2006 Recent Developments In Transportation and Insurance Law  

(formatted copy for printing)

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.

BMC-32

As we reported in Bits and Pieces, the Second Circuit Court of Appeals has ruled that the BMC-32 Endorsement does not apply to contract carriage for shipments taking place after January 1, 1996, the effective date of the ICC Termination Act. In M. Fortunoff of Westbury Corp. v. Peerless Insurance Company, 2005 WL 3387698 (December 13, 2005), in which Schindel, Farman, Lipsius, Gardiner & Rabinovich represented the insurer, the Court approved the practice of the FMCSA to apply the BMC-32 Endorsement to common carriage only. The Court held that the Termination Act “gave the FMCSA discretion to require cargo liability insurance for some types of motor carriage and not others.”

The Court also said that the authority of the FMCSA to issue both common carrier certificates and contract carrier permits under the “transition rule” of 49 U.S.C. §13902(d) expired in 1998 when the rulemaking to revise the registration system under 49 U.S.C. §13908 was due. The FMCSA, apparently in the belief that the transition rule was in effect until it actually issued a rulemaking, has continued to issue separate common and contract authorities. The effect of the court’s ruling is that all authorities issued by the FMCSA after the end of 1997 would be deemed simply general carrier authorities. A carrier with this general carrier authority may perform both common and contract carriage. If there is a BMC-32 Endorsement on the cargo liability policy of the carrier, it will apply only to common carriage services provided by the carrier. It is not entirely clear how it will be determined if carriage is common or contract. It would appear, however, that this issue may provoke continued litigation. In this case, the Court remanded the case to the District Court, presumably for a finding as to whether the shipper and the carrier actually agreed that the shipments would be contract transactions. This should not be an issue insofar as the contract between the shipper and the carrier specifically states that all services are to be provided under the contract carrier permit.

Meanwhile, the FMCSA has not issued new regulations which could resolve these issues. The ICC Termination Act, in 49 U.S.C. §13908, gave the DOT two years from January 1996 to issue new registration rules. Knowing that this was not done, Congress amended §13908, effective August 10, 2005, giving the DOT a year from that date to establish a new registration system.

PRE-EMPTION

Many court decisions in 2005 dealt with the issue of pre-emption of state law claims by the Carmack Amendment. Because the Carmack Amendment limits recovery for cargo loss and damage in regulated interstate transportation to the actual value of the cargo, claimants have an incentive to allege claims which may result in punitive or other extra-contractual damages. For example, in Miracle of Life, LLC v. North American Van Lines, Inc., 2005 WL 1005988 (D.S.C.), the plaintiff alleged eight separate causes of action, including fraud, civil conspiracy, negligence, promissory estoppel and violation of the South Carolina Unfair Trade Practices Act. The court held that all of these claims were prohibited by the Carmack Amendment. In Vitramax Group, Inc., v. Roadway Express, Inc., 2005 WL 1036180 (W.D. Ky.), the court held that a claim for fraud which occurred prior to the actual transportation was pre-empted. Similarly, in The Mapes Piano String Co. v. USF Dugan, Inc., 2005 WL 1924184 (E.D. Tenn.), the court held that state law claims arising out of misrepresentations which took place prior to the receipt of the cargo are pre-empted. State law claims for loss of business damages were held to be pre-empted in AIG Aviation, Inc., v. On Time Express, Inc., 2005 WL 2416382 (D.Ariz.).

On the other hand, in Schwarz v. National Van Lines, Inc., 2005 WL 1498463 (N.D. Ill.), state common law claims for intentional and negligent infliction of emotional distress were held not pre-empted. In Ducham v. Reebie Allied Moving and Storage, Inc., 2005 WL 1383183 (N.D. Ill.) the same court held that a claim for fraud related to freight charges was not pre-empted. In Hewlett-Packard Co. v. Brother’s Trucking Enterprises, Inc., 2005 WL 1524920 (S.D.Fla.), the court denied the defendant’s motion to dismiss state law claims on the grounds that there was a question of fact as to whether the defendant was acting as a carrier or as a broker. The Carmack Amendment does not pre-empt claims against brokers. Similarly, in Nebraska Turkey Growers Cooperative Association v. ATS Logistics Services, Inc., 2005 WL 2600235 (D.Neb.), the court permitted remand to a state court because claims against a broker are not pre-empted by the Carmack Amendment.

