When working with owner-operators, certain elements must be considered to ensure the business relationship is not affected, and freight is safely delivered. Two of those main areas are leasing and insurance. Let’s dive into frequently asked questions about owner-operator leasing and insurance and how this involves carriers.
What is a lease agreement in transportation?
A lease agreement in transportation is a contract between a trucking company and an owner-operator that details specific terms. This contract is required by law (49 CFR § 376.12) and is necessary because of the nature of the business relationship, as the owner-operator is not an employee of the trucking company; they just provide a transportation service for specific freight and receive a previously agreed fee.
The three most common lease agreements are the lease program, lease-purchase, and lease on owner operator.
What items are required by law in a lease agreement?
The lease agreement for equipment between an authorized carrier and the equipment owner must contain the following key points:
a) Parties: The lease should clearly state that it is between the authorized carrier and the equipment owner, signed by both parties or their authorized representatives.
(b) Duration: The lease must specify the start and end dates or circumstances, coinciding with receipt requirements.
(c) Exclusive Possession and Responsibilities: The authorized carrier lessee will have exclusive possession and control of the equipment throughout the lease. The lessee will also be responsible for its operation. Provision for subleasing is allowed, and certain provisions may apply only during transportation of household goods.
(d) Compensation: The lease must clearly state the amount to be paid by the authorized carrier for equipment and driver's services, which can be expressed in various ways as agreed upon by the parties.
(e) Lease Specifications: The lease must clearly specify various responsibilities, such as removing identification devices upon termination, cost responsibilities for fuel, taxes, permits, tolls, loading, and unloading services, as well as reimbursement for fines.
(f) Payment Period: Payment to the equipment owner, the lessor, must be made within 15 days after submitting necessary delivery documents. Certain requirements may need to be fulfilled before final payment.
(g) Copies of Freight Documentation: The lease must specify that the lessor receives copies of freight documentation for shipments or access to the carrier's tariff documents.
(h) Charge-back Items: All items that may be deducted from the lessor's compensation upon payment or settlement must be clearly specified, along with how the amount for each item is computed.
(i) Products/Services from Authorized Carrier: The lessor is not required to purchase or rent any products, equipment, or services from the authorized carrier as a condition of the lease. Any agreements for deductions related to equipment purchases or rentals must be specified.
(j) Insurance: The lease must clearly state the authorized carrier's legal obligation for insurance coverage and any other insurance responsibilities. Deductions for cargo or property damage require a written explanation and itemization.
(k) Escrow Funds: If escrow funds are required, the lease must specify the amount, purpose, accounting, interest, and conditions for return.
(l) Copies of the Lease: Both parties must sign the lease, with one copy placed on the equipment during the lease, and both parties should keep a copy.
Are lease agreements important to brokers and shippers?
They are vital! Why? Here are three main reasons:
- Allows brokers and shippers to identify whether the carrier uses owner-operators or engages in double brokering.
- Allows brokers and shippers to check if the owner-operator has the proper terms in place that a true relationship of this nature should have.
- Search for anomalies in the contact information and data to identify fraudulent behavior.
Unfortunately, not all companies take the time to review lease agreements for three reasons:
- Carriers can easily provide a fake lease agreement.
- The carrier is ultimately responsible for anything that happens to the freight, so the lease agreement is irrelevant.
- Example: If the owner-operator does something wrong, the carrier is responsible.
- It is time-consuming, and most people do not know what they are reviewing.
Should Owner-Operator Run Under Carrier’s Insurance?
Yes. The carrier is ultimately responsible for everything that that owner-operator does. Owner-operators leased to a motor carrier are usually covered by the company’s auto liability and cargo insurance, but only under dispatch.
Most carriers will also require the owner-operator to have non-trucking liability insurance as well. This coverage pays for property damage or bodily injury in the event of an accident when the truck or driver is not under dispatch and on personal time. Some motor-carriers also may require the owner operator to purchase occupational accident coverage (OCC/ACC) before leasing on, which may provide coverage for accidental death and dismemberment, medical expenses, and disability in addition to other types of available coverages.
Should the VIN of the Owner-Operator be listed as a scheduled auto?
Yes. Brokers and shippers should verify that the owner-operator’s VIN or Vehicle Identification Number should be listed as a scheduled auto on the motor-carrier’s insurance policy. The VIN is a unique serial number used to identify individual vehicles.
If the motor-carrier has a scheduled VIN policy and the owner-operator’s equipment is not listed on that policy in the list of VINs, that means there may not be coverage for the owner-operator’s conduct under that policy.
Before starting a new business relationship with an owner-operator:
- Understand all the leasing and insurance details.
- Communicate constantly with your transportation partner.
- Undergo vetting processes to ensure you select a suitable partner for your business.
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