Schindel, Farman & Lipsius LLP

2007 Recent Developments In Transportation and Insurance Law

(formatted copy for printing)

MCS-90 & STATE FILINGS

A series of novel issues relating to filings were addressed by the court in Kolencik v. Progressive Preferred Insurance Co., 2006 WL 738715 (N.D. Ga.). T.I. Wood Enterprises had held federal operating authority in the past and Progressive, its insurer, had made a filing with the USDOT; at the time of the loss, though, the company held only Georgia authority, although the federal filing remained in effect. Wood hired a contractor named Yarbrough, who controlled three trucks, to haul dirt to a dumpsite, and the loss occurred as the contractors drove to their local campsite after a day of work. Two of those trucks were involved in a fatal accident with Mrs. Kolencik. The court concluded that the relationship between Wood and Yarbrough was one of lessee/lessor and that Wood bore vicarious liability for the negligence of the contractors.

The contractor’s vehicles, though, were not covered by the Progressive policy. The estate and the widower sought recovery based on both state and federal filings. The court rejected the argument that the federal filing applied. Since the trip was purely intrastate, and since the company held no federal authority, the MCS-90 and the federal filing were inapplicable. Only the Georgia filing applied.

The court then turned to plaintiff’s claim that he was entitled to recover multiple awards under the Georgia filing Progressive made for Wood. In the first place, plaintiff argued for a doubling of the limits on the basis that he had claims as both an individual and an administrator. On top of that he argued for tripling the award because there were claims against two truck drivers and Yarbrough. And on top of that he argued that the award should be doubled again because Progressive had not only made a state filing for the year in which the accident occurred, but had failed to cancel the filing for a previous year. The court rejected all of these arguments – Progressive owed only $100,000, the per-person limit of the Georgia filing. Our firm represented Progressive in the litigation.

A second Kolencik litigation, Kolencik v. Stratford Insurance Company, 2006 WL 2466182 (11th Cir.), involved Yarbrough’s insurer or, to be precise, former insurer. As a result of Yarbrough’s delinquency, his premium finance company cancelled his policy five months prior to the accident. Kolencik, citing to Georgia’s Public Service Commission (PSC) motor carrier regulations and the decision in Progressive Preferred Insurance Co. v. Ramirez, 277 Ga. 392 (2003) (discussed in our 2004 Summary) argued that Stratford’s cancellation was ineffective because no notice of cancellation was given to the PSC. Stratford had never made a Form E filing with the PSC, but Kolencik noted statutory language which makes clear that the failure to file a form required by the PSC does not extinguish a claimant’s right to collect from the motor carrier’s insurer.

The Eleventh Circuit, though, affirmed the district court’s ruling and rejected Kolencik’s argument. Yarbrough was not registered with the PSC as a motor carrier: had Stratford attempted to file a form E – or, for that matter, to cancel such a filing – the PSC would simply have bounced the communication. The law does not require an impossible act; Stratford, therefore, bore no exposure.

An impossible act was precisely what had been demanded of the insurer in a matter that had been slowly winding its way through the state and federal courts of Connecticut since the late 1990’s. In 2004 a federal judge had ruled that by failing to cancel an MCS-90 the insurer remained exposed to the public. Barbarula v. Canal Insurance Co., 353 F. Supp. 2d 246 (D. Conn. 2004). As stated the decision may not seem remarkable, but in fact it was highly problematic. At policy inception, no filing was requested and none was made. In mid-policy term Canal had, to its later regret, faxed an MCS-90 to a facility where the insured’s truck had been stopped by the USDOT inspector for failure to produce an MCS-90 on demand. Months later the policy was cancelled but, since there was no filing, Canal took no special steps with respect to the MCS-90. The court, noting that the MCS-90 was never cancelled, found that even though the policy had been cancelled effective the morning of the accident, Canal was exposed because of the MCS-90. The 2004 decision ignored the fact that since there was no filing there was no way to effectively notify the USDOT that the MCS-90 was no longer in effect.

The motor carrier had never been authorized by the USDOT to haul goods interstate and appears to have been operating illegally. (There is a class of motor carriers, under the current regulatory system, which does not require federal motor carrier authority but still requires an MCS-90. In demanding that the carrier produce an MCS-90 – but not closing it down for operating without authorization – the USDOT field inspector may have believed that the insured was in this class of carriers). Canal insisted that the MCS-90 was cancelled along with the rest of the policy, pointing out that sending a cancellation notice to the USDOT would have been futile since there was no filing to cancel and the insured was not a USDOT carrier. In its 2004 decision the Connecticut district court had rejected the argument. Fortunately, the district court’s decision has now been withdrawn by the court, thereby facilitating settlement of the suit. It will have no precedential value. Our firm was working with Canal's counsel in anticipation of an appeal when the case was settled.