BROKER-CARRIER

The proclivity of transportation providers to act as both brokers and carriers continues to provoke litigation. In addition to the Hewlett-Packard and Nebraska Turkey cases referred to above, we direct your attention to the decision in Just Take Action, Inc. v. GST (Americas), Inc., 2005 WL 1080597 (D.Minn.), in which a defendant sought to avoid Carmack liability by claiming that it acted as a broker. The opinion sets forth the considerations a court will make to determine broker and carrier activity. Another useful case discussing the carrier-broker issue is Mach Mold Inc. v. Clover Associates, Inc., 2005 WL 2007249 (N.D.Ill.).

 OTHER CARGO CASES OF INTEREST

There were a number of interesting cases this year dealing with damages. Although the Carmack Amendment provides that the cargo owner’s sole remedy is for “actual loss or injury to the property,” the courts have consistently held that consequential or special damages are included. In The National Hispanic Circus, Inc., v. Rex Trucking, Inc., 2005 WL 1484773 (5th Cir.), the circus was awarded damages for its missing bleachers, including rental cost, lost ticket sales and the cost to replace the custom-made bleachers. The circus was able to show that the carrier, because of its experience in moving the circus’ equipment could have had notice of the special damages which would result from non-delivery. Likewise, in the Mach Mold case referred to above, the court held that “lost profits and all reasonably foreseeable consequential damages” are recoverable under the Carmack Amendment.

Two cases dealt with the issue of the proper measure of damages where the owner obtained the cargo in a bargain purchase. In Delta Research Corporation v. EMS, Inc., 2005 WL 2090890, (E.D.Mich.) the claimant demanded the cost to buy a new machine to replace the damaged one it bought cheaply. The court awarded the claimant its purchase price because that best reflected the actual market value. On the other hand, in CPCI v. Technical Transportation, Inc., 2005 WL 1354662 (W.D.Wash.), the claimant purchased used television sets for $400 each and sold them for $2,800 each. The court held that the re-sale price was the proper measure of damages.

In Crown Express, LLC., v. Ozark Trucking, Inc., 2005 WL 1657064 (E.D.Ca.), the court refused to dismiss a suit against a motor carrier on the grounds that no written claim was made within nine months of the date of delivery. The carrier presented evidence that it was its practice to issue the uniform straight bill of lading, but it did not show that a bill of lading was issued for the shipment in question. The court held that the nine-month claim period would not apply unless there was a bill of lading which specifically provided for the claim time. As for what constitutes a claim, the 11th Circuit Court of Appeals held that a written claim which specified a range of damages satisfied the requirement of 49 C.F.R. §370.3(b) for a claim for a “specified or determinable amount of money.”

NO RECOVERY FOR DRIVER UNDER MCS-90

Canal Ins. v. A&R Transportation and Warehouse, LLC, 827 N.E.2d 942 (Ill. App.) arose out of a one vehicle accident. The driver Boyd lost control of the rig, allegedly due to brake failure, and suffered bodily injury. He sued the tractor owner A&R, and others. Canal defended its insured A&R under reservation and separately sought a declaration that it provided no coverage since neither the tractor nor trailer was scheduled on the policy. Boyd argued that even if the basic policy did not apply he was entitled to recover under the MCS-90 attached to the A&R policy. Canal argued, and the court agreed, that the MCS-90 explicitly excludes from coverage the insured’s employees while engaged in the course of their employment. Boyd responded that he was an independent contractor, not an employee. The court concluded, though, that the regulatory language defined employee, for purposes of the MCS-90 to include independent contractors.

CERTIFICATE OF INSURANCE

Periodically lay people, and sometimes even insurance professionals, misunderstand what certificates of insurance are for. The decision in T.I.G. Insurance Company v. Via Net, ___ S.W.3d ____ (Tx. App.), might not do much for clarifying the matter. Via Net, insured by Lumbermens Mutual, was a vendor for Safety Lights, a manufacturer insured by T.I.G. A Via Net employee was injured while making a delivery to the Safety Lights location and sued Safety Lights. Vendors were required to have Safety Lights named as an additional insured on their policies.

