COTTON STATES MUTUAL INSURANCE COMPANY

v.

BRIGHTMAN.

April 29, 2003.

Reconsideration Denied June 6, 2003.

David R. Montgomery, James E. Hudson, Kenneth Kalivoda, Hudson, Montgomery & Kalivoda, P.C., Athens, for appellee.

Philip Wade Savrin, Freeman Mathis & Gary, LLP, James Errol Singer, Bovis, Kyle & Burch, LLC, Atlanta, Jerry A. Buchanan, Buchanan & Land, Columbus, for amici appellant.

FLETCHER, Chief Justice.

After James Brightman obtained a $1,787,500 judgment against Lynn Martin and Gregory Cumbo for injuries suffered in a 1992 automobile collision, Martin assigned to Brightman her bad faith claim against her insurance company, Cotton States Mutual Insurance Company. Brightman sued Cotton States for its bad faith and negligent refusal to settle the personal injury action, the jury returned a verdict in his favor, and the Court of Appeals for the State of Georgia affirmed. [FN1] We granted a writ of certiorari to consider whether an insurer is liable under Southern General Insurance Company v. Holt [FN2] when it fails to tender its policy limits because the plaintiff's demand contains a condition beyond the insurer's control. We hold that an insurance company in a case involving multiple insurers may be liable to its insured on a bad faith claim when it fails to tender its policy limits in response to a settlement offer solely because the offer also seeks the policy limits from other insurers. Because there was sufficient evidence for the jury to find that Cotton States acted unreasonably in failing to tender its policy limits in response to Brightman's settlement offer in January 1995, we affirm.

FN1. See Cotton States Mut. Ins. Co. v. Brightman, 256 Ga.App. 451, 568 S.E.2d 498 (2002).

FN2. 262 Ga. 267, 416 S.E.2d 274 (1992).

Brightman was seriously injured in August 1992 when the van owned by Martin and driven by Cumbo struck his car as he was turning left at an intersection controlled by a traffic light. Police charged Brightman with failure to yield the right of way and charged Cumbo with speeding and causing serious injury by a vehicle. Police later charged Cumbo with driving under the influence based on a blood test that revealed the presence of marijuana metabolites in his blood. There was no evidence at the scene that Cumbo's driving was impaired.

On January 31, 1994, Brightman's attorney wrote Cotton States offering to settle his claims against Martin and Cumbo for $300,000, which was the limits of Martin's policy of liability insurance. The letter said that Brightman had sustained traumatic brain injury and attached medical bills totaling $329,457.20. On April 20, 1994, Cotton States declined to accept the offer to settle for the policy limits, citing a police officer's testimony that Brightman caused the accident, the company's inability to discover how a second officer calculated Cumbo's speed, and its desire to await the outcome of Cumbo's DUI case. As a result, Brightman withdrew his offer to settle.

Brightman sued Martin and Cumbo in May 1994, and they filed a counterclaim. During discovery, the parties learned that Cumbo had a $100,000 policy with State Farm Mutual Automobile Insurance Company. The investigating officers testified in depositions that the collision was caused by Brightman's failure to yield the right of way and Cumbo's speeding and driving under the influence. One officer calculated that Cumbo was driving 58 to 65 miles per hour in the 45-mile-per-hour zone. A third officer testified that he smelled a strong odor of marijuana in Cumbo's van at the time of the collision. In January 1995, a non-binding arbitration panel found in Brightman's favor and awarded him $2 million.

On January 30, 1995, Brightman offered Cotton States a final opportunity to settle the case for Martin's policy limits of $300,000. The offer stated:

We are willing to give Cotton States Mutual Insurance Company one last chance in which to settle this case for your policy limits of $300,000.00. We will agree to accept your policy limits, contingent upon State Farm Mutual Automobile Insurance Company also tendering its limits of $100,000, for the next ten days. If you have not accepted this offer within ten days from the date of this letter, then it is to be considered irrevocably withdrawn.

The ten-day period expired on February 9 without either Cotton States or State Farm tendering its policy limits. Although State Farm continued to deny coverage, Cotton States offered on March 17, 1995, to pay its policy limits of $300,000 in exchange for a general release from Brightman and a dismissal of the complaint with prejudice. Brightman declined the offer.

The personal injury action went to trial in 1996, and the jury awarded Brightman nearly $1.8 million in damages. Cotton States paid its $300,000 policy limits and State Farm paid $100,000, leaving an excess judgment of $1,387,500 against Martin and Cumbo. After Brightman filed a lien on Martin's house, she assigned to him her claim against Cotton States for its bad faith or negligent refusal to settle the personal injury action within its policy limits. In exchange, Brightman agreed not to seek any of her assets. Brightman sued Cotton States, the trial court denied the insurer's motion for a directed verdict, and the jury returned a verdict awarding Brightman more than $2.1 million in principal and interest.

1. An insurance company may be liable for the excess judgment entered against its insured based on the insurer's bad faith or negligent refusal to settle a personal claim within the policy limits. [FN3] Judged by the standard of the ordinarily prudent insurer, the insurer is negligent in failing to settle if the ordinarily prudent insurer would consider choosing to try the case created an unreasonable risk. [FN4] The rationale is that the interests of the insurer and insured diverge when a plaintiff offers to settle a claim for the limits of the insurance policy. The insured is interested in protecting itself against an excess judgment; the insurer has less incentive to settle because litigation may result in a verdict below the policy limits or a defense verdict. [FN5]

FN3. See McCall v. Allstate Ins. Co., 251 Ga. 869, 310 S.E.2d 513 (1984).

FN4. See U.S. Fidelity & Guar. Co. v. Evans, 116 Ga.App. 93, 156 S.E.2d 809, (1967), aff'd, 223 Ga. 789, 158 S.E.2d 243 (1967).

FN5. See generally William Shernoff et al., Insurance Bad Faith Litigation 1.07(2002).

In determining whether the insurer has breached its duty to its insured to settle, a factual issue is sometimes presented concerning whether the insurer had an opportunity to make an effective compromise. [FN6] In Southern General Insurance Co. v. Holt, this Court addressed whether the insured had a bad faith claim against her insurance company for its failure to accept the plaintiff's time-limited settlement offer within the policy limits. [FN7] We held that the insurer had a duty to its insured to respond to the plaintiff's deadline to settle the personal injury claim within policy limits when the insurer had knowledge of clear liability and special damages exceeding the policy limits. Our holding in Holt was consistent with the general rule that the issue of an insurer's bad faith depends on whether the insurance company acted reasonably in responding to a settlement offer. [FN8]

FN6. See Government Employees Ins. Co. v. Gingold, 249 Ga. 156, 288 S.E.2d 557 (1982) (affirming grant of summary judgment to insurer in excess liability action when insured's deliberate disappearance made settlement of underlying action impossible). See generally Stephen S. Ashley, Bad Faith Actions: Liability and Damages §§ 3:25-3:29 (2d ed.1997) (discussing prerequisites of a settlement offer).

FN7. See 262 Ga. at 267, 416 S.E.2d 274.

FN8. See id. at 269, 416 S.E.2d 274.

Although this case also involves an insurer's failure to respond within a specific time limit, it presents an additional issue concerning the insurer's opportunity to accept the plaintiff's offer to settle. Whereas only one insurance company was involved in Holt, Brightman's settlement offer in January 1995 involved two defendants and their insurance companies. By its terms, the letter demanded that Cotton States tender its policy limits within 10 days, with the plaintiff's acceptance of the $300,000 contingent on State Farm's tendering its policy limits. The question here is whether Cotton States is excused, as a matter of law, from tendering its policy limits because the plaintiff's demand contained a condition over which Cotton States had no control.

Relying on authority from other jurisdictions, the majority decision of the court of appeals found the insurer had an "affirmative duty ... to engage the injured party in discussions regarding an initial settlement demand in excess of policy limits." [FN9] Because the insurer did not respond to Brightman's conditional offer in 1995 with a counteroffer to effect a settlement, the court of appeals concluded that the evidence supported the jury's finding that Cotton States was negligent in failing to settle the underlying personal injury action. Cotton States criticizes this ruling as making an insurer liable for failing to offer its policy limits in response to a contingent demand that cannot be accepted. It argues that it never had the opportunity to settle in 1995 because the plaintiff's demand contained a condition beyond its control.

FN9. See 256 Ga.App. at 454, 568 S.E.2d 498 (citing Yeomans v. Allstate Ins. Co., 130 N.J.Super. 48, 324 A.2d 906 (1974) and Young v. American Cas. & Co., 416 F.2d 906 (2d Cir.1969)). Compare Cotton States Mut. Ins. Co. v. Fields, 106 Ga.App. 740, 128 S.E.2d 358 (1962) (finding no causation based on the insurer's failure to solicit or make an offer of settlement at the insured's request).

Contrary to Cotton States' contention, we are unable to conclude that it was entitled to a directed verdict on the bad faith claim because the January 1995 settlement offer was a conditional demand incapable of its acceptance. [FN10] At trial, Brightman presented expert testimony that the insurer had the opportunity to make an effective compromise in 1995. An insurance defense attorney and claims adjuster testified that Cotton States could have offered its $300,000 before the 10-day deadline passed without waiting to see what State Farm would do. In addition, industry experts agreed that, in cases involving multiple defendants and insurance companies, one insurance company can offer its policy limits in response to a demand--"put our money on the table"--and then let the plaintiff negotiate with the remaining insurers. This testimony is supported by the action of Cotton States in tendering its policy limits six weeks after the plaintiff's deadline expired, despite State Farm's continuing refusal to pay. If Cotton States had tendered its policy limits while the plaintiff's offer was pending, it would have done everything within its control to accept the plaintiff's offer and thus protect its policyholder from an excess verdict. In that situation, the insurance company would have given equal consideration to its insured's financial interests and fulfilled its duty to her.

FN10. See McNally v. Nationwide Ins. Co., 815 F.2d 254 (3d Cir.1987) (rejecting insurer's argument that an offer was impermissibly conditional because it required a response from more than one insurer).

