NOT ALL SURPRISES ARE WELCOME: Expanded Exposure under the MCS-90 Endorsement

Transcription

1 NOT ALL SURPRISES ARE WELCOME: Expanded Exposure under the MCS-90 Endorsement I. Introduction Kimberly B. Reeves, Attorney, Carlock, Copeland & Stair, LLP In 1980 Congress enacted the Motor Carrier Act ( MCA ) to govern and regulate interstate trucking. 1 Two goals of this legislation were to increase safety and to reduce the costs of the trucking industry that were allegedly passed along to consumers. In 1982, the Raegan administration promulgated a series of administrative laws that adopted certain minimum insurance requirements to reduce costs and to incentivize the trucking industry to increase its safety standards. 2 Prior to these laws, trucking companies were accused of skirting financial responsibility for accidents by declaring all employees to be independent contractors. 3 The MCA mandated certain levels of insurance coverage that would pertain to drivers, regardless of whether the drivers were employees or independent contractors. The Federal Motor Carrier Safety Administration ( FMCSA ) currently oversees and enforces these laws. With a few exceptions mentioned below, all interstate motor carriers are required to maintain a form MCS- 90 endorsement or a surety bond, called a form MCS-82, to demonstrate compliance with the FMCSA liability insurance requirements. 4 As discussed below, some courts have interpreted these otherwise laudable public policy goals to hold any insurer issuing an MCS-90 as the ultimate guarantor in the case of a trucking accident where the responsible party or parties lack coverage. Therefore, it is important to 1 Pub. L. No (July 1, 1980), 94 Stat. 793; 49 U.S.C , et seq U.S.C ; 49 CFR Carolina Cas. Ins. Co. v. Yeates, 584 F.3d 868, 873 (10th Cir. 2009) (citations omitted) CFR

2 understand the ways in which these courts have expanded coverage under the MCS-90 to accurately assess exposure in cases where the endorsement may apply. a. What is it? The MCS-90 is an endorsement that provides coverage for all vehicles driven on behalf of the named-insured motor carrier. 5 The form applies in the event of an accident regardless of whether the vehicle is not otherwise insured under the policy. The text provides as follows: In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere..... It is understood and agreed that no condition, provision, stipulation, or limitation contained in the policy, this endorsement, or any other endorsement thereon, or violation thereof, shall relieve the company from liability or from the payment of any final judgment, within the limits of liability herein described, irrespective of the financial condition, insolvency or bankruptcy of the insured. However, all terms, conditions, and limitations in the policy to which the endorsement is attached shall remain in full force and effect as binding between the insured and the company. 6 The most common scenario involves an accident caused by a vehicle being driven on behalf of the insured motor-carrier that is not a covered vehicle under the policy. The MCS-90 form has the effect of ensuring that there are insurance proceeds available if a third-party plaintiff prevails on a judgment against the insured-carrier. However, coverage is not triggered until there is an actual judgment or a final settlement against the named insured motor-carrier. 7 5 E.g., Ill. Cent. R.R. v. DuPont, 326 F.3d 665, 666 (5th Cir. 2003) CFR ; Form MCS-90 Revised 06/19/2014, available at 7 See T.H.E. Ins. Co. v. Larsen Intermodal Servs., 242 F.3d 667, 676 (5th Cir. 2001). 2

3 The minimum limits of public liability are listed on the MCS-90 endorsement. 8 Those limits are: Although the minimum for a non-hazardous motor carrier is $750,000, the limit of the endorsement generally corresponds to the limit of the policy. 9 Therefore, if the policy provides coverage up to $1M, then $1M is the total exposure per accident. The limits established in the MCS-90 are per accident, not per injury, and do not add coverage above policy limits that exceed the minimum. 10 A majority of courts hold that there is no duty to defend based on the MCS-90 endorsement. 11 The endorsement is only there to ensure recovery for the public. Therefore it does not expand coverage for the insured policy-holder. Because there is no duty to defend, 8 49 C.F.R , Carolina Cas. Ins. Co. v. Estate of Karpov, 559 F.3d 621, 623 (7th Cir. 2009); see also cases cited therein. 10 Id. 11 Lincoln Gen. Ins. Co v. De La Luz Garcia, 501 F.3d 436, 439 n.3 (5th Cir. 2007) (citing Harco Nat'l Ins. Co. v. Bobac Trucking, Inc., 107 F.3d 733, (9th Cir. 1997)); Carolina Cas. Ins. Co. v. Yeates, 584 F.3d 868, (10th Cir. 2009). 3

