Federal Regulations require that motor carriers provide the public with certain minimum amounts of financial responsibility. 49 CFR 387.1, et seq. The Regulations provide three options for providing this financial responsibility -- through a surety bond, through an authorization to self insure, or through a policy of liability insurance containing a MCS-90 endorsement (which is the subject of this paper). 49 CFR 387.7. Section 387.9 specifies the limits of liability that are required. The endorsement itself is specified in 49 CFR 387.15. A copy of the endorsement is attached. The meaning and effect of this endorsement is among the most litigated insurance coverage issues among those in the trucking industry. The purpose of this paper is not to be comprehensive, but rather to highlight the issues which arise when the endorsement is considered, and the primary approaches of the courts.

A. The Basic Elements
The MCS-90 endorsement itself contains several items of note. First, while it contains a beginning date, it has no ending date. Both Section 387.7 and Section 387.15 require that the policy specify that coverage will remain in effect "continuously until terminated." Research has not disclosed any cases which construe this phrase in the context of the normal expiration date of a policy at the end of its term. One could argue that this type of expiration is what is meant by "until terminated." One could also argue the exception provided for in Section 387.7(2), which allows policies of insurance for "finite period of time to cover any lapse in continuous compliance," means that the only way for a policy with a MCS-90 endorsement to cease providing coverage would be to issue a cancellation notice pursuant to the terms of the endorsement itself and the terms of Section 387.7(b)(1), or to make sure that there is a replacement policy as permitted by Section 387.7(c).

As to cancellation, which usually refers to termination of coverage before the expiration of the policy period, there is an interesting difference between the language of Section 387.7(b)(1) and the language of the form itself, as required by Section 387.15. Both permit cancellation upon 35 days written notice, with the time commencing from the date of mailing. The MCS-90 endorsement, however, also adds the requirement of 30 days notice to the ICC if the insured is subject to the ICC's jurisdiction. It is probable that, in most cases, notice of cancellation to the insured alone would not be sufficient to effect a cancellation, unless notice is also sent to the government. It may also still be unsettled as to whether the dissolution of the ICC in favor of the DOT will have an effect on this issue.

Beyond the timing of the effective dates of the endorsement, other language of interest includes the provision that "no condition, provision, stipulation, or limitation . . . shall relieve the company from liability or from the payment of any final judgment." While this is so, the endorsement expressly notes that the terms of the policy are in full force and effect as binding between the insured and the insurer and, sometimes most important of all, that the insured agrees to reimburse the insurer for any payment made on account of the endorsement where the insurer would not otherwise have been required to pay.

The endorsement typically spawns disputes between: (1) the insurer and the injured member of the public; (2) the insurer and the insured; and (3) between insurers.

B. The Insurer and the Injured Member of the Public
There is one basic rule of thumb on this issue. The member of the public always wins. This is, after all, the reason that the Regulations were promulgated in the first place.

Typical of the cases is Adams v. Royal Indemnity Co., 99 F.3d 964 (10th Cir. 1996). It demonstrates the lengths to which courts will go to find coverage, yet at the same time also shows that those lengths do have some limits. Adams was injured in an accident with Hofer. He obtained a $1 million default judgment against Hofer, and sought to recover that judgment from Royal. Royal had issued two policies, one to Geiger and one to Thomas. Each policy contained a MCS-90 endorsement.

Thomas was a partner in the partnership which owned the trailer. He did not own the trailer personally. The partnership leased the trailer to Geiger, who lent it to Hofer. The judgment was only against Hofer. The issue, therefore, was whether Hofer was "covered" under either of the separate policies issued by Royal to Thomas and Geiger.

The court first determined that, absent the endorsement, Hofer would not have been covered by either policy. He did not qualify as an insured, because the trailer was not listed as a "covered auto" under either policy, and neither policy had been issued to him (Geiger had purchased "Specifically Described Autos" coverage only).