The Barbarula court had also weighed in on an issue that has been attracting particular attention from lawyers representing victims of motor carrier accidents: whether the insurance company which writes a liability policy for a trucker has a separate obligation to find out whether the trucker needs a filing, and how much coverage it is obligated to carry. It has traditionally been understood that it is the motor carrier, not the insurer, which is obligated to prove compliance with the relevant insurance requirements imposed upon the motor carrier by statute or federal regulation. In fact, in a 1981 rulemaking relating to the MCS-90, the USDOT observed that it has no jurisdiction over insurance companies.

That, though, has not stopped attempts by bodily injury plaintiffs to argue that the motor carrier’s insurance limits were too low and that the court should reform the limits to assure compliance with the regulation. A recent attempt along these lines is described in Thompson v. Eroglu, 2006 WL 3849286 (Ohio Ct. App. Dec. 29, 2006).

Hasan Eroglu was hauling a load of waste from New York City to a landfill in Ohio when he collided with a passenger vehicle causing bodily injury. Eroglu had been insured at one point by Empire Fire & Marine Insurance Company. The policy, though, had been cancelled prior to the loss. The injured party filed suit against Eroglu, who defaulted; he then secured permission from the court to proceed directly against Empire.

The thrust of plaintiff’s argument was that, under controlling New Jersey law, the cancellation of Eroglu’s policy was ineffective because Empire had failed to notify the USDOT of the cancellation in accordance with 49 U.S.C. §13906 and 49 C.F.R. §387.15. The court rejected the argument noting that plaintiff “fails to explain why Eroglu and Empire are subject to these federal regulations.”

The cancellation process was initiated by the premium finance company after the insured failed to make a scheduled payment. Empire had not made a filing for Eroglu and no MCS-90 had been attached to the policy.

An Empire underwriter testified that the policy was not issued to satisfy the federal requirements. The court found nothing in the record indicating that Empire had actual or constructive knowledge of Eroglu’s business practices other than what he revealed when he applied for the coverage. The underwriter indicated that so far as she knew Eroglu had no federal carrier authority (that was true) and that she was unaware he was doing any interstate hauling. The court rejected plaintiff’s argument that the “out of state extensions” section of the policy form indicated an awareness that Eroglu operated interstate. “Further, Appellant fails to direct this Court’s attention to anything tending to indicate that Empire, as Eroglu’s insurer, had an obligation to determine if its insured was hauling in interstate commerce and then issue the requisite coverage.”

This, it seems to us, is useful language, imposing no duty on the insurer to check what the insured is actually doing – it is apparently permitted to rely upon what it is told in the application. It is possible, though, that if the insurer had actual knowledge that the insured is engaged, legally or otherwise, in interstate commerce, the result would have been different.

The first two decisions which fully discuss the applicability of an excess MCS-90 arise out of some anomalous circumstances. Both cases involved Builders Transport, a South Carolina based motor carrier, which in the 1990’s was certified by the I.C.C. as a self-insured carrier. Since it was so certified, there was no need for it to secure a filing. However, the company purchased layers of excess insurance: Reliance Insurance provided the first layer of coverage over the self-insurance, although the Reliance policy itself was subject to an annual aggregate deductible which ranged from $1 million to $1.65 million over the years. Above the Reliance layer was a $13 million umbrella policy issued by Gulf Insurance, and another layer was purchased above that. Thus, depending on the year, the Gulf policy attached at $3 million or $3.65 million.

As noted Builders was a certified self-insured carrier and no filing was made by either Reliance or Gulf with the I.C.C., or later the USDOT, on its behalf. Yet, for no apparent good reason, both Reliance and Gulf prepared MCS-90 endorsements – although it was not completely clear that the Gulf MCS-90 was attached to the policy – and in each endorsement the second, or excess, box was checked. Each endorsement had the same amounts typed in the two spaces left open on the form: “This insurance is excess and the company should not be liable for amounts in excess of $1 million for each accident in excess of the underlying limit of $1 million, for each accident".

In the two cases described below Gulf acknowledged coverage. However, Builders Transport filed for protection under the Bankruptcy Code in 2001. (Reliance, of course, followed closely on its heels). Plaintiffs argued that Gulf was liable for the first $1 million of the judgment under its MCS-90, in addition to its regular coverage which attached at $3 million or more.

The complaint in Kline v. Gulf Insurance Co., 466 F. 3d 430 (6th Cir.), was filed after a consent judgment for $3.2 million was entered against Builders. Gulf acknowledged that its coverage attached at $3 million, and paid $200,000. Kline was able to recover $1 million from Reliance. Kline argued, though, that in light of the Gulf MCS-90, Gulf should also pay $1 million under its MCS-90 in place of the self-insurance Builders was unable to pay.