4 there is no claim for bad faith related to an MCS-90 endorsement. There is also no right of subrogation under the MCS Although there is no duty to defend as a result of the MCS-90 endorsement, an insurance carrier may elect to voluntarily defend the defendant. Importantly, the insurer can recover any funds paid from the motor carrier: The insured agrees to reimburse the company for any payment made by the company on account of any accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement. 13 It is not a settled question of law as to whether an insurer who elects to defend may seek reimbursement for the costs of defense under the MCS-90. It may make sense to defend the insured in certain instances even if the costs are not recoverable, for example to avoid a default judgment, to limit the exposure of a settlement, or where there are viable defenses to liability. Notify the insured that payment is being made only as a result of the endorsement under a full reservation of rights to recoup those funds to avoid any appearance of a voluntary payment. 14 b. Public Policy behind the MCS-90 The purpose of the MCS-90 is to ensure an avenue of recovery for a presumably innocent victim of the public in the event a motor carrier is negligent and lacks resources to satisfy a judgment obtained by the victim. 15 The MCS-90 requires the insurance carrier to satisfy any judgment against the policy holder, regardless of whether the vehicle is otherwise covered. The 12 Carolina Cas. Ins. Co. v. Yeates, 584 F.3d 868, 883 (10th Cir. 2009); Travelers Indem. Co. v. W. Am. Specialized Transp. Co., 317 F. Supp. 2d 693, 699 (W.D. La. 2004). 13 MCS-90 Form. 14 Canal Ins. Co. v. First Gen. Ins. Co., 889 F.2d 604, 611 (5th Cir. 1989) (holding that Canal could recoup the costs of defense from the primary insurer). 15 Am. Alt. Ins. Co. v. Sentry Select Ins. Co., 176 F. Supp. 2d 550, 557 (E.D. Va. 2001) (citing Transamerican Freight Lines, Inc. v. Brada Miller Freight Sys., Inc., 423 U.S. 28, 37 (1975)). 4

5 endorsement also did away the ability to escape liability by claiming that drivers were independent contractors, as opposed to employees. 16 Because the endorsement is in place to protect the injured public, courts differ in how the endorsement affects priority of coverage. Most courts have held that the endorsement does permit another insurance company to seek contribution for claims related to a non-covered vehicle, even though the endorsement would have afforded coverage for the non-covered vehicle to the general public. 17 In fact, this is the overwhelming majority rule. 18 The rationale is sound, the policy behind the endorsement is to ensure a recovery to the victims in the public, which should not affect the contractual provisions between the insurers and their insureds. 19 II. When does not it apply? (A somewhat tricky question depending on the jurisdiction and the underlying facts.) The MCS-90 only applies where the available policy to which it is attached does not provide coverage and where there are no other policies that would provide coverage up to the minimum federally mandated minimums. 20 The MCS-90 does not apply to claims by employees of the insured, nor does it cover damage to cargo. 21 There has been litigation, however, over whether a driver is an employee at the time of his or her injury. The form does not specifically define employee. The regulations do define an employee as follows: 16 Consumers Cty. Mut. Ins. Co v. PW & Sons Trucking Inc., 307 F.3d 362, 366 (5th Cir. 2002). 17 Canal Ins. Co. v. First Gen. Ins. Co., 889 F.2d 604, 611 (5th Cir. 1989) (collecting cases). 18 Sentry Select Ins. Co., 176 F. Supp. 2d at 558 (collecting cases from the Fifth, Ninth, Eleventh, Seventh, Eighth, and Third Circuits). 19 See id. and the cases discussed therein. 20 Great W. Cas. Co. v. Gen. Cas. Co., 734 F. Supp. 2d 718, 736 (D. Minn. 2010) 21 Such insurance as is afforded, for public liability, does not apply to injury to or death of the insured s employees while engaged in the course of their employment, or property transported by the insured, designated as cargo. Form MCS-90 Revised 06/19/2014, available at 5