Based on this evidence, we conclude that Brightman presented a jury question on whether Cotton States had an adequate opportunity to settle and therefore acted unreasonably in refusing to tender its policy limits in response to the January 1995 settlement offer. Construing the evidence most favorably towards Brightman as the party opposing the motion for directed verdict, there is evidence to support the jury's verdict that Cotton States breached its duty to its insured to settle Brightman's claim. By the time of the offer, Cotton States knew that the police had concluded that the driver of Martin's van was partially responsible for the collision, Brightman's damages exceeded the limits of Martin's liability policy with Cotton States, and a court-ordered arbitration panel had rendered a damages award of $2 million in Brightman's favor. Brightman's inclusion of a condition in the offer involving State Farm is insufficient for us to resolve, as a matter of law, that Cotton States acted reasonably and like the ordinarily prudent insurer in declining to tender its policy limits.

2. Although we agree with the court of appeals that the evidence supported the jury's verdict in favor of Brightman, we disagree with its description of the insurer's duty to settle. Specifically, we disapprove of the language placing an affirmative duty on the company to engage in negotiations concerning a settlement demand that is in excess of the insurance policy's limits. [FN11] We are also unwilling to ascribe a duty to insurers to make a counteroffer to every settlement demand that involves a condition beyond their control. Instead, we conclude that an insurance company faced with a demand involving multiple insurers can create a safe harbor from liability for an insured's bad faith claim under Holt by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured. This rule is intended to protect the financial interests of policyholders in cases where continued litigation would expose them to a judgment exceeding their policy limits while protecting insurers from bad faith claims when there are conditions involved in the settlement demand over which they have no control.

FN11. See Cotton States v. Fields, 106 Ga.App. at 742, 128 S.E.2d 358.

Judgment affirmed.

All the Justices concur.

District Court of Appeal of Florida,

Fourth District.

Maribel FARINAS and Margarita Farinas, Susan Walker, individually, and as

representative of the Estate of Margaux Schehr, Rochelle Slosberg,

individually, Irving Slosberg, individually, and as representative of the

Estate of Dori Slosberg, Emily Slosberg, individually, and Ligia Gallego,

individually, and as representative of the Estate of Carolina Gil, Appellants,

v.

FLORIDA FARM BUREAU GENERAL INSURANCE COMPANY, Nicholas Frank Copertino and

Nicholas T. Copertino, Appellees.

April 23, 2003.

Order Denying Rehearing and Certifying Question July 9, 2003.

PER CURIAM.

This consolidated appeal arises from litigation regarding a February 23, 1996 car accident. Nicholas Copertino lost control of his car and crossed a median, hitting an oncoming car. This tragedy resulted in the unfortunate deaths of five teenagers and severe injuries to another seven, including Copertino and a 14-year-old girl rendered a quadriplegic. Copertino's liability for those resulting injuries was not in question.

Copertino was covered by his father's Florida Farm Bureau General Insurance Company ("Farm Bureau") policy with bodily injury limits of $100,000 per claim and $300,000 per accident. Consequently, with the five death claims and seven significant personal injury claims, the policy limits were plainly inadequate.

Farm Bureau settled for the limits with Lisa Boccia, the driver of the other car, and the Rashidian and Cordes estates, two of the death claims, by March 8, 1996. After exhausting the limits, Farm Bureau filed a declaratory judgment action in July 1996 against the insured, the Copertinos, to determine whether it had any further duty to defend the Copertinos after having paid the policy limits. Appellants intervened and ultimately all filed third-party bad faith actions alleging that Farm Bureau entered into settlements without due regard for the interests of the insured.

Farm Bureau moved for summary judgment against all appellants, and the Farinases moved for cross-summary judgment. The trial court granted summary judgment to Farm Bureau as to all the appellants and denied the Farinases' summary judgment. Now, all appellants seek review of the summary judgment granted to Farm Bureau, and the Farinases also seek review of the denial of their summary judgment.

We are confronted with three questions: 1) what was Farm Bureau's good-faith duty to the insured, the Copertinos, in a multiple claimant situation, 2) did Farm Bureau meet that duty and 3) are there any remaining issues of fact for a jury to determine.

A brief background of insurance good-faith law is necessary to provide context for our analysis. Good-faith law in Florida evolved as liability insurance policies began to replace traditional indemnity policies.

Under liability policies, however, insurance companies took on the obligation of defending the insured, which, in turn, made insureds dependent on the acts of the insurers; insurers had the power to settle and foreclose an insured's exposure or to refuse to settle and leave the insured exposed to liability in excess of policy limits. This placed insurers in a fiduciary relationship with their insureds similar to that which exists between an attorney and client. Consequently, courts began to recognize that insurers "owed a duty to their insureds to refrain from acting solely on the basis of their own interests in settlement." This duty became known as the "exercise of good faith" or the "avoidance of bad faith." Under this new standard of culpability, if an insurer was found to have acted in bad faith, the insurer would have to pay the entire judgment entered against the insured in favor of the injured third party, including any amount in excess of the insured's policy limits. This type of claim became known as a third-party bad faith action.

State Farm Mut. Ins. Co. v. Laforet, 658 So.2d 55, 57-58 (Fla.1995).

Even though the bad faith occurs between the insurer and its named insured, Florida law allows the injured third party insured to bring an action directly against the insurer. See Thompson v. Commercial Union Ins. Co., 250 So.2d 259 (Fla.1971). The rationale behind this procedure is that the injured party, as the beneficiary of any successful bad faith claim, is the real party in interest as a sort of judgment creditor. See id. at 264.

In 1982, the Florida legislature enacted section 624.155, which created a statutory bad faith claim and extended the claim to the first-party insureds. See § 624.155, Fla. Stat. (Supp.1982). A 1990 amendment noted the existence of common-law bad faith and added that a person may obtain a judgment under either the common law remedy or the statutory remedy, but not both. See § 624.155, Fla. Stat. (Supp.1990). The third district has determined that this statutory obligation did not change the common law obligation of good faith or the measure of damages. See Hollar v. Int'l Bankers Ins. Co., 572 So.2d 937, 939 (Fla. 3d DCA 1990). All the appellants in the present case, except the Farinases, grounded their claims on both the common law and statutory standards.

The Florida Supreme Court announced the case law standard for insurer good faith in Boston Old Colony Insurance Co. v. Gutierrez, 386 So.2d 783 (Fla.1980). The general standard of care that the insurer must exercise when handling claims against the insured is "the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business." Id. at 785 (citation omitted). Because the insured has relinquished control of all decisions regarding claims to the insurer, the insurer's standard of care requires the insurer to act "in good faith and with due regard for the interests of the insured." Id. (citation omitted). The extent of this good faith duty is explicitly defined in detail by the court:

This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid the same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.

Id. (citations omitted). The determination of whether an insurer has satisfied this standard is one for the jury. Id. (citation omitted).

This standard of care is further reflected in the applicable Florida Statute, which states that an insured has a cause of action for bad faith, when the insurer did not attempt "in good faith to settle claims when, under all circumstances, it could and should have done so, had it acted fairly and honestly towards its insured and with due regard for her or his interests." § 624.155(b)(1), Fla. Stat. (2002).

Both prior and subsequent to the Florida Supreme Court's decision in Boston Old Colony, courts have recognized attendant duties of good faith under Florida law. The United States Court of Appeals for the Fifth Circuit, when interpreting Florida bad faith law in a diversity action, concluded that the jury is to decide whether an insurer has given inappropriate primary regard to his own interests over those of the insured in making a settlement determination. Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, 480 (5th Cir.1969). Additionally, when there are multiple claimants and minimal policy limits, "it follows that, insofar as the insureds' interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible." Id. at 481. More recently, the Florida Supreme Court augmented its decision in Boston Old Colony, by specifically addressing a multiple claimant situation involving a "deems expedient" clause, much like the present case. Shuster v. S. Broward Hosp. Dist. Physicians' Prof'l Liab. Ins. Trust, 591 So.2d 174 (Fla.1992).

For example, when there are multiple parties to a suit, we do not believe a "deems expedient" clause will protect an insurer who, in bad faith, indiscriminately settles with one or more of the parties for the full policy limits, thus exposing the insured to an excess judgment from the remaining parties. Clearly, the intent of the parties would not have been to allow the insurer to escape its primary duty to defend and indemnify the insured merely by paying out the full sum of the policy limits in bad faith.

Id. at 177 (citations omitted). Although Shuster approves of an insurance company settling claims within policy limits, there is nothing in Shuster that states the insurer is not subject to a good faith duty to the insured. Shuster states that "an insured's good faith discretion is broader when deciding to settle a claim within the policy limits than when refusing to settle or defend a claim." Id. at 176 (citing Gardner v. Aetna Cas. & Sur. Co., 841 F.2d 82 (4th Cir.1988)). Stating that discretion is broader when an insurer settles a claim necessarily implies that what discretion exists, although broad, is not unbridled and is limited by some duty.

On the opposing side of the coin to the Florida Supreme Court's evolving articulation of insurer good faith standards, is the Second District Court of Appeal decision in Harmon v. State Farm Mutual Automobile Insurance Co., 232 So.2d 206 (Fla. 2d DCA 1970). The case raised an issue of first impression:

Whether an insurance company may settle with two insureds in the full amount of the policy limits, thereby exhausting the limits of the policy to the exclusion of another insured under the uninsured motorist provisions of said policy.

Id. at 207. The court reviewed case precedent from other states and concluded that:

It is generally held that where multiple claims arise out of one accident, the liability insurer has the right to enter reasonable settlements with some of those claimants, regardless of whether the settlements deplete or even exhaust the policy limits to the extent that one or more claimants are left without recourse against the insurance company.

Id. at 207-208 (citations omitted). The trial court in the present case found this argument to be persuasive and relied upon it in determining that Farm Bureau acted within its rights when settling with three of the possible claimants.

On their faces, Boston Old Colony and related cases seem irreconcilably opposed to Harmon. Boston Old Colony provides that an insurer must conduct a full investigation of all competing claims arising out of an accident before endeavoring to settle any one individual claim, while keeping the insured informed at all junctures of the process. Harmon provides that an insurer may pick and choose which claims to settle based on any strategy it deems expedient, as long as those choices are reasonable. The trial court in the present case believes that it can decide which of these standards to apply. However, this is not the case, because the two cases are capable of harmonization.