The court noted that the phrase “underlying limit of $1 million” in the MCS-90 was ambiguous in light of the complex self-insurance and insurance program the insured had created. However, that ambiguity could not be held against the insurer since the USDOT, not the insurer, had promulgated the endorsement. The court found that in issuing the endorsement, albeit unnecessarily, Gulf was not changing the attachment point of its coverage. “Read as a whole, the MCS-90 incorporated the limits of liability in the original insurance policy; it did not replace them.”

There were several factual variants between Kline and McGirt v. Gulf Insurance Co., 2006 WL 3456369 (4th Cir.) which also arose out of an accident involving Builders Transport. The declaratory judgment action was tried first – to date there is no judgment against Builders Transport. If such judgment is ever entered, Reliance is not around to pay its share of coverage. Finally the amount of the aggregate deductible was some what higher for the policy year in question. The Gulf policy attaches, therefore at $3.65 million.

The plaintiffs in McGirt argued that precisely because Reliance was no longer available to pay, Kline was distinguishable and Gulf must drop down to pay the first million dollars. The district court so held, finding that Gulf would pay the first million of any judgment, and then pick up again at $3.65 million with the remainder of its $13 million coverage. There would, then, be a gap of over two and a half million dollars between the bookends of Gulf’s exposure. Both sides appealed.

The Fourth Circuit, in an unpublished opinion, found that Gulf’s attachment point was $3.65 million and that the excess MCS-90 did not change that. The court rejected the argument that a different result was required than in Kline because in McGirt there was no possibility of securing $1 million from other sources. Reviewing the legislative history, the court found that the requirements of the federal regulatory framework were satisfied by the certification of Builders as a self-insurer. The regulatory history made clear that the USDOT understood that in permitting self-insurance there was a certain element of risk that in any particular case the public could go unprotected.

Turning to the words of the MCS-90, the court stressed that only judgments “within the limits of liability described herein” are encompassed by the endorsement; since the Gulf policy would attach at $3.65 million, that is where the excess MCS-90 attaches. Our firm worked with the counsel of record for Gulf in these matters.

Love-Diggs v. Tirath, 911 A. 2d 539 (Pa. Super. Ct.), is a useful reminder that the Form E filing and Form F truckers endorsement, promulgated originally by the Interstate Commerce Commission for use by state agencies, may be mandated for taxies as well as trucking companies. The decision itself is straightforward: an insurer may be liable under a filing even if the vehicle involved in the accident is not scheduled on the policy at issue.

POLICY EXCLUSIONS

Several decisions dealt with standard exclusions. Wilson v. Nationwide Mutual Insurance Co., 395 Md. 524, 910 A. 2d 1122, dealt with the fellow employee exclusion. Wilson suffered serious bodily injury in a collision while riding in a vehicle operated by a colleague. Both Wilson and the driver were employed by Allegheny Industries and were acting within the scope of their employment. Allegheny maintained a business auto policy and a worker’s compensation policy with Nationwide. The auto policy contained the fellow employee exclusion, but because the policy was delivered in Maryland, a state with a broad compulsory insurance statute, the insurer had amended the exclusion so that it applied only after the insurer paid the state’s mandatory insurance limits. Plaintiff argued that since the legislature had not specifically authorized the fellow employee exclusion it was unenforceable and, therefore, that Nationwide should be obligated to pay any judgment up to its $1 million limit. In a 1989 decision, Maryland’s Court of Appeals had indeed voided a standard fellow employee exclusion, even though the injured party was able to recover worker’s compensation benefits. In this case, though, the insurer acknowledged its responsibility to pay the state’s minimum limits under the liability coverage. Accordingly there was no public policy blocking the enforceability of the fellow employee exclusion for the portion of the liability coverage not required as a matter of law.

Penske Truck Leasing Co. v. Republic Western Insurance. Co., 407 F. Supp. 2d 741 (E.D.N.C.), addressed the employee and worker’s compensation exclusions in light of the "severability of interests clause", and also considered the completed operations exclusion. Bridgeways Company, Inc., leased vehicles from Penske and arranged, as required in the lease agreement, to have Penske added as an insured to its policy with Republic Western. Willie White, a Bridgeways employee, was injured in the course of his employment when he fell from a tractor-trailer rig owned by Penske. After qualifying for worker’s compensation benefits, White filed an action for bodily injury against Penske alleging that he had fallen out of the tractor while attempting to repair a light attached to the exterior of the vehicle. He alleged that Penske had negligently failed to attach a hard bar to the tractor. Republic denied coverage. Penske successfully defended the case at its own expense, although it ultimately settled for $15, 000 in the course of a mediation ordered by the appellate court. Penske then sued Republic Western to secure reimbursement of its defense costs and the settlement payment. Republic argued that since White was an employee of the named insured Bridgeways, recovery was precluded by the employee and worker’s compensation exclusions. Republic relied in particular on a 1961 North Carolina appellate decision which had indeed enforced the employee and worker’s compensation exclusions where an employee of the named insured dealership was injured through the negligence of an additional insured who was test–driving a vehicle.

