United States Court of Appeals,

Second Circuit.

SOMPO JAPAN INSURANCE COMPANY OF AMERICA, Plaintiff-Appellant,

v.

UNION PACIFIC RAILROAD COMPANY, Defendant-Appellee.

Docket No. 04-4066-CV.

Argued: July 14, 2005.

Decided: July 10, 2006.

Background: Insurer of tractors damaged during domestic rail portion of a continuous intermodal shipment originating in Japan brought action against rail carrier. The Southern District of New York, Duffy, J., granted partial summary judgment in favor of railroad, giving effect to the contract for carriage, which incorporated by reference the Carriage of Goods by Sea Act (COGSA), and effectively limited railroad’s liability to $500 per tractor, and insurer appealed.

Holdings: The Court of Appeals, Wesley, Circuit Judge, held that:

(1) Carmack Amendment applied to the domestic rail portion of a continuous intermodal shipment originating in foreign country and traveling under through bills of lading, and

(2) ocean carrier could not contractually extend COGSA’s terms to domestic rail subcontractor.

Vacated and remanded.

A shipment of thirty-two tractors, en route from Tokyo, Japan to Swanee, Georgia, was severely damaged when the train carrying the cargo derailed in Texas. The cargo owner, Kubota Tractor Corporation (“Kubota”), collected the full value of the tractors–$479,500–from its insurer, Sompo Japan Insurance Co. of America (“Sompo”). Subrogating Kubota’s claim, Sompo then brought this suit against defendant-appellee Union Pacific Railroad Co. (“Union Pacific” or “the Railroad”) in the Southern District of New York. The district court (Duffy, J.) granted partial summary judgment in favor of Union Pacific, giving effect to the contract for carriage, which incorporates by reference the Carriage of Goods by Sea Act (“COGSA”), Pub.L. 16 No. 74-521, 49 Stat. 1207 (1936) (codified at 46 U.S.C. app. § §  1301-1315), and effectively limits Union Pacific’s liability to $500 per tractor, or $16,000. See Sompo Japan Ins. of Am. v. Union Pac. R.R. Co., No. 03-1604, 2003 WL 22510361, at(S.D.N.Y. Nov.5, 2003).

On appeal, Sompo argues that the district court erred in finding that another statute, the Carmack Amendment to the Interstate Commerce Act of 1887 (“Carmack”), Act of June 29, 1906, ch. 3591, 34 Stat. 584 (1906) (current version at 49 U.S.C. §  11706), does not govern the Railroad’s liability in this case. We agree and accordingly vacate the district court’s order for partial summary judgment and remand this case for further proceedings.

Background

In July 2002, Kubota hired Mitsui OSK Line Ltd. (“MOL”), an ocean shipping company, to ship thirty-two tractors from Tokyo, Japan to Swanee, Georgia. As evidence of this agreement, MOL issued three identical bills of lading, contracts that “record[ ] that a carrier has received goods from the party that wishes to ship them, state[ ] the terms of carriage, and serve[ ] as evidence of the contract for carriage.” Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 18, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004). The bills of lading were “through” bills: they covered the entire journey from start to finish, including both the ocean and land legs. See id. at 25-26. Further, they were “intermodal” through bills, meaning that they contemplated multiple modes of transportation, including ocean and rail carriage. Pursuant to the bills of lading, MOL shipped the tractors by ocean transit from Tokyo to Los Angeles, California where the cargo was then transferred from MOL’s ship to MOL’s subcontractor, Union Pacific, for rail carriage to Georgia. Union Pacific issued electronic waybills  covering the rail carriage to Georgia. While Union Pacific was transporting the cargo, the tractors were damaged in a train derailment in Texas.

In the district court, Union Pacific argued that, pursuant to the MOL bills of lading, its liability should be limited to $500 per package. In particular, Union Pacific relied upon two provisions in the bills, Clause 29 and Clause 4. Clause 29 is a “clause paramount,” which identifies the law that will govern the rights and liabilities of all parties to the bill of lading. Stephen G. Wood, Multimodal Transportation: An American Perspective on Carrier Liability and Bill of Lading Issues, 46 Am. J. Comp. L. 403, 408 n. 37 (1998). The clause paramount in the MOL bills recognizes COGSA as the governing law for the ocean leg of the journey and further includes a “period of responsibility clause,” see id. at 408 n. 36, a contractual provision extending COGSA’s reach beyond “the period from the time when the goods are loaded on to the time when they are discharged from the ship.” 46 U.S.C. app. §  1301(e). The period of responsibility clause in the MOL bills of lading provides that “[MOL] shall be entitled to the benefits of the defences [sic] and limitations in the U.S. COGSA, whether the loss or damage to the Goods occurs at sea or not.” Sompo, 2003 WL 22510361, at(quoting MOL bills of lading) (second alteration in Sompo; emphasis removed).

Clause 4 of the MOL bills of lading constitutes what is referred to as a “himalaya clause,”  a contractual provision “extend[ing] to third parties the defenses, immunities, limitations or other protections a law or a bill of lading confers on a carrier.” Wood, supra, at 408 n. 35. The himalaya clause in the MOL bills expressly authorizes MOL to subcontract the carriage of Kubota’s tractors and grants all subcontractors “the benefit of all provisions herein benefiting the Carrier [MOL] as if such provisions were expressly for their benefit.” Sompo, 2003 WL 22510361, at(quoting MOL bills of lading) (emphasis removed). Combining the Clause 29 period of responsibility clause with the Clause 4 himalaya clause, Union Pacific argued that its liability as a subcontractor was limited to $500 per tractor.

The district court agreed with Union Pacific. It rejected Sompo’s contention that two other federal statutes–Carmack and the Staggers Rail Act of 1980 (“Staggers”), Pub.L. No. 96-448, 94 Stat. 1895 (codified at 49 U.S.C. §  11706)–governed the liability of Union Pacific in this case. Sompo argues on appeal, as it argued below, that Carmack and Staggers together take precedence over the COGSA liability limitation that the MOL bills of lading extend to Union Pacific. Although the district court recognized that Carmack and Staggers apply in certain circumstances to impose full liability upon a rail carrier for any losses caused by the railroad, it nevertheless ruled that, because MOL employed through bills of lading containing period of responsibility and himalaya clauses, the Carmack/Staggers statutory regime was inapplicable to this case. Sompo, 2003 WL 22510361, at *4. We disagree. Carmack applies to the domestic rail portion of a continuous intermodal shipment originating in a foreign country, like the one at issue here. While the through bills attempt to extend COGSA’s sweep inland, that contractual extension lacks the force of statute. And in our view, the intermodal through bills, written in the context of COGSA, falls short of the Staggers prerequisite for limiting a rail carrier’s Carmack liability. Carmack controls; a remand is required.

Discussion

I. The Statutory Landscape

The issues presented in this case arise out of the confluence of two fairly complex federal statutory schemes that govern different aspects of international commerce.

A. COGSA

COGSA “was lifted almost bodily from the Hague Rules of 1921, as amended by the Brussels Convention of 1924.” Robert C. Herd & Co. v. Krawill Mach. Corp., 359 U.S. 297, 301, 79 S.Ct. 766, 3 L.Ed.2d 820 (1959). The purpose of the Hague Rules was to establish “international uniformity in the law governing the carriage of goods by sea.” Michael F. Sturley, Uniformity in the Law iGoverning the Carriage of Goods By Sea, 26 J. Mar. L. & Com. 553, 556 (1995) (hereinafter “Uniformity in the Law”). “COGSA is the culmination of a multilateral effort ‘to establish uniform ocean bills of lading to govern the rights and liabilities of carriers and shippers inter se in international trade….” Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 537, 115 S.Ct. 2322, 132 L.Ed.2d 462 (1995) (quoting Robert C. Herd & Co., 359 U.S. at 301).

COGSA establishes a negligence-based liability regime. The statute also explicitly permits a carrier to limit its liability for loss or damage to the cargo it is carrying to $500 per “package.” 46 U.S.C. app. §  1304(5). A carrier cannot avail itself of the COGSA $500-per-package liability limitation unless the shipper is given a “fair opportunity” to declare a higher liability value for its cargo. Gen. Elec. Co. v. MV Nedlloyd, 817 F.2d 1022, 1028 (2d Cir.1987).

Thus, as long as the shipper is given a fair opportunity to declare a value higher than $500 per package–the higher value need not be the full value of the goods–the carrier’s maximum liability is limited to whatever value the shipper declares. If the shipper declares no value, the carrier’s liability is defaulted to $500 per package. But if the carrier fails to give the shipper a fair opportunity to declare a value, then the carrier is liable for the full value of the cargo.

By its terms, COGSA only applies to “the period from the time when the goods are loaded on to the time when they are discharged from the ship,” 46 U.S.C. app. §  1301(e), the so-called “tackle-to-tackle” period. But the statute also contemplates that parties will enter into agreements extending COGSA’s terms beyond the tackle-to-tackle period:

Nothing contained in [COGSA] shall prevent a carrier or a shipper from entering into any agreement, stipulation, condition, reservation, or exemption as to the responsibility and liability of the carrier or the ship for the loss or damage to or in connection with the custody and care and handling of goods prior to the loading on and subsequent to the discharge from the ship on which the goods are carried by sea.

46 U.S.C. app. §  1307. Thus, COGSA does not prevent a carrier in its bill of lading from choosing “to extend the [COGSA] default rule to the entire period in which the [cargo] would be under its responsibility, including the period of the inland transport.” Kirby, 543 U.S. at 29.

