For 20 years, the Tenth Circuit has been an outlier in holding that the MCS-90 endorsement modifies the underlying liability insurance policy. The circuit has now come in from the cold. In Carolina Casualty Insurance Co. v. Yeates, 2009 WL 2809387 (10th Cir. Sept. 3, 2009), the court issued an en banc opinion reversing Empire Fire & Marine Insurance Co. v. Guarantee National Insurance Co., 868 F.2d 357 (10th Cir. 1989), and joining the majority of circuits in recognizing the MCS-90 endorsement as a surety obligation.

The Motor Carrier Act of 1980 requires interstate motor carriers to comply with certain minimum financial responsibility requirements. 49 U.S.C. § 13902(a)(1). Motor carriers must maintain at least $750,000 in financial responsibility coverage for vehicles transporting non-hazardous cargo, $1,000,000 for vehicles transporting oil and certain hazardous substances, and $5,000,000 for other hazardous substances and radioactive materials. 49 C.F.R. § 387.9.

The Federal Motor Carrier Safety Administration’s implementing regulations require proof of financial responsibility by one of three methods:

1. ‘Endorsement(s) for motor carrier policies of insurance for public viability under Sections 29 and 30 of the Motor Carrier Act of 1980’ (Form MCS-90) issued by an insurer(s);
2. A ‘motor carrier surety bond for public liability under Section 30 of the Motor Carrier Act of 1980’ (Form MCS-82) issued by a surety; or
3. A written decision, order, or authorization of the Federal Motor Carrier Safety Administration authorizing a motor carrier to self-insure under § 387.309, provided the motor carrier maintains a satisfactory safety rating as determined by the Federal Motor Carrier Safety Administration … .

49 C.F.R. § 387.7(d)(1)-(3). 

The MCS-90 form is set forth in 49 C.F.R. § 387.15. In pertinent part, Section 387.15 provides:

In consideration of the premiums 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 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.

Id. 

Carolina Casualty concerns a 2003 accident in which Tymer Yeates was severely injured when a car his wife was driving collided head-on with a truck owned by Bingham Livestock. Yeates and his wife sued Bingham Livestock and the truck driver in state court. Bingham Livestock carried two insurance policies that were implicated by the accident, one issued by State Farm and the other issued by Carolina Casualty. Bingham Livestock notified both carriers of the claim.

The State Farm policy specifically insured the truck involved in the accident. State Farm tendered the Yeateses the policy limit of $750,000. Carolina Casualty’s policy was a general liability policy that provided coverage for a variety of commercial claims, but did not extend coverage to the truck involved in the accident. The Carolina Casualty policy did, however, include an MCS-90 endorsement, which provided that Carolina Casualty would pay up to $1,000,000 for “any final judgment recovered against [Bingham Livestock] for public liability resulting from negligence in the operation, maintenance or use of motor vehicles.” 2009 WL 2809387, at * 2.

Carolina Casualty filed a declaratory judgment action in federal court, seeking a declaration that it had no liability to the Yeateses under its general liability policy because (1) State Farm had already tendered its $750,000 policy limits; (2) federal regulations require a minimum of $750,000 for such accident claims; and (3) therefore, the MCS-90 endorsement would not be needed to provide federally mandated minimum coverage. On the authority of Empire Fire, the district court held that Carolina Casualty’s policy provided primary insurance for the accident under the endorsement and thus Carolina Casualty was required to pay any final judgment resulting from the Yeates’ accident. Id. A panel at the Tenth Circuit affirmed the district court’s holding. On en banc review, the court reversed Empire Fire and entered judgment for Carolina Casualty.

In Empire Fire, the court held that an MCS-90 endorsement amended contrary language in the underlying insurance policy, which would otherwise have limited the insurer’s liability to excess coverage. 868 F.2d at 363. The court further held that liability for primary coverage should be allocated among the insurers “pursuant to traditional state insurance and contract law principles.” Id. at 368.

The court noted that its decision in Empire Fire had been “interpreted to mean that an MCS-90 endorsement modifies the underlying insurance policy in a variety of ways, including (1) allowing recovery from a policy that otherwise does not provide liability coverage, and (2) allowing primary liability recovery from a policy that provides only excess coverage.” 2009 WL 2809387, at *1. The court pointedly observed that “since our holding in Empire Fire, only one other circuit [the Sixth] has followed our lead.” Id.

