Our firm is pleased to present our annual summary of legal decisions that we feel are of interest to our clients and friends.  All of the cases referred to, and several others of interest, are available on the firm website sfl-legal.com.

In Canal Insurance Co. v. Distribution Services, Inc., 320 F.3d 488 the Fourth Circuit adopted what it referred to as the "majority view" regarding the operation and effect of the MCS-90 endorsement with respect to the allocation of loss among insurers. This, of course, is an issue we have often discussed on these pages. Here, though, the context was rather odd since, arguably, neither policy covered the loss and, absent the respective MCS-90 endorsements, neither policy would have applied. The truck driver whose negligence allegedly caused the loss was operating within the scope of his employment for DSI, a registered motor carrier insured by Canal under a liability policy covering only specified vehicles. The rig that he was operating was owned by AIM, a truck leasing company insured by Pacific Employers. The vehicle was a covered auto under the Pacific policy and not scheduled under the Canal policy. Each policy contained an MCS-90 endorsement.

The lease agreement required DSI to obtain liability insurance which named AIM as an additional insured. DSI also agreed to hold AIM harmless from any claims and related expenses. DSI presumably provided AIM with a certificate of insurance. This, though, serves to show how inadequate these certificates are. The Canal policy did not cover hired autos; the lease agreement did not require proof of insurance for hired autos. We observe that this is a common problem in these type of arrangements. The policy that Pacific issued to AIM was structured as contingent coverage: it would attach only if the lessee had provided AIM with proof of insurance and if, for some reason, the lessee’s insurance was not collectible.

Canal settled the bodily injury claim against DSI and the driver (AIM appears not to have been a defendant), then sought to recover the payment that it made under the MCS-90 from Pacific. (It also attempted, and failed, to recover from AIM, but that portion of the case was not appealed.) Canal’s argument was that the MCS-90 that Pacific issued cancelled the language of the contingent coverage provision and converted the policy into a standard primary policy. Since the Canal policy did not cover the tractor and the Pacific policy admittedly did, Canal argued that it was entitled to full indemnification from Pacific. In rejecting that argument, the court, pointing to the majority view, held that the MCS-90 does not apply to determine the allocation of loss among insurers. The court’s language was rather broad: "By virtue of Canal’s settlement payment to [claimant] pursuant to the MCS-90 endorsement in the Canal Policy, the public protection purpose of the MCS-90 endorsement has been served. Therefore, the MCS-90 endorsement in the Pacific Policy does not come into play."

This may have simply been the court’s way of saying that if an insurer pays a claim under an MCS-90, it has no right to recover from another insurer which also issued an MCS-90. This approach, which other courts have also adopted, is certainly defensible, though it may encourage an Alphonse - Gaston approach - "You first, my dear. No, you first, I insist" - when two insurer are exposed solely on the basis of the MCS-90. The approach may discourage settlement, since the insurer which pays will be unable to recover from the insurer which declines to pay.

One might assay a different reading of the Court’s language. Over the years, many of our clients have asked whether they retain an obligation to pay under the MCS-90 where another insurer has already paid $750,000 or $1 million under its own policy. After all, the U.S. Department of Transportaton’s goal of ensuring public protection has been met. Thus, if plaintiff secures a verdict of $2 million and some other insurer has paid its $1 million dollar limits, is an insurer which has no policy coverage but does have a filing obligated to pay under the filing? The short answer has been "yes". One could argue that the Fourth Circuit’s pronouncement cited above suggests a different answer. We point out, though, that the court stressed that it was addressing a dispute between insurers. It is far from clear to us that a court would have limited a plaintiff who had won a multi-million dollar verdict to $1 million on this basis.