B. The Carmack Amendment and the Staggers Rail Act of 1980

In 1887, Congress passed the Interstate Commerce Act (“ICA”) and created the Interstate Commerce Commission (“ICC”). The ICA empowered the ICC to regulate railroad rates, a responsibility that in 1995 Congress transferred to the Surface Transportation Board (“Board”). See Interstate Commerce Commission Termination Act of 1995, Pub.L. No. 104-88, 109 Stat. 803 (codified generally at Title 49). Congress added Carmack to the ICA in 1906, see Act of June 29, 1906, ch. 3591, 34 Stat. 584 (1906), in an effort “to create a national scheme of carrier liability for goods damaged or lost during interstate shipment under a valid bill of lading.” Ting-Hwa Shao v. Link Cargo (Taiwan) Ltd., 986 F.2d 700, 704 (4th Cir.1993). Carmack applies to carriage by railroad or “by railroad and water” if the carriage is “under common control, management, or arrangement for a continuous carriage or shipment,” including “transportation in the United States between a place in … the United States and a place in a foreign country.” 49 U.S .C. §  10501(a). In enacting Carmack, Congress also intended “to relieve shippers of the burden of searching out a particular negligent carrier from among the often numerous carriers handling an interstate shipment of goods.” Reider v. Thompson, 339 U.S. 113, 119, 70 S.Ct. 499, 94 L.Ed. 698 (1950). Thus, Carmack allows a shipper to recover for damage or loss from either the delivering carrier or the carrier issuing the bill of lading or receipt.

Whereas COGSA establishes a negligence-like liability regime, Carmack  “imposes something close to strict liability upon originating and delivering carriers.” Rankin v. Allstate Ins. Co., 336 F.3d 8, 9 (1st Cir.2003). Indeed, Carmack effectively codified the strict liability rule that governed the liability of common carriers at common law. See Missouri Pac. R.R. Co. v. Elmore & Stahl, 377 U.S. 134, 137, 84 S.Ct. 1142, 12 L.Ed.2d 194 (1964). Once the shipper establishes a prima facie case of Carmack liability by showing “delivery in good condition, arrival in damaged condition, and the amount of damages,” id. at 138; see also 49 U.S.C. §  14706(a)(1), the carrier is liable “for the actual loss or injury to the property” it transports, 49 U.S.C. §  14706(a)(1), unless there is an available defense.

By 1976, the extensive regulatory scheme created by the ICA had prevented rail carriers from effectively competing with other modes of transportation. See Tokio Marine & Fire Ins., Co. v. Amato Motors, Inc., 996 F.2d 874, 877 (7th Cir.1993); W. Coal Traffic League v. United States, 694 F.2d 378, 384 (5th Cir.1982). As part of an expansive deregulation effort, Congress enacted the Staggers Rail Act of 1980, Pub.L. No. 96-448, 94 Stat. 1895 (codified at 49 U.S.C. §  11706), which, among other things, authorized the ICC “to exempt transportation that is provided by a rail carrier as part of a continuous intermodal movement.” 49 U.S.C. §  10502(f). Pursuant to this authority, the ICC exempted from regulation rail carriers, like Union Pacific, that operate one leg of a continuous intermodal movement. See 49 C.F.R. §  1090.2.

While this exempt order relieved certain rail carriers of rate regulation, it did not free them from all legal obligations to shippers. In particular, exempt rail carriers must satisfy the requirements of 49 U.S.C. §  10502(e), which states:

No exemption order issued pursuant to this section shall operate to relieve any rail carrier from an obligation to provide contractual terms for liability and claims which are consistent with the provisions of section 11706 of this title. Nothing in this subsection or section 11706 of this title shall prevent rail carriers from offering alternative terms nor give the Board the authority to require any specific level of rates or services based upon the provisions of section 11706 of this title.

Section 11706 is the Carmack provision governing the liability of rail carriers. It provides, among other things, that the “rail carrier and any other carrier that delivers the property and is providing transportation or service subject to the jurisdiction of the Board under this part are liable to the person entitled to recover under the receipt or bill of lading. The liability imposed under this subsection is for the actual loss or injury to the property.” 49 U.S.C. §  11706(a). Thus, exempt rail carriers, including those operating under an intermodal may limit their liability under Carmack by negotiating “alternative terms.” However, the combined effect of §  10502(e) and §  11706(a) is that rail carriers that wish to limit their liability must offer the shipper the option of full Carmack coverage, which includes both the Carmack version of strict liability and full coverage for loss. See Tokio Marine, 996 F.2d at 879 (“rail carriers still must offer full rates”); Am. Trucking Ass’ns, Inc. v. ICC, 656 F.2d 1115, 1124 (5th Cir.1981) (“the exemption does not and could not relieve rail carriers from the provisions of [§  11706]”); Co-Operative Shippers, Inc. v. Atchison, Topeka & Santa Fe Ry. Co., 613 F.Supp. 788, 791 (N.D.Ill.1985) (“[a]lthough freed from most regulation, [exempt rail carriers] are still subject to the liability provisions of [§  11706]”), overruled on other grounds, 840 F.2d 447 (7th Cir.1988); cf. Yamazen (U.S.A.), Inc. v. Chicago & Nw. Transp. Co., 790 F.2d 621, 622 (7th Cir.1986) (finding that §  11502(e), coupled with 11706(e), which states that a rail carrier or freight provider “may not provide by rule, contract, or otherwise … a period of less than 2 years for bringing a civil action against it under this section,” requires the carrier to offer the shipper a two-year filing period before offering alternative terms); Ferrostaal, Inc. v. Union Pac. R.R. Co., 109 F.Supp.2d 146, 149-50 (S.D.N.Y.2000) (same). If an exempt rail carrier fails to offer the shipper the option of coverage for the actual loss or injury to the property, then the shipper may sue the carrier under Carmack. See, e.g., Tokio Marine, 996 F.2d at 880.

As noted above, MOL’s through bills of lading gave Kubota a “fair opportunity” to declare a value for the tractors in excess of $500 per package, and Kubota declined. Thus, MOL did all that was required under COGSA to trigger the statute’s $500-per-package liability limitation. But Sompo argues forcefully on appeal that Carmack and Staggers apply to the domestic rail portion of a shipment that, like Kubota’s, originates in a foreign country and travels under a through bill of lading. We therefore must decide whether Carmack applies to the inland portion of Kubota’s shipment, a carriage of goods by rail shipped under a through bill of lading from a foreign country to a destination in the United States. If it does not, then the joint force of the period of responsibility and himalaya clauses will limit Union Pacific’s liability to $500 per package. If, however, Carmack does apply, we must resolve a potential conflict between Carmack’s possible imposition of full liability upon Union Pacific and COGSA’s liability limitation incorporated by reference in MOL’s bill of lading and extended to Union Pacific by virtue of the himalaya clause. If Carmack takes precedence over a contractual extension of COGSA, then we must address whether Union Pacific has complied with the requirements of Staggers so as to be permitted to limit its liability under Carmack. See 49 U.S.C. §  11706(c)(1), (c)(3)(A).

II. Carmack’s Applicability

Carmack applies to common carriers “providing transportation or service subject to the jurisdiction of the [Surface Transportation] Board.” 49 U.S.C. §  11706(a). The Board’s jurisdiction over rail carriers applies to “transportation in the United States between a place in … the United States and a place in a foreign country.” 49 U.S.C. §  10501(2)(A) & (F).

Sompo argues that “if the domestic rail transport is part of a larger transportation originating in a foreign country, then it fits the statutory requirement that it is a shipment between a place in the United States and a foreign country, and Carmack is applicable to it.” Not surprisingly, Union Pacific sees things differently: “[t]he Carmack Amendment is generally inapplicable where a through bill of lading contemplated inland transportation of goods.” The parties’ arguments reflect a difference of opinion in the courts regarding Carmack’s applicability to a through bill of lading covering a shipment of goods originating in a foreign country. Compare, e.g., Neptune Orient Lines, Ltd. v. Burlington N. & Santa Fe Ry. Co., 213 F.3d 1118, 1119 (9th Cir.2000); Swift Textiles, Inc. v. Watkins Motor Lines, Inc., 799 F.2d 697, 698-700 (11th Cir .1986); Berlanga v. Terrier Transp., Inc., 269 F.Supp.2d 821, 829-30 (N.D.Tex.2003); Canon USA, Inc. v. Nippon Liner Sys., Ltd. ., No. 90-C-7350, 1992 WL 82509, at *6-8 (N.D.Ill.1992), with Shao, 986 F.2d at 701-04; Capitol Converting Equipment, Inc. v. LEP Transp., Inc., 965 F.2d 391, 394-95 (7th Cir.1992); Toshiba Int’l Corp. v. M/V “Sea-Land Express,” 841 F.Supp. 123, 128 (S.D.N.Y.1994). Surprisingly, this is an issue of first impression in this Circuit.

Most courts that have answered this question tend to reiterate the Eleventh Circuit’s articulation of its holding in Swift Textiles v. Watkins Lines, Inc. that “when a shipment of foreign goods is sent to the United States with the intention that it come to final rest at a specific destination beyond its port of discharge,” Swift, 799 F.2d at 701, as is the case with a through bill of lading, then Carmack applies only if there is a separate bill of lading covering the inland portion of the shipment. See, e.g., Shao, 986 F.2d at 703; Capitol Converting, 965 F.2d at 394; Toshiba, 841 F.Supp. at 128. We agree with Swift’s mode of analysis but think that the court’s articulated holding is fatally flawed.