The court then considered the effect of the MCS-90 endorsement. Royal argued that the MCS-90 endorsement only applied, by its own terms, to the "insured," and that it did not, therefore, apply to Hofer, since he was not an "insured." Interpreting the language of the endorsement which provides that "no condition, provision, stipulation, or limitation . . . shall relieve the company from liability or from the payment of any final judgment," the court stated that this language "negates" any limiting clauses in the policy. The definition of "insured" limited it to permissive users of covered autos driving vehicles owned, hired, or borrowed by the named insured. By "negating" the "covered autos" part of the provision, since this was a limiting clause, the court re-wrote the provision to read: "Anyone else . . . while using with your permission an auto you own, hire, or borrow." As to the Geiger policy, Hofer was using a trailer that Geiger had "hired" with his permission. The MCS-90 endorsement therefore required Royal to pay the judgment.

The result was different as to the Royal policy issued to Thomas. Thomas did not own the vehicle - the partnership did. Thomas did not give permission to Hofer - Geiger did. Thus, even the MCS-90 endorsement was insufficient to require Thomas' insurer to pay the judgment.

One other item of note from the endorsement. Just as the Regulations exclude employees of the trucking company from their liability scope, so does the endorsement exclude employees from coverage under the endorsement. Specifically, the endorsement provides: "Such insurance as is afforded, for public liability, does not apply to injury or death of the insured's employees while engaged in the course of their employment, or property transported by the insured, designated as cargo." Employees of the insured are not "members of the public."

C. The Insurer and Insured
The rule of thumb changes in this context - the insurer usually wins. If the insurer pays pursuant to the endorsement where it would not otherwise have had to pay, it is entitled to recover those payments from the insured. As specified above, the endorsement states this expressly. Courts have usually upheld this provision. The insurer's problem, then, would be to find assets of the insured to recover.

A demonstrative example is Harco National Ins. Co. v. Bobac Trucking, 107 F.3d 733 (9th Cir. 1996). Harco paid $225,000 on behalf of Bobac as part of the settlement of the underlying tort case and then sought reimbursement from Bobac. It was undisputed that, but for the MCS-90 endorsement, there would have been no coverage under the policy. Bobac argued, however, that the failure of Harco to defend the underlying case was a breach of the policy, relieving it of its obligation to reimburse Harco. The court rejected this argument. The court noted that the purpose of MCS-90 was to protect the public, not to give a windfall to the insured. Once the member of the public had been paid, the purpose of the endorsement had been satisfied. The endorsement did not effect the rights of the insurer and the insured as between each other. Moreover, the court noted, MCS-90 is not really an insurance policy, rather than a financial responsibility method. Thus, the endorsement did not create a duty to defend, meaning that Harco's failure to defend could not be considered a breach of Harco's obligations. Harco was entitled to reimbursement.

D. Between Insurers
These cases typically involve fights over who is primary and who is excess. It is often contended that the MCS-90 endorsement alters in some way the outcome of the usual battle over "other insurance" clauses.

There are several variations on "other insurance" clauses, typically resulting in debates over "escape" clauses, "excess" clauses, or "co-primary" clauses. In construing the impact of any of these clauses in conjunction with MCS-90, courts have generally recognized three lines of cases. One line holds that MCS-90 in essence trumps all other provisions, making the policy with the endorsement the sole primary coverage. This line is in the clear minority.

The second and third lines of cases reject the logic of the first line because the purpose of the endorsement is served once the member of the public is paid, and has no effect among parties that the Regulations were not intended to protect. The difference between the second and third lines of cases, however, is that the second line still requires the endorsement-containing policy to be a co-primary policy, refusing to give effect to any excess or escape language in the policy. Such language is considered by these cases to be "limiting" language which is "negated" by MCS-90.

The third line, by contrast, gives the endorsement no effect whatsoever once the member of the public has been protected. In this line, excess or escape clauses will be interpreted in the same manner that they would be interpreted in any other kind of policy.

A good discussion of the three lines of cases can be found in Prestige Casualty Co. v. Michigan Mutual Ins. Co., 99 F.3d 1340 (6th Cir. 1996). Unlike the other kinds of disputes, there is no rule of thumb for resolution of inter-insurer disputes. Since each jurisdiction has reached a different result, the law of the particular jurisdiction must be consulted in each case. Keep in mind that choice of law rules might be critical in resolving these disputes.

This publication has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.