DTCI: Motor carrier financial responsibility and the MCS-90 endorsement

Fennimore

By Keenan C. Fennimore

Equipment leasing has been a common practice in the trucking industry since Congress began regulating interstate motor carrier operations in 1935. In a typical arrangement, an owner-operator leases his or her tractor-trailer unit to a motor carrier for use under the motor carrier’s Department of Transportation operating authority. The motor carrier, in turn, hires the owner-operator as an independent contractor to operate the leased tractor-trailer. There are many legitimate benefits to this business model, but historically, it became a means for unprincipled motor carriers to avoid vicarious liability and the attendant financial responsibility arising from automobile accidents involving the leased equipment. The Motor Carrier Act of 1980 sought to remedy this, in part, by requiring interstate motor carriers to maintain minimum levels of financial responsibility for public liability arising from their trucking operations. Pursuant to the Act, motor carriers must procure a bond, insurance policy, or other type of security “sufficient to pay, not more than the amount of the security, for each final judgment against the registrant for bodily injury to, or death of, an individual resulting from the negligent operation, maintenance, or use of motor vehicles[.]” 49 U.S.C. § 13906(a)(1). Where a motor carrier establishes this financial responsibility through insurance, federal regulations further require that the policy include Form MCS-90, an endorsement guaranteeing payment by the insurer under certain circumstances. 49 C.F.R. § 387.7(d)(1).

The MCS-90 endorsement

The operative language of the MCS-90 endorsement provides: “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. 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.” 49 C.F.R. § 387.15, illus. 1. Together, these provisions create a suretyship between the injured public, the insured and the insurer, under which the insurer guarantees a minimum payment to the injured public on a final judgment against the insured, regardless of whether the injury would, in fact, be covered by the policy. Auto-Owners Insurance Co. v. Munroe, 614 F.3d 322, 227 (7th Cir. 2010). Noncoverage most commonly occurs when a motor carrier leases a semi-tractor but fails to add the unit to the “Schedule of Covered Autos,” which describes the vehicles to which coverage applies. It can also occur where the policy of a motor carrier lessee covers only “Owned Autos.”

Priority of coverage

Perhaps the most frequently litigated issue concerning the MCS-90 endorsement is its effect on coverage priority among multiple insurance policies. The first time a district court in the 7th Circuit addressed this issue, it was held that the insurance policy to which an MCS-90 endorsement is attached provides primary coverage “as a matter of law.” Aetna Casualty & Surety Co. v. Arkin, 365 F. Supp. 813, 817 (N.D. Ill. 1973). In reaching this conclusion, the district court cited the endorsement provision that “no condition, provision, stipulation, or limitation contained in the policy … shall relieve the company from liability” and presumably found that the endorsement nullified any provision in the subject insurance policy that might have otherwise warranted a finding of excess coverage. Id. at 817 (citing Argonaut Insurance Co. v. National Indemnity Co., 435 F.2d 718 (10th Cir. 1971) (stating the endorsement “imposes primary liability and eliminates the need for consideration of the effect of identical ‘other insurance’ clauses”)).

The view espoused in Arkin is not widely accepted and, in fact, has been explicitly rejected by the 7th Circuit Court of Appeals. In Travelers Insurance Co. v. Transport Insurance Co., 787 F.2d 1133 (7th Cir. 1986), the 7th Circuit held that the MCS-90 endorsement has no effect whatsoever on the issue of coverage priority, stating: “The purpose of the federal statute and regulations is to ensure that an ICC carrier has independent financial responsibility to pay for losses sustained by the general public arising out of its trucking operations.” Id. at 1140. The court found this public policy determinative where “protection of a member of the public is at stake” but concluded it “cannot be invoked by another insurance company which contracted to insure a specific risk and which needs no equivalent protection.” Id. Accordingly, the 7th Circuit ignores the MCS-90 endorsement when determining whether insurance coverage is primary or excess and, instead, examines the language of the policy and/or applicable state law. Id.

The Travelers decision undoubtedly arrives at the correct result, but its public-policy-driven interpretation of the MCS-90 endorsement in the absence of any contractual analysis is unsatisfying. The fact that the purpose of the endorsement is to secure financial protection for the public does not support the negative inference that the endorsement does not apply when the public’s financial protection is not at issue. See Empire Fire & Marine Ins. Co. v. Guar. Nat. Ins. Co., 868 F.2d 357, 366 (10th Cir. 1989), overruled by Carolina Cas. Ins. Co. v. Yeates, 584 F.3d 868 (10th Cir. 2009). That conclusion, however, can be derived from the plain language of the MCS-90 endorsement provision that “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[.]” The 7th Circuit’s failure to make any reference to this provision in Travelers is perplexing.

Multiple endorsements

Although the priority-of-coverage issue has long been settled in the 7th Circuit, the MCS-90 endorsement has been litigated in recent years. In Fairmont Specialty Insurance Co. v. Ontario, Inc., 2011 WL 3651333 (N.D. Ind.), the district court held that payment under the MCS-90 endorsement by the insurer of one motor carrier does not relieve another motor carrier’s insurer of its MCS-90 payment obligation for the same loss. Id. at *6. In reaching this decision, the court stated that the Motor Carrier Act “routinely references ‘motor carrier’ in the singular and requires ‘each motor carrier’ to have a bond, insurance policy, or other security, such as an MCS-90 endorsement, sufficient to pay the minimum financial responsibility[.]” Id. at *5.

The Fairmont court also distinguished the facts before it from those presented in Carolina Casualty Insurance Co. v. Yeates, 584 F.3d 868 (10th Cir. 2009). There, the 10th Circuit Court of Appeals held that the insurer of one motor carrier was relieved of its MCS-90 payment obligation because a second insurer of the same motor carrier had already paid its policy limits in satisfaction of its minimum financial responsibility requirement. Id. at 872. According to the court, the public policy purposes underlying the MCS-90 endorsement had therefore been satisfied. Id. at 888.

Other fairly recent decisions by the 7th Circuit include Carolina Casualty Insurance Co. v. Estate of Karpov, 559 F.3d 621, 624-25 (7th Cir. 2009) (holding MCS-90 endorsement payment obligation applied per accident, not per injured person); Auto-Owners Insurance Co. v. Munroe, 614 F.3d 322, 326-27 (7th Cir. 2010) (indicated that MCS-90 endorsement payment obligation applied on a per accident basis, even when the accident involves more than one vehicle); and Illinois National Insurance Co. v. Termian, 779 F. Supp. 2d 921, 928 (N.D. Ind. 2011) (holding MCS-90 payment obligation applies only for judgment against a named insured on the policy).

Practice pointer

The 7th Circuit’s judicial interpretation of the MCS-90 endorsement is generally consistent with the majority of other jurisdictions that have considered the same issues. Although there exists a handful of state and federal courts across the country applying differing views, the fundamentals are ubiquitous. An insurer’s obligations under the MCS-90 endorsement are triggered only when there is (1) a final judgment, (2) against a motor carrier, (3) for negligence in the operation, maintenance or use of a commercial motor vehicle, (4) for which the insured’s policy affords no coverage. If any of these elements is lacking, the MCS-90 endorsement is not at issue.•

Mr. Fennimore is an associate in the Indianapolis office of Cruser Mitchell Novitz Sanchez Gaston & Zimet and a member of the DTCI Insurance Coverage Section. The opinions expressed in this article are those of the author.