Our firm is pleased to present our annual summary of legal decisions that we feel are of interest to our clients and friends. During calendar year 2002, the D.O.T. form MCS-90 figured prominently in many important decisions. All of the cases referred to, and several others of interest, are available on the firm website sfl-legal.com

The two most disconcerting decisions, from the perspective of motor carrier insurers, relate to the question of whether judgment against a party other than the named insured triggers an insurer's exposure under the MCS-90.

In Pierre v. Providence Washington Insurance Company, 2002 WL 31770499 (N.Y., Dec. 12, 2002), a sharply divided Court of Appeals held that the insurer was obligated by the MCS-90 to pay a default judgment entered against the owner and the driver of a tractor leased to a registered motor carrier. The tractor was garaged and licensed in Pennsylvania, but was being used in the motor carrier's business in Brooklyn, New York where the collision occurred with plaintiff's vehicle. Plaintiff sued only the owner and the driver, both of whom were citizens of Pennsylvania. The police report did not record the name of the motor carrier and plaintiff later explained that he did not know the carrier's identity at the time of the loss.

The driver and the owner defaulted. At a hearing held thereafter, the court awarded about $250,000. A second lawsuit was filed against the motor carrier but plaintiff dismissed that action and, instead, filed a third action, this time against the motor carrier's insurance company, demanding payment under the policy. Although the defendants had failed to provide notice of the loss of the suit, plaintiff responded that the MCS-90 required payment of the judgment since owner and driver fell within the definition of "insured". The trial court concluded that the MCS-90 was applicable and a split appellate division affirmed.

New York's highest court, the Court of Appeals, held in a 4-3 decision, that the MCS-90 applied under these circumstances. There was no doubt that the driver and owner were insureds pursuant to the policy definition. By not reporting the loss or the lawsuit, defendants had, arguably, waived their rights under the policy. However, the MCS-90 required the insurer to pay any judgment against "the insured" even if the insured had failed to give notice. The majority, noting that the MCS-90 itself did not define the word "insured," held that the policy definition applied. Accordingly, Providence Washington was obligated to pay the default judgment under the MCS-90.

The blistering dissent noted that the word insured did not require a special definition since the federal regulations which promulgated the MCS-90 already defined "insured" for purposes of the MCS-90 as "the motor carrier named in the policy of insurance." In addition, the dissent pointed to the amicus brief that the Solicitor General and the D.O.T. had filed with the Supreme Court in the Nueva case discussed in this space the past two years. Our firm represented Providence Washington in the Appellate Division and the Court of Appeals.

In Lynch v. Yob, 95 Ohio St.3d 441, the Ohio Supreme Court took an even more expansive view of the MCS-90 than did the Pierre court. Yob was a truck driver employed by Bath Transport, a registered motor carrier whose authority was being used when he was involved in a two vehicle collision. Bath was insured by AIG, and there was no dispute that AIG's $1 million policy provided coverage to Yob and Bath for their liability arising out of the accident. The controversy revolved around a $2.5 million policy which AIG had issued to Central Cartage Company, the owner of the trailer that was attached to the Bath tractor at the time of the accident. It was not disputed that the vehicle was not being used in the business of Central or its related companies. Central bore no direct exposure to plaintiffs; the sole issue was whether the AIG/Central policy covered Yob and Bath. The trailer was apparently not a covered vehicle under the AIG/Central policy. Beyond that, AIG successfully argued in the middle level appellate court that Yob and Bath were excluded from coverage under the AIG/Central policy by virtue of the "reciprocity clause". The appellate court had concluded that since they were not insureds under the policy, Yob and Bath were also not insureds under the MCS-90 that AIG had issued to Central.

The Ohio Supreme, in a 4-3 split, reversed and found that the MCS-90 did apply. The court found that the facts largely paralleled those in Nueva: in both cases the policy issued to the owner of a trailer did not provide coverage to the driver and owner of the tractor to which the trailer had been attached. The majority found that the appellate court, and the three dissenters, were reading the MCS-90 and the applicable case law too narrowly. The MCS-90 mandates coverage for permissive users of non-covered autos; it is simply irrelevant whether or not the driver qualifies as an insured under the basic policy.

There were also two unreported federal circuit cases on the MCS-90. In Avalos v. Duron, 2002 WL 1277939, the Tenth Circuit reaffirmed its position on the meaning of insured in the endorsement; its holding is along the same lines as Pierre and not the more expansive Yob. In National Indemnity Co. v. Ozark Mountain Sightseeing, Inc., 2002 WL 31119906, the Eighth Circuit, in accordance, with what we have, in the past, called the majority view, held that attaching an MCS-90 to a policy does not automatically convert that policy into a primary policy.

