Although Mexican trucks have been banned from all U.S. roads outside a 20-mile commercial border zone since 1982, NAFTA allowed Mexican trucks and buses full access to U.S. roads beginning in 2000, but those changes were postponed.

President Bush pledged in 2001 to allow Mexican trucks access to all U.S. highways, and the Supreme Court in June ruled that the administration can skip a lengthy environmental study and open U.S. roadways to the trucks when it wishes.

The precise timing of such action remains unknown, however, according to Steve Zisser, a specialist in U.S. customs and international trade and founder of the Zisser Group, a San Diegobased international trade consulting and management company It is clear, however, that when Mexican trucks can travel beyond the commercial zone, the issues surrounding conflicting and uncoordinated insurance standards will become more significant for all truckers.

Currently, Zisser said it is common for most U.S.-based trucking companies to contract with a separate Mexican operation or hire an owner-operator in Mexico to make deliveries within the commercial zone.

“Any company that succeeds on the border has to operate as a Mexican company. The guy who operates primarily in the commercial zone near the border will never compete with a Mexican company because of insurance and workers’ comp costs,” said Zisser.

This may be about to change.

According to Lawrence, one of nine members of the govern governorappointed in California Transportation Commission, “NAFTA is going to evolve where U.S. carriers can take their own trucks with their own cargo into Mexico rather than commissioning with U.S. trailers.”

But Snyder of the AIA said that because neither Mexico nor the United States recognizes insurance written in the other country, “this creates a whole series of underwriting challenges.”

He added: “The ideal solution would be to have U.S. insurers writing policies for U.S. motor carriers that are recognized and accepted in Mexico and vice versa. This is the best alternative that is not available today and ought to be.”

Until then, however, Garamendi said, “cross-border insurance for commercial traffic is one of the issues I will be spending personal time on during the next few months.” In the early fall, he is scheduled to head to San Francisco for the second meeting of the Tri- National NAFTA Working Group.

Copyright San Diego Business Journal May 30, 2005