Boston Old Colony and Harmon provide a general rule and a more specific application of that rule. The rule in Boston Old Colony sets a standard applicable in all automobile insurance bad faith cases, regardless of the factual circumstances and legal nuances of the cases. The Harmon rule focuses on the standard in scenarios with multiple competing claims. Therefore, the Boston Old Colony standard applies to all Florida cases alleging insurer bad faith, and Harmon applies to the subset of those cases involving multiple competing claims. Under this rationale, the present case is subject to both standards.

Farm Bureau was required by Boston Old Colony to fully investigate all the claims at hand to determine how to best limit the insured's liability. Additionally, based on Davis, Farm Bureau should have sought to settle as many claims as possible within the policy limits. Finally, based on Shuster, Farm Bureau had the duty to avoid indiscriminately settling selected claims and leaving the insured at risk of excess judgments that could have been minimized by wiser settlement practice. Whether Farm Bureau satisfied each of these requirements, are questions for a jury to decide.

Additionally, Farm Bureau, by virtue of having a policy with the insured, had primary control of claims settlement placed in its hands by the insured. This fact gives Farm Bureau a certain degree of discretion in deciding how to approach decisions of settlement and defense with regard to the multiple claims in the present case. Based on Harmon, Farm Bureau could have entered into reasonable settlements with some claimants to the exclusion of others based on an exercise of its discretion. However, Farm Bureau, and the trial court, are not free to overlook the fact that Harmon requires these settlements to be "reasonable," as part of the insurer's fiduciary duty to the insured. However, the Second District Court of Appeal did not define "reasonable" in Harmon. Therefore, reasonableness must be determined based on some external source of authority, and in the present case, the general rules of Boston Old Colony and Florida Statutes section 624.155(b)(1) provide that very guidance.

Harmon may apply to the case at hand, but Farm Bureau's decisions under its authority are subject to Boston Old Colony's definition of reasonable standard of care and associated requirements. After full investigation and communication with the insured, Farm Bureau could have elected to follow a strategy of settlement with selected claimants, if that policy were reasonable. The reasonableness of that policy is also a question for the jury, one subject to the constraints of Boston Old Colony and related cases and statutes.

Because the necessary determinations of reasonableness were dispensed with by the trial court due to its reliance on Harmon, factual issues remain to be resolved by a jury.

We now answer the three questions posed for resolution by this opinion. First, Farm Bureau's good faith duty to the insured requires it to fully investigate all claims arising from a multiple claim accident, keep the insured informed of the claim resolution process, and minimize the magnitude of possible excess judgments against the insured by reasoned claim settlement. This does not mean that Farm Bureau has no discretion in how it elects to settle claims, and may even choose to settle certain claims to the exclusion of others, provided this decision is reasonable and in keeping with its good faith duty. Second, whether Farm Bureau has met its good faith duty and undertaken a reasonable claims settlement strategy are questions for a jury to decide. Consequently, in answer to the third question, there are many factual issues for the jury to resolve, including whether Farm Bureau's quick settlement with three of the possible claimants was reasonable, whether Farm Bureau's rejection of global and other settlement options contemplated the best interests of the insured, whether Farm Bureau adequately investigated the facts of all of the claims, and whether Farm Bureau properly rejected advice of legal counsel and suggested settlement strategies proposed by Farm Bureau employees.

As a result, we reverse the summary judgment in favor of Farm Bureau, affirm the denial of the Farinases' motion for summary judgment, and remand for jury trial. We affirm all other aspects of the appeal without comment.

REVERSED IN PART, AFFIRMED IN PART, AND REMANDED FOR JURY TRIAL.

POLEN, C.J., GUNTHER and SHAHOOD, JJ., concur.

MOTION FOR REHEARING, REHEARING EN BANC AND CERTIFICATION

PER CURIAM.

We deny Florida Farm Bureau's Motion for Rehearing and Motion for Rehearing En Banc. However, in light of the fact that automobile accidents involving multiple claims and inadequate policy limits are likely to lead to recurrent lawsuits raising similar issues in the future, we grant Florida Farm Bureau's Motion for Certification and certify the following question as one of great public importance:

IN AN AUTOMOBILE ACCIDENT SCENARIO INVOLVING CLEAR LIABILITY, MULTIPLE CLAIMS, AND INADEQUATE POLICY LIMITS, DOES INSURANCE GOOD FAITH LAW REQUIRE THAT AN INSURER REASONABLY INVESTIGATE ALL CLAIMS PRIOR TO PAYMENT OF ANY CLAIM, KEEP THE INSURED INFORMED OF THE CLAIMS RESOLUTION PROCESS, AND ATTEMPT TO MINIMIZE THE MAGNITUDE OF POSSIBLE EXCESS JUDGMENTS AGAINST THE INSURED?

GUNTHER, POLEN and SHAHOOD, JJ., concur.

United States District Court,

S.D. Texas,

Houston Division.

FIREMAN'S FUND MCGEE, Plaintiff,

v.

LANDSTAR RANGER, INC., Defendant.

Feb. 10, 2003.

MEMORANDUM AND ORDER

ATLAS, District Judge.

This cargo damage case is before the Court on Defendant Landstar Ranger, Inc.'s Motion for Summary Judgment ("Landstar's Motion") [Doc. # 18]. Plaintiff Fireman's Fund McGee ("Fireman's Fund") has filed its Opposition to Defendant Landstar Ranger, Inc.'s Motion for Summary Judgment [Doc. # 19], and Landstar has filed a Reply [Doc. # 20]. Having considered the parties' submissions, all matters of record, and applicable legal authorities, the Court concludes that Landstar's Motion should be granted.

I. FACTUAL BACKGROUND

Plaintiff Fireman's Fund is subrogee for Empire Resources, Inc. Empire Resources imported fifty-five bundles of aluminum extrusions from Taishan, China. The cargo arrived in a shipping container at Southern Warehouse in Houston, Texas, on June 21, 2000. Southern Warehouse issued a bill of lading as agent of the shipper, Empire Resources, directing delivery of the cargo to Arrow Metals in Garland, Texas. Landstar is the carrier that delivered the goods to Arrow Metals for Empire Resources. The bill of lading specified that "material must be covered and dry at all times" and should be delivered on a "well tarped" flatbed trailer. See Exhibit 2 to Landstar's Motion.

The cargo was damaged by heavy rain when it was being loaded onto the flatbed trailer at the Southern Warehouse facility. The parties disagree as to whether it was a Landstar employee or a Southern Warehouse employee who loaded the cargo in the rain, but do not dispute that the cargo was undamaged when it arrived at Southern Warehouse. Landstar delivered the cargo to Arrow Metals in Garland, Texas on June 26, 2000 "soaking wet." Id. Arrow Metals accepted the damaged cargo subject to a claim for the damages. Id.

Fireman's Fund reimbursed Empire Resources $22,380.79 for its loss on its sale to Arrow Metals pursuant to an insurance contract. Fireman's Fund, as subrogee for Empire Resources, filed a claim against Landstar on May 30, 2001. See Plaintiff's Opposition, Exhibit D. Landstar denied Fireman's Fund's claim because it was not filed within nine months of delivery as required by the Uniform Straight Bill of Lading provisions contained in the National Motor Freight Classifications, which Landstar contends governs the shipping contract. See Affidavit of Brenda J. Baker, Exhibit 1 to Landstar's Motion. Fireman's Fund filed this suit to recover funds it paid to Empire Resources for the damaged cargo.

The parties agree that the Southern Warehouse bill of lading is the contract that governs the relationship between the parties, Fireman's Fund as subrogee for Empire Resources, the shipper, Southern Warehouse, the custodian of the cargo who arranged for the cargo's transport, and Landstar, the carrier. The parties further agree that neither Empire Resources or Fireman's Fund submitted a claim for loss or damage to Landstar within nine months of the June 26, 2000 delivery. However, Fireman's Fund denies having notice of the nine-month claim filing limitation, and thus denies that its claim is time-barred. Landstar contends that Fireman's Fund's claim is time-barred, and thus it is entitled to summary judgment.

II. SUMMARY JUDGMENT STANDARDS

Rule 56 of the Federal Rules of Civil Procedure mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a sufficient showing of the existence of an element essential to the party's case, and on which that party will bear the burden at trial. Baton Rouge Oil and Chem. Workers Union v. ExxonMobil Corp., 289 F.3d 373, 375 (5th Cir.2002) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).

In deciding a motion for summary judgment, the Court must determine whether "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Calbillo v. Cavender Oldsmobile, Inc., 288 F.3d 721, 725 (5th Cir.2002). An issue is material if its resolution could affect the outcome of the action. Terrebonne Parish Sch. Bd. v. Columbia Gulf Transmission Co., 290 F.3d 303, 310 (5th Cir.2002) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). In deciding whether a fact issue has been created, the facts and the inferences to be drawn from them must be reviewed in the light most favorable to the nonmoving party. Hotard v. State Farm Fire & Cas. Co., 286 F.3d 814, 817 (5th Cir.2002). However, factual controversies are resolved in favor of the nonmovant "only when there is an actual controversy--that is, when both parties have submitted evidence of contradictory facts." Olabisiomotosho v. City of Houston, 185 F.3d 521, 525 (5th Cir.1999).

The party moving for summary judgment has the initial burden of demonstrating the absence of a material fact issue with respect to those issues on which the movant bears the burden of proof at trial. Smith v. Brenoettsy, 158 F.3d 908, 911 (5th Cir.1998). The movant meets this initial burden by showing that the "evidence in the record would not permit the nonmovant to carry its burden of proof at trial." Id. If the movant meets this burden, the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. Littlefield v. Forney Indep. Sch. Dist., 268 F.3d 275, 282 (5th Cir.2001) (quoting Tubacex, Inc. v. M/V Risan, 45 F.3d 951, 954 (5th Cir.1995)). A dispute over a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. (quoting Smith v. Brenoettsy, 158 F.3d 908, 911 (5th Cir.1998)); see also Quorum Health Resources, L.L.C. v. Maverick County Hosp. District, 308 F.3d 451, 458 (5th Cir.2002).