Not all MCS-90 decisions were decided against the issuing insurer. In Swartz v. McNabb, 830 So.2d 1093 (La. App.), the truck driver punched the manager of a convenience store who had asked him to move his truck. The court reviewing the coverage began by noting that the tort was excluded from coverage under the basic truckers policy; even if the loss arose from the use of the truck in that this was no accident. Plaintiff argued that the MCS-90 should apply; the court, though, noted that the endorsement required that the injury resulted "from negligence in the operation, maintenance or use of motor vehicles", and that the injury be neither expected nor intended. Since the driver had acted intentionally, the MCS-90 was inapplicable. There has been precious little case law on the question of the MCS-90 and intentional tort, but that point has never been in serious doubt. Far more controversial is the question of whether the MCS-90 applies to intrastate shipments, particularly when the company engages in both intrastate and interstate shipments, and particularly when the vehicle itself is used in both interstate and intrastate commerce. The cases on this point are not consistent. The most recent decision is General Security Ins. Co. v. Barrentine, 829 So.2d 980 (Fla App., 1st Dist.). At the time of the accident the truck at issue was not listed on the declaration page of the policy. The insured attempted to retroactively add the vehicle after the loss. The court voided that attempt. Plaintiff, though, argued that even if the policy itself did not apply, the MCS-90 did. At the time of the loss the driver was en route from Graceville, Florida to Southport, Florida to pick up an empty trailer. He was to bring the trailer back to Graceville; after any necessary repairs were done the trailer was to be hauled out of state to pick up sod. The court held that the MCS-90 applies only when the vehicle is operating in interstate commerce.

The Pennsylvania Supreme Court implied the same understanding of the scope of the MCS-90 in Progressive Cas. Ins. Co. v. Hoover, 809 A.2d 353. The case involved the shipment of distiller's grain. Progressive's insured, Marbec Trucking, whose driver caused the accident, carried the shipment from one Pennsylvania location to another. However, the shipment had originated out of state. The lower court had concluded that there was a continuous movement in interstate commerce and that, accordingly, the MCS-90 applied. The Supreme Court, though, held that the trial and appellate courts had misapplied the test as to whether the shipment was one continuous interstate move, or two separate shipments, the second of which was purely intrastate. The particular circumstances need to be reviewed to determine whether the essential character of the shipment was interstate. Here the shipment had been ordered by Jesse Stewart Co. a month prior to the accident and brought by barge from Illinois and stored in a Pennsylvania warehouse. From there the product was either picked up by the customer directly or, as in this case, shipped to them by a truck hired by Stewart. Stewart was then, arguably, a second shipper (the Illinois manufacturer was the first). There is a fair amount of precedent that under these circumstances the second shipment is separate from the first and deemed to be intrastate in nature. The Supreme Court found that the granting of summary judgment in favor of plaintiff was in error in light of material disputes of fact and gaps in plaintiff's case. Accordingly, this matter was remanded to the trial court. Our firm represented the appellant Progressive in the appeal.

The flow of uninsured motorist cases continues unabated. Among the most important cases this year were the following:

Seaco Ins. Co. v. Davis-Irish, 300 F.3d 84 (1st Cir.) - the court held that an employee of the named insured engaged in the employer's business while a passenger in a non-covered auto was not entitled to UM coverage. The court blasted the Ohio Supreme Court's decision in the infamous Scott-Pontzer decision ("We consider Scott-Pontzer an anomaly.") A Class II insured (someone other than the named insured) is entitled to UM coverage only while occupying a covered auto.

Kentucky Farm Bureau Mut. Ins. Co. v. Rodgers, 2002 WL 31045356 (Ky. App., Sept. 13, 2002). Punitive damages in the amount of $1 million were awarded after the court had a look at the insurer's adjuster training manual which encouraged adjusters to plant uncertainty in the minds of claimants and to seize upon fear, anxiety and money needs faced by claimants. Monday v. Canal Insurance Co. 73 S.W.3d 594. Supreme Court of Arkansas, interpreting the state's UM statute held that there is no need to offer UM in a commercial policy. The statute speaks only of private passenger automobile liability policies. The Maryland Court of Special Appeals took a similar position in Hams of Southern Maryland v. Nationwide Mut. Ins. Co., 2002 WL 31852881.

Mid-Century Ins. Co. of Texas v. Boyte, 80 S.W.3d 546. The Texas Supreme Court held that once a jury or judge enters judgment for a claimant, bad faith is no longer possible. At that point, plaintiff was a judgment creditor - an insurer's duty of good faith arises out of the disparity in the bargaining power of the insurer and the insured. These concerns do not arise in the context of a judgment creditor.

Yocherer v. Farmers Ins. Exchange, 643 N.W. 2d 547. The Wisconsin Supreme Court held that the statute of limitations on a UIM claim begins not at the time of the accident, but on the date of the settlement of the case against the tortfeasor. At that point the claimant knows whether or not there will be a UIM claim.