6 Employee means any individual, other than an employer, who is employed by an employer and who in the course of his or her employment directly affects commercial motor vehicle safety. Such term includes a driver of a commercial motor vehicle (including an independent contractor while in the course of operating a commercial motor vehicle), a mechanic, and a freight handler. Such term does not include an employee of the United States, any State, any political subdivision of a State, or any agency established under a compact between States and approved by the Congress of the United States who is acting within the course of such employment. 22 The courts have enforced this language and have found that owner-operators are employees and are excluded from coverage. 23 One case, Pouliot v. Paul Arpin Van Lines, Inc., very narrowly interpreted this provision to only apply where the independent contractor was actually driving a commercial vehicle at the time of the accident. 24 The court read the text of the regulation and surrounding provisions and found that an independent contractor could recover for injuries that occurred when he was loading the truck, because that was distinct from operating a motor vehicle. 25 The plaintiff in the Pouliot case was rendered a paraplegic when the equipment he was delivering fell on him. The case has been criticized. 26 The Pouliot case is perhaps viewed as an example of bad facts making bad law. There is also a split of authority over whether the employee of an independent contractor, or owner-operator, is excluded from coverage. 27 Some courts have found that the MCS-90 expands coverage to require compensation even where the named-insured is not found to be negligent, but is otherwise implicated as a lessee, statutory employer, or where the driver is a C.F.R E.g., Consumers Cty. Mut. Ins. Co v. PW & Sons Trucking Inc., 307 F.3d 362, 367 (5th Cir. 2002); Perry v. Harco Nat. Ins. Co., 129 F.3d 1072 (9th Cir. 1997). But see Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 478 (5th Cir. 2009) (noting statutory employees do not fall within the employee exclusion of the MCS-90 Endorsement) F. Supp. 2d 374, 382 (D. Conn. 2003). 25 Id. 26 E.g., Lancer Ins. Co. v. Newman Specialized Carriers, Inc., 903 F. Supp. 2d 1272, 1280 (N.D. Ala. 2012); United Fin. Cas. Co. v. Abe Hershberger & Sons Trucking Ltd., 2012-Ohio-561, 17 (Ct. App.). 27 See Vargas v. FMI, Inc., 233 Cal. App. 4th 638, 664, 182 Cal. Rptr. 3d 803, 823 (2015) and cases cited therein. 6

7 permissive user of a vehicle that is not covered, but to which the MCS-90 endorsement would otherwise apply. 28 Likewise, courts have found that the endorsement provides coverage where the motor-carrier is alleged to be vicariously liable for the actions of a driver who is not otherwise an insured. 29 These decisions have found that there is no requirement that the named-insured be found to have been actually negligent. 30 Other cases have found the endorsement only applies to cover non-covered autos used by the named-insured, not to permissive users of the insured s non-covered autos. 31 The MCS-90 only applies to interstate commerce. This is overwhelming majority rule. This rule was also recently adopted in Georgia. 32 Grange Indem. Ins. Co. v. Burns was just issued on June 23, In Burns, the plaintiff was injured when a box truck collided with her vehicle. It was undisputed that the box truck was purely engaged in intrastate commerce and was not hauling any hazardous commodities. A jury ultimately awarded the plaintiff $3.3 million, which the trial court reduced to $2,035, Grange insured the box truck driver. The policy at issue had limits of $350,000 per accident. 34 The policy also had an MCS-90 Endorsement. Thus, under the MCS-90 Endorsement, the liability limits were $750,000 where the vehicle was involved in interstate commerce. The plaintiff argued (and the trial court agreed) that the MCS-90 Endorsement 28 Adams v. Royal Indem. Co., 99 F.3d 964, 971 (10th Cir. 1996); John Deere Ins. Co. v, Nueva, 229 F.3d 853 (9th Cir. 2000). 29 Integral Ins. Co. v. Lawrence Fulbright Trucking, Inc., 930 F.2d 258, 262 (2d Cir. 1991). 30 Id.; see also Miller v. Harco Nat'l Ins. Co., 274 Ga. 387, 392 (2001) (applying the rationale of Integral Insurance and finding that, under Georgia law, the insurer of an otherwise legally distinct entity was liable for a judgment against the motor carrier of which the insured was the sole shareholder under a theory of corporate veil piercing). 31 Armstrong v. United States Fire Ins. Co., 606 F. Supp. 2d 794, 814 (E.D. Tenn. 2009) (collecting cases from the Eighth, Fifth and Third Districts). 32 Grange Indem. Ins. Co. v. Burns, 337 Ga. App. 532 (2016). 33 Id. at Id. at