The federal court observed, however, that the 1961 decision made no reference to a severability of interests clause. Such clauses were in existence then and it was plausible that the policy at issue had such a clause. Since, however, the earlier decision had failed to even cite, let alone analyze, the severability language, the court concluded that the earlier case could not be dispositive. The severability of interests clause explicitly mandates that each insured be considered independently for a determination of whether coverage applied. The employee exclusion, for instance, referred to “an employee of the insured.” In order for the exclusion to apply, the claimant must be the employee of the insured against whom the claim is made. The court, as others have over the years, suggested that a different result could be required if the exclusion were modified to refer to the employee of “any insured.”

Also of interest is the decision in Harleysville Mutual Insurance Co. v. Zelinski, 393 Md. 83, 899 A. 2d 835, in which the court enforced a "named driver" exclusion.

NON-TRUCKING USE

In Canal Insurance Co. v. Underwriters at Lloyd’s London, 435 F. 3d 431, the Third Circuit affirmed a district court decision reviewed on these pages two years ago. As noted there, the relationships between the motor carrier BIR and the owner of the motor vehicle was not the typical one. In the Third Circuit’s words Singh, the owner-operator, “enjoyed a business relationship” with BIR (he appears, in fact, to have been one of its owners). Singh had received no dispatch order for several days. On the date of loss, with the knowledge of BIR, Singh hired a driver to drive his tractor to a Kenworth dealership with the hope of selling it or trading it in. However, just in case BIR were to get a load for him to carry, Singh directed the driver to take along an empty trailer. The loss arose as the driver was headed toward the dealership.

Underwriters had issued a non-trucking policy to Singh. The non-trucking endorsement contained somewhat broader exclusionary language than the standard ISO version. Underwriters argued, and the district court had agreed, that the attempt to sell the vehicle constituted an excluded “business use” which was broadly defined as “any use of the covered auto that promotes the business purposes of the insured.” On appeal Canal argued that the exclusion was overly broad and also ambiguous. Relying on several Pennsylvania cases, although not trucking cases, the Third Circuit found a reasonably clear line between business use and personal use, and affirmed the decision of the district court. The court also rejected a variety of public policy and equitable arguments raised by Canal. The court was unimpressed with public policy arguments. It cited the reaction of a Pennsylvania court to public policy objections to the absolute pollution exclusion: the only issue before a court is how to interpret the contractual language in the specific context. Questions of whether the provision violates public policy must be left to the legislature and the Insurance Commissioner.

We note that courts over the years certainly have looked to policy concerns. Judge (now Justice) Alito, who is well known for his deference to Congress in reviewing legislation, was on the panel. This particular non-trucking clause may have been upheld because the Canal policy, as mandated by Congress, provided a safety net. But is it true that Congress, by setting up a system in which coverage for the motor carrier is guaranteed, was taking a position on the scope of non-trucking coverage? We are not convinced.

HOW MANY LIMITS?

Zurich American Insurance Co. v. Goodwin, 920 So. 2d 427 (Miss) - An eighteen wheeler operated in the business of West Side Transport, an Iowa-based trucker, plowed into a row of stopped traffic on Interstate 20 in Lauderdale County, Mississippi. The rig collided with a total of eight other vehicles causing two deaths and other injuries and damage. West Side was insured by Zurich for auto liability with limits of $1million. Three separate lawsuits were filed and it was immediately apparent that the Zurich limits would be insufficient to cover all of the losses.

The trial court found a way around this problem. Under Mississippi law, an accident is viewed from the perspective of the injured party unless the policy specifically provides that “accident” is to be viewed from the perspective of the insured. The question of whose perspective controls has been central to the debate over whether an intentional act can qualify as an accident (leading ISO, long ago, to add the definition that the controlling perspective is that of the insured). What is truly astounding about the trial court’s decision is the conclusion that each injury constitutes a different accident under Mississippi law in spite of the inclusion in the Zurich policy of the standard provision limiting recovery to the amount set out in the declaration, regardless of the number of vehicles involved in the accident or the number of claimants. The court concluded that Zurich’s exposure was $8 million, a million for each accident victim.

The Supreme Court reversed, not because the trial court’s analysis of Mississippi was wrong but because it concluded that Iowa law controlled under the “center of gravity test.” The implications of the case are not likely to escape the plaintiff’s bar, however.

FEDERAL LAW

The first decisions under the regime of Congress’s 2005 enactment (the Safe, Accountable, Flexible Efficient Transportation Equity Act) (“SAFETEA”) have begun to appear. The Graves Amendment to that statute prohibits states from imposing vicarious liability against car owners who rent or lease vehicles which are then involved in accidents. The New York court in Infante v. U-Haul Co. of Florida, 815 N.Y.S. 2d 921, held that a claim against U-Haul for vicarious liability (permitted by New York’s ownership liability statute) was precluded by the new federal statute.