The nonmovant's burden is not met by mere reliance on the allegations or denials in the nonmovant's pleadings. See Morris v. Covan Worldwide Moving, Inc., 144 F.3d 377, 380 (5th Cir.1998). Likewise, "unsubstantiated or conclusory assertions that a fact issue exists" do not meet this burden. Id. Instead, the nonmoving party must present specific facts which show "the existence of a 'genuine' issue concerning every essential component of its case." Id. In the absence of any proof, the court will not assume that the nonmovant could or would prove the necessary facts. McCallum Highlands, Ltd. v. Washington Capital Dus, Inc., 66 F.3d 89, 92 (5th Cir.1995), revised on other grounds upon denial of reh'g, 70 F.3d 26 (5th Cir.1995); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994) (citing Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990)).

III. ANALYSIS

A. The Carmack Amendment

This case is governed by § 14706(e)(1) of Carmack Amendment, which authorizes shippers and carriers to contractually limit the deadline for shippers to report claims to carriers for cargo damage as long as the filing period is not less than nine months after delivery. [FN1] See eg., Salzstein v. Bekins Van Lines Inc., 993 F.2d 1187, 1189 (5th Cir.1993). The Carmack Amendment and Surface Transportation Board Regulations, 49 C.F.R. §§ 1005.1-7 (2002), govern processing of claims for damage to property transported by common carriers. Salzstein, 993 F.2d at 1189; Trailblazers Int'l Inc. v. Central Freight Lines, 951 F.Supp. 121, 123 (S.D.Tex.1996). The shipper must meet minimum claim filing requirements, which include providing the carrier written notice within time limits specified in the bill of lading, asserting facts identifying the property, assessing liability for the loss and demanding a determinable amount of money. 49 C.F.R. § 1005.2(b) (2002). [FN2] Strict compliance with claim filing provisions is a "mandatory condition precedent to recovery on a claim." Trailblazers, 951 F.Supp. at 123 (applying Salzstein, 993 F.2d at 1190). [FN3]

FN1. This provision states:

A carrier may not provide by rule, contract, or otherwise, a period of less than 9 months for filing a claim against it under this section and a period of less than 2 years for bringing a civil action against it under this section. The period for bringing a civil action is computed from the date the carrier gives a person written notice that the carrier has disallowed any part of the claim specified in the notice. 49 U.S.C. § 14706(e)(1) (2000).

FN2. The regulation provides:

Minimum filing requirements. A written or electronic communication (when agreed to by the carrier and the shipper or receiver involved) from a claimant, filed with a proper carrier within the time limits specified in the bill of lading or contract of carriage or transportation and: (1) Containing facts sufficient to identify the baggage of shipment (or shipments) of property, (2) asserting liability for the alleged loss, damage, injury, or delay, and (3) making claim for the payment of a specified or determinable amount of money, shall be considered as sufficient compliance with the provisions for filing claims embraced in the bill of lading or other contract for carriage: provided, however, that where claims are electronically handled, procedures are established to ensure reasonable carrier access to supporting documents.

49 C.F.R. § 1005.2(b) (2002) (emphasis added).

FN3. A prima facie case against a carrier for damage to a shipment may be shown by a bill of lading indicating delivery in good condition and then subsequent arrival in damaged condition with supporting documentation of the amount of damages. See Accura Sys. Inc., v. Watkins Motor Lines, Inc., 98 F.3d 874, 877 (5th Cir.1996); see also 49 U.S.C. § 14706(a)(1) (2000) (imposing liability on carriers for loss or injury to the property.)

B. The ICC Termination Act

Prior to the ICC Termination Act [FN4], carriers filed tariffs with the ICC that established rates and set liability and notice limitations. Tempel Steel Corp., v. Landstar Inway, Inc., 211 F.3d 1029, 1030 (7th Cir.2000). Shippers were deemed to have knowledge of the tariffs on file with the ICC, and parties could not contract around them. Id. Currently under 49 U.S.C. § 14706(c)(1)(B) (2000), "[if] the motor carrier is not required to file a tariff with the [Surface Transportation] Board, it shall provide ... to the shipper, on request of the shipper, a written or electronic copy of the rate classification, rules, and practices upon which any rate applicable to a shipment, or agreed to between the shipper and the carrier is based." [FN5] Therefore, shippers now are not automatically deemed to have knowledge of a carrier's tariffs, but the parties are free to agree to limit liability according to a carrier's tariffs, or standard contractual terms, if such are incorporated into the parties' contract, i.e., a bill of lading.

FN4. The ICC Termination Act abolished the Interstate Commerce Commission, and accordingly the mechanism for filing tariffs. ICC Termination Act of 1995, Pub.L. No. 104-88, 109 Stat. 803 (1995).

FN5. Carriers required to file tariffs are designated by 49 U.S.C. § 13702(a)(1), (2) (2002) as those providing transportation or service that is in noncontiguous domestic trade or movement of household goods.

C. Analysis: Terms of the Bill of Lading

Landstar does not dispute Fireman's Fund's ability to make a prima facie showing on its claim, but contends that, even if Fireman's Fund's claim is otherwise valid, Fireman's Fund's untimely notice bars recovery. Fireman's Fund sent to Landstar on May 30, 2001, written notice of its claim for damage to the aluminum extrusions. It is undisputed that Fireman's Fund sent this notice more than nine months after the delivery date of June 26, 2000.

The dispositive issue is whether the parties agreed to a nine-month claim filing deadline in the bill of lading. Landstar argues that the nine-month notice limitation is incorporated into the bill of lading by the following language:

... it is mutually agreed ... that every service to be performed hereunder shall be subject to all of the terms and conditions of the Uniform Domestic Straight Bill of Lading set forth (1) in Uniform Freight Classification in effect on the date thereof [i]f this is a rail or rail-water shipment or (2) in the applicable motor carrier classification or tariff if this is a motor carrier shipment.

Landstar's Motion, Exhibit 2. Moreover, the bill of lading provides:

Shipper hereby certifies that he is familiar with all of the terms and conditions of the said bill of lading, including those on the back thereof, set forth in the classification or tariff which governs the transportation of this shipment and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns.

Id. Landstar has submitted the uncontradicted affidavit of Brenda J. Baker, a cargo claims analyst with Landstar Risk Management Claim Services, Inc. Landstar's Motion, Exhibit 1. Baker's affidavit demonstrates that the bill of lading in issue in fact incorporates by reference the Uniform Straight Bill of Landing set forth in the National Motor Freight Classification 100-Z. Id. The Uniform Straight Bill of Lading includes a nine-month claim filing deadline. "Claims for loss or damage must be filed within nine months after the delivery of the property...." [FN6]

FN6. Exhibit B to Baker's Affidavit, at 5, § 3(b).

Fireman's Fund argues that it did not have notice of Landstar's limitation period for filing a damage claim because the bill of lading was not issued by Landstar and did not expressly incorporate Landstar's tariff. Fireman's Fund argues that because tariffs are no longer filed with the ICC, they are not legally binding unless a shipper has actual notice of the terms with which the carrier seeks to limit its liability. Fireman's Fund cites Tempel Steel, 211 F.3d at 1030, for the proposition that a bill of lading purporting to incorporate by reference "tariffs in effect" is insufficient to limit carrier's liability because the filed-rate system is no longer in effect and thus a carrier would not have actual notice of the limitation. A review of Tempel Steel belies this assertion. In Tempel Steel, the carrier sought to exclude its liability for a press machine damaged as it was transported in Mexico. The carrier had a tariff in its own files maintaining an exclusion for any damage to a shipment sustained within the country of Mexico. The carrier drafted the bill of lading, which stated that the cargo was received "subject to the classifications and tariffs in effect on the date of issue." The bill of lading also contained a clause that made the tariff applicable "only in connection with tariffs making reference to the ICC number hereof." Tempel Steel, 211 F.3d at 1030. As a matter of basic contract interpretation, the court found that the absence of any reference to the ICC number in the bill of lading, the parties' contract, as required by that contract's own limiting clause, defeated the carrier's contention that the limitation had been incorporated into the contract. In sum, the carrier's bill of lading did not incorporate into that contract the tariff's exclusion from liability, and thus the limitation could not be enforced.

Although the ICC Termination Act abolished the rule that carriers' tariffs are automatically enforceable merely if on file with the ICC, [FN7] tariffs today (and in 2000-2001) are enforceable between shippers and carriers if the parties agree by contract. [FN8] If a shipper is unaware of the "rate, classifications, rules and practices ... agreed to between the shipper and carrier," the shipper has the burden to request a copy of the carrier's tariff. [FN9] Thus, under the ICC Termination Act and a correct reading of Tempel Steel, Landstar's position prevails.

FN7. See 49 U.S.C. § 13710(a)(4) (2000).

FN8. "Today carriers adopt standard contractual terms, which some call 'tariffs' out of habit, but which have no effect apart from their status as contracts." Tempel Steel Corp., 211 F.3d at 1030.

FN9. See 49 U.S.C. § 13710(a)(1) (2000); See also EFS Nat'l Bank v. Averitt Express, Inc., 164 F.Supp.2d 994, 1002 (W.D.Tenn.2001) (holding bill of lading which incorporates by reference carrier's tariff is effective to limit liability).

The Southern Warehouse bill of lading states "[s]hipper hereby certifies that he is familiar with all of the terms and conditions ... set forth in the classification or tariff which governs the transportation of this shipment." Landstar's Motion, Exhibit 2. This clause clearly places responsibility with the shipper to familiarize itself with the terms of the tariff that governs the shipment. Landstar was the carrier that transported the cargo at the pertinent time. Thus, its tariffs apply under the contract.

Fireman's Fund parries with the argument that neither Landstar's tariff or the National Motor Freight Classification govern the shipment because Landstar did not draft the bill of lading. [FN10] Fireman's Fund has no legal or factual support for this contention. The bill of lading does not identify who will do the transportation. However, because the bill of lading covered the shipment through to Empire Resources' designated recipient, and Southern Warehouse, the drafter of the contract, designated Landstar as the carrier, the tariffs governing Landstar's business were incorporated by reference into the bill of lading.