Via Net’s broker had provided Safety Lights a certificate of insurance which identified the latter as a certificate holder for the Lumbermens coverage. The certificate had the standard, printed language to the effect that it was issued for information purposes only and conferred no rights upon the certificate holder. The broker, though, typed in language directly conflicting with the printed language to the effect that the certificate holder was added as an additional insured. Lumbermens, nonetheless, took the position, correct in our view, that Safety Lights was not an insured under the policy issued to Via Net. T.I.G. and Safety Lights then settled the claim of the deliveryman.

Safety Lights sought a declaration in federal court that it was an insured under the Lumbermens policy, but the court agreed with Lumbermens that it was not. Then Safety Lights and T.I.G. sued Via Net in state court for breach of contract, fraud and misrepresentation in failing to add Safety Lights as an additional insured. Via Net responded that Safety Lights should have discovered the breach as soon as it received the certificate with the printed language denying that it was an insured. The trial court agreed and granted summary judgment for Via Net on the basis that the claims were time barred.

Safety Lights appealed, arguing that it could not reasonably have discovered that it was not an insured until Lumbermens actually denied coverage. The appellate court agreed that, in light of the typed language in the certificate, Safety Lights could reasonably have believed that it was an insured. The court pointed out that even some of the printed language in the certificate could lead the certificate holder to believe that it was entitled to coverage. The matter was remanded.

The decision is troubling on several grounds. It is not clear, for instance, whether the appellate court disagreed with the federal court and would, in fact, have found that Safety Lights was an insured had that question still been at issue. It is certainly possible that the decision will be read that way in the future, or that some will argue that that is how it should be read. All of this confusion arises simply because an industry professional used a certificate of insurance when it should have asked the insurer to simply issue an additional insured endorsement.

STATUS OF OWNER-OPERATORS

The historical tension between owner-operators, as a class, and motor carriers, that generally lies just beneath the surface of a close working relationship periodically bubbles up as it did in Rivas v. Rail Delivery Service, Inc, 423 F.3d 1079 (9th Cir.). The matter involves a class action bought by California owner-operators who entered into written leases with motor carriers between 1991 and 1995, that is before the Interstate Commerce Commission was sunsetted. The owner-operators sought relief under the leasing regulations enacted in 1979 by the I.C.C. (which continue to exist in virtually the same form under D.O.T. jurisdiction.) The district court threw out several of the claims: for instance, it held that federal law did not require owner-operators to be considered employees: they could be independent contractors. The district court also found no evidence that the motor carriers had sold the owner-operators insurance without a California license to do so. The court, though, did issue an injunction directing the motor carriers to comply with the leasing regulation (now found at 49 C.F.R. §376.12 (c) (1)) which requires the lease to specifically provide that the motor carrier assumes complete responsibility for the operation of hauling equipment for the duration of the lease.

On appeal the Ninth Circuit concluded that the owner-operators lacked standing to bring suit. A plaintiff must have suffered injury in fact to have standing to sue. The initial complaint had alleged that owner-operators had suffered financial harm by the carriers’ mischaracterization of them as independent contractors and extraction of hidden charges through the selling of insurance and other provisions of the contract. Those claims, however, had been thrown out by the trial court and were not appealed. The owner-operators lacked standing to complain about the alleged failure of the motor carriers to assume responsibility for the leased equipment.

UM AND THE STATE GUARANTY FUND

In Johnson v. Braddy 869 A.2d 964 (N.J. App.) (currently on appeal to the New Jersey Supreme Court) the court clarified the responsibilities of various entities when a state guaranty fund becomes involved in a claim and the value of plaintiff’s claims exceeds the fund’s limit of exposure. Braddy, who was operating his rig in the business of Walsh Trucking, struck Johnson as he was exiting his vehicle. Walsh was insured by a $1 million primary policy issued by Reliance Insurance Company and a $25 million excess policy issued by A.I.G. Johnson filed suit against Walsh and Braddy. When Reliance was declared insolvent, however, the trial judge entered a consent order dismissing the complaint subject to restoration after disposition of plaintiff’s UM claim against his own insurer. That insurer ultimately paid Johnson the full UM limit of $300,000. By coincidence $300,000 is also the maximum recoverable under the New Jersey Guaranty Association’s rules. On that basis, Walsh and Braddy sought summary judgment arguing that they could not be subject to liability in excess of the Association’s limits.