Swift involved a shipment of textile machinery from Switzerland to LaGrange, Georgia. There was no through bill of lading. Rather, the machinery was shipped from Switzerland to Savannah, Georgia under one bill of lading and then trucked by a motor carrier from Savannah to LaGrange under a separate bill of lading. Swift, 799 F.2d at 698. During the Savannah-to-LaGrange leg of the journey, one of the containers housing the machinery slid off the truck, and the contents of the container was damaged. See id. In 1986, when the case came before the Eleventh Circuit, the ICC’s jurisdiction over the shipment in question was governed by a provision that was nearly identical to that applying to rail carriers. Compare 49 U.S.C. §  10521(a)(1)(E) (repealed in 1995), with 49 U.S.C. §  10501(a)(2)(F). The provision stated that the ICC exercised jurisdiction over transportation of motor carriers “between a place in … the United States and a place in a foreign country to the extent the transportation is in the United States.” 49 U.S.C. §  10521(a)(1)(E) (repealed in 1995). The ICC had no jurisdiction, however, over a purely intrastate journey. [0]

For the court in Swift, there was no question that Carmack applied to the domestic leg of a shipment that began in a foreign country. Indeed, the court referred in the opinion to §  10521(a)(1)(E) as “the continuation of foreign commerce provision.” Swift, 799 F.2d at 699. Thus, the court understood that if the shipment of goods from Switzerland to LaGrange, Georgia, was one continuous foreign shipment, then Carmack applied. However, if there were two separate shipments–one from Switzerland to Savannah and another from Savannah to LaGrange–then Carmack did not apply to the inland portion of the trip. The motor carrier urged the court to view the separate domestic bill of lading covering the inland carriage as evidence of two separate, distinct shipments. The court rejected this argument and articulated an “intent test” for determining the nature of an intermodal shipment: “[t]he nature of a shipment is not determined by a mechanical inspection of the bill of lading nor by when and to whom title passes but rather by ‘the essential character of the commerce,’ United States v. Erie R .R. Co., 280 U.S. 98, 102, 50 S.Ct. 51, 74 L.Ed. 187 (1929), reflected by the ‘intention formed prior to shipment, pursuant to which property is carried to a selected destination by a continuous or unified movement,’ Great N. Ry. Co. v. Thompson, 222 F.Supp. 573, 582 (D.N.D.1963) (three-judge district court).” Swift, 799 F.2d at 699.

Applying this intent test, the court determined that the shipment represented a “continuation of foreign commerce” and therefore Carmack applied. “There was no reason for the container to come to rest in Savannah other than for the consignee’s customs broker to make arrangements for the Savannah to LaGrange leg of the journey.” Id. at 700. It was obvious the parties “intended [the shipment] to begin in Switzerland and end in LaGrange, Georgia.” Id. Having adopted a view of the shipment as a single continuous transport, the court considered it irrelevant that the motor carrier had issued a separate bill of lading for the final intrastate leg of the journey. Quoting the Supreme Court in Erie Railroad, the Swift court explained that the character of the shipment is “not affected by the fact that the transaction is … completed under a local bill of lading which is wholly intrastate….” Id. at 700 (quoting Erie R.R., 280 U.S. at 102).

Despite the clarity of Swift’s analysis, the court muddied the waters when it articulated its holding:

[W]hen a shipment of foreign goods is sent to the United States with the intention that it come to final rest at a specific destination beyond its port of discharge, then the domestic leg of the journey (from the port of discharge to the intended destination) will be subject to the Carmack Amendment as long as the domestic leg is covered by separate bill or bills of lading.

Id. at 701 (emphasis added). The court’s statement that a domestic bill of lading is necessary for Carmack to apply is perplexing to say the least. Indeed, it was the separate domestic bill of lading (covering a purely intrastate journey) in Swift that the motor carrier employed, unsuccessfully, to argue that Carmack did not apply. Once the Swift court had determined that the parties intended a continuous shipment from the foreign place of origin to the final destination, it deemed the separate domestic bill of lading to be irrelevant. Further, the version of Carmack in force at the time of Swift explicitly provided that a motor (or rail) carrier’s failure to issue a bill of lading did not remove the carrier from Carmack’s reach, see 92 Stat. at 1359, 1361, 1453, and that provision still exists as to rail carriers, see 49 U.S.C. §  11706(a).

The disconnect between Swift’s reasoning and the articulation of its holding has not gone unnoticed. See, e.g., Berlanga, 269 F.Supp.2d at 829. In fact, recognizing the inconsistency, one court has hypothesized that Swift’s use of the phrase “as long as” instead of “even if” was due to a typographical error. See Canon USA, 1992 WL 82509, at *7. We are therefore reluctant to rely on any line of precedent derived from Swift’s articulated holding. [1]

Nevertheless, although we reject Swift’s articulated holding, we have no hesitation about adopting Swift’s mode of analysis for determining Carmack’s applicability, and in fact we have done so before. See Project Hope v. M/V IBN SINA, 250 F.3d 67, 74-75 (2d Cir.2001). Under that analysis, we must first determine the nature of the shipment in question–whether it is a single continuous intermodal shipment or multiple shipments consisting of separate ocean and domestic legs. Then we must determine whether Carmack applies to the shipment at issue.

The answer to the first question is straightforward. Under the Swift intent test, which we applied in Project Hope, the domestic leg of the Kubota shipment is a continuation of foreign commerce rather than a separate and distinct interstate transport of goods. Kubota’s intention that the tractors travel from Japan to Swanee, Georgia was fixed at the time the shipment began in Japan, as evidenced by the through bill of lading designating Swanee, Georgia as the final destination. The fact that Union Pacific issued separate domestic waybills does not change the nature of the shipment. Cf. Project Hope, 250 F.3d at 75 (collecting cases supporting the proposition that the foreign commerce nature of a shipment is not affected by the issuance of a domestic bill of lading covering intrastate transport).

While it is relatively clear that Kubota’s shipment of tractors is a single continuous shipment of goods originating in a foreign country and destined for the United States, whether Carmack applies to the domestic rail portion of such a shipment is a more complicated question. To be clear, the source of the complexity is not the requirement of Swift’s articulated holding that Carmack applies to such a shipment only if there is also a separate domestic bill of lading. As we have already explained, that requirement is nonsensical in light of Swift’s own analysis, as well as the statute, and was likely the result of an inadvertent error. Rather, the complexity derives from the language and history of the statute itself.

“The starting point for [the] interpretation of a statute is always its language,” Community for Creative Non-Violence v. Reid, 490 U.S. 730, 739, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989), and “courts must presume that a legislature says in a statute what it means and means in a statute what it says there,” Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). As pertinent to this case, Carmack applies to “transportation in the United States between a place in … the United States and a place in a foreign country.” 49 U.S.C. §  10501(a)(2)(F). At first blush, the word “between” does not seem to imply a direction of travel; rather, it appears to describe simply the relationship that an object or activity bears with respect to two fixed points. Thus, the phrase “air service between the two cities” means that the air service is from one city to the other and vice versa. WEBSTER’S THIRD NEW INT’L DICTIONARY 209 (2002). Then again, the phrase “two cities” does not give priority to either of the two endpoints. Both rest on equal footing. By contrast, by providing that the Board has jurisdiction over “transportation … between … the United States and … a foreign country,” 49 U.S.C. §  10501(a)(2)(F), without also granting jurisdiction over transportation between a foreign country and the United States, the ICA might be read as distinguishing between exports and imports.

In a thoughtful analysis of Carmack’s applicability, a Texas district court relied in part upon a comparison of prior versions of the statute to find that Carmack applies to the domestic portion of international shipments regardless of the direction of travel. Berlanga, 269 F.Supp.2d at 826-27. Prior to 1978, the statute did not include the word “between” and instead covered the transportation of property “from any point in the United States to a point in an adjacent country.” F.J. McCarty Co. v. S. Pac. Co., 428 F.2d 690, 692 n. 1 (9th Cir.1970) (quoting 49 U.S.C. §  20(11)) (emphasis added). In 1978, Congress amended the Interstate Commerce Act, replacing the “from … to” construction with the word “between.” Amendments to the Interstate Commerce Act, Pub.L. No. 95-473, §  10501(a)(2)(G), 92 Stat. 1337, 1359 (1978). Employing the canon of statutory construction “requiring a change in language to be read, if possible, to have some effect,” Am. Nat’l Red Cross v. S. G., 505 U.S. 247, 263, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992), the court in Berlanga concluded that Congress, by changing this language in 1978, must have intended for Carmack’s applicability to the carriage of goods traveling in foreign commerce to no longer depend upon the shipment’s point of origin. 269 F.Supp.2d at 826-27.

However, the court in Berlanga, as well as subsequent courts, failed to notice that the 1978 amendments were adopted in a codification bill enacting the ICA into positive law, and it is well-established that courts should not “infer[ ] that Congress, in revising and consolidating the laws, intended to change their effect, unless such intention is clearly expressed.” Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 227, 77 S.Ct. 787, 1 L.Ed.2d 786 (1957). Congress expressed no such intention in the 1978 amendments. To the contrary, Congress made clear that the bill was intended to leave the law substantively unchanged. See H.R.Rep. No. 1395, 95th Cong., 2d Sess. 9 (1978), reprinted in U.S.Code Cong. & Ad. News 3009, 3018 (cited in In re Roll Form Prods., Inc., 662 F.2d 150, 153 & n. 5 (2d Cir.1981)).  [2]

Nevertheless, judicial interpretations of this earlier version of the ICA, combined with well-settled principles of statutory construction, lead us to conclude that even the pre-1978 statute, which contained the “from … to” language, provided that Carmack applied to the transportation of goods both exiting and entering the United States. When Carmack was first enacted, it did not apply to shipments of goods destined for foreign countries but was instead limited to purely interstate commerce. See Act of June 29, 1906, c. 3591, 34 Stat. 593 (originally codified at 49 U.S.C. §  20(11)); see also J.H. Hamlen & Sons Co. v. Ill. Cent. R. Co., 212 F. 324, 327 (E.D.Ark.1914). By contrast, the ICC’s regulatory jurisdiction originally included transportation “from any place in the United States to an adjacent foreign country.” Act to Regulate Commerce, Feb. 4, 1887, c. 104, 24 Stat. 379 (originally codified at 49 U.S.C. §  1). Thus, as of 1906, the ICA provision establishing the ICC’s jurisdiction covered a wider swathe of common carrier transportation than under Carmack, the ICA provision establishing a common carrier’s liability.