FN10. The fact that the bill of lading was not prepared by Landstar actually weighs against Fireman's Fund's position. Southern Warehouse prepared the bill of lading as agent for Empire Resources, in whose shoes Fireman's Fund stands. Thus, any ambiguity in the bill of lading should be construed against Fireman's Fund. Cf. Giacona v. Marubeni Oceano Corp., 623 F.Supp. 1560, 1569 (S.D.Tex.1985) (holding "a tariff should be construed strictly against the drafter of the tariff, as a corollary to the rule that written instruments will be construed strictly against their drafters."). Tellingly, Fireman's Fund does not state what tariff or classification, if not Landstar's, governs the shipment. Because Empire Resource's agent drafted the bill of lading, Fireman's Fund, as Empire Resource's subrogee, is in a unique position to know which tariffs and classifications apply and whether or not they contain a nine-month notice provision.

Fireman's Fund therefore has not contradicted Landstar's evidence (submitted through the Affidavit of Brenda Baker) that the Uniform Straight Bill of Lading set forth in the National Motor Freight Classification 100-Z applies to this shipment, and that such Uniform Bill of Lading contains a term requiring the shipper to give notice of claim within nine months of the date of delivery. Fireman's Fund presents nothing that raises a genuine and material fact issue as to whether the nine-month notice period applies to its claim. Accordingly, Fireman's Fund has failed to meet its burden to demonstrate its claim is not time-barred.

IV. CONCLUSION AND ORDER

Landstar has met its summary judgment burden to show that the Southern Warehouse bill of lading incorporates by reference the terms and conditions of the Uniform Straight Bill of Lading set forth in the National Motor Freight Classification, which terms include the requirement that a notice of claim be filed within nine months after delivery of damaged cargo. Fireman's Fund did not provide notice within this period. Thus, there is no genuine issue of material fact the Fireman's Funds' claim for $22,380.79 for damages to the aluminum extrusions asserted in or about June 2000 is time-barred. Landstar is entitled to judgment as a matter of law dismissing Fireman's Funds' claim. It is therefore

ORDERED that Landstar's Motion for Summary Judgment [Doc. # 18] is GRANTED. It is further

ORDERED that Fireman's Fund's claims will be dismissed in their entirety.

The Court will issue a separate final judgment.

Supreme Court of Montana.

Ned C. HARDY, Plaintiff,

v.

PROGRESSIVE SPECIALTY INSURANCE COMPANY, Defendant.

Argued Jan. 23, 2003.

Submitted Jan. 30, 2003.

Decided April 18, 2003.

Justice TERRY N. TRIEWEILER delivered the Opinion of the Court.

¶ 1 The Plaintiff, Ned Hardy, brought this action in the United States District Court for the District of Montana to recover damages from the Defendant, Progressive Specialty Insurance Company, pursuant to the policy of insurance it had issued to him. Hardy alleged that he was entitled to recover $150,000 by stacking three $50,000 underinsured motorist coverages for which he paid three separate premiums. Both parties moved for summary judgment and a hearing was held. Following the hearing, the United States District Court certified three questions of law to this Court.

¶ 2 We accepted the following certified questions of law from the United States District Court:

¶ 3 1. Is the offset provision in the Progressive policy void in Montana because it violates the public policy of this state?

¶ 4 2. Given that the Montana Supreme Court has determined that underinsured motorist coverage is personal and portable, is it against public policy in Montana to charge separate premiums for that coverage for separate vehicles insured on the same policy if the insured can only collect one amount of coverage?

¶ 5 3. Are insurance policies such as the one in question here against public policy in Montana when they include provisions that defeat coverage for which the insurer has received valuable consideration?

¶ 6 We answer the three certified questions in the affirmative.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 7 The Plaintiff, Ned Hardy, was injured in an automobile accident on December 26, 2000. Hardy was riding in a vehicle driven by his wife when their vehicle was negligently struck by a car driven by Gary Marr. Hardy suffered serious injuries as a result of the accident and recovered $50,000 from Marr's liability insurer. However, $50,000 was insufficient to compensate Hardy for his injuries. Consequently, he sought compensation pursuant to the Underinsured Motorist (UIM) coverage he had for three of his vehicles through Progressive Specialty Insurance.

¶ 8 A separate premium was paid for each of the three $50,000 UIM coverages in Hardy's Progressive policy. The policy provided in part:

INSURING AGREEMENT--UNDERINSURED MOTORIST COVERAGE

Subject to the Limits of Liability, if you pay a premium for Underinsured Motorist Coverage, we will pay for damages, other than punitive or exemplary damages, which an insured person is entitled to recover from the owner or operator of an underinsured motor vehicle because of bodily injury:

1. sustained by an insured person;

2. caused by accident; and

3. arising out of the ownership, maintenance, or use of an underinsured motor vehicle.

ADDITIONAL DEFINITIONS

2. "Underinsured motor vehicle" means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident, but the sum of all applicable limits of liability for bodily injury is less than the coverage limit for Underinsured Motorist Coverage shown on the Declarations Page.

An underinsured motor vehicle does not include any vehicle or equipment ...

(h) that is an uninsured motor vehicle.

....

LIMITS OF LIABILITY

If you or a relative are in a vehicle which:

1. is involved in an accident with an uninsured motor vehicle or underinsured motor vehicle; and

2. is not a covered vehicle;

then the maximum recovery under this policy for any one (1) accident shall not exceed the highest dollar benefit limits for any one (1) covered vehicle.

If an insured person is entitled to similar benefits under more than one (1) motor vehicle insurance policy issued by us or an affiliate company, the maximum recovery under all policies shall not exceed the amount payable under the policy with the highest dollar benefit limits. Similar benefits available under more than one (1) motor vehicle insurance policy issued by us or an affiliate may not be added together to determine the limits of coverage available under the policies for any one (1) accident.

The Limits of Liability shown on the Declarations Page for Underinsured Motorist Coverage shall be reduced by all sums:

1. paid because of bodily injury by or on behalf of any persons or organizations who may be legally responsible, including, but not limited to, all sums paid under Part I--Liability to Others.

¶ 9 The declarations page of the policy reflects that Hardy paid separate premiums for UIM coverage of $50,000 per person and $100,000 per accident for each of the three vehicles. A premium of $10 was paid for the coverage of vehicle one, a premium of $8 was paid for vehicle two, and a premium of $9 was paid for vehicle three. Hardy believed the policies could be stacked to aggregate $150,000 of UIM coverage. Progressive denied coverage and Hardy sued for damages in the United States District Court for the District of Montana.

¶ 10 Progressive raised three arguments in its defense. First, Progressive argued that the tortfeasor's vehicle was not "underinsured" as defined in the policy because the total liability coverage for Marr's vehicle was equal to the highest single UIM coverage limit in Hardy's policy. Second, the policy required Hardy's UIM coverage for one vehicle to be offset by all amounts recovered from the tortfeasor. Hardy recovered $50,000 from Marr's insurer and that amount had to be offset against Hardy's UIM coverage. Finally, Progressive argued that Hardy's UIM coverages could not be "stacked" or aggregated for the purposes of either comparing limits or affording $150,000 of UIM coverage pursuant to the strict language of the policy and Montana law.

¶ 11 On July 19, 2002, United States District Court Chief Judge Donald W. Molloy submitted a Certified Order to this Court with three certified questions. This Court accepted certification on August 6, 2002. We granted the Montana Trial Lawyers Association (MTLA) and the National Association of Independent Insurers (NAII) leave to appear as amicus curiae. Oral argument was held before this Court en banc on January 23, 2003.

ISSUE 1

¶ 12 Is the offset provision in the Progressive policy void in Montana because it violates the public policy of this state?

¶ 13 Hardy contends that the policy's definition of underinsured motorist and the tortfeasor offset provision are in conflict with the declarations page of the Progressive insurance policy, which expressly provides for coverage of $50,000. Consequently, he argues that the policy is ambiguous, contravenes the reasonable expectations of the insurance consumer, and violates Montana public policy. Progressive asserts that the policy language is clear and that Hardy is not entitled to recover because the Marr vehicle was not "underinsured" according to the policy definition.

¶ 14 When we look at an insurance contract for purpose and intent "we [will] examine the contract as a whole, giving no special deference to any specific clause." Farmers Alliance Mut. Ins. Co. v. Holeman, 1998 MT 155, ¶ 25, 289 Mont. 312, ¶ 25, 961 P.2d 114, ¶ 25. The terms and words used in aninsurance contract are to be given their usual meaning and construed using common sense. Dakota Fire Ins. Co. v. Oie, 1998 MT 288, ¶ 5, 291 Mont. 486, ¶ 5, 968 P.2d 1126, ¶ 5. Any ambiguity in an insurance policy must be construed in favor of the insured and in favor of extending coverage. Holeman, ¶ 25. An ambiguity exists where the contract, when taken as a whole, is reasonably subject to two different interpretations. Holeman, ¶ 25. Whether an ambiguity exists is determined through the eyes of "a consumer with average intelligence but not trained in the law or insurance business." Holeman, ¶ 25.

¶ 15 The Progressive policy declarations page establishes that Hardy paid a separate premium for $50,000 of UIM coverage for three separate vehicles. The language of the Insuring Agreement found on page 17 of the policy states that Progressive will pay for damages "which the insured person is entitled to recover from the owner or operator of an underinsured motor vehicle...." Hardy asserts that the declarations page and the UIM Insuring Agreement indicate that $50,000 of UIM coverage was purchased and is applicable in the event that Hardy was entitled to recover money in excess of the tortfeasor's insurance.

¶ 16 However, according to the UIM definition, coverage is only available if the tortfeasor's liability insurance limit is less than the stated UIM coverage on Hardy's declarations page. Furthermore, UIM coverage does not apply to damages suffered as the result of an accident with an uninsured motor vehicle (UM). Finally, the UIM coverage shown on the declarations page is offset by the amount the insured recovers from the tortfeasor.