8 applied and that the policy limits should be reformed to $750,000 to conform to the federally prescribed limits. 35 In a well-reasoned opinion, the Georgia Court of Appeals reversed finding that the MCS- 90 did not apply to purely intrastate commerce and the federally mandated limits were therefore inapplicable. 36 The court looked to the statutory language mandating the MCS-90 and the federal limits and noted that it specifically applied to interstate commerce and to intrastate commerce when hazardous materials were being transported. The court applied a canon of statutory interpretation and noted that the express inclusion of a particular sort of intrastate commerce, meant that other sorts of intrastate commerce were excluded from the federal regime. 37 Therefore, what matters is the actual trip at the time the accident occurred. The court further found that under both Georgia and federal law, Georgia was permitted to set its own minimum limits applicable to intrastate commerce. 38 Therefore, the trucking company at issue may be involved in interstate commerce, but if the accident occurs when the trip is purely intrastate, the MCS-90 does not apply. The Burns case also correctly noted that this is the majority rule adopted by most courts to have considered the issue. 39 Further, while the MCS-90 explicitly applies to hazardous materials in intrastate commerce, it also exempts certain goods in interstate commerce. The MCS-90 does not cover agricultural or horticultural commodities (other than manufactured products thereof). 40 The MCS-90 does not apply to accidents that occur outside of the United States. 41 Although trucking 35 Id. at Id. at Id. at Id. at 539 (citing Ga. Comp. Rules & Regs., r ). 39 Id. at 538 n.4 (collecting cases). 40 Ill. Cent. R.R. Co. v. Dupont, 190 F. Supp. 2d 880, 884 (M.D. La. 2001) (citing 49 U.S.C (a)(6)). But see Royal Indem. Co. v. Jacobsen, 863 F. Supp. 1537, 1542 (D. Utah 1994) (finding that the endorsement could apply where the insured voluntarily purchased the policy and the attached endorsement for its hay-hauling business). 41 Lincoln Gen. Ins. Co v. De La Luz Garcia, 501 F.3d 436, 439 n.3 (5th Cir. 2007) (construing the MCS-90B). 8

9 companies located in Mexico are required to obtain coverage under the MCS-90 form, the endorsement will not apply when the accident occurs outside of the United States. The relevant inquiry is where the accident occurred. a. Does it permit direct action against the insurance carrier? The MCS-90 by its own terms and under federal law does not permit a direct cause of action against an insurance carrier until after a judgment has been obtained: It is further understood and agreed that, upon failure of the company to pay any final judgment recovered against the insured as provided herein, the judgment creditor may maintain an action in any court of competent jurisdiction against the company to compel such payment. 42 However, some state laws, including Georgia, may permit direct action against the insurance carrier. 43 This is a murky and evolving area of the law that is outside of the scope of these materials. But, suffice it to say that the MCS-90 does not expand any existing rights of a tort plaintiff to bring a direct action against the insurance carrier absent some other provision permitting direct action under state or federal law. b. Cancellation The endorsement also specifies the method of cancellation: Cancellation of this endorsement may be effected by the company of the insured by giving (1) thirty-five (35) days notice in writing to the other party (said 35 days notice to commence from the date the notice is mailed, proof of mailing shall be sufficient proof of notice), and (2) if the insured is subject to the FMCSA s registration requirements under 49 U.S.C , by providing thirty (30) days notice to the FMCSA (said 30 days notice to commence from the date the notice is received by the FMCSA at its office in Washington, DC) Form MCS-90 Revised 06/19/2014, available at 90% %20508.pdf 43 O.C.G.A , Form MCS-90 Revised 06/19/2014, available at 90% %20508.pdf 9

10 This procedure must be followed, including written notice to the FMCSA, or the policy and the endorsement will remain effective. 45 III. Conclusion: Know Your Risk and Consider the Ways in Which the MCS-90 Endorsement May be Triggered. Some courts will essentially read an MCS-90 endorsement into a policy that lacks such an endorsement expanding the limits of possible exposure up to the federally mandated amount of $750, Furthermore, as discussed above, some courts are willing to expand coverage to permissive users of non-scheduled vehicles. Courts are also prone to expand or contract the definition of employee depending on the context of the claim. When the claim is brought by a third party who is injured in an accident, the courts are inclined to find coverage under an expansive definition of employee. Conversely, when the claim is brought by an injured employee of a lessee or employee of another unrelated independent contractor, the court may apply a narrow definition of employee to find coverage based on an exception to the employee exclusion. The theme is that some courts are inclined to find coverage that would not otherwise exist under the policy on the basis of public policy. As a result, it is imperative to use appropriate underwriting techniques to determine the nature and extent to which the named insured leases vehicles to other entities engaged in the trucking industry and/or may have exposure under one of the scenarios listed above. Further, it may make sense to undertake the defense in the case where there is potential exposure under the MCS-90 to avoid a default judgment even if the costs of defense are not ultimately recoverable. Such a determination should consider the controlling 45 There are likely also state law requirements that govern cancellation of motor carrier policies in the carrier state of registration. 46 But see Waters v. Miller, 564 F.3d 1355, 1355 (11th Cir. 2009) (declining to read the MCS-90 endorsement into the policy where there was no evidence the insurer new or should have known the insured was engaged in interstate commerce). 10

11 authority in the jurisdiction where the enforcement of the judgment would be brought against the insurer issuing the MCS v.1