The en banc court thus reversed Empire Fire:

We hold the MCS-90 endorsement only applies where: (1) the underlying insurance policy to which the endorsement is attached does not provide coverage for the motor carrier’s accident, and (2) the motor carrier’s insurance coverage is either not sufficient to satisfy the federally-prescribed minimum levels of financial responsibility or is non-existent.”

2009 WL 2809387, at *2 (emphasis in original).

In reaching this holding, the court observed:

The language of the MCS-90 endorsement and the underlying regulations evince several key conclusions with respect to the financial responsibility requirements. First, the financial responsibility provisions require motor carriers to demonstrate they are adequately insured in order to protect the public from risk created by the carriers’ operations.  …  Second, the provisions were designed to ensure the collectibility of a judgment – not to relieve the injured member of the public from the requirement that he or she obtain a final judgment of legal liability against the motor carrier and its insurers as a prerequisite. …  Third, an MCS-90 endorsement – as one of the acceptable methods of demonstrating financial responsibility – is ambiguous with respect to how it interacts with the underlying insurance policy. The endorsement states that ‘no condition, provision, stipulation or limitation contained in the policy, this endorsement, or any other endorsement thereon, or violation thereof, shall relieve [insurance company] from liability or from the payment of any final judgment, within the limits of liability herein described.’ On one hand, this provision may suggest the endorsement modifies the underlying policy to the extent the policy is inconsistent. But on the other hand, the endorsement further provides 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.’ …  It is precisely this ambiguity that has created the confusion about the effect of an MCS-90 endorsement on an injured party’s right to recover a negligence judgment against a motor carrier.

2009 WL 2809387, at *4-*5 (emphasis in original).

The court explained that the “tension between these competing clauses in the MCS-90 endorsement leads to confusion because courts are typically confronted with two determinations involving the endorsement that must be resolved contemporaneously: (1) the proper allocation of insurance liability among multiple insurers and the motor carrier, and (2) any possible public financial responsibility because of a shortfall and available sources for satisfaction of a judgment against the motor carrier, at least up to the prescribed minimum amount under the regulations.” 2009 WL 2809387, at *5.

The court explained that the Empire Fire holding was a choice among three competing interpretations of the scope of the MCS-90 endorsement:

1.  
   1. The endorsement makes the insurance policy to which it is attached primary as a matter of law over all other insurance policies that lack similar provisions.
   2. The endorsement only negates limiting provisions in the policy to which it is attached, such as an ‘excess coverage’ clause, but does not establish primary liability over other policies that are also primary by their own terms.
   3. The endorsement applies only to situations in which a claim is being asserted by a shipper or a member of the public, and that the endorsement does not apply when allocating liability among insurance carriers.

2009 WL 2809387, at *6.  The Empire Fire court adopted the second approach. The court noted that Empire Fire had “fallen into disfavor,” because its holding compelled “an insurer … to indemnify the motor carrier for its negligence to a greater extent than it bargained for and without a right to reimbursement from another primary insurer.” 2009 WL 2809387, at *7.

On reexamination of Empire Fire in light of the approach taken by the majority of circuits, the Tenth Circuit found the majority “framework persuasive.” The court rested its holding on five conclusions:

First, the cases describe the insurer’s obligation under the MCS-90 endorsement is one of a surety rather than a modification of the underlying policy. The endorsement is a safety net in the event other insurance is lacking. …  Under this reasoning, an MCS-90 insurer’s duty to pay a judgment arises not from any insurance obligation, but from the endorsement’s language guaranteeing a source of recovery in the event the motor carrier negligently injures a member of the public on the highways. Second, in marked contrast to our approach in Empire Fire, these cases describe the surety obligation – to pay a negligence judgment against a motor carrier under the MCS-90 endorsement – as one that is triggered only when (1) the underlying insurance policy to which the endorsement is attached does not otherwise provide coverage, and (2) either no other insurer is available to satisfy the judgment against the motor carrier or the motor carrier’s insurance coverage is insufficient to satisfy the federally prescribed minimum levels of financial responsibility. …  Third, … the MCS-90 endorsement, its terms, and its operating provisions that supersede any limitation in the underlying insurance policy are only implicated as between an injured member of the public and the MCS-90 insurer … the endorsement, in other words, is irrelevant to and has no effect on the ultimate allocation of judgment against a motor carrier as between the carrier and its various insurers. Finally, … the MCS-90 endorsement operates only to guarantee a source of payment of a judgment, and does not relieve the motor carrier or its liability insurers (assuming the respective insurance policies extend to the accident at issue) of their duty to satisfy an injured party’s judgment against the carrier. …  The endorsement thereby presents neither a windfall for the motor carrier, nor does it alter the motor carrier’s coverage under its other insurance policies.

2009 WL 2809387, at *7-*8 (emphasis in original).

The court embraced the majority approach and held that “the MCS-90 endorsement is intended to impose a surety obligation on the insurance company.” 2009 WL 2809387, at *8. Therefore, “when an injured party obtains a negligence judgment against the motor carrier, an insurer’s obligation under the MCS-90 endorsement is not triggered unless (1) the underlying insurance policy (to which the endorsement is attached) does not provide liability coverage for the accident, and (2) the carrier’s other insurance coverage is either insufficient to meet the federally mandated minimums or non-existent.” 2009 WL 2809387, at *9. “Once the federally-mandated minimums have been satisfied, however, the endorsement does not apply.” Id.

The “endorsement and the underlying insurance policy, while linked, imposed different obligations based on different requirements.” 2009 WL 2809387, at *12. “An insurance policy typically imposes an obligation to indemnify (i.e., pay without reimbursement) on the insurance company based on the policy’s coverage of a particular risk.” Id. “The endorsement on the other hand, imposes an obligation on the insurance company to make payment in the first instance, based on a final judgment entered against the motor carrier and subject to possible reimbursement by that carrier.” Id. 

“To accomplish the MCS-90’s suretyship purpose, the endorsement – when triggered – reads out only those clauses in the policy that would limit the ability of a third-party victim to recover for his loss.” 2009 WL 2809387, at *13. “This purpose, however, is not implicated when there is an allocation of responsibility as between multiple insurers.” Id. (emphasis in original). That is, the “MCS-90 should not render the endorsement -insurer primary, or co-primary as a matter of law where the underlying policy provides otherwise.” Id.

“In sum, the MCS-90 endorsement creates an obligation entirely separate from other obligations created by the policy to which it is attached.” Id. “The MCS-90 defines the insurer’s public financial responsibility obligation, while the underlying policy defines the insurer’s insurance liability obligation.” Id. (emphasis in original).

The court held that the MCS-90 endorsement is triggered in two circumstances. “First, if no other insurance policy is available the purposes behind the MCS-90 are clearly implicated.” 2009 WL 2809387, at *14. “Second, and similarly, the endorsement may be implicated where the sum of all liability coverage applicable to a motor carrier’s accident is insufficient to meet the financial responsibility minimums.” Id.

Applying its holding to the Yeates’ claim, the court rejected the Yeates’ contention that Carolina Casualty’s MCS-90 endorsement should “stack” with other applicable policy limits to satisfy their judgment. To the contrary, the MCS-90 endorsement was not triggered because the State Farm policy was available to satisfy the requisite minimum level of financial responsibility. 2009 WL 2809387, at *15.

The court further rejected the Yeates’ argument that, because Carolina Casualty’s MCS-90 endorsement provided a $1,000,000 limit, the policy authorized an additional recovery against Carolina Casualty. This argument is unpersuasive because the $1,000,000 limit stemmed from the higher financial responsibility limits required for the transport of oil and certain hazardous cargo. Rather, the endorsement attaches only to the extent that it is required by the financial responsibility requirements. The MCS-90 does not operate to make the insurer liable on any amount its policy does not otherwise mandate. 2009 WL 2809387, at *16-*17. Carolina Casualty’s policy thus did not supply additional coverage for Bingham Livestock’s liability to the Yeateses. 2009 WL 2809387, at *17.