Legal Briefs: The case of the uninsured motor carrier

Many shippers believe that the motor carriers they use all have cargo liability insurance because it is required by the Federal Motor Carrier Safety Administration (FMCSA), an agency within the U.S. Department of Transportation (DOT). Consequently, a number of shippers assume that if a motor carrier fails to honor a loss or damage claim — perhaps because the motor carrier is out of business — the shipper can always recover from the carrier's insurance company.

These beliefs and assumptions are no longer true due to a recent decision by a federal appellate court. Both shippers and truckers need to examine the insurance options available and determine what insurance coverage may apply to individual movements. In particular, shippers need to know if a motor carrier it utilizes has cargo liability insurance for the loads in question.

Historically, under the Interstate Commerce Act (before it was revised in 1990 by the Interstate Commerce Commission Termination Act, or ICCTA), motor vehicle common carriers were required to have cargo liability insurance in amounts established by the now abolished Interstate Commerce Commission (ICC). This came to be known as "BMC-32" insurance, referring to what was the ICC's Bureau of Motor Carriers form number. Contract motor carriers were not required to have cargo liability insurance.

BMC-32 was an insurance endorsement, required by ICC regulations, to all common carrier insurance policies, providing minimum levels of cargo insurance. If goods were lost or damaged by the trucker and the trucker would not or could not pay for the loss, then the shipper could make a claim on the insurance company and be compensated.

The ICCTA abolished the ICC and significantly modified various components of the Interstate Commerce Act. This included abolishing the categories of "common carrier" and "contract carrier." The new version of the act just refers to "motor carriers." Authority over cargo insurance and BMC-32 filings was placed under the DOT.

So, is there mandatory cargo insurance for "motor carrier" transportation? Can a shipper safely assume the motor carrier it uses has cargo insurance? This is where the recent decision by the U.S. Federal Court of Appeals comes into play.

The shipper/consignee, M. Fortunoff of Westbury, a retailer, contracted with a motor carrier, Frederickson Motor Express, to transport freight. The motor carrier had old ICC authority to operate both as a common and contract carrier. Its arrangement with Fortunoff was under a contract, although it contained a clause saying in effect that while it was a contract move, the carrier agreed to keep in force "insurance policies in amounts required by the ICC for common carriers."

You can guess what happened. Yes, the carrier went out of business. The shipper had outstanding claims and went after the insurance company, Peerless Insurance. Peerless said it was not liable because the only insurance it ever provided to the motor carrier was the BMC-32 endorsement, and it specifically covers only common carriage.

First, the appellate court found that when Congress passed the ICCTA, it abolished the distinction between common and contract carriage. Instead, the court said it gave the DOT the power to require motor carriers to have cargo insurance. The DOT designated the FMCSA as the agency to handle cargo insurance. The FMCSA continued the old ICC regulations requiring "common carriers" to have cargo insurance, but not "contract carriers." The court was then faced with a legally ambiguous situation of Congress having abolished any distinction between common and contract carriage, but the DOT maintaining regulations requiring "common carriers" to have cargo insurance but not "contract carriers."

The court in effect held that the DOT did have the statutory power to require motor carriers to have cargo insurance, and that the FMCSA still had regulations requiring cargo insurance for common carriers. The court then reasoned that for purposes of cargo insurance, there must still be some distinction between the two types of carriage, even though the distinction was no longer recognized by the statute.

In the case before it, the court held for the insurance company and against the shipper. It said that clearly the arrangement was a contract shipment because that is what the written agreement between the motor carrier and the shipper called it. Because the FMCSA regulations only mandate cargo insurance for common carriers, Peerless, the insurance company, was not required to compensate the shipper.

The gist of this decision is that shippers should not assume that their shipments are covered by a motor carrier's cargo insurance. Endless hours of court time could be spent wrangling over whether or not a particular movement was "common" or "contract." A motor carrier is certainly free to provide cargo insurance for contract moves, and shippers may want to obtain written assurances that its loads will be covered.

James Calderwood is a partner with the law firm of Zuckert, Scoutt & Rasenberger L.L.P., in Washington, D.C., where he concentrates on transportation matters. He can be reached at [email protected]. This column is designed to provide information of general interest. It cannot substitute for in-depth legal analysis of particular problems. Readers are urged to seek counsel concerning individual situations.

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