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Cablegate: Canada Asks U.S. To Change Rule On Insurance

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 TORONTO 002609

SIPDIS

E.O. 12958: N/A
TAGS: ETRD EAGR TBIO CA
SUBJECT: Canada Asks U.S. to Change Rule on Insurance
for Cross-border Motor Carriers - In Accordance with
SPP Objectives

1. During a September 26 financial services roundtable
discussion with Consulate and embassy officials,
leaders of the Canadian insurance industry advised that
the Government of Canada would soon request changes to
the U.S. policy on the certification of insurance
coverage for cross-border motor carriers. The
September 29, 2005, Petition for Rule Making (contained
in para 2), provided to us by an insurance industry
contact, asks the U.S. to enact rules that would
harmonize requirements and certification for motor
vehicle liability insurance. The Canadian Embassy in
Washington sent this request to the Secretaries of
Transportation, Commerce, State, and Treasury on
September 30. The Canadian Embassy letter argues that
the requested changes would "contribute to enhancing
the competitive and efficient position of North
American businesses and would assist in meeting the
stated goals of the Security and Prosperity Partnership
(SPP)." ConGen Toronto notes that this request is
consistent with the following priority area identified
in the SPP "...seek ways to improve convenience and
cost of insurance coverage for carriers engaged in
cross border commerce."

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2. Begin full copy of the Petition for Rulemaking:

September 29, 2005

Annette M. Sandberg
Administrator
Federal Motor Carrier Safety Administration
U.S. Department of Transportation
400 Seventh St. SW
Washington, DC 20590

Dear Ms. Sandberg:

Re: Petition for Rulemaking by the Government of Canada
to Amend 49 CM Part 387 (Financial Responsibility
Requirements for Motor Carriers)

Interest of the Petitioner

Part 387 of the Federal Motor Carrier Safety
Administration (FMCSA) Regulations sets out the
financial responsibility requirements for motor
carriers. The combined effect of Part 387.7 and Part
387.11 of the Regulations is to require Canadian-
domiciled motor carriers operating in any of the United
States to obtain the necessary insurance coverage, in
the form of the MCS-90 endorsement, from or through a
U.S.-licensed insurer in addition to obtaining
insurance that is valid in Canada from an insurer
licensed in the province of Canada in which the motor
carrier is domiciled.

The result of these requirements is an additional
administrative burden, inconvenience and cost not faced
by U.S.-domiciled motor carriers operating into Canada.
The insurance policy issued by a U.S.-licensed insurer
to a U.S.-domiciled motor carrier is accepted as valid
insurance for the Canadian portion of the trip. The
insurance policy issued by a Canadian-licensed insurer
to a Canadian-domiciled motor carrier is not accepted
as valid insurance for the U.S. portion of a trip.

The Governments of Canada and the US have taken
significant steps in recent years to improve the flow
of trade in North America. The Canada-U.S. Free Trade
Agreement was followed by the much broader North
American Free Trade Agreement (NAFTA) signed by the
U.S., Canada and Mexico. The focus on trade issues has
recently been reinforced by the Security and Prosperity
Partnership of North America (SPP), discussed in more
detail below. Cross-border motor carrier insurance
issues have arisen in the context of the NAFTA treaty
and the SPP initiative.

The Government of Canada has participated for many
years in the work of the Trinational Insurance Working
Group, which was created by and reports to the NAFTA
Financial Services Committee (comprised of senior
officials from the U.S. Treasury Department, Canada's
Department of Finance and Mexico's Hacienda). Its
mandate and function is to examine and seek solutions
to cross-border trucking insurance issues. All members
of the Trinational Insurance Working Group have agreed
that the highest and best solution to these issues is a
seamless motor vehicle liability policy that would
require insurance companies to provide the compulsory
insurance coverages and policy limits required in any
of the three NAFTA countries, regardless of the home
jurisdiction of the truck and the country in which the
policy is written. This would afford mutual recognition
of motor vehicle liability policies written in any of
the NAFTA countries.

As between Canada and the United States, one of the
critical changes required in order to effect full
mutual recognition of such insurance policies for
commercial trucks is an amendment to the Federal Motor
Carrier Safety Administration Regulations to permit
insurance companies, licensed either provincially or
federally in Canada to write motor vehicle liability
insurance policies, to sign the MCS-90.