Congress eliminated that distinction in 1915 when it enacted the First Cummins Amendment, which extended Carmack’s application to transportation “from any point in the United States to a point in an adjacent foreign country.” Act of March 4, 1915, c. 176, 38 Stat. 1196, 1197. While the First Cummins Amendment brought certain foreign shipments within Carmack’s reach, there remained a question as to the precise boundaries of the “from … to” language.

In Galveston, Harrisburg & San Antonio Ry. Co. v. Woodbury, 254 U.S. 357, 359-60, 41 S.Ct. 114, 65 L.Ed. 301 (1920), the Supreme Court interpreted the “from … to” language contained in the ICA’s jurisdictional provision as encompassing both exports and imports. At issue in Woodbury was whether a railroad could avail itself of a tariff published with the ICC to limit its liability for a passenger’s trunk that was lost in transit from Canada to Texas. The Court explained that even under Carmack, carriers could limit their liability by publishing a tariff with the ICC and that this rule survived the First Cummins Amendment. Id. at 359. The rail passenger argued that, in order to take advantage of the tariff published with the ICC, the transportation in question had to be one over which the ICC could assert its jurisdiction. Id. Because the transportation in question originated in Canada rather than in the United States, the rail passenger argued, the transportation was not “from any place in the United States to an adjacent foreign country,” and therefore the ICC lacked jurisdiction. Id. The Supreme Court rejected this argument and, in what was later described euphemistically as a “prodigious feat of interpretation,” Note, Foreign Commerce and the Interstate Commerce Act, 40 Harv. L.Rev. 1130, 1134 (1927), read the “from … to” language as conferring upon the ICC jurisdiction over transportation in foreign commerce regardless of whether the transportation originated in the United States or in an adjacent foreign country, Woodbury, 254 U.S. at 359. Writing for the Court, Justice Brandeis reasoned that “[a] carrier engaged in transportation by rail to an adjacent foreign country is, at least ordinarily, engaged in transportation also from that country to the United States.” Id. Justice Brandeis found support for this bi-directional reading of the language in both ICC interpretations and Supreme Court cases interpreting similar language in analogous trade contexts. See id. at 360.

The use of similar language, let alone identical language, in two different provisions of the same statute is, as the Supreme Court has emphasized, “a strong indication that [the two provisions] should be interpreted pari passu,” i.e., in the same manner. Northcross v. Bd. of Ed. of Memphis City Sch., 412 U.S. 427, 428, 93 S.Ct. 2201, 37 L.Ed.2d 48 (1973) (per curiam). This principle of statutory construction holds true unless “there is strong evidence that Congress did not intend the language to be used uniformly.” Smith v. City of Jackson, 544 U.S. 228, 261, 125 S.Ct. 1536, 161 L.Ed.2d 410 (2005) (O’Connor, J., concurring in the judgment); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, — U.S. —-, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). Thus, while the Woodbury Court interpreted the “from … to” language only in that section of the ICA defining the ICC’s jurisdiction, one would think that the same interpretation would have applied to the identical language in Carmack. In general, however, lower courts have resisted that inclination, see, e.g., Sklaroff v. Pennsylvania R.R. Co., 184 F.2d 575, 575 (3rd Cir.1950); Strachman v. Palmer, 177 F.2d 427, 429 (1st Cir.1949); Condakes v. Smith, 281 F.Supp. 1014, 1015 (D.Mass.1968), and have tended instead to adopt the reasoning of an influential Pennsylvania Superior Court decision, Alwine v. Pennsylvania R. Co., 141 Pa.Super. 558, 15 A.2d 507 (Pa.Super.Ct.1940).

The Alwine court provided two rationales for its decision not to extend the Woodbury interpretation of the “from … to” language of the Carmack liability provision and instead to limit that interpretation to the language in the ICC jurisdiction provision. First, the Alwine court noted that the ICC itself had interpreted the First Cummins Amendment as “extend[ing] the territorial application of the provisions of the Carmack amendment to … goods exported to adjacent foreign countries.” Id. at 510 (quoting 52 I.C.C. 671, 683 (Apr. 14, 1919)). However, it is not clear that this quote represented the ICC’s official interpretation of the ICA. And even if it was an official interpretation, the ICC did not state, and to our knowledge has never stated, that Carmack applied exclusively to exports.

Second, the court in Alwine also relied upon an inference drawn from congressional action following the Woodbury decision. Id. It explained that in Woodbury, after the state court’s decision, which viewed the ICC jurisdiction provision as covering only exports, Congress set into motion an amendment to the ICA to make clear that the ICC had jurisdiction over the carriage of goods exported to, or imported from, an adjacent foreign country. Id. That amendment was finally enacted two months after the Supreme Court issued its decision in Woodbury. See Act of February 28, 1920, c. 91, 41 Stat. 456, 474. The court in Alwine reasoned that Congress’s failure, in the course of altering the language in the jurisdiction provision, to change the parallel language in Carmack, while at the same time making other minor revisions in Carmack, see id. 41 Stat. at 494, supported an inference that Congress no longer intended the two provisions to be co-extensive. Alwine, 15 A.2d at 510.

We are less sanguine than the Alwine court about the force of that inference. The Supreme Court has on numerous occasions expressed a “reluctan [ce] to draw inferences from Congress’ failure to act.” Brecht v. Abrahamson, 507 U.S. 619, 632-33, 113 S.Ct. 1710, 123 L.Ed.2d 353 (1993) (quoting Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 306, 108 S.Ct. 1145, 99 L.Ed.2d 316 (1988) (citing Am. Trucking Assns., Inc. v. Atchison, T. & S.F.R. Co., 387 U.S. 397, 416-18, 87 S.Ct. 1608, 18 L.Ed.2d 847 (1967))). That reluctance seems to be particularly apt in a case like Alwine, where the inference drawn would deny the effect of a Supreme Court precedent. Indeed, if anything, Congress’s re-enactment of Carmack in the Act of February 28, 1920 without changing the “from … to” language would seem to reflect a congressional intent to ratify the Supreme Court’s interpretation of that language in Woodbury. Cf. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 382 n. 66, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982) (“Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change ….” (quoting Lorillard v. Pons, 434 U.S. 575, 580-81, 98 S.Ct. 866, 55 L.Ed.2d 40 (1978))). We do not think that Congress, by simply making the language of the ICC jurisdiction provision more explicit in light of the Woodbury Court’s interpretation of that language, indicated any intent to restrict Carmack’s coverage solely to exports.

Nor do we think that the Supreme Court’s later decision in Reider v. Thompson, 339 U.S. 113, 70 S.Ct. 499, 94 L.Ed. 698 (1950), resolved the issue at hand, as the Seventh Circuit has suggested. See Capitol Converting, 965 F.2d at 394 (characterizing Reider as holding that Carmack does not cover goods shipped under a through bill of lading issued in a foreign country). The issue in Reider was whether Carmack applied to the inland rail carriage of a shipment of goods that originated in Buenos Aires, Argentina with the final destination of Boston, by way of New Orleans, Louisiana. Importantly, the original carrier in Reider did not issue a through bill of lading from Buenos Aires to Boston. 339 U.S. at 117. Accordingly, the Supreme Court viewed the shipment as consisting of two distinct legs: Buenos Aires to New Orleans and New Orleans to Boston, and the Court rightly pointed out that Carmack clearly applies to the interstate leg from New Orleans to Boston. Id. The Court then proceeded to clarify that, because the shipment involved no through bill of lading, it would not decide whether Alwine was correctly decided. See id. at 118 (“We need not now determine whether [Alwine] was correctly decided. For purposes of this case it is sufficient to note that there the Pennsylvania court emphasized that the shipment came into this country on a through bill of lading from Canada. The contract of carriage did not terminate at the border, as in the instant case.”). Thus, notwithstanding the Seventh Circuit’s suggestion to the contrary in Capitol Converting, the Reider Court specifically reserved from its judgment the question at issue here: whether Carmack applies to the domestic rail portion of a single, continuous shipment of goods originating in a foreign country.

Where does that leave us? We know that Woodbury interpreted the phrase “from a place in the United States to a place in an adjacent foreign country” in the ICC jurisdiction provision as encompassing both imports and exports. As we have noted, that interpretation should also govern the “from … to” language in Carmack in the absence of “strong evidence” that Congress wished for the language in the ICC jurisdiction provision to be interpreted differently from that of Carmack. See Smith, 544 U.S. at 261 (O’Connor, J., concurring). Because we have found no evidence, let alone “strong evidence,” of such congressional intent, we conclude that the Supreme Court’s decision in Woodbury would have governed the interpretation of the “from … to” language in Carmack prior to 1978, the year that Congress enacted the ICA into positive law. Accordingly, we find that at that time, Carmack applied to the domestic portion of a transportation of goods originating outside of the United States. [3] Although we might question the basis for the Woodbury Court’s interpretation, we cannot simply jettison a Supreme Court case because we disagree with it. “Even if a Supreme Court precedent was ‘unsound when decided’ … it remains the Supreme Court’s ‘prerogative alone to overrule one of its precedents .’ ” Bach v. Pataki, 408 F.3d 75, 86 (2d Cir.2005) (quoting State Oil Co. v. Khan, 522 U.S. 3, 9, 20, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997) (quoting Khan v. State Oil Co., 93 F.3d 1358, 1363 (7th Cir.1996) (Posner, J.))). Woodbury has never been overruled and therefore is still good law that we are obligated to follow.