This argument was rejected by the trial court and the appellate court. The appellate court noted that a basic thrust of the law is to permit an injured party to recover the full amount of his or her damages from the tortfeasor. Thus, if the damages exceed the tortfeasor’s insurance limits, the tortfeasor remains personally liable for the difference. The same should therefore be true of an award in excess of the Association’s limits. In so holding the court disagreed with its own reading of the guaranty association statute in an earlier case. Braddy and Walsh, thus, remained liable for any judgment over $300,000. The umbrella policy would not drop down. Accordingly, the defendants bore direct exposure for the portion of any judgment between $300,000 and $1 million.

FREIGHT FORWARDERS AND NVOCCs

 In Scholastic Inc. v. M/V Kitano, 362 F.Supp.2d 449 (S.D.N.Y.) a consignment of books burned on board the M/V Kitano at sea as a result of the combustion of another container on board packed with impregnated activated carbon. The carbon had been prepared and packed by General Carbon Corporation and had not been marked “hazardous.” In heavy seas moisture seeped in to one of the containers containing the carbon and a fire broke out. General carbon settled the claims by Scholastic and others and then sought reimbursement from the international freight forwarder Navtrans International.

The court distinguished between freight forwarders, described as intermediaries who secure cargo space on the ocean vessel, give advice on government licensing requirements and letters of credit and arrange for ground transport to meet the vessel, and NVOCCs (non-vessel operating common carriers) which assume the responsibility of delivering the goods and issue a bill of lading. (This is similar to the distinction between forwarders and brokers in domestic transportation, although there it is the forwarder which issues a bill of lading and assumes responsibility for delivering the goods.)

General Cargo argued that Navtrans was both an NVOCC and a forwarder. The court concluded that under either theory Navtrans was not liable. Navtrans had issued a bill of lading which provided, inter alia, that if the shipper failed to disclose that its goods were flammable or unstable it would be responsible to indemnify the carrier (Navtrans) for any resulting loss.

Nor was Navtrans liable as a forwarder. International forwarders are obligated to act reasonably in selecting the carriers who perform the transportation. There was no evidence of negligence in selecting carriers. The court rejected General Carbon’s argument that a forwarder has additional duties which Navtrans performed negligently. It was not the job of the forwarder to select a low-moisture container, or to ask the shipper to put in writing that the cargo was not hazardous.

MCS-90

In a statement published in the Federal Register and dated October 5, 2005, the DOT issued formal agency guidance for the interpretation of the MCS-90 endorsement. In so doing, the DOT declined a petition filed by several insurers for a rulemaking modifying the language of the endorsement. The guidance is set out in question and answer form:

Q.- Does the term “insured” as used on Form MCS-90, Endorsement for Motor Carrier Policies of Insurance for Public Liability, or “Principal”, as used on Form MCS-82, Motor Carrier Liability Surety Bond, mean the motor carrier named in the endorsement or surety bond? Guidance: Yes. Under 49 C.F.R. §387.5, “insured and principal” is defined as “the motor carrier named in the policy of insurance, surety bond, endorsement, or notice of cancellation, and also the fiduciary of such motor carrier.” Form MCS-90 and Form MCS-82 are not intended, and do not purport, to require a motor carrier’s insurer or surety to satisfy a judgment against any party other than the carrier named in the endorsement or surety bond or its fiduciary.

By implication, the DOT is disagreeing with such decisions as John Deere Ins. Co. v. Nueva, 229 F.3d 853 (9th Cir. 2000) and Pierre v. Providence Wash. Ins. Co., 286 A.D. 2d 139 (2001) which are referred to in a footnote.

We hope that this will encourage courts to change course on this issue. A change in the language of the MCS-90, of course, would have been harder to ignore. For what it is worth, we are disappointed that the D.O.T attorneys appear to have missed the fact that the Pierre case went up to the New York Court of Appeals. Had the D.O.T. read the Court of Appeals decision, it may have been more specific about which “fiduciaries” are included within the definition of “insured” in section 387.5. We have a feeling that this “guidance” may not be dispositive.