¶ 17 In practically all circumstances the UIM coverage of $50,000 in Montana will be offset by at least $25,000 because of Montana's minimum mandatory coverage requirements. See § 61-6-103, MCA. In all cases where the tortfeasor's liability coverage is equal to or more than Hardy's UIM coverage limit, Hardy can recover nothing from the UIM coverage. In any case where the tortfeasor's coverage is less than $25,000, the tortfeasor is uninsured (See Oleson v. Farmers Ins. Group (1980), 185 Mont. 164, 171, 605 P.2d 166, 170) and underinsurance coverage is unavailable pursuant to the terms of the policy.

¶ 18 Hardy maintains that he had an expectation of coverage when a tortfeasor's insurance provided inadequate indemnity and cites language from this Court's prior cases, the UIM Insuring Agreement, and the declarations page as support for the reasonableness of that expectation. Progressive argues that regardless of those factors, the language of the policy renders Hardy's expectation and argument unreasonable.

¶ 19 We agree with Hardy's contention that the policy purports to provide $50,000 of coverage when the insured is entitled to damages that exceed that tortfeasor's policy limits. We also agree that the UIM definition and offset provisions preclude Hardy from recovering in this case. Consequently, we conclude that the policy in this case is subject to more than one reasonable interpretation and is, therefore, ambiguous.

¶ 20 Next, Hardy argues that Progressive's UIM definition and offset provision violate Montana public policy because they contravene the consumer's reasonable expectations, create fraudulent and illusory coverage, and contravene the made whole doctrine.

¶ 21 Public policy considerations that favor adequate compensation for accident victims apply to UIM coverage in spite of the fact that UIM coverage is not mandatory in Montana. Bennett v. State Farm Mut. Auto. Ins. Co. (1993), 261 Mont. 386, 389, 862 P.2d 1146, 1148. The purpose of underinsured motorist coverage is to provide a source of indemnification when the tortfeasor does not provide adequate indemnification. Bennett, 261 Mont. at 389, 862 P.2d at 1148; State Farm v. Estate of Braun (1990), 243 Mont. 125, 130, 793 P.2d 253, 256. We recognize that Bennett and Braun are factually distinct from this case and decided different issues. However, the principle that the insurance consumer's reasonable expectation is that UIM insurance provides additional coverage when the insured's damages exceed what is available from the tortfeasor, which is expressed in those cases, is applicable to the facts in this case.

¶ 22 Although we are not bound by its decision, a United States District Court for the District of Montana has held that a similar offset provision and UIM definition violated Montana public policy in Transamerica Ins. Group v. Osborn (1986 D.Mont.), 627 F.Supp. 1405. The court concluded that the UIM definition and the offset provision contradicted the declarations page and the reasonable expectation of the insured. Osborn, 627 F.Supp. at 1408-409. It stated that the illusory nature of the coverage conflicted with the reasonable belief that the insured purchased $50,000 of additional UIM coverage. Osborn, 627 F.Supp at 1409. We find that the United States District Court's reasoning in that case is persuasive.

¶ 23 Progressive argues that Farmers Alliance Mut. Ins. Co. v. Miller (1989 9th Cir.), 869 F.2d 509, a case which concluded that a similar provision was valid, should control. In Miller, 869 F.2d at 512, the Ninth Circuit stated that Osborn robbed the declarations page of any value because it effectively required full disclosure of the UIM provisions on the declarations page. However, we conclude the opposite is true. From a consumer's point of view, a declarations page may be his or her only plain and simple source of information and, if misleading, is of no value. A declarations page which suggests coverage in an amount which is not actually available is misleading. Consequently, we conclude that the Miller decision is unpersuasive, and that the UIM definition and offset clause in Hardy's Progressive policy violated Hardy's reasonable expectations.

¶ 24 Hardy also contends that as a result of the offset provision, $25,000 of coverage for which Progressive received valuable consideration is illusory.

¶ 25 Progressive responds that it is permitted to exclude coverage for optional insurance such as UIM coverage in light of Stutzman v. Safeco Ins. Co. of America (1997), 284 Mont. 372, 945 P.2d 32. However, distinctions in Stutzman and the present case limit its applicability. The household exclusion in Stutzman was not ambiguous and did not violate public policy. Stutzman, 284 Mont. at 380-81, 945 P.2d at 37. We emphasized that a household exclusion was not against public policy and did not violate the consumer's reasonable expectations when "the terms of the insurance policy clearly demonstrate an intent to exclude coverage." Stutzman, 284 Mont. at 381, 945 P.2d at 37. We did not hold that exclusions could be accomplished by "bait and switch" tactics.

¶ 26 In this case, we concluded that the terms of the UIM coverage are ambiguous. We, therefore, conclude that the narrow holding in Stutzman is inapplicable to the Progressive policy.

¶ 27 Progressive also argues that the UIM coverage is not illusory because there are circumstances when the insured can recover more than $25,000 per person. For example, the UIM coverage may exceed $25,000 when the tortfeasor is insured in a state that has lower mandatory liability limits than Montana, or if there are multiple people in Hardy's vehicle attempting to recover from a tortfeasor with insufficient coverage, which is in an amount less that $50,000.

¶ 28 However, we conclude that these remote examples are not the typical occurrence; will not in most cases provide Hardy with the amount of UIM coverage that he thought he purchased; and are not sufficient to overcome the fact that in nearly all conceivable situations, Progressive's promise to pay up to $50,000 of UIM coverage will not be honored.

¶ 29 Therefore, in answer to the first certified question, we conclude that the offset provision, as well as the definition of underinsured motorist, violate Montana public policy because they create an ambiguity regarding coverage, render coverage that Progressive promised to provide illusory, and defeat the insured's reasonable expectation.

ISSUE 2

¶ 30 Given that the Montana Supreme Court has determined that underinsured motorist coverage is personal and portable, is it against public policy in Montana to charge separate premiums for that coverage for separate vehicles insured on the same policy if the insured can only collect one amount of coverage?

¶ 31 Both Hardy and the MTLA contend that the anti-stacking provision in the Progressive policy violates Montana public policy. They maintain that § 33- 23-203, MCA, which authorizes that provision is constitutionally infirm because it violates separation of powers, infringes upon fundamental rights, denies equal protection of the law, and, on its face, violates the right to substantive due process. They contend, therefore, that the public policy of this Court, which prohibits provisions of this nature, must be followed. Progressive and the NAII maintain that § 33-23-203, MCA, is constitutionally valid and that the Progressive policy is consistent with the public policy stated therein.

¶ 32 As a general rule, the Montana public policy is prescribed by the legislature through its enactment of statutes. Duck Inn, Inc. v. Montana State Univ. (1997), 285 Mont. 519, 523-24, 949 P.2d 1179, 1182. Therefore, we must begin our analysis by reviewing Hardy's contention that § 33-23-203, MCA, is not the proper measure of public policy in Montana because it is unconstitutional.

¶ 33 "[A] party challenging the constitutionality of a statute bears the heavy burden of proving it to be unconstitutional beyond a reasonable doubt." Estate of McCarthy v. Second Judicial Dist., 1999 MT 309, ¶ 13, 297 Mont. 212, ¶ 13, 994 P.2d 1090, ¶ 13. This Court has a duty to interpret the statute in a manner that upholds a constitutional interpretation. See Estate of McCarthy, ¶ 13.

¶ 34 Section 33-23-203, MCA, provides in part:

Limitation of liability under motor vehicle liability policy.

(1) Unless a motor vehicle liability policy specifically provides otherwise, the limits of insurance coverage available under each part of the policy must be determined as follows, regardless of the number of motor vehicles insured under the policy, the number of policies issued by the same company covering the insured, or the number of separate premiums paid:

....

(c) the limits of the coverages specified under one policy or under more than one policy issued by the same company may not be added together to determine the limits of the insurance coverage or coverages available under the policy or policies for any one accident. [Emphasis added.]

¶ 35 Article II, Section 17, of the Montana Constitution provides that: "No person shall be denied life, liberty, or property without due process of law." Substantive due process prohibits the state from taking unreasonable, arbitrary or capricious action. Powell v. State Comp. Ins. Fund, 2000 MT 321, ¶¶ 28-29, 302 Mont. 518, ¶¶ 28-29, 15 P.3d 877, ¶¶ 28-29. "[A] statute enacted by the legislature must be reasonably related to a permissible legislative objective" to comply with the requirements of substantive due process. Powell, ¶ 29.

¶ 36 Hardy and the MTLA argue that § 33-23-203, MCA, does not withstand the test for substantive due process. Progressive and MAII maintain that § 33- 23-203, MCA, is reasonably related to making and keeping insurance premiums affordable for all Montanans. They argue that stacking coverage forces insurers to pay more in claims, which drives the cost of insurance up for everyone.

¶ 37 While the state may have a legitimate interest in insurance rates, we fail to understand how § 33-23-203, MCA, which allows insurers to charge premiums for non-existent coverage, is rationally related to the stated objective. That contention simply defies logic. The cost to the insurance consumer could not be higher. Charging consumers for non-existent coverage is the antithesis of affordable coverage. Section 33-23-203, MCA, permits the insurance industry to deprive Montanans of their hard earned money for no consideration. There is no legitimate objective for doing so.

¶ 38 We conclude that § 33-23-203, MCA, is not rationally related to the stated objective of maintaining affordable insurance in Montana, nor any other "permissible legislative objective" that we can imagine, and constitutes an arbitrary and capricious action. Consequently, § 33-23-203, MCA, to the extent that it allows charging premiums for illusory coverage, violates substantive due process and is unconstitutional.

¶ 39 In the absence of valid legislative enactment of public policy, Progressive's anti-stacking provision must be reviewed in light of the public policy developed by this Court. Hardy contends this Court has consistently held that provisions of this nature violate Montana public policy. Progressive maintains that its anti-stacking provision does not render the additional policies valueless. Specifically, it argues that the premium on the first vehicle provides full coverage for the named insured and his family and the lesser premiums on the second and third vehicles provide secondary coverage for otherwise unprotected passengers in the second and third vehicles.