Our interpretation of Carmack–that it applies to the domestic inland portion of a foreign shipment regardless of the shipment’s point of origin–also comports with Congress’s view of the law when Congress codified the ICA in 1978. In the codification bill, Congress struck the “from … to” language from Carmack altogether and made Carmack’s applicability turn on whether a “common carrier [is] providing transportation subject to the Interstate Commerce Commission.” 49 U.S.C. §  11706, 92 Stat. at 1453. Thus, Congress indicated that, in order to determine Carmack’s applicability, one must consult the ICC jurisdiction provision. Because the codification bill was intended to leave the substantive law unchanged, this structural re-arrangement of Carmack reflects Congress’s understanding that the boundaries of Carmack’s applicability have always been co-extensive with those of the ICC’s jurisdiction. Woodbury and the Act of February 28, 1920 (ratifying the Woodbury interpretation) clearly establish that the ICC’s jurisdiction includes transportation from a foreign country to the United States. Because the scope of the ICC jurisdiction provision is co-extensive with the scope of Carmack’s applicability and because the Woodbury Court interpreted the “from … to” language as applying to goods traveling in foreign commerce regardless of direction, it follows that the “from … to” language in Carmack also applies to goods in foreign commerce regardless of the direction of travel. We therefore conclude that Carmack applies to the domestic interstate leg of the Kubota shipment. [4]

III. The Carmack Amendment and COGSA

Because the period of responsibility and himalaya clauses in MOL’s through bills of lading together extend COGSA’s terms to subcontractors, like Union Pacific, the fact that Carmack also applies to the Union Pacific leg of the Kubota shipment creates a potential conflict between two different liability regimes. In our view, however, the conflict is not between two federal laws but rather between one federal law (Carmack) and a contract that, although incorporating the terms of another statute (COGSA), nevertheless lacks statute-like status.

Section 1307 of COGSA states:

Nothing contained in [COGSA] shall prevent a carrier or a shipper from entering into any agreement, stipulation, condition, reservation, or exemption as to the responsibility and liability of the carrier or the ship for the loss or damage to or in connection with the custody and care and handling of goods prior to the loading on and subsequent to the discharge from the ship on which the goods are carried by sea.

46 U.S.C. app. §  1307. Because COGSA only applies to “the period from the time when the goods are loaded on to the time when they are discharged from the ship,” id. §  1301(e), courts have consistently held that when COGSA is extended by contract beyond the tackles, as contemplated by §  1307, the statute does not apply of its own force, or ex proprio vigore, but rather as a contractual term. See Hartford Fire Ins. Co. v. Orient Overseas Containers Lines (UK) Ltd., 230 F.3d 549, 557 (2d Cir.2000); Colgate Palmolive Co. v. S/S Dart Canada, 724 F.2d 313, 315 (2d Cir.1983); Pannell v. U.S. Lines Co., 263 F.2d 497, 498 (2d Cir.1959); Inst. of London Underwriters v. Sea-Land Serv., Inc., 881 F.2d 761, 764-66 (9th Cir.1989); Croft & Scully Co. v. M/V SKULPTOR VUCHETICH, 664 F.2d 1277, 1280 (5th Cir.1982); Commonwealth Petrochems., Inc. v. S/S Puerto Rico, 607 F.2d 322, 325 (4th Cir.1979).

This view of COGSA finds further support in the fact that Congress explicitly provided that contracts extending the statute’s reach in ways other than over land–in particular, contractual extensions covering trade between United States ports (or “coastwise trade”)–do have statutory force. COGSA by its terms only applies to shipping “to or from ports of the United States” and is further limited to foreign trade. 46 U.S.C. app. §  1300. Shipping between the ports of a single nation falls under the jurisdiction of that nation alone and therefore does not raise the uniformity concerns the Hague Rules were intended to address. See Commonwealth Petrochems., 607 F.2d at 327; see also Michael F. Sturley, Proposed Amendments to the Carriage of Goods by Sea Act, 18 Hous. J. Int’l L. 609, 622-27 (1996). In the United States, coastwise trade remains governed by the Harter Act. [5] Although COGSA left the Harter Act’s application to domestic shipping largely unaffected, Congress created in COGSA what has become known as the “coastwise option,” which authorizes carriers and shippers in domestic trade to, in effect, contractually opt out of the Harter Act and into the COGSA regime, as long as they do so with an “express statement.” 46 U.S.C. app. §  1312; see also 2A-V BENEDICT ON ADMIRALTY §  42 (7th ed.1998). Thus, there is little dispute that Congress intended for certain contracts extending COGSA’s reach to supersede prevailing federal statutes.

However, Congress made an important textual distinction between contracts extending the statute’s terms to coastwise trade under §  1312 and contracts extending COGSA’s terms beyond the tackles, pursuant to §  1307. With respect to contracts under the coastwise option, Congress made clear that such contracts “shall be subjected [to COGSA] as fully as if subject… by the express provisions of [the statute].” 46 U.S.C. app. §  1312. Thus, when extended by contract to cover coastwise trade, COGSA does indeed act ex proprio vigore. [6] However, with respect to period of responsibility provisions, like the one in the MOL bills of lading, Congress simply stated that “[n]othing [in COGSA] shall prevent a carrier or a shipper from entering into any [such] agreement.” Id. §  1307. “[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) ((quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir.1972) (alteration in original)). Therefore, that Congress, in enacting §  1307, omitted language similar to the language in §  1312 is persuasive evidence that Congress did not wish for period of responsibility clauses to have the force of statute with the capability to supersede federal law.

In light of the contractual nature of period of responsibility provisions, courts have routinely held that contracts extending COGSA beyond the tackles must give way to conflicting law. See Colgate Palmolive, 724 F.2d at 315-16 (refusing to apply COGSA $500-per-package limitation in view of governing state law because “provisions of COGSA incorporated by contract can be valid only insofar as they do not conflict with applicable state law”); Wemhoener Pressen v. Ceres Marine Terminals, Inc., 5 F.3d 734, 739 (4th Cir.1993) (“To portions of the carriage that take place prior to loading or after discharge and therefore are not covered by the terms of COGSA, the Harter Act controls.”); Uncle Ben’s Int’l Div. of Uncle Ben’s, Inc. v. Hapag-Lloyd Aktiengesellschaft, 855 F.2d 215, 217 (5th Cir.1988) (holding that “[i]f the parties extend the provisions of COGSA to the preloading phase, any inconsistency with the Harter Act must yield to the Harter Act” but finding that the contractual incorporation of COGSA’s one-year statute of limitation was not inconsistent with the Harter Act); Toshiba Int’l Corp., 841 F.Supp. at 128 (suggesting that if Carmack applied to the inland portion of the journey, it would disallow the COGSA liability limitations incorporated by contract). [7] But see Schramm, Inc. v. Shipco Transp., Inc., 364 F.3d 560, 565 (4th Cir.2004) (assuming without discussion that a contract incorporating COGSA’s terms wins out over any conflict with the Harter Act).

In fact, in cases involving foreign trade where there is a conflict between a period of responsibility clause and the Harter Act–which, in international shipments, applies from the time when the goods are unloaded until “proper delivery”–the principal issue is not whether a contract incorporating COGSA’s terms must give way to conflicting provisions in the Harter Act, but rather whether there is in fact a conflict. “Because COGSA and the Harter Act are so similar, it often makes no difference which statute applies.” 2A-II BENEDICT ON ADMIRALTY §  14 (7th 9 ed.1998). Nevertheless, when courts have identified inconsistencies between the two statutes, they have held that the Harter Act supersedes the period of responsibility clause. For example, in R.L. Pritchard & Co. v. S.S. Hellenic Laurel, 342 F.Supp. 388, 391 (S.D.N.Y.1972), one of our district court’s noted that “[i]nsofar as the provisions of COGSA are inconsistent with the Harter Act, they cannot be incorporated into a bill of lading to cover the responsibilities of the carrier after discharge and before delivery of the cargo.” Id. at 391. The court held that the “fire exemption” provision of COGSA, 49 U.S.C. §  1304(2)(b)–under which the carrier is liable for losses due to fire only if caused by certain types of negligence is inconsistent with the Harter Act and therefore “null and void.” R.L. Pritchard & Co., 342 F.Supp. at 391. Similarly, in United States v. Ultramar Shipping Co., 685 F.Supp. 887 (S.D.N.Y.1987), the court found that the carrier’s burden of proof for demonstrating due diligence in assuring seaworthiness is more relaxed under COGSA than under the Harter Act. See id. at 894-95. Accordingly, the court held that the period of responsibility clause must yield to the Harter Act. Finally, in Birdsall, Inc. v. Tramore Trading Co., 771 F.Supp. 1193, 1199 (S.D.Fla.1991), the United States District Court for the Southern District of Florida held that COGSA’s statute of limitations cannot supersede the absence of such a limitation in the Harter Act for the pre- and post-loading phases. See id. at 896.