Another New York based court, though, held that in invalidating New York Vehicle and Traffic Law §388, and similar statutes, the federal legislation is unconstitutional. Graham v. Dunkley, ____ NYS 2d _____, 13 Misc. 3d 790 (Supreme Court, Queens County) found that the law, by relieving lessors of vicarious liability imposed by state law, exceeded Congress’s powers under the Commerce Clause. The court relied on the Tenth Amendment which provides that powers not delegated to the federal government are reserved to the states or the people. New York’s ownership liability law is a part of the substantive law of torts, and is not substantially related to interstate commerce. We eagerly await the next shot in this battle.

Empire Fire & Marine Insurance Co. v. Continental Casualty Co., 426 F. Supp. 2d 329 (D. Md.) considered the meaning of the phrase “standard time” as used in liability policies. The loss occurred in New Jersey on May 7, 2004 at 12:28 a.m. daylight savings time. May 7, 2004 was the anniversary date of the policy issued to Coleman Trucking whose rig was involved in the accident. In the 2003-2004 policy year Coleman was insured by CNA. Coleman opted to insure with Empire for the 2004-2005 policy. The Empire policy period was specified as May 7, 2004 to May 7, 2005, “12:01 a.m. standard time at your mailing address.”

Empire argued that the loss occurred at 11:28 p.m. on May 6 according to the (theoretical) standard time. This was certainly a clever argument, but citing to the Uniform Time Act of 1966, the court held that during the period that daylight savings time is in effect it becomes the standard time. Acknowledging the existence of some precedent leaning in the opposite direction, the court noted that had the insured’s home state enacted legislation (as Hawaii and Alaska have done) exempting the state from daylight savings time, the case would have been decided differently.

Musarra v. Digital Dish, Inc., 454 F. Supp. 2d 692 (S.D. Ohio), focused on the scope of the Fair Labor Standards Act, but also involved the definition of private carrier under the federal Motor Carrier Act, and the question of shipper’s intent for purposing of determining whether a particular shipment is moving in interstate commerce. FLSA requires that employees engaged in commerce or production of goods for commerce be paid time and a half for all time worked over forty hours per week. However, employees subject to the Secretary of Transportation’s power to establish qualifications and maximum hours of service for those in the transportation industry are exempt from FLSA rules.

As part of the 2005 “SAFETEA” act, the definition of private motor carrier was modified; under the current definition an entity wishing to qualify as a “motor private carrier” must conduct business in commercial vehicles (that is vehicles weighing over 10,000 lbs. or used to transport hazardous commodities). Before the statutory amendment, though, there was no need for the driver to be operating a commercial auto: an entity qualified as a private carrier whenever it hauled property that it owned (the private carrier can also be the lessee or bailee of the cargo) and when that property was being transported in interstate commerce for sale or lease or to further any commercial enterprise.

Employees of Digital Dish, the Ohio regional service provider for Dish Network, filed suit claiming that the company was in violation of the FLSA. The company responded that its technicians – who installed and repaired satellite dishes and receivers – were subject to the regulations of the Secretary of Transportation and, therefore, exempt from FLSA, because they picked up the dishes and other items and carried them in the company’s business, in interstate commerce.

The bulk of the decision is directed at the question of shipper’s intent and determining when a particular shipment is moving in interstate commerce, an issue of general importance for those involved in the motor carrier business and related insurance matters. The technician–plaintiffs never left the State of Ohio in Dish’s business. However, citing to a line of United States Supreme Court cases, the court pointed out that transportation within a single state may be interstate in character when it forms part of a “practical continuity of movement” across state lines. In determining the shipper’s fixed and persisting intent as to whether a particular shipment was interstate in nature, the court adopted the seven-part test formulated by the I.C.C. in 1992 in Policy Statement No. MC-207, 8 I.C.C.2d 470.

NOTICE TO EXCESS INSURER

A recurring difficulty in insurance litigation (perhaps chronic in the case of insureds with high exposures) is when notice must be given to an excess or umbrella insurer. Several recent New York decisions have spoken to this issue.

Morris Park Contracting Corp. v. National Union Fire Insurance. Co. of Pittsburgh, PA., 822 N.Y.S. 2d 616 (2d Dep’t), involved a personal injury action filed against the insured with an ad damnum clause seeking $10 million. Morris Park’s primary liability coverage was in the amount of $1 million; National Union, which provided umbrella coverage, argued that by not notifying it at once of the complaint, Morris Park forfeited its coverage.

The complaint was filed in July, 2002. The insured (presumably through its primary insurer) answered the complaint and served discovery demands. In November, Morris Park learned that the plaintiff had filed a bill of particulars in a related case against several municipal defendants alleging severe injuries. Plaintiff’s bill of particulars, served on Morris Park in late January, 2003, set forth a list of serious injuries, allegedly suffered as a result of Morris’s negligence. Within days of receiving this (second) bill of particulars, Morris Park put National Union on notice. About a month later National Union declined coverage based on late notice.