The need to seek ways to improve the convenience,
efficiency and cost of insurance coverage for motor
carriers engaged in cross-border commerce was noted in
the Security and Prosperity Partnership of North
America (SPP). The establishment of the SPP was
announced on March 23, 2005, by President Bush,
together with the Prime Minister of Canada and the
President of Mexico. The Prosperity Agenda that
accompanied the Leaders' Statement of this Partnership
stated, among other things, that:

"To enhance the competitive position of North American
industries in the global marketplace and to provide
greater economic opportunity for all of our societies,
while maintaining high standards of health and safety
for our people, the United States, Mexico and Canada
will work together, and in consultation with
stakeholders, to:

- Work towards the freer flow of capital and the
"efficient provision of financial services throughout
North America" (e.g., ... seek ways to improve
convenience and cost of insurance coverage for carriers
engaged in cross border commerce).

In furtherance of the SPP, on June 27, 2005 a Report to
the Leaders was signed on behalf of the United States
by the respective Secretaries of Homeland Security,
Commerce and State. One of the stated initiatives in
the Report, set out at page 17 under the section
entitled "Financial Services", is to "Seek ways to
improve the availability and affordability of insurance
coverage for carriers engaged in cross-border commerce
in North America". The following Key Milestone is
stated for this initiative:

"U.S. and Canada to work towards possible amendment of
the U.S. Federal Motor Carrier Safety Administration
Regulation to allow Canadian insurers to directly sign
the MCS-90 form concerning endorsement for motor
carrier policies of insurance for public liability: by
June 2006."

Rulemaking Requested

The Government of Canada requests that 49 CFR, Part
387.11 be amended to provide that one of the types of
policies of insurance that satisfies the financial
responsibility requirements set out in Part 387.9 of
the Regulations is a policy of insurance issued by a
Canadian insurance company legally authorized to issue
such a policy in the Province of Canada in which a
Canadian motor carrier has its principal place of
business or domicile, and that is willing to designate
a person upon whom process, issued by or under the
authority of any court having jurisdiction of the
subject matter, may be served in any proceeding at law
or equity brought in any State in which the motor
carrier operates. The Government of Canada further
requests that any additional or other amendments be
made to 49 CFR, Part 387 that maybe required in order
to give effect to the above-referenced initiative of
the Security and Prosperity Partnership of North
America.

Current Means by which Canadian-Domiciled Motor
Carriers are Insured for Cross-Border Commerce

Currently, there are only two insurance options
available to Canadian motor carriers wishing to engage
in U.S. cross-border commerce. They may obtain
separate insurance policies, one valid in Canada
written by a Canadian insurer and one valid in the U.S.
written by a U.S. insurer. This is a very expensive
option and puts Canadian insurance companies that would
otherwise earn income on policies issued to Canadian-
domiciled motor carriers at a distinct trade
disadvantage. It is rarely used.

The second option, which is by far the most commonly
used, is for a Canadian-licensed insurer to enter into
what is known as a "fronting arrangement" with a U.S.-
licensed insurer whereby the U.S. insurer permits the
Canadian insurer to sign the MCS-90 as its agent, and
the entire risk is contractually "reinsured" back to
the Canadian insurer by the US insurer. In order that
the U.S. insurer is not at risk in the event of a claim
against the Canadian motor carrier, the Canadian
insurer of the carrier must put up an agreed-upon
amount of capital under the fronting arrangement. The
second option also puts Canadian insurers and motor
carriers at a trade disadvantage, as the cost of
entering into the fronting arrangement is borne
entirely by the Canadian insurer, which it in turn
passes on to the motor carrier. As well, the capital
put up under the fronting arrangement by the Canadian
insurer is capital taken out of the Canadian insurance
marketplace, thus reducing the capital available to
underwrite insurance in Canada. U.S. motor carriers
and their insurers do not face these additional costs
in transporting goods into Canada.

Canadian insurers are finding it increasingly difficult
to find fronting partners in the U.S. This has come
about because, as a result of mergers and acquisitions,
there are few multinational insurers left that write
motor vehicle liability (i.e. public liability)
policies for motor carriers in both Canada and the U.S.
It is much more difficult and much more costly to enter
into such an arrangement with a company that is not
part of the same corporate group. This also has the
effect of limiting competition in the marketplace
largely to the very few multinational insurance
companies writing insurance for motor carriers on both
sides of the Canada-U.S. border.