These cases are consistent with the policy motivating COGSA. The driving force behind COGSA was a need for uniformity in the law governing the contracts central to maritime commerce. See Vimar Seguros y Reaseguros, S.A., 515 U.S. at 537. Uniformity was considered necessary to minimize the costs arising in maritime transactions that touch the shores of, and involve parties haling from, the numerous maritime nations. For the carriers, shippers, insurers, cargo underwriters, and financial intermediaries involved in these transactions, this harmonization of the law governing the agreements that drive international shipping eliminated much of the uncertainty and unpredictability that prevailed before the adoption of the Hague Rules and COGSA, when a party would not know before the fact which law would control in the event of a lawsuit under the bill of lading. However, the Hague Rules (and by extension COGSA) only sought to achieve uniformity in the law governing the international carriage of goods by sea. Other types of carriage, including land-based carriage, were to be governed by the law of the individual nations that participated in the international convention at the Hague. See Sturley, Uniformity in the Law, supra, at 573-74. The United States’ decision to preserve the application of the Harter Act did not “sacrifice international uniformity for the simple reason that the international community made no effort to establish a uniform rule” governing the carriage of goods outside of the tackle-to-tackle period. Id.

Consistent with the treaty’s intent, Congress specifically provided in COGSA that the statute would have no effect upon laws applying to the inland carriage of goods:

Nothing in [COGSA] shall be construed as superseding any part of [the Harter Act], or of any other law which would be applicable in the absence of [COGSA], insofar as they relate to the duties, responsibilities, and liabilities of the ship or carrier prior to the time when the goods are loaded on or after the time they are discharged from the ship.

46 U.S.C. app. §  1311. As Senator White explained in the Commerce Committee’s report of the bill to Congress, “[COGSA] supersedes the so-called ‘Harter Act’ from the time the goods are loaded on the ship to the time they are discharged from the ship. Otherwise our law remains precisely as it is, unaffected and unimpaired by the proposed legislation.” 1 Legislative History of the Carriage of Goods by Sea Act and the Travaux Préparatoires of the Hague Rules, at 589 (Michael F. Sturley ed., 1990). Although §  1311 makes specific reference to the Harter Act, it also preserves from COGSA’s reach “any other law which would be applicable in the absence of [COGSA], insofar as they relate to the duties, responsibilities, and liabilities of the ship or carrier prior to the time when the goods are loaded on or after the time they are discharged from the ship.” 46 U.S.C. app. §  1311 (emphasis added). Carmack is such a law. Accordingly, we hold that the contractual provision extending COGSA’s terms inland must yield to Carmack. Therefore, we hold that Carmack governs Union Pacific’s liability in this case.

Union Pacific would have us rely upon the Supreme Court’s recent decision in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004), but Kirby does not alter our analysis. In Kirby, the Supreme Court held that federal law should govern the interpretation of a through bill of lading consisting of sea and land portions, as long as the sea portions are “substantial.” Id. at 27. The shipper, Kirby, had hired a freight forwarder to arrange for the shipment of machinery from Switzerland to Huntsville, Alabama. The freight forwarder hired a German ocean shipping company to transport the cargo, and the ocean shipping company then contracted with a railroad, Norfolk Southern, to carry the goods by rail from the port of discharge–Savannah, Georgia–to the final destination, Huntsville, Alabama. See id. at 19. The bill of lading between the ocean shipping company and Norfolk Southern contained a period of responsibility clause and a himalaya clause conferring the benefit of COGSA’s $500-per-package liability limitation on independent contractors, like Norfolk Southern. See id. at 19-20. When the goods were damaged after the train derailed en route to Huntsville, Norfolk Southern claimed that its liability was limited to $500 per package, as provided for in the bill of lading. [8] The cargo owner, Kirby, argued that the period of responsibility clause should be interpreted in light of state agency law principles, in which case the railroad was not entitled to benefit from the himalaya clause because the freight forwarder was not acting as Kirby’s agent when it received the ocean shipping company’s bill of lading. Id. at 22.

The Supreme Court found that the bill of lading, although covering carriage by both sea and land, was nevertheless a maritime contract to which federal law applied. See id. at 23-27. Adopting a conceptual approach, the Court stated that “so long as a bill of lading requires substantial carriage of goods by sea, its purpose is to effectuate maritime commerce–and thus it is a maritime contract … [even if] it also provides for some land carriage…. If a bill’s sea components are insubstantial, [however,] then the bill is not a maritime contract.” Id. at 27. The Court further explained that in applying federal law, it was avoiding the “[c]onfusion and inefficiency [that] will inevitably result if more than one body of law governs a given contract’s meaning,” id. at 29, and thereby was promoting “the uniformity of general maritime law,” id. at 28. The Court noted that in applying a single body of law to the contract, it was also “reinforc[ing] the liability regime Congress established in COGSA.” Id at 29.

Union Pacific contends that the same concern for uniformity and consistency in interpreting international maritime contracts “demands that provisions of ‘through bills of lading’ which extend limitations of liability to inland carriers should be analyzed under COGSA and not the Carmack Amendment.” We cannot read Kirby so broadly. In Kirby, the Court was primarily concerned with the lack of uniformity and consistency that would result if state law were applied to contracts extending COGSA’s terms inland. That is a significant concern, especially for the myriad parties potentially responsible for an inland carrier’s damage to goods who cannot know before the fact which state law might define the contours of their liability. The Supreme Court’s decision that national law will govern the interpretation of an international bill of lading with a substantial sea component adroitly avoids that problem.

However, in Kirby, the cargo owner failed to raise the issue of Carmack’s applicability. See Brief for the United States as Amicus Curiae at 12, Norfolk So. Ry. Co. v. Kirby, 543 U.S. 14, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004) (No. 02-1028), 2003 WL 22762727. Therefore the only issue before the Court was the interaction between state law and contractual provisions extending COGSA’s terms to a rail carrier. Consequently, Kirby only established the principle that maritime contracts should be interpreted in light of federal maritime law. Notwithstanding Union Pacific’s argument to the contrary, it does not follow from that principle that the only federal law to apply is COGSA. Nor can we accept the argument that Carmack–what Union Pacific refers to as a “non-maritime federal law”–cannot play a role in governing the terms of the domestic carriage portion of a maritime contract. Federal maritime law consists of both federal common law and federal statutes. Although federal common law plays a more prominent role in the maritime context than in others, where it remains largely interstitial, it nevertheless only applies in the absence of a relevant statute. See, e.g., E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 864, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986) (“Absent a relevant statute, the general maritime law, as developed by the judiciary, applies.”). What constitutes a relevant federal statute is determined solely by whether a given statute applies by its own terms to a particular set of facts. There is no additional requirement that only those federal statutes that a court deems “inherently maritime” can govern the interpretation of a maritime contract.

To apply COGSA here to the exclusion of Carmack would be to contradict well-established circuit precedent holding that period of responsibility provisions do not have statute-like status and would undermine the text of the statute itself, which explicitly states that COGSA does not affect laws governing the carriage of goods prior to loading and after discharge. 49 U.S.C. app. §  1311. [9] We cannot interpret the Kirby Court’s language concerning the policy underlying COGSA–language that at most merely supported, but was far from central, to the Court’s holding that federal law should apply instead of state law–as implying that a contract extending COGSA inland should supersede an otherwise applicable federal law. Without further guidance from the Supreme Court or from Congress, we must rely on precedent and the plain language of the statutory scheme.

IV. Compliance with the Carmack Amendment and the Staggers Rail Act

Now that we have determined that Carmack applies to the domestic rail portion of an international shipment originating in a foreign country and traveling under a through bill of lading, even where the parties have extended COGSA’s liability provisions to domestic rail carriers, one question remains: when Union Pacific negotiated the applicable terms of carriage of Kubota’s tractors, did it provide the shipper an opportunity, consistent with Staggers, see 49 U.S .C. § §  10502(e); 11706(a), (c)(3), to receive full Carmack liability coverage as well as “alternative terms”? If so, then under Carmack and Staggers, see 49 U.S.C. §  11706(c)(3), such alternative terms would circumscribe Union Pacific’s liability. If not, and in the absence of any other defense, then Union Pacific, having failed to comply with the Carmack and Staggers requirements, would be liable for the full value of the tractors. Because the district court determined that COGSA, rather than Carmack, applied to the Kubota shipment, it did not have the opportunity to address whether Union Pacific satisfied Staggers. Moreover, the question of whether Union Pacific satisfied Staggers raises potential issues of fact and law that the district court, in the first instance, is in a better position to evaluate than are we. Accordingly, we find it prudent to remand the case to the district court to address whether Union Pacific satisfied the requirements of 49 U.S.C. §  10502(e).

We see no reason, however, to refrain from addressing Union Pacific’s argument, advanced on appeal, that the MOL bills of lading satisfy Staggers. Union Pacific urges us to view the $500-per-package liability limitation in the MOL bills of lading as “alternative terms” and contends that Clause 29(2) of the MOL bills “gave Kubota the opportunity to declare the full value of the cargo and receive full value coverage as required by 49 U.S.C. §  11706.” Clause 29(2) provides:

If the U.S. COGSA applies as Clause 29(1) above, neither the Carrier nor the Vessel shall, in any event, be or become liable for any loss or damage to or in connection with the Goods in an amount exceeding $500.00 per package, lawful money of the United States or in the case of Goods not shipped in packages, per customary freight unit, unless the value of the Goods has been declared and inserted in the declared value box on the face hereof, in which case Clause 6(2) shall apply.