The dissent felt strongly that for three separate reasons National Union should have been granted summary judgment. Firstly, with respect to Morris Park’s claim that until it received the January bill of particulars it held a good faith belief that excess coverage would not be triggered, an insured must establish that the timing of its notice was the result of a deliberate determination. The record contained no evidence that the insured, after receiving a complaint demanding $10 million, and then again, in November, when it learned that plaintiff was specifically alleging serious injuries, ever made a deliberate determination that no notice to the excess insurer was necessary.

Secondly, the dissenter felt that the bill of particular from the related case made it impossible to believe in good faith that the $10 million ad damnum clause was pure puffery. The dissenter referred to a letter from defense counsel to the primary insurer on November 27, 2002, describing the injuries based on the bill of particulars in this case, as a “smoking gun” showing that it was aware of the severity of the injuries. Finally, there was simply no good excuse for delaying from November through the end of January before notifying the excess insurer.

The majority did not completely disagree with the dissent’s analysis. However, it was unwilling to rule as a matter of law that there had been unjustified delay. Moreover, the last sentence of the majority opinion raised another issue – whether the insurer’s declination for late notice was itself late. Particularly in states such as New York, where no claim of prejudice needs to be asserted by the insurer in declining for late notice, it is hard to gauge how a particular judge or jury will interpret the evidence.

Also discussing the question of notice to an excess insurer was Shaya B. Pacific, LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, ____ N.Y.S. 2d ____ (Dec. 19, 2006). The Wilson, Elser law firm was hired by the primary insurer Lloyds to defend Shaya B. Pacific in a bodily injury action. Lloyds’s liability limits were $1 million; the complaint sought damages of $52,500,000. Lloyds wrote an “excess letter” to its insured in January, 2001, suggesting that it contact its agent to learn whether any excess coverage was in force. The accident was in April, 2000; Lloyds had hired Wilson, Elser that July to represent the insured in the expected lawsuit.

In February, 2003, the underlying plaintiff was awarded summary judgment on the issue of liability. In April, 2003, as the trial on damages was approaching, Wilson, Elser, on behalf of its client, tendered the matter to the excess insurer National Union. National Union declined the tender on the basis of late notice, and also noted that it had no information indicating that Shaya Pacific was an insured under its policy.

A judgment is excess of $6 million was entered against Shaya Pacific, which then filed an action for legal malpractice against the law firm for failure to advise National Union of the underlying action. The trial court granted the law firm’s motion to dismiss on three grounds: 1) the client had failed to establish that it was an insured on the excess policy; 2) any negligence by the firm could not have been the proximate cause of the loss of excess coverage, since the client, assuming that it did qualify as an insured under the excess policy, should have notified the excess carrier of the loss even before the firm was hired; and 3) since it was hired by the primary insurer to represent the company, the law firm had no duty to advise its client with respect to coverage issues (and, in fact, should not get involved in any coverage issues.)

To the firm’s and the legal community’s surprise, the appellate division, in a split decision, has now reversed in part, finding that the firm must defend itself at trial on the question of malpractice. The matter may go to the state’s highest court before any trial is scheduled.

The majority felt that a question of fact exists with respect to the scope of the law firm’s duties, noting that the firm did, in the end, send a tender to the excess carrier. Moreover, it was not obvious that the client knew enough about the details of the damages before the law firm was hired so that its duty to notify the excess insurer pre-dated the firm’s involvement.

The court then turned to what it described as the central questions of the appeal: does a law firm hired to defend an insured have an obligation to investigate whether excess coverage is available and to see to it that timely notice is filed?; and does it makes any difference if counsel is hired by the primary insurer?

The court noted that there is at least one New York decision which found that a malpractice action against an attorney may be maintained for failure to investigate insurance coverage or for failing to give notice to the insurer. The question simply is whether it would be the standard practice for an average attorney in the community to make such an inquiry. Wilson, Elser, though, argued that when counsel is hired by an insurer it need not, in fact must not, investigate coverage issues since that would violate the principles embedded in the tri-partite relationship between insurer, insured and defense counsel. The court understood that to mean that Wilson, Elser was asserting that it had an attorney-client relationship with both the insurer and the insured and that since those interests conflict the attorney must steer clear. The court responded that even if such a relationship existed with both entities there is no conflict – a primary carrier simply has no interest in whether its insured has additional coverage.

The dissent pointed out that notice to the excess insurer was something the broker (who had presumably notified the primary insurer) would have been expected to do. The attorney clearly would have less knowledge than the client about the client’s own insurance. We suspect that the focus of the appeal to the Court of Appeals will be the duties of defense counsel and the question of having defense counsel involved in coverage issues. We also wonder whether any connection will be made between an attorney’s duty, and the question of whether a primary insurer has a duty to notify the excess insurer.