There were a large number of reported cases relating to the MCS-90 this year, several of which our firm was involved in. Among the most important were:

In Ross v. Wall Street Systems, 400 F.3d 478 (6th Cir.), the motor carrier had unilaterally terminated the lease on one day’s notice just days after it had been expected because the driver had failed to pick up the very first load that had been assigned to him. The lease permitted the carrier to terminate the lease and the court held that the termination did not violate the federal motor carrier laws. The company’s placards were still attached to the vehicle a month later when it collided with plaintiff’s vehicle and caused injury. Based on the unanimous case law the court had no trouble concluding that the lease was cancelled. Similarly, the court rejected the possibility that the motor carrier could be liable on a negligent entrustment theory.

Plaintiff’s final theory focused not on the motor carrier’s exposure but on the MCS-90. He noted that the endorsement has a 35 day grace period (that, of course, is not quite accurate) and argued that the MCS-90 endorsement remained in effect for 35 days after the lease was terminated. The court pointed out that the argument was simply incorrect. The rule is that the MCS-90 remains in effect for 35 days after the notice of cancellation is sent to the insured: cancellation, that is, of the policy. The rule does not relate to the cancellation of any particular lease. Once the lease was no longer effective its motor carrier had no responsibility for the driver and neither the policy nor the MCS-90 applied to the loss.

It seems likely that underlying plaintiff’s theory is the assumption, wrongly adopted in recent years by some important courts, that the MCS-90 relates to the liability of individual drivers. In a statement issued this year, the D.O.T repeated that unless judgment is entered against the motor carrier for which the filing was made, the MCS-90 does not apply. We will see if the judiciary is willing to accept the D.O.T’s definitive explanation and reverse the decisions in Nueva (9th Circuit) and Pierre (N.Y. Court of Appeals).
Two decisions, one by a District Court in Michigan, one by a District Court in Maryland, reached conflicting conclusions about the applicability of an MCS-90 allegedly attached to an umbrella policy in a somewhat bizarre factual scenario. Both cases involve Builders Transport which had been certified by the I.C.C (and later the D.O.T.) as a self-insurer; in other words, there was no need for the company to secure a filing and, in fact, none of the insurers made a filing with the D.O.T.

Builders provided self-insurance for the first million dollars. Reliance Insurance provided the next million of coverage, but that policy was itself subject to a separate million dollar aggregate deductible. Above that lay a $13 million umbrella policy issued by Gulf Insurance. For no apparent reason, the underwriters at both insurance companies prepared MCS-90 endorsements (both of them were marked identically:$1 million excess over $1 million), although it remains in dispute whether the endorsement was actually attached to the policy. In short, the factual background is problematic and the underwriters were not at the top of their game, at lease with respect to the MCS-90.

In the Michigan case, Kline v. Gulf Insurance Co., 2002 U.S. Dist. LEXIS 12628 (W.D. Mich. July 10, 2002), a judgment of $3.2 million was entered. Reliance, which defended the claim took the position that its coverage attached at $2 million and paid its $1 million limit. Gulf then paid the remaining $200,000. Kline argued that, in fact, Reliance should be deemed to have paid the first million of the judgment, and that Gulf should pay the next $1 million under its MCS-90. The court held that Gulf’’s attachment point under both the policy and the MCS-90 was $3 million and the MCS-90 did not drop down.

In the Maryland case, McGirt v Royal Insurance Co. of America, Case No. RWT 02cv3455 (Md. Nov. 8, 2005), the insurance case was tried before the underlying case, so there is, as yet, no judgment against Builders. Since Reliance is no longer solvent, McGirt will not be able to collect anything from Reliance. That fact, held the court, distinguished McGirt from Kline. The court held, therefore, that Gulf will be required to pay the first $1 million of any judgment because the MCS-90 drops down to protect McGirt. Then, held the court, there will be a gap and further recovery will not have been possible (since Reliance and Builders are defunct) until the attachment point of the Gulf policy is reached. Gulf would be responsible for the next $13 million (i.e., its full policy limits). This construction is difficult to accept, even apart from the issue of whether excess MCS-90 drops down, since Gulf will end up having a $14 million exposure (at least theoretically since it is unlikely plaintiff will win a $16 million judgment even though the policy has liability limits of $13 million. The McGirt case is on appeal to the Fourth Circuit, while Kline is on appeal to the Sixth Circuit. Our firm has advised Gulf in both matters.

Central Analysis Bureau's "Resumé - 2005 Motor Carrier Industry"

Copyright 2006, Schindel, Farman, Lipsius, Gardiner & Rabinovich LLP