Another issue that clients often ask about is whether the insurer has a duty to ensure that its motor carrier insureds secure all required filings. In these cases plaintiff wins - or seems likely to win - a large verdict against the defendant/insured, then learns that the only available liability policy does not cover the accident vehicle or, if it does, contains limits well below the financial security limits for motor carriers. In Illinois Central Railroad Co. v. Dupont, 326 F.3d 665, the Fifth Circuit reviewed a policy issued by Underwriters Insurance to Denmar Logging, a Louisiana logging company which hauled logs in interstate commerce. The vehicle hauling the logs was not scheduled on the Underwriters’ policy. Plaintiff argued that the policy should have contained an MCS-90. The trial court had accepted Underwriters’ argument that logging companies are exempt from DOT regulation. The Fifth Circuit noted, without deciding, that the MCS-90 might well be required even for truckers that haul exempt products such as logs in interstate commerce. However, the regulations promulgated by the DOT are directed at the motor carriers not their insurers. It is the motor carrier which is best situated to know the nature of its business. Accordingly, the court declined to read an MCS-90 endorsement into the policy as a matter of law.

Courts continue to struggle with the related question of whether an MCS-90 which is attached to a motor carrier’s policy applies when a particular transportation is intrastate or involves a vehicle that weighs under 10,000 pounds. In QBE Ins. Co. v. P&F Container Services, Inc., 828A.2d. 935 (N.J. App.), the truck driver was en route to Port Elizabeth, New Jersey to pick up a load destined for delivery elsewhere in New Jersey. The vehicle was under lease to a registered interstate motor carrier although no placards or other identifying markings were attached to the tractor. QBE insured the motor carrier and made a filing; however, the policy did not cover hired autos and the vehicle in question was not scheduled on the QBE policy. The owner/operator had purchased non-trucking coverage from Connecticut Indemnity.

The court suggested three possible interpretations of the MCS-90 in the context of an intrastate haul: 1) The MCS-90 applies to any trip by any vehicle operated by an interstate carrier, including trips wholly within a particular state; 2) The MCS-90 applies only to trips that "involve" interstate commerce either because the vehicle involved was available for interstate commerce (even though the trip under discussion was intrastate) or because the trip originated outside the state or was destined for out of state delivery; 3) The MCS-90 endorsement applies only when the trip originated or was intended to terminate outside the state. Reviewing a line of cases that we discussed last year, the court selected interpretation number two. Since the record was deficient in various respects, the court remanded the matter to the trial court. However, the court clearly rejected the view that each trip must be examined separately in order to determine whether it was interstate or instrastate. Rather, an insurer which issues an MCS-90 must pay a judgment entered against the insured unless it can establish that the vehicle involved in the accident was leased for use, and in fact solely used, in intrastate commerce.

In Travelers Indem. Co. v. Western Amer. Spec. Transportation Serv., Inc., 235 F. Supp.2d 522, the court also looked to the lease agreement between the owner and the motor carrier which, in this case, clearly anticipated that the leased vehicle would be used in interstate commerce to haul hazardous commodities. On that basis, the court concluded that it was not necessary to consider whether the particular transportation at issue was intrastate in nature or whether the vehicle at issue weighed less than 10,000 pounds. The court may have reached a different conclusion if no hazardous commodities had ever been carried on this vehicle. These decisions suggest that the MCS-90 will be applicable unless the lease agreement for a particular vehicle or group of vehicles limits the scope of operations to purely intrastate commerce.

In Serna v. Pettey Leach Trucking, Inc., 110 Cal. App. 4th 1475, the court reviewed the jurisdiction of the Surface Transportation Board in the context of a lawsuit filed by the estate of an accident victim against PLT, an interstate motor carrier engaged in hauling exempt commodities in interstate commerce. PLT arranged for a second carrier to actually haul the load but PLT’s name appeared on the bill of lading. On that basis, the court rejected PLT’s argument that it had acted as a broker. PLT’s other argument, based on a line of California cases relating to sub-haulers, was that it was not responsible for the negligence of an independent contractor; it argued that since exempt agricultural products were being shipped, the DOT’s regulations did not apply. The court disagreed. Even exempt motor carriers are subject to the safety and financial responsibility requirements. Accordingly, the carrier had a non-delegable duty and PLT was responsible for any negligence committed by the independent contractor.