Canada Extends Full Recognition to Motor Vehicle
(Public Liability) Insurance Policies Issued by U.S.-
Licensed Insurers

Between the U.S. and Canada, in regard to private
passenger vehicles and light trucks, there has been for
many years full mutual recognition and acceptance of
motor vehicle liability policies issued in either
country as acceptable proof of financial
responsibility. All of the American states and Canadian
provinces recognize the certificate of insurance issued
by a motor vehicle insurer licensed in any state of the
US or any province of Canada as acceptable proof of
financial responsibility for private passenger vehicles
and light trucks domiciled in the jurisdiction of issue
of the policy.

In addition, Canada has long extended this recognition
in respect of motor vehicle liability insurance for US-
domiciled motor carriers. All Canadian jurisdictions
accept the signing and filing by insurers licensed in
any jurisdiction of the U.S. of a Power of Attorney and
Undertaking as valid proof, in Canada, of financial
responsibility of U.S.-issued motor vehicle liability
policies on U.S. resident motor vehicles of all
categories. In essence, the Power of Attorney and
Undertaking (PATJ) provides that the U.S. insurer will
comply with and meet the minimum compulsory coverages
and policy limits required in any Canadian jurisdiction
in which an accident involving its insured occurs. The
PAU is similar to the combined provisions of Sub-Parts
387.11 and 387.15 (MCS-90 Form) of the FMCSA
Regulations. The PAU is filed with the Canadian
Council of Insurance Regulators (the Canadian
equivalent to the U.S. National Association of
Insurance Commissioners).

Protection for U.S. Citizens if a Canadian-Licensed
Insurer is authorized to sign the MCS-90

As indicated above, the general current practice for
Canadian-domiciled motor carriers operating into and
throughout the U.S. is for the motor carrier's Canadian
insurer to enter into a fronting arrangement with a
U.S. insurer. Typically, the fronting agreement
provides that the U.S. insurer will handle any claims
made in the U.S. against the Canadian motor carrier in
return for an additional fee to be paid to the U.S.
insurer by the Canadian insurer. However, it is always
open to the Canadian insurer to retain an independent
insurance adjusting company in the U.S. to handle the
claim on its behalf. In either case, the dollars paid
to settle the claim or to pay any judgment by a U.S.
Court against the Canadian motor carrier are always
paid directly by the Canadian insurer.

Motor vehicle liability laws and the judicial systems
of the U.S. and Canada are very similar. The terms of
Canadian motor vehicle liability insurance policies,
Canadian insurance claims handling practices, and the
use by Canadian insurers of independent claims
adjusters located in the jurisdiction where an accident
occurs to handle the front-line investigation of
claims, are very similar to their U.S. counterparts.
In the many decades during which Canadian vehicles,
including commercial trucks, have traveled throughout
the United States, there has not been one single
reported incident where a Canadian insurer has failed
to pay a judgment awarded against its Canadian insured
to a U.S. citizen or resident to the full extent of its
legal obligation to pay. Canadian motor vehicle
insurers have decades of direct experience in handling
motor vehicle liability claims in the U.S. through
their private passenger and light truck line of
business. There is no reason to expect this to change
if Canadian insurers are permitted to issue proof of
financial responsibility to Canadian-domiciled motor
carriers by way of signing the MCS-90 Form directly
rather than as the agent of a U.S. insurer.

Conclusion

Achieving a seamless motor vehicle liability insurance
policy between Canada and the U.S. for motor carriers
would contribute to enhancing the competitive and
efficient position of North American business and would
assist in meeting the stated goals of the Security and
Prosperity Partnership.

We request that in view of the foregoing this petition
be considered and that a Rulemaking be initiated to
make the proposed amendments to the FMCSA Regulations.

Yours very truly,

Claude Carriere
Minister (Economic) and Deputy Head of Mission

Copy to:
Norman Y. Mineta, Secretary of Transportation
Carlos Gutierrez, Secretary of Commerce
Condoleezza Rice, Secretary of State
John Snow, Secretary of the Treasury

End Text.

LECROY

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