UNINSURED MOTORIST

Allianz Insurance Co. of Canada v. Sanftleben 454 F. 3d 853 (8th Cir.), presented a choice of law question that crossed an international border. Husband Richard, a Canadian citizen, owned a GMC truck insured by Allianz with liability limits of $1 million and the Canadian equivalent of underinsured motorists coverage. At the time of the loss he was driving his American wife’s Ford Explorer insured by Farmers with limits of $50,000. The wife Carolyn was a passenger in the vehicle and suffered bodily injury when Richard lost control of the vehicle as they were driving in Minnesota en route to Canada.

Since Richard was an insured under Farmer’s policy, Farmer’s paid its $50,000 limits to Carolyn. Then Carolyn sued Richard. Allianz defended him under reservation of rights. After the couple entered a consent judgment for $650,000 Carolyn conceded that the Allianz policy provided no liability coverage for Richard, but argued that she was entitled to UIM benefits under the policy. Allianz sought declaratory judgment that its UIM coverage was not applicable.

The court first determined that Canadian law governed the determination of whether Carolyn was entitled to UIM coverage under the Allianz policy. The court enforced a contractual provision that liability questions be determined pursuant to the law of the place of the accident while “issues of quantum” (which the court identified with the amount of coverage) be determined under the law of the place where the policy was delivered.

Ultimately, the court concluded that Carolyn was not entitled to coverage. The Allianz policy defined uninsured motorist (actually “inadequately insured motorist”) as one driving a vehicle for which the combined coverage of the owner and driver is less than the UIM benefits provided by Allianz. Since the combined liability limit of the owner and the driver was $1,050,000, there was no UIM claim.

Two different approaches can be found in the statutes of the various states with respect to the problem of the “phantom vehicle.” Some states require physical contact before permitting an insured to collect on a UM claim arising from the negligence of a driver who flees the scene or is otherwise unidentified; other states do not. In an interesting twist, Dehart v. Wisconsin Mutual Insurance Co., 719 N.W. 2d 518 (Wis. Ct. App.) held that Wisconsin’s physical damage requirement was satisfied where the tortfeasor’s vehicle collided with a third vehicle, and the insured vehicle was forced off the road causing injury to the insured. So long as there was actual contact between two vehicles, even if the contact was not between the phantom and the claimant, the fear of fraud abates, at least somewhat. The decision will be reviewed by the Wisconsin Supreme Court.

In Howell v. USF&G, 636 S.E. 2d 626, the Supreme Court of South Carolina held that where a policy covered only hired and non-owned vehicles but not owned autos, there was no need for the insurer to offer UM/UIM coverage.

Son of Scott-Pontzer? The New Mexico Supreme Court has granted certification in the matter of Rehders v. Allstate Insurance Co., 135 P. 3d 237 (N.M. Ct. App.) Robbie Rehders, the passenger in a vehicle involved in an accident, collected UM benefits from the insurer of the accident vehicle (as an occupant) as well as under his parents’ personal vehicle policy (as a class 1 insured – family member). The parents were the sole shareholders of a subchapter S corporation which maintained a corporate policy with Allstate covering seven company vehicles with $250,000 of UM. Rehders sought to stack the 7 coverages and the trial court agreed, awarding him $1.75 million.

The appellate court, however, agreed with Allstate that the trial court had jumped the gun by analyzing stacking without considering whether he was even an insured. The company policy had been issued to a d/b/a for several years and had only recently been changed to reflect its incorporation with no substantive change in premium. Nonetheless, the appellate court had no difficultly concluding that since the named insured was not a corporation, Rehders (and his parents for that matter) could not be a class 1 insured. Only someone occupying a covered auto could qualify for UM/UIM under the policy. No expectation could outweigh the plain language of the policy.

APPLICATION OF COGSA TO INLAND TRANSPORTATION

The hot issue in 2006 appears to be the application of the Carriage of Goods by Sea Act (“COGSA”) to the inland portion of ocean import shipments. After the decision of the United States Supreme Court in the Kirby case, (Norfolk So. Railway. Co. v. Kirby, 543 U.S. 14, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004)), it was generally understood that COGSA, which includes a package limitation of liability, as well as other provisions regarding the bringing of suits, would apply to inland transportation under ocean bills of lading which obligated the ocean carrier to deliver the goods the inland destination (a “through” bill), and which contained a provision extending the benefits of the ocean bill to inland carriers (a “Himalaya” clause). The issue was “clarified” by an interminable opinion in Sompo Japan Insurance Company of America v. Union Pacific Railroad Company, 456 F.3d 54, (2d Cir.). The Sompo case, in which, like Kirby, the inland carrier was a railroad, holds that the liability of the inland carrier under COGSA, and pursuant to the Himalaya clause in the ocean bill of lading, is subject to the requirements of the Carmack Amendment. The package limitation will not apply, the Court said, unless “the shipper be given an opportunity to receive full Carmack liability coverage before accepting alternative terms.” No consideration is given to the circumstance that any shipper who has ocean marine coverage for the actual value of the cargo, as is the usual case, will have no incentive to pay extra for full value to any carrier of the cargo.