The world’s most infamous UM decision has been overruled. In Westfield Ins. Co. v. Galatis, 797 N.E.2d 1256, the Ohio Supreme Court, in another bitterly fought 4-3 decision, concluded that its 1999 decision in Scott-Pontzer was wrongly decided. Scott-Pontzer claims have become a cottage industry and the decision immediately sent shock waves through the Ohio court system. As one of the dissenters pointed out, many insurers had already substituted a new UM form which circumvented the problem. We note that the Galatis decision treats the major symptom : it prevents off-duty employees or family members from recovering under the UM coverage in an employer’s policy. It does not correct what we view as the primary error of Scott-Pontzer : namely, the failure to distinguish between Class I and Class II insured. Galatis is defensible as a common sense response, but may itself be subject to future political developments.

There were other UM decisions of note including : State Farm Mut. Auto. Ins. Co. v. Kastner, 77 P.3d 1256, an en banc decision by the Colorado Supreme Court which held that a sexual assault did not constitute use of a vehicle, and Hardy v. Progressive Spec. Ins. Co., 315 Mont. 107, which concluded that the state’s anti-stacking law was unconstitutional.

What limits are available for payment when a policy in cancelled but the state filing is not cancelled until after the accident? Unlike the MCS-90, the Form F endorsement, and the Form E filing do not provide a place for the insurer to enter a dollar amount. In Progressive Preferred Ins. Co. v. Ramirez, 588 S.E.2d 751, the Georgia Supreme Court was asked to decide whether the injured plaintiff who had won a large judgment against the insured motor carrier was entitled to the full policy limits of $500,000 or the Georgia P.S.C. limits of $100,000/300,000. Although the vehicle was scheduled on the policy, the insured had failed to pay its premiums and the policy was cancelled. However, as of the date of the accident the P.S.C. filing had not been cancelled. Progressive paid $100,000 but argued that it had no further obligation under the filing.

In its 1998 Ross decision the court had held that when a loss involved a non-scheduled vehicle and the insurer was liable solely based on the filing, that liability was limited to $100,000/300,000 rather than the policy limits. Here, though, citing to the regulatory language, the court held that the policy remained in effect (at least as respects the amount of coverage) so long as the filing is not cancelled. Accordingly, the insurer was obligated to pay the full policy limits. Our firm represented Progressive in this action.

Many sensitive issues arise when a plaintiff makes a settlement demand within the liability limits of a policy. Among this year’s crop of decisions on this question, two caught our eye.

In Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, plaintiff issued a time demand letter to Cotton States, the insurer of the vehicle owner, offering to accept the $300,000 policy limit but only if a second insurer, which had issued a policy to the co-defendant driver also agreed to pay its $100,000 limit. Cotton States, not unreasonably in our view, did not view this as a demand within policy limits and the time lapsed. Nonetheless, Cotton States did offer its limits on the eve of trial. The offer was rejected and plaintiff was awarded $1.8 million. The two insurers ultimately paid their limits; the vehicle owner assigned its rights against Cotton States for bad faith or negligent refusal to settle and plaintiff filed suit against Cotton States for the excess judgment.

In the bad faith action, the jury concluded that a reasonable insurer would have accepted the timed offer to settle and, accordingly, held Cotton States liable for the excess judgment. The appellate court upheld the verdict. In reviewing the appellate decision, the Georgia Supreme Court held that an insurer has no obligation to respond to an offer in excess of policy limits, nor is the insurer obligated to respond to every settlement demand that involves a condition beyond the insurer’s context. However, under the circumstances of this case, the jury’s award was not reversible error. When a plaintiff presents a settlement demand to more than one insurer, a particular insurer can create a safe harbor from bad faith claims by meeting the portion of the demand over which it has control. Here the insurer could have offered its limits within the time specified by plaintiff: having done so it would have protected itself from any bad faith action even if the case did not settle. By failing to enter the "safe harbor" the insurer was left exposed to the jury’s verdict.

In Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So.2d 555, the court examined a question that frequently arises in settlements: may an insurer exhaust its policy limits settling some but not all of the claims filed against the insured. Five teenagers were killed and seven others injured when two cars collided. The negligent driver was insured under a Farm Bureau policy with limits $100,000/300,000. It was immediately obvious that those limits were woefully inadequate to satisfy the various claims. Farm Bureau settled three of the claims and then sought a declaration that it had no further obligation to defend the driver. The various claimants intervened and argued that Farm Bureau had acted in bad faith without proper regard for the interests of the insured. Florida law permits claimants to bring bad faith actions as third party beneficiaries.

Here the problem is not the insurer’s reluctance to settle but what is, from the insured’s point of view, an over eagerness on the part of the insurer to pay its limits and close its file. Citing controlling precedent, the court acknowledge that an "insurer’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." When facing multiple claims the insurer must: 1) fully investigate all claims to determine how best to limit the insured’s liability; 2) settle as many claims as possible within the policy limits; 3) avoid indiscriminately settling cases and leaving the insured at risk of excess judgments that could have been minimized by user settlement practice. The determination as to whether the insured acted in good faith is to be left to the jury.

There were several interesting decisions in 2003 involving the limitation of liability of motor carriers for loss and damage to cargo. The most notable is the decision of the Eleventh Circuit Court of Appeals in Sassy Doll Creations v. Watkins Motor Lines, 331 F.3d 834. The shipper in that case declared a value on the face of the bill of lading. It did not, however, indicate in writing on the face of the bill of lading that it wanted coverage in a specific amount in excess of the $25 per pound per package limitation of liability set forth in the carrier’s tariff. The carrier argued that its tariff required both a declaration of value and a request for excess coverage in order to avoid the tariff limitation of liability. The Court of Appeals held that the motor carrier could not require an excess coverage request because the bill of lading form which it provided did not have any specific location for an excess coverage request, and the tariff did not specify where on the bill of lading such a request should be made.

Noting that the TIRRA and the ICCTA changed the application of the so-called four-pronged test for a motor carrier to limit liability [(1)maintain a tariff, (2) obtain the shipper’s agreement as to choice of liability, (3) give the shipper a reasonable opportunity to choose between two or more levels of liability and (4) issue a receipt or bill of lading prior to moving the shipment], the court held that the third element survived. The court held that the carrier did not meet the third requirement, stating: "Forcing the shipper to express a choice where there is no proper place to do so is not providing a reasonable opportunity to choose."

The Sassy Doll decision was followed in Penske Logistics v. KLLM, 285 F. Supp 2d 468. In that case, the shipper prepared a bill of lading which contained a limitation of $1.50 on its face. The court stated that Sassy Doll reduced the four prongs to three. It held that under TIRRA and ICCTA, a carrier could limit liability under the Carmack Amendment, 49 U.S.C. §14706(c)(1)(A), which it describes as the "released rate exclusion," if there was a valid written contract which established a reasonable limited value, a tariff which was available to the shipper on request, and a choice of rates. It held that the bill of lading constituted a written agreement to accept a reasonable limitation. It also held that the motor carrier did not have to offer a choice of rates where the shipper "drafted" the bill of lading which set forth the limitation. The Sassy Doll opinion explains that "drafted" means more than just filling out a form, apparently requiring that the form itself be prepared by the shipper.

Although the courts continue to require it, we would suggest that the obligation to offer a choice of rates is dubious. To begin with, a full value rate does not have to be one of the choices offered. In Kesel v. U.P.S., 339 F3d 849, United Parcel Service refused to permit a shipper to declare full value of $60,000, offering to increase its usual $100 limit to $588. The Ninth Circuit Court of Appeals held that UPS satisfied the choice of rates requirement under federal common law (the Carmack Amendment did not apply to transportation partly by air) because $588 was more than $100. In King Jewelry v. FedEx Corp., 316 F3d 961, the same court held that FedEx’s limitation of $500 for goods of extraordinary value satisfied the federal common law requirement of a choice because it was more than their usual $100 limit. It makes little sense to require a choice if the choice still results in a substantial limitation of liability. Further evidence that the choice requirement is not looked upon favorably, at least in the Ninth Circuit, is the decision in Albingia Versicherungs v. Schenker Int’l, 344 F3d 931, which holds that the purchase of separate insurance by the shipper is evidence that the shipper knew about the carrier’s limitation and chose to not declare a higher value. Furthermore, we would observe that the requirement to offer a choice of rates is not required by the statutes. In fact, the prior statute, 49 U.S.C. §10730(b)(2), permitted the ICC to require carriers to offer full value rates. This was omitted under the ICCTA.