Union Pacific’s argument is without merit because, although Clause 29(2) provides the option of full coverage under COGSA, it does not provide the option of full coverage under Carmack. Of course, substituting the liability scheme available under COGSA for that available under Carmack might be a harmless error if the liability rules under COGSA and Carmack were identical. But as discussed above, COGSA liability is grounded in negligence while Carmack liability is rooted in strict liability. Thus, Union Pacific’s argument that it is liable under either COGSA’s or Carmack’s standard of care misses the point. Because COGSA and Carmack create two different liability standards, we cannot assume that the shipper contracting with Union Pacific had the opportunity to choose among several types of liability coverage and opted not to pay a higher freight rate for full coverage under a strict liability rule.

While we hold that the MOL bills of lading do not satisfy Staggers, we express no opinion as to any other potential contention that Union Pacific complied with the requirements of Carmack and Staggers.

Conclusion

For the foregoing reasons, we conclude that Carmack governs Union Pacific’s liability in this case. We further conclude that the MOL bills of lading do not satisfy the Staggers requirement that the shipper be given an opportunity to receive full Carmack liability coverage before accepting alternative terms. We remand this case to the district court to consider any other potential arguments that Union Pacific might raise that it complied with the requirements of Carmack and Staggers. Accordingly, we vacate the judgment of the district court and remand the case to the court for further proceedings consistent with this opinion.

The Honorable David G. Trager, Judge of the United States District Court for the Eastern District of New York, sitting by designation.

After the district court denied Sompo’s motion for reconsideration, the parties stipulated to a final judgment subject to Sompo’s right to appeal. See Sompo Japan Ins. of Am. v. Union Pac. R.R. Co., No. 03-1604 (S.D.N.Y. Nov. 18, 2003); Sompo Japan Ins. Co. of Am. v. Union Pac. R.R. Co., No. 03-1604 (S.D.N.Y. March 31, 2004).

There is some confusion as to how exactly the rail shipment was subcontracted to Union Pacific. See Sompo, 2003 WL 22510361, atn. 2. How the subcontract was entered is of no moment to the resolution of this appeal.

Like bills of lading, waybills are contracts for the carriage of goods. 1 T. SCHOENBAUM, ADMIRALTY LAW §  10-11 (4th ed.2006). But in contrast to bills of lading, waybills are nonnegotiable. Id.

The clause derives its name “from the steamship ‘Himalaya’ which was involved in Adler v. Dixon, [1955] 1 Q.B. 158 (C.A.1954).” Toshiba Int’l Corp. v. M/V “Sea-Land Express”, 841 F.Supp. 123, 125 n. 4 (S.D.N.Y.1994) (alteration in original).

Under COGSA, a carrier may avoid liability on a number of grounds, including “due diligence” with respect to damage caused by unseaworthiness. See 46 U.S.C. app. §  1304(1). With respect to damage caused by something other than unseaworthines, the carrier can avoid liability by proving among other things that he was without actual fault and privity and that his agents or servants were without fault or neglect. See id. §  1304(2)(q).

The statute itself does not define the term “package,” which is a term that is largely fact-dependent. See 2A-XVI BENEDICT ON ADMIRALTY §  167 (7th ed.1998). In any case, the definition of “package” is not at issue in this case.

The Supreme Court has indicated that Carmack preserved the defenses available to common carriers at common law. See Missouri Pac. R.R., 377 U.S. at 137-38. Thus, even under Carmack, a carrier is relieved of liability if it can prove (1) that it was free from negligence, and (2) that the damage to the cargo was caused by one of five excusable factors: (a) an act of God, (b) the public enemy, (c) an act of the shipper himself, (d) public authority, or (e) the inherent vice or nature of the goods. Id.

At the time these cases were decided, 49 U.S.C. §  11706 was codified at 49 U.S.C. §  11707.

0. The statute gave the ICC jurisdiction over transportation by motor carrier between “a State and a place in another State” and between “a State and another place in the same State through another State.” Act to Revise the Interstate Commerce Act, Pub.L. 95-473, 92 Stat. 1337, §  10521(a)(1)(B), 1361-62 (1978). But because the entire domestic leg of the journey took place solely within one state, these provisions did not apply.

1. For an illustration of the confusion caused by Swift’s articulated holding, one need look no further than the Seventh Circuit’s opinion in Capitol Converting, 965 F.2d at 391. In an attempt to rationalize Swift’s articulated holding, the court in Capitol Converting explained that Carmack only applies to a shipment of goods originating in a foreign country if there is a “separate domestic segment,” as evidenced by a separate domestic bill of lading. Id. at 394. But this surely cannot be the rationale underlying Swift’s articulated holding because the Swift court clearly viewed the domestic transport at issue in that case as part of a single continuous shipment rather than as a separate domestic shipment. See Swift, 799 F.2d at 700 (“[I]t cannot be disputed that the shipment was intended to begin in Switzerland and end in LaGrange, Georgia.”). Further, the Swift court explicitly stated that Carmack applies to such a “continuation of foreign commerce.” Id. Moreover, had the Swift court viewed the domestic shipment in that case as separate and distinct from the rest of the transport, as Capitol Converting suggests, it would clearly have held that Carmack did not apply because, unlike the domestic interstate shipment in Capitol Converting, the domestic shipment in Swift was an intrastate shipment to which Carmack clearly does not apply. Id. at 699. Thus, Capitol Converting’s rationalization of Swift is wholly unpersuasive. Regrettably, it has proven to be influential. See, e.g., Tokio Marine & Fire Ins. Co. v. Kaisha, 25 F.Supp.2d 1071, 1081 (C.D.Cal.1997); N.Y. Marine & Gen. Ins. Co. v. S/S “Ming Prosperity”, 920 F.Supp. 416, 425 (S.D.N.Y.1996); Toshiba, 841 F.Supp. at 128.

2. In particular, Congress stated the following:

Like other codifications undertaken to enact into positive law all titles of the United States Code, this bill makes no substantive change in the law. It is sometimes feared that mere changes in terminology and style will result in changes in substance or impair the precedent value of earlier judicial decisions and other interpretations. This fear might have some weight if this were the usual kind of amendatory legislation where it can be inferred that a change of language is intended to change substance. In a codification statute, however, the courts uphold the contrary presumption: the statute is intended to remain substantively unchanged.

H.R.Rep. No. 1395, 95th Cong., 2d Sess. 9 (1978), reprinted in U.S.Code Cong. & Ad. News 3009, 3018.

3. One could fairly raise the objection that, regardless of the proper interpretation of the “from … to” language in the pre-codification version of Carmack, the pre-codification version of the statute contained language making clear that Carmack only applied to international shipments of goods involving “an adjacent foreign country,” Berlanga, 269 F.Supp.2d at 827 (quoting 49 U.S.C. §  20(11) (1976) (emphasis added)), and that the codification bill’s omission of the word “adjacent” should not be interpreted as a change in the law. Under this objection, it would follow that Carmack does not apply in this case because the Kubota shipment involved transportation from a non-adjacent country, Japan, to Georgia. This objection, however, is foreclosed by our decision in Project Hope. Focusing solely on the post-codification language, we held in Project Hope that Carmack applied to the domestic motor carriage portion of an international shipment originating in Virginia and destined for a non-adjacent country, Egypt.

See Project Hope, 250 F.3d at 75. Although Project Hope involved motor, rather than rail, carriage, the post-codification language governing the Board’s jurisdiction, and therefore Carmack’s applicability, is identical regardless of the mode of transport. Compare 49 U.S.C. §  13501(1)(E) with 49 U.S.C. §  10501(2)(F). Thus, we find ourselves bound by Project Hope’s holding, which effectively extended Carmack’s applicability to international shipments involving non-adjacent foreign countries.

4. We note that, even if we were to view Union Pacific’s domestic, interstate carriage as a shipment entirely distinct from the rest of the transport, Carmack would still apply by virtue of 49 U.S.C. §  10501(a)(2)(A), because the Union Pacific waybill covers the interstate carriage of goods.

5. Enacted in 1898, the Harter Act imposes a duty of “proper loading, stowage, custody, care, [and] proper delivery.” 46 U.S.C. app. §  190. It prohibits any exculpation clause in a bill of lading or shipping document relieving the carrier from liability arising out of negligence or fault in loading, stowage, custody, care, delivery of cargo, and the provision of a properly equipped and seaworthy vessel. See 46 U.S.C. app. § §  190, 191. Like COGSA, the Harter Act also provides for exoneration of the carrier in certain circumstances, including “errors of navigation,” “dangers of the sea,” and “acts of God.” 46 U.S.C. app. §  192. Although COGSA superseded the Harter Act with respect to the tackle-to-tackle period of international shipments, the Harter Act nevertheless continues to govern the carrier’s duties in international shipments prior to the time when the goods are loaded on the ship and after the time they are discharged from the ship, until “proper delivery.” See Wemhoener Pressen v. Ceres Marine Terminals, Inc., 5 F.3d 734, 741-42 (4th Cir.1993) (“[‘Proper delivery’ includes] actual or constructive delivery. Actual delivery consists [of] completely transferring the possession and control of the goods from the vessel to the consignee or his agent. Constructive delivery occurs where the goods are discharged from the ship upon a fit wharf and the consignee receives due and reasonable notice that the goods have been discharged and has a reasonable opportunity to remove the goods or put them under proper care and custody.” (quoting B. Elliott (Canada) Ltd. v. John T. Clark & Son, 704 F.2d 1305, 1308 (4th Cir.1983) (in turn quoting Orient Overseas Line, Inc. v. Globemaster Baltimore, Inc., 33 Md.App. 372, 365 A.2d 325, 335-36 (Md.1976)))). “It is clear from the legislative history that Congress intended the Harter Act to continue to apply to all cases not governed by COGSA.” 2A-II BENEDICT ON ADMIRALTY §  14 (7th ed.1998). Because COGSA only applies to the tackle-to-tackle period in international shipments, see 46 U.S.C. app. §  1300 (“Every bill of lading or similar document of title which is evidence of a contract for the carriage of goods by sea to or from ports of the United States, in foreign trade, shall have effect subject to the provisions of this Act.” (emphasis added)), the Harter Act continues to apply to trade between United States ports. Id. Similarly, because COGSA specifically exempts from its coverage goods stored on the deck of a ship, see 46 U.S.C. app. §  1304, courts have also held that the Harter Act applies to damage to goods in international trade during the tackle-to-tackle period, as long as the goods were carried on deck, see, e.g., Blanchard Lumber Co. v. S.S. Anthony II, 259 F.Supp. 857, 865 (S.D.N.Y.1966).