Shortly after the Second Circuit Sompo opinion, the Eleventh Circuit issued a contradictory opinion in Altadis USA v. Sea Star Line, 458 F.3d 1288, (11th Cir.). The shipper argued that the two-year Carmack suit limitation period should apply rather than the COGSA one-year suit provision. The Court held that the Carmack provision would apply only if the inland carrier issued a domestic bill of lading upon receipt of the cargo from the ocean carrier. We understand that the United States Supreme Court has agreed to hear an appeal from this decision.

LIMITATION OF CARRIER LIABILITY

There were some interesting cases on our favorite subject, limitation of liability, in 2006. The common thread in these cases is that the carrier did not, or may not have, limited its liability for cargo loss and damage. The most notable of the new cases is Emerson Electric Supply Company v. Estes Express Lines Corp., 451F.3d. 179, (3d Cir.). Estes claimed that its tariff, which did not offer a choice of rates, limited its liability to 10 cents a pound. The Court of Appeals affirmed the District Court’s holding that the changes to the Carmack Amendment made by the Interstate Commerce Commission Termination Act of 1995 did not affect the prior requirement that a motor carrier offer a shipper two or more rates with corresponding levels of liability. This case was followed by the federal court in Oregon in Shielding International v. Oak Harbor Freight Lines, 442 F.Supp.2d 1092, (D.Or.), in which the carrier’s tariff did not offer a choice of liability levels. The Court also rejected the motor carrier’s argument that it had procedures in place which could have allowed the shipper to choose between different liability levels on the grounds that the carrier did not bring these procedures to the shipper’s attention.

In addition to offering a choice of rates, the carrier must provide the shipper with an opportunity to make a choice. In Spray-Tech, Inc., v. Robbins Motor Transportation, Inc., 426 F.Supp.2d 875, (W.D. Wisc.), the motor carrier’s tariff provided for a choice of rates, and the bill of lading properly incorporated the tariff. However, the Court said that there was a question of fact as to whether the shipper had actual knowledge of the choice of liability levels. The Court appears to hold the carrier had to do more than just refer to the tariff in the bill of lading in order to enforce the limitation set forth in the tariff. In Zolo Technologies, Inc., v. Roadway Express, Inc., 2006 WL 2092072 (D.Colo.), the shipper requested a value declaration, but it was not reflected on the bill of lading, which incorporated a limitation of liability. In denying summary judgment motions, the court held that there was a question of fact as to whether the parties had actually agreed to the limitation. Likewise, the court in Audio Visual Services Corp. v. Felter International, 2006 WL 2382285 (S.D. Tx.), denied summary judgment motions because the shipper may not have known about the carrier’s limitation. The same issue was involved in Polesuk v. CBR Systems, Inc., Fed Carr. Cus. P 84, 469, 2006 WL 2796789 (S.D.N.Y.). In that case, the limitation was not contained in a tariff. Rather, the carrier claimed to have given the shipper notice of the limitation and an opportunity to make a choice in its pick-up receipt and other pre-shipment documents. The actual knowledge of the shipper created a fact issue.

OTHER CARGO CASES OF INTEREST

We often hear a driver say the shipper told him it was all right to take a load which he felt might become damaged. This issue was raised in Man Roland, Inc. v. Kreitz Motor Express, Inc., 438 F.3d 476, (5th Cir.). The shipper insisted that printing machinery be tarped over the carrier’s objection that it be protected in a more expensive manner. Of course, it got wet. The Court held that the carrier could avoid liability only if it could establish that it was free from negligence in tarping the cargo and that the shipper was negligent in ordering the tarping. The Court said that the shipper would not be negligent if in fact the cargo could be carried safely by tarping it. Presumably, the carrier could avoid liability if tarping could not protect the cargo and the carrier tarped it competently. To be sure, these are burdens are difficult for the carrier to bear.

In one of those increasingly rare cases where the carrier is found to avoid liability, Miracle of Life, LLC, v. North American Van Lines, 444 F.Supp.2d 478, (D.S.C.), the federal court in South Carolina dismissed a claim against a household goods carrier because the shipper failed to make a written claim within 9 months of the date of loss. The Court also rejected the shipper’s argument that the carrier’s failure to provide claim forms and its direction to the shipper to seek recovery elsewhere constituted an estoppel. On the other hand, a federal court in North Carolina held that a written claim for “in excess of $75,000” complied with the claim requirement for a specific amount, in Buckley v. North American Van Lines, Fed. Carr. Cas. P84, 449, 2006 WL 1875329 (W.D.N.C.)

Central Analysis Bureau's "Resumé - 2006 Motor Carrier Industry"