A number of interesting opinions were handed down in 2002 which were sympathetic to warehousemen's attempts to limit their liability. In HIH Marine Insurance Services, Inc., v. Gateway Freight Services, 116 Cal. Rptr. 2d 893 (Cal. App., 1st Dist.), a California appellate court applied the Warsaw limitation of liability contained in an China Airlines air waybill to a California cargo handling facility which acted as a bailee of goods. The goods were stolen from its warehouse which was not on the premises of an airport. China Airlines issued its air waybill from Malaysia through to the ultimate consignee in San Francisco. Pursuant to an agreement with China Airlines, Gateway received the cargo of hard disk drives at the airport and transported it to its storage warehouse in South San Francisco for pick-up by the consignee. Acknowledging that the Warsaw Convention generally applies only to transportation in an airplane or in an airport, the court nevertheless extended the air waybill limitation to the warehouseman and to a loss outside the airport. It did so on the basis of a provision on the reverse side of the air waybill which extended the limitation of liability to the carrier's agents who perform services incidental to the air carriage. The court found that under the released value doctrine of federal common law, the shipper was bound by the contractual provisions of the air waybill because it had notice of the limitation and a fair opportunity to obtain greater protection by declaring a higher value and paying a greater freight charge. It found that Gateway was acting as an agent of China Airlines in furtherance of the contract of carriage. The court rejected the analysis of the Second Circuit decision in the Victoria Sales case which held that air transportation ended at the geographical boundaries of the airport, and it rejected the argument that air transportation ended when the goods came to rest at Gateway's warehouse.

A limitation of liability in a warehouseman's invoices was applied where the warehouseman released a loaded container to an impostor in Perfumeria Ultra, S.A DE C.V. v. Miami Customs Service, Inc., 2002 WL 31664695 (S.D. Fla., Nov. 4, 2002). Without making reference to ¤7-204 of the U.C.C., which permits a warehouseman to limit liability in a warehouse receipt, a federal court in Florida held that an agreement to limit liability was established by a course of dealing which made the invoices' terms and conditions part of the agreement to store duty-free bonded cargo and load it for transportation. Moreover, the court held that the warehouseman had not waived its right to enforce the limitation by paying two earlier claims "as a gesture of goodwill." Similarly, in Lubell v. Samson Moving & Storage, Inc., 737 N.Y.S. 2d 24 (N.Y.A.D, 1st Dept.) a New York appellate court held that the limitation of liability contained in a household goods storage contract was enforceable even though the depositor did not sign the form in the place designated for agreement to limit liability.

The limitation of liability was not enforced in J.W.S. Delavau, Inc., v. Eastern America Transport & Warehousing, Inc., 810 A. 2d 672 (Pa. Super.), where a limitation contained in warehouse receipts was not applied. In that case the parties had both signed a letter which set forth the price and some other terms under which Eastern would store Delavau's nutritional supplements. Each shipment of goods into the warehouse was evidenced by a warehouse receipt which contained a limitation of liability. A Pennsylvania appellate court held that the trial court could find that the letter agreement constituted the entire agreement. And despite the fact that Delavau had received hundreds of warehouse receipts without taking exception over a period of time, the court found that Eastern had failed to establish that Delavau had consented to the limitation. The court held further that the limitation was not binding because it found that the receipts, which required the signature of an officer of Eastern, contained only the computer-generated initials of the warehouse administrator who was not a corporate officer.

Because motor carriers continue to file for bankruptcy or simply close up, the BMC-32 Endorsement occupies the attention of cargo insurers. We have advised cargo insurers that claims made under the Endorsement for loss and damage to goods in the course of transportation performed pursuant to contracts could be declined on the grounds that by its terms the Endorsement applies only to common carriage. Shippers are taking the position that despite the wording of the Endorsement, it applies to all carriage because the Interstate Commerce Commission Termination Act of 1995 eliminates the distinction between common and contract carriage. We submitted this issue to a federal court in New York in April 2002, taking the position that the Endorsement applies only to common carriage so long as the mandated form retains its current text and so long as the DOT continues to issue both common carrier certificates and contract carrier permits. The court has not yet rendered its decision.