The question of whether a shipper must have actual notice of a limitation is still unsettled. A number of decisions in 2003 held that under federal common law, which would apply to interstate transportation which is not covered by or is exempt from the Carmack Amendment, a carrier may limit its liability if it gives reasonable notice and a fair opportunity to purchase a higher value. In Universal Und. Ins. Co. v Allstates Air Cargo, 2003 Vt. 8, the Supreme Court of Vermont held that the shipper did not have actual notice of a limitation set forth on the back of the bill of lading because the front did not make any reference to terms on the back and because the signatures on the bottom of the front ordinarily signify that all of the agreement is above the signatures. On the other hand, in Kesel, the owner if the cargo claimed that he did not have notice of the limitation because the person who presented the cargo to UPS did not read English, and that the back of the waybill, where the limitation was described, was smudged. He also said that he mistakenly understood that the additional coverage which UPS offered was in addition to its liability for full value. The Ninth Circuit Court of Appeals, apparently choosing not to believe the claimant, held that he "knew how to find out the extent of UPS’s liability." The court also quoted a decision in which it had held that "Federal common law has never required actual notice of a carrier’s liability limitation." The court apparently felt that it was sufficient that UPS gave notice of its limitation and that the shipper could not avoid it by saying he did not understand it.

Whether a shipper must have actual notice of a limitation under the so-called "released rate exemption" to the Carmack Amendment is also unsettled. In Fireman’s Fund McGee v. Landstar Ranger, 250 F.Supp 2d 684, the court held that where the bill of lading incorporates the terms of the carrier’s tariff, the shipper is bound by those terms. In that case, the nine-month claims deadline was at issue, but the same principle should apply to other tariff provisions. Furthermore, the court in Sassy Doll suggested that the result might be different if the carrier’s tariff indicated where on the bill of lading a valuation request could be made. This implies that the shipper would be responsible to know that the tariff required a valuation request in a specific place on the bill of lading. The court did not say that the shipper had to have actual knowledge of the tariff provision. Also, a federal court in New York in Martino v. Transgroup Express, 269 F.Supp 2d 448, held that a carrier which noted a limitation of liability on its bill of lading did not have any obligation to point it out to the shipper.

We would report on one last matter. Under federal common law, a limitation would not be voided by the motor carrier’s gross negligence or by theft by the motor carrier’s employees. This may not be the case if state law applies. In the Albiginia  case noted above, the cargo was presumed to have been stolen by the carrier’s employees. The court applied the carrier’s limitation under federal common law, noting that the limitation would not be enforceable under California law.

OTHER CARGO CASES OF INTEREST

In Parramore v. Tru-Pak Moving Sys, 286 F.Supp. F.2d 643, the court held that an agent of national household goods carrier is not liable to the shipper for loss and damage in the course of transportation performed under the national van lines’ bill of lading.

In Mercer Tranp. Co. v. Greentree Tranp. Co, 341 F.3d 1192, the Tenth Circuit Court of Appeals held that the placard rule which would hold a carrier liable for bodily injury and property damage does not apply to liability for cargo loss and damage.

A federal court in New York held in M. Fortunoff of Westbury Co. v. Peerless Ins. Co., 260 F.Supp.2d 524, that the BMC-32 endorsement applies to loss and damage to goods performed by a motor carrier under a contract with a shipper. This decision is under appeal.

Central Analysis Bureau's "Resumé - 2003 Motor Carrier Industry"

Copyright 2003, Schindel, Farman, Lipsius, Gardiner & Rabinovich LLP