¶ 40 In Bennett, 261 Mont. at 389, 862 P.2d at 1148, we concluded that a provision that defeats coverage for which valuable consideration has been received violates Montana public policy. We held that UIM coverage, by definition, is personal and portable. Bennett, 261 Mont. at 389-90, 862 P.2d at 1148-149. Therefore, a Montanan could reasonably expect coverage up to the aggregate limit of the separate policies when a separate premium for UIM coverage was charged for each. Bennett, 261 Mont. at 389-90, 862 P.2d at 1148-149.

¶ 41 In Chaffee v. U.S. Fid. & Guar. Co. (1979), 181 Mont. 1, 591 P.2d 1102, USF & G charged three separate and equal premiums for uninsured coverage on three vehicles insured under the same policy, but similarly limited the insured to recovery of one coverage. We rejected USF & G's contention that the risk involved in extending second class coverage to the second and third vehicles justified the separate premiums. We held that: "There are no added risks to justify the full premium paid on the second and third vehicles." Chaffee, 181 Mont. at 6, 591 P.2d at 1104. We concluded that "[a]n attempted reduction of coverage of this kind simply takes the heart out of the policy and erodes the coverage to a point of no value simply because the policy on the first vehicle becomes the only full coverage." Chaffee, 181 Mont. at 6, 591 P.2d at 1104.

¶ 42 Based upon the synthesis of Bennett and Chaffee, we conclude that an anti-stacking provision in an insurance policy that permits an insurer to receive valuable consideration for coverage that is not provided violates Montana public policy. To the extent that the premium charged for the second and third vehicles were disproportionate to the coverage provided, the anti-stacking provisions in Hardy's policy cannot be enforced.

¶ 43 Here, unlike Chaffee, the full premium was not charged for the second and third vehicles. However, nothing in the record before us suggests that charging 80% to 90% of the full-coverage premium for the limited coverage on the second and third vehicle reflects the actual risk willingly assumed.

¶ 44 Even if it could be shown that it does, the anti-stacking provision still defeats the insured's reasonable expectations. We held that UIM coverage is both personal and portable. See Bennett, 261 Mont. at 389-90, 862 P.2d at 1148-149. Progressive's anti-stacking provision destroys the personal and portable nature of UIM coverage by completely relieving Progressive of the obligation to pay damages to the insured.

¶ 45 We conclude that Progressive's anti-stacking provision belies the insurance consumer's reasonable expectation that he has purchased UIM coverage, which by definition, is personal, portable, and, therefore, stackable. For this reason, we conclude the anti-stacking provision in this case violates Montana public policy.

ISSUE 3

¶ 46 Are insurance policies such as the one in question here against public policy in Montana when they include provisions that defeat coverage for which the insurer has received valuable consideration?

¶ 47 Our resolution of the first and second certified questions indicates that an insurance policy that contains provisions that defeat coverage for which the insurer has received valuable consideration is against public policy.

We Concur: PATRICIA COTTER, JAMES C. NELSON, W. WILLIAM LEAPHART and JIM REGNIER, Justices.

Justice JIM RICE, concurring in part and dissenting in part.

¶ 48 I concur with the Court's holding on Issue 1. A consumer's rightful expectation that the policy provides $50,000 of underinsured motorist "coverage" is defeated by the policy's terms, which limit payment to the amount which is necessary to "fill the gap" between the available liability coverage and $50,000. Here, because liability coverage of $50,000 was available and paid, there was no "gap" to fill, and thus, the entirety of the $50,000 underinsured "coverage" was defeated. Moreover, if there is no liability coverage, the resulting $50,000 gap will not be filled at all, because the policy's definition of an underinsured vehicle excludes vehicles which are uninsured. Consequently, though "$50,000 coverage" is offered to consumers, collection of that amount from the insurer is an assurance which must be considered illusory. In that regard, I find instructive the Idaho Supreme Court's reasoning that insurance coverage is deemed illusory when:

it appears that if any actual coverage does exist it is extremely minimal and affords no realistic protection to any group or class of injured persons. The declarations page of the policy contains language and words of coverage, then by definition and exclusion takes away the coverage. The fact that there might be some small circumstance where coverage could arguably exist does not change the reality that, when the policy is considered in its entirety, the City was receiving only an illusion of coverage for its premiums. This Court will not allow policy limitations and exclusions to defeat the precise purpose for which the insurance is purchased.

Martinez v. Idaho Counties Reciprocal Management Program (2000), 134 Idaho 247, 999 P.2d 902, 907. As in Martinez, it is possible here to conceive of circumstances under which the full $50,000 of underinsured coverage could be paid under the policy, but considered in its entirety, the policy does not fairly provide a consumer with coverage consistent with its representations.

¶ 49 I respectfully dissent from the Court's holding in Issue 2, as it is founded upon an erroneous factual predicate. In ¶ 37 of the opinion, the Court finds that Progressive has charged a premium for "non-existent coverage," and thus, § 33-23-203, MCA, is without a rational basis and unconstitutional, because the provision "permits the insurance industry to deprive Montanans of their hard earned money for no consideration." These statements are not accurate.

¶ 50 First, to the extent that underinsured coverage was nonexistent or illusory under this policy, that inadequacy has been remedied by our holding under Issue 1. Pursuant thereto, a full $50,000 in coverage, as represented to the consumer, is now available, in excess of any liability coverage, for payment of damages sustained by an insured in an accident. There is now nothing which is nonexistent or illusory about that coverage.

¶ 51 Further, the Hardys insured more than one vehicle and more than one driver under the policy. Additional premiums of $8 and $9 were assessed by Progressive for underinsured coverage on the Hardys' second and third vehicles to underwrite the costs associated with the additional risks Progressive was undertaking on these vehicles. Those additional risks were unrelated to the personal and portable nature of underinsured coverage for the policyholders. Rather, the additional risk is posed by the potential passengers, unnamed under the policy, who could be victims of accidents in those vehicles. The terms of the underinsured coverage specifically define "insured person" more broadly in order to provide coverage to those unnamed passengers. Thus, if the Hardys were involved in separate accidents while carrying passengers, additional claims reasonably could arise beyond those which would be made by the Hardys themselves, and beyond the coverage provided on a single vehicle, providing a legitimate reason for the premium adjustment, and valid consideration for the premiums paid.

¶ 52 In fact, at oral argument, Hardy's counsel acknowledged that had Progressive charged a combined policy premium for this coverage, instead of separate premiums for each vehicle, his claim on this issue would be essentially eliminated. Given the de minimus nature of Hardy's objection, and the valid basis for charging a separate premium, it is completely unnecessary for the Court to engage in a constitutional analysis and declare § 33-23- 203, MCA, to be invalid. I dissent from the Court's decision to do so.

¶ 53 I concur with the Court's conclusion on Issue 3, finding that issue was subsumed within the holding on Issue 1.

Chief Justice KARLA M. GRAY joins in the foregoing concurring and dissenting opinion of Justice RICE.

United States Court of Appeals,

Fifth Circuit.

ILLINOIS CENTRAL RAILROAD COMPANY, Plaintiff,

v.

Ronald L. DUPONT, et al., Defendants.

Fern Sheridan Roshto Dupuy Connor, etc., et al., Plaintiffs,

v.

Canadian National/Illinois Central Railroad, et al., Defendants,

Illinois Central Railroad Company, Defendant-Appellant,

v.

Underwriters Insurance Company, Defendant-Appellee.

April 1, 2003.

REAVLEY, Circuit Judge:

In this insurance coverage dispute, appellee Illinois Central Railroad Co. (the Railroad) argues that an insurance policy issued by appellant Underwriters Insurance Co. (Underwriters) should be deemed to include an endorsement pertinent to a regulation of the motor carrier insured. The district court disagreed, and granted summary judgment in favor of Underwriters. We affirm.

BACKGROUND

The Railroad sued Denmar Logging, Inc., (Denmar) a Louisiana logging company, after an accident in which one of Denmar's contract drivers collided with a Railroad train. The accident occurred in Louisiana, on a planned trip from a logging site in Mississippi to a paper mill in Louisiana. Ronald Dupont was driving the truck involved in the collision. At the time Dupont was hauling logs for Denmar but was driving his own truck. [FN1]

FN1. The Railroad argues that Dupont was a Denmar employee rather than an independent contractor, but we do not reach this issue.

Underwriters issued the business automobile insurance policy in issue to Denmar. Underwriters intervened in this suit, seeking a declaratory judgment that its policy did not cover the accident. It moved for summary judgment on grounds that the policy only covered one truck that was owned by Denmar and was not involved in the accident. We agree with Underwriters that the policy as written plainly did not cover the accident for this reason.

The Railroad argued below that, by virtue of the Motor Carrier Act of 1980 and a regulation promulgated thereunder, Denmar was required to have a special endorsement in its insurance policy, providing that the insurer will pay within policy limits any judgment recovered against the insured motor carrier for liability resulting from the carrier's negligence, whether or not the vehicle involved in the accident is specifically described in the policy. This endorsement is known as the MCS-90 endorsement.[ FN2] "Basically, the MCS-90 makes the insurer liable to third parties for any liability resulting from the negligent use of any motor vehicle by the insured, even if the vehicle is not covered under the insurance policy." [FN3] The Railroad argued that the endorsement should be deemed a part of the policy because of the regulation.

FN2. The MCS-90 endorsement, set out at 49 C.F.R. § 387.15 (2002), states in part:

In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of sections 29 and 30 of the Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.

FN3. T.H.E. Ins. Co. v. Larsen Intermodal Servs., Inc., 242 F.3d 667, 671 (5th Cir.2001).

A section of the Title 49 provides that neither the Secretary of Transportation nor the Surface Transportation Board (which assumed certain responsibilities of the defunct Interstate Commerce Commission) has jurisdiction over transportation by motor vehicle of "agricultural or horticultural commodities (other than manufactured products thereof)." [FN4] The district court held that the regulation requiring the MCS-90 endorsement did not apply to Denmar's logging operations because trees and logs are agricultural or horticultural commodities. It further held that if Denmar was required to have the MCS-90 endorsement, it failed to obtain the endorsement and was therefore subject to a fine, but that Underwriters could not be held liable for failing to include the endorsement, since there is no federal remedy imposing such a liability on Underwriters.