There continues to be a split of authority as to whether a carrier must give specific notice to a shipper of a limitation of liability contained in its tariff. In Hillenbrand Industries, Inc., v. Con-Way Transportation Services, Inc., 2002 WL 1461687 (S.D. Ind.), the court considered the effect of the Interstate Commerce Commission Termination Act of 1995 on the traditional elements required for limitation of liability set forth in the widely-cited opinion of the Seventh Circuit Court of Appeals in Hughes v. United Van Lines, 829 F.2d 1407 (7th Cir. 1987). The court affirmed that the ICCTA and cases in other jurisdictions did not change the rule in the Seventh Circuit that a shipper must have actual knowledge (as distinguished from constructive knowledge) of a liability limitation contained in a carrier's tariff in order for the limitation to be enforceable. The court stated that incorporation of a tariff by reference in a bill of lading would not achieve actual notice, even to a sophisticated commercial shipper. It also said that the carrier's receipt, which clearly incorporated its tariffs was "problematic" because it was not signed by the shipper and because it did not have a space for the shipper to declare a value. This opinion, therefore, would appear to require that the bill of lading make a specific reference to the limitation contained in the carrier's tariff, that it provide a space to declare a value and that it be signed by the shipper.

In Nematollahi v. Starving Students, Inc., 2002 WL 31006127 (N.D. Ill., Sept. 5, 2002), the court held that the provision in a household goods carrier's tariff which requires that suits be brought within two years after the written denial of a claim was not binding on the shipper because he did not have actual knowledge of it. In that case, the tariff was properly incorporated by reference into the bill of lading. Curiously, the court based this conclusion on the premise that under the ICCTA, the tariffs are not filed with the DOT. In fact, household goods carriers do file tariffs. Presumably, the result would have been different had the court been advised that the tariff was on file. The carrier's liability was found to be limited in that case on the basis of a specific declared value, not on the basis of the tariff.

Another federal district court in Illinois held that under the federal common law, which applies to interstate transportation which is not subject to the Carmack Amendment (because it is exempt, such as transportation of agricultural commodities or transportation which is prior or subsequent to air carriage), a carrier may limit liability under the "released value doctrine." In Mudd-Lyman Sales and Service Corporation v. United Parcel Service, Inc., 2002 WL 31687683 (N.D. Ill., Nov. 26, 2002), the court held that the UPS package limitation of liability was enforceable under the "released value doctrine" because it gave the shipper reasonable notice of the limitation and a fair opportunity to purchase higher liability. Presumably, this requires that the shipper have actual knowledge of the limitation. It is interesting to note that the court found that the shipper accepted the terms of UPS's limitation of liability by breaking the shrinkwrap seal on computer software provided by UPS and by on-screen acceptance of the software license.

Applying federal common law to a FedEx shipment, a federal district court in Minnesota applied the limitation of liability contained in the FedEx Service Guide to limit the liability of an interstate motor carrier on whose truck the goods were destroyed. U.S. Xpress, Inc. v. Great Northern Insurance Company, 2002 WL 31789380 (D.Minn, Dec. 9, 2002).

In J.B. Hunt Transport, Inc. v. USF Distribution Services, Inc., 2002 WL 31045152 (E.D. Pa. Sept. 10, 2002), the federal court conducted an analysis of an aspect of the federal motor carrier law that has rarely been examined by the courts. J.B. Hunt, the huge motor carrier headquartered at Lowell, Arizona, is self-insured for $ 1 million, though it maintains umbrella coverage. Hunt had a contract with Home Depot to provide contract carrier services. A Home Depot employee was injured while unloading a J. B. Hunt trailer that had allegedly been negligently loaded by employees of USF distribution which was also under contract to Home Depot. The injured employee sued both USF and J. B. Hunt. USF argued that J. B. Hunt, as self-insurer, was obligated to defend USF which had been the permissive user of a covered auto. The court reviewed the federal regulatory materials and found no support for USF's claim. In a conclusion cited by the dissent in Pierre, the court found that J. B. Hunt has a duty under federal law to protect the public in the event judgment is entered against the company. However, there is simply no basis, concluded the court, for holding that J. B. Hunt is responsible to either defend or indemnify any other entity.

In Rapp v. Awany, 205 F. Supp. 2d. 279, the District Court of New Jersey considered an argument that one periodically encounters in MCS-90 litigation. A truck owned and operated by a motor carrier caused a double fatality - a father and son - which resulted in a $ 27 million judgment . Astonishingly, the motor carrier's insurance policy had limits of $35,000. The estate sued the insurance agent and the insurer for gross negligence in failing to provide greater insurance coverage. There was no doubt that the insured selected the $35,000 liability limit after telling the agent that he had no DOT authority and required no filings. In this application, he described his business as sixty-percent (60%) intrastate transport of boxes, and forty-percent (40%) transport of boxes between New Jersey and JFK Airport in New York. In fact, the insured had registered with the DOT and received his DOT number several weeks after the policy was bound. The insurer, however, was not told of this development. Clearly, the trucker should have held at least $750,000 in coverage. Although the court was troubled by the result, and by the difference in mandatory limits between state and federal law, it concluded that the insurer and agent could not be held responsible for the insured's deceit.