FN4. 49 U.S.C. § 13506(a)(6)(B).

DISCUSSION

We need not decide whether the MCS-90 regulation is inapplicable to the accident because of the statutory exemption for agricultural commodities. We note briefly that logs might well fall within the definition of an agricultural commodity applicable to the statutory exemption. [FN5] There are, however additional issues of statutory construction as to whether this agricultural exemption applies to the MCS-90 regulation, [FN6] and whether the MCS-90 regulation applies to a logging company like Denmar. [FN7] We simply posit, without resolving, these issues in the margin.

FN5. The exemption applies to transportation by motor vehicle of "agricultural or horticultural commodities (other than manufactured products thereof)." 49 U.S.C. § 13506(a)(6)(B). A regulation interpreting this exemption, 49 C.F.R. § 372.115 (2002), provides that "Trees: Sawed into lumber" are manufactured products which are not exempt. Were we required to decide the issue, we might well agree with the district court that trees which have simply been cut down for hauling are agricultural commodities and are not "manufactured products thereof," since we might conclude that raw timber is not the same as trees which have been "sawed into lumber" under the regulation.

FN6. The MCS-90 regulation was promulgated by the Secretary of Transportation. Under 49 U.S.C. § 13506(a), the Secretary has no jurisdiction "under this part" to regulate the transportation by motor vehicle of agricultural commodities. This exemption is found in Subtitle IV of Title 49, titled "Interstate Transportation," and Part B of this subtitle covers "Motor Carriers" and other vehicles. If the MCS-90 regulation was promulgated under the Secretary's authority to "prescribe regulations in carrying out this part" granted in a provision of Part B of Subtitle IV, 49 U.S.C. § 13301(a), and § 13506 of the same Part states that the Secretary has no jurisdiction to regulate the motor vehicle transportation of agricultural commodities, then the district court was correct in its analysis. However, the Railroad points out that a different subtitle of Title 49, Subtitle VI, titled "Motor Vehicle and Driver Programs," has its own Part B, titled "Commercial." A provision found in this part, 49 U.S.C. § 31139(b), provides that the Secretary "shall prescribe regulations to require minimum levels of financial responsibility...." The Railroad may be correct in arguing that the MCS-90 regulation was promulgated under this Subtitle, which does not contain an agricultural exemption. The MCS-90 regulation is contained in Part 387 of Title 49 of the Code of Federal Regulations, setting out regulations for "Minimum Levels of Financial Responsibility for Motor Carriers," which suggests that it is part of a regulatory package to implement Subtitle VI's financial responsibility section. The Railroad's position is supported by the Eighth Circuit's analysis in Century Indem. Co. v. Carlson, 133 F.3d 591 (8th Cir.1998), which held that "[t]he MCS-90 endorsement applies notwithstanding that an interstate motor carrier transported an agricultural commodity." Id. at 600. The court concluded that the agricultural commodity exemption was a limitation on the jurisdiction of the Interstate Commerce Commission, while the MCS-90 regulation was promulgated under the broader jurisdiction of the Department of Transportation to impose financial responsibility standards, granted in section 30 of the Motor Carrier Act of 1980 and codified at 49 U.S.C. § 31119. Carlson, 133 F.3d at 599-600.

FN7. Even if the the financial responsibility regulations which include the MCS-90 endorsement are not subject to the statutory exemption for agricultural commodities, they might not apply to Denmar. The Railroad states in its opening brief that "Denmar is a Louisiana corporation that operates solely in the logging business." The president of Denmar testified in his deposition that "I work for an independent forester; he gets the tract of timber; I go to it, start cutting, haul it to ABC, whatever, the mill. But I do not have a contract." Whether Denmar had title to the logs at the time of the accident is unclear from the record. The MCS-90 regulation might not be applicable to a logging company that was hauling its own logs to a paper mill. Section 31139--the financial responsibility statute discussed above--by its terms applies to the interstate "transportation of property for compensation." 49 U.S.C. § 31119(b) (emphasis added). It therefore appears to apply to carriers who transport the goods of another. The regulations comprising Part 387 of 49 C.F.R., regulations which arguably implement section 31119 and contain the MCS-90 endorsement, state that they apply to (1) carriers transporting certain hazardous materials and "for-hire motor carriers," (2) operating in interstate or foreign commerce, and (3) weighing over 10,000 pounds. See 49 C.F.R. § 387.3 (2002) (emphasis added). "For-hire carriage" is defined as "the business of transporting, for compensation, the goods or property of another." Id. § 387.5 (emphasis added). If Denmar is not in the business of transporting the goods of another for compensation, and is instead a private carrier who hauls its own logs, the MCS-90 regulation might not apply to its business.

Regardless, we agree with the district court that, as an alternative basis for summary judgment, the failure to include the endorsement in the policy cannot give rise to the remedy the Railroad seeks, namely a reformation of the policy deeming the endorsement to be a part of the policy.

Even if Denmar was hauling a non-exempt product, and was otherwise required to have the MCS-90 endorsement in its vehicle insurance policy, its failure to obtain such an endorsement does not make Underwriters liable. The Underwriters policy as written did not contain the endorsement. We reject the Railroad's argument that, since Denmar was required to have the endorsement, the policy should be read as automatically including the endorsement.

The regulations requiring the endorsement are directed at the motor carrier, not its insurer. They state that they prescribe "the minimum levels of financial responsibility required to be maintained by motor carriers," [FN8] and that "[p]roof of the required financial responsibility" that includes the MCS-90 endorsement "shall be maintained at the motor carrier's principal place of business." [FN9] The regulations place responsibility on the motor carriers, not their insurers, as one would expect of regulations promulgated by the Secretary of Transportation pursuant to her authority to regulate motor carriers. Further, as the district court noted, the sanction prescribed in the relevant regulation for failure to carry the required insurance is a fine against the "person ... who knowingly violates" the financial responsibility rules. [FN10]

FN8. 49 C.F.R. § 387.1 (2002).

FN9. Id. § 387.7(d).

FN10. Id. § 387.17 (2002); see also 49 U.S.C. § 31139(f).

Since the regulations requiring the MCS-90 endorsement are directed at the motor carrier, we do not read them as imposing a duty on the insurer to make sure that non-exempt motor carriers secure the required insurance. In short, the Railroad seeks the wrong remedy against the wrong party.

The Railroad argues that as a matter of public policy the endorsement should be deemed a part of the policy. Assuming that public policy concerns should inform our analysis, we first question the fairness of placing a duty on insurance companies to determine whether an insured is a motor carrier for hire, who engages in the interstate shipment of non-exempt goods, using non- exempt vehicles, and is otherwise subject to the Motor Carrier Act and its complex regulations. The motor carrier is in the best position to know the nature of its business and the legal requirements for conducting that business.

Second, holding that the MCS-90 endorsement is automatically a part of the policy whether or not a motor carrier requested or paid for such an endorsement would create a perverse incentive. Motor carriers then would have an incentive not to comply with the regulations and obtain the endorsement and pay the additional premium associated with it, knowing that the courts would deem the endorsement part of the policy whether or not it was requested by the carrier.

The Railroad cites a Sixth Circuit case [FN11] in support of its contention that as a matter of law the MCS-90 endorsement should be incorporated into the policy, even if it is not physically attached to the policy. That case involved a dispute about which of two policies covering an accident was the primary policy. The court noted that one of the insurers conceded that the MCS-90 endorsement was incorporated into its policy as a matter of law even though it was not attached to the policy, [FN12] and therefore the court was not called upon to decide the issue here.

FN11. Prestige Cas. Co. v. Mich. Mut. Ins. Co., 99 F.3d 1340 (6th Cir.1996).

FN12. Id. at 1348 n. 6.

AFFIRMED.

United States Court of Appeals,

Ninth Circuit.

KING JEWELRY, INC., Plaintiff-Appellant,

v.

FEDERAL EXPRESS CORPORATION, Defendant-Appellee.

Argued and Submitted Dec. 4, 2002.

Filed Jan. 16, 2003.

T.G. NELSON, Circuit Judge.

King Jewelry, Inc. ("King Jewelry") appeals the grant of partial summary judgment limiting Federal Express Corporation's ("Federal Express") liability for damage to a shipment of candelabra. We affirm because we find that: (1) the district court [FN1] appropriately found that the candelabra were "items of extraordinary value" as defined in the contract; (2) federal common law governs the limited liability provision; and (3) Federal Express complied with the released valuation doctrine and successfully limited its liability to $500.00 per crate. However, because Federal Express concedes that it should return the excess valuation charge King Jewelry paid, we modify the damages accordingly.

FN1. The parties consented to proceed before a magistrate judge. We use the term "district court" for convenience.

I. FACTS AND PROCEDURAL HISTORY

This case arises from damage caused to a shipment of candelabra when Federal Express transported them from Florida to California. King Jewelry contracted with a professional packager, Raymie's, in Florida to package and ship the candelabra to California. The candelabra were valued at $37,000.00.

After discussing the shipment with several other companies who refused to ship such a high value item, Raymie's contacted Federal Express. Raymie's asserts that the Federal Express agent advised him that he could pay an extra $185.00 for the declared value of $37,000.00 after Raymie's advised the agent that the items included fragile marble and bronze statuary.

On February 5, 2000, Raymie's paid Federal Express $710.73 to ship the three crates containing the candelabra, declaring a value of $37,000.00. Directly under the section that includes the declared value, the Federal Express airbill states "[w]hen declaring a value higher than $100 per shipment, you pay an additional charge. See SERVICE CONDITIONS, DECLARED VALUE AND LIMIT OF LIABILITY section for further information." The service conditions section provides that "[b]y using this airbill, you agree to the service conditions in our current Service Guide ... available on request. SEE BACK OF SENDER'S COPY OF THIS AIRBILL FOR INFORMATION AND ADDITIONAL TERMS." The airbill further states: "No one is authorized to change the terms of our Agreement," [FN2] and that, in case of a conflict between the airbill and the Service Guide, the Service Guide will control. In the declared value limits section, the airbill provides that the highest declared value allowed is $50,000.00, ex