6. Accordingly, the First and Ninth Circuits, along with the Southern District of New York, have held that COGSA applies with the force of statute when a bill of lading in domestic trade incorporates COGSA’s terms with an “express statement.” Hanover Ins. Co. v. Shulman Transp. Enters., Inc., 581 F.2d 268, 270 & n. 2 (1st Cir.1978); Pan Am. World Airways v. Cal. Stevedore & Ballast Co., 559 F.2d 1173, 1175 n. 3 (9th Cir.1977) (per curiam); Orion Ins. Co. v. M/V “Humacao”, 851 F.Supp. 575, 578 (S.D.N.Y.1994); Watermill Export, Inc. v. MV Ponce, 506 F.Supp. 612, 614-15 (S.D.N.Y.1981). The Fourth and Fifth Circuits, on the other hand, have held that, notwithstanding §  1312’s language to the contrary, COGSA applies simply as a contractual term even when extended to domestic bills of lading. Commonwealth Petrochems., 607 F.2d at 326-27; Ralston Purina Co. v. Barge Juneau & Gulf Carribean Marine Lines, Inc., 619 F.2d 374, 375-76 (5th Cir.1980) (per curiam). But see Burdines, Inc. v. Pan-Atlantic S.S. Corp., 199 F.2d 571, 573 (5th Cir.1952).

7. In Norfolk Southern Ry. Co. v. Kirby, the Supreme Court held that a through bill of lading consisting of a “substantial” sea component is governed by federal law, even if the bill covers inland carriage. 543 U.S. at 27. Thus, Kirby would appear to effectively overrule those cases, like Colgate Palmolive, that hold that contracts extending COGSA’s terms beyond the tackles must yield to conflicting state law, but only to the extent that the bills of lading in those cases consist of a sea component that is “substantial.”

8. Norfolk Southern also sought to insulate itself by relying on the himalaya clause in the bill of lading between the freight forwarder and the ocean shipping company. However, the interpretation of that himalaya clause raised the question of the meaning of Supreme Court precedent rather than which law, federal or state, to apply. See Kirby, 543 U.S. at 30 (explaining that the interpretation “turns only on whether the Eleventh Circuit correctly applied this Court’s decision in Robert C. Herd & Co. v. Krawill Machinery Corp., 359 U.S. 297, 79 S.Ct. 766, 3 L.Ed.2d 820 (1959)”). Thus, it is less relevant to our discussion here, which is concerned with the correct law to apply when federal laws conflict with a contract extending COGSA’s reach.

9. Section 1311 was irrelevant to the Court’s analysis in Kirby . Once again, §  1311 states: Nothing in [COGSA] shall be construed as superseding any part of [the Harter Act], or of any other law which would be applicable in the absence of [COGSA], insofar as they relate to the duties, responsibilities, and liabilities of the ship or carrier prior to the time when the goods are loaded on or after the time they are discharged from the ship.

46 U.S.C. app. §  1311. Once the Kirby Court had determined that federal, not state, law governed the bill of lading, state law would not have been “applicable in the absence of [COGSA],” and therefore §  1311 did not require that the period of responsibility provision yield to state law.

— F.3d —-, 2006 WL 1900996 (2nd Cir.(N.Y.))

Briefs and Other Related Documents (Back to top)

• 04-4066 (Docket) (Jul. 26, 2004)

END OF DOCUMENT

Motions, Pleadings and Filings

United States District Court,

E.D. California.

CLARENDON NATIONAL INSURANCE COMPANY, a New Jersey Corporation, Plaintiff,

v.

INSURANCE COMPANY OF the WEST, a Texas Corporation, et al., Defendants.

Insurance Company of the West, Counter-Claimant,

v.

Clarendon National Insurance Company, Counter-Defendant.

No. 1:99-cv-5461-SMS.

July 7, 2006.

Andrew Karonis, Schindel Farman And Lipsius, New York, NY, Michael John Czeshinski, Wilkins Drolshagen and Czeshinski, Fresno, CA, for Plaintiff.

James Patrick Wagoner, McCormick Barstow Sheppard Wayte and Carruth, Fresno, CA, for Defendants.

Andrew Karonis, Ira S. Lipsius, Lorienton Palmer, Schindel Farman and Lipsius, New York, NY, Michael John Czeshinski, Wilkins Drolshagen and Czeshinski, Fresno, CA, for Counter-Defendant.

James Patrick Wagoner, McCormick Barstow Sheppard Wayte And Carruth, Fresno, CA, for Counter-Claimant.

MEMORANDUM OF LAW, FINDINGS OF FACT, AND CONCLUSIONS OF LAW FOLLOWING COURT

TRIAL

SANDRA M. SNYDER, Magistrate Judge.

This matter was tried to the Court on September 20 and 21, 2004. Ira S. Lipsius and Andrew Karonis of Shindel, Farman & Lipsius, LLP, appeared and argued on behalf of Plaintiff Clarendon National Insurance Company (Clarendon); and James P. Wagoner and Dana E. Denno of McCormick, Barstow, Sheppard, Wayte & Carruth, LLP, appeared and argued on behalf of Defendant Insurance Company of the West (ICW). The joint pretrial statement filed on May 14, 2004, was adopted in place of the earlier pretrial order as the order governing the trial. (R.T. at 6.) Transcripts of the trial were filed in this Court on November 2, 2004; by February 8, 2005, the parties had submitted Defendant’s post-trial brief, both parties’ proposed findings of fact and conclusions of law and replies thereto, and Defendant’s reply to Plaintiff’s Appendix. On August 23, 2005, each party filed supplemental briefing as directed by the Court. The Court has considered these matters as well as all the briefing submitted before the trial, and the matter has been submitted to the Court. The matter has been referred to the Magistrate Judge for all proceedings, including the entry of final judgment, pursuant to 28 U.S.C. §  636(c), Fed.R.Civ.P. 73(b), and Local Rule 73-301.

ISSUES TRIED

The parties have stipulated that all legal issues resolved by the Court’s order of June 30, 2000, with the sole exception of the Court’s determination regarding the materiality of G & P’s alleged misrepresentation which is set forth at II.C. of the June 30, 2000 order, are deemed the law of the case. (Joint Pretrial Statement and Pretrial Order filed May 14, 2004 at 28.)

In the order of June 30, 2000, Judge Coyle determined that the ICW policy’s coverage of G & P under the base policy is primary over the Clarendon policy; the Clarendon policy’s MCS-90 endorsement provides no coverage for purposes of disputes among insurers over ultimate liability and thus provides no coverage as against ICW; and Clarendon is entitled to indemnity/reimbursement of legal fees Clarendon paid in defending H & G because Clarendon’s liability arises only from the MCS-90, a governmentally required filing.

In the order of January 16, 2001, Judge Coyle granted Defendant’s motion for a new trial or to alter and amend judgment, determining that there was a dispute of material fact regarding whether G & P engaged in material misrepresentation and/or concealment in applying for the ICW policy which had not been waived or lost by estoppel because neither waiver nor estoppel had been established on the evidence submitted by Clarendon, the subrogee of G & P, ICW’s insured.

At the trial, the Court determined that Judge Coyle had thus already decided that the ICW base policy covering G & P was primary and that the truck, which included the trailer, was a specifically described auto. (R.T. at 10-11.) The Court further concluded that in addition to the misrepresentation defense to ICW’s coverage, the trial would also cover the issues of waiver and/or estoppel against denying coverage on the ground of misrepresentation. (Id. at 11-12.)

The parties reserved the right to stipulate to the amounts expended by the parties in defending underlying legal actions that were filed as a result of the accident in which the insured was involved. (Id. at 18-19.)

Therefore, the issues tried at the bench trial in September 2004 are whether or not material misrepresentation or concealment rendered the ICW insurance contract void or otherwise provided a defense to ICW, and whether or not this defense was waived, or ICW is estopped to raise it.

MEMORANDUM OF LAW

I. Governing Law

In his order of June 30, 2000, Judge Coyle determined that the law governing the interpretation of the policies and the insurer’s obligations was the substantive law of California. Id. at 10-12. Neither party seeks to reopen that issue or argues that any other law should govern the issues remaining in dispute. Thus, California law governs.

II. Burden of Proof, Persuasion; Defense

Defendant has the burden of proof by a preponderance of the evidence of each fact the existence or nonexistence of which is essential to the affirmative defense of misrepresentation. Cal. Evid.Code § §  115, 500; Thompson v. Occidental Life Ins. Co. of California, 9 Cal.3d 904, 915-916, 919 (1973); see, Liodas v. Sahadi, 19 Cal.3d 278, 286-90 (1977). The elements in the present case   are intentionally false material misrepresentation or concealment of facts with the intent to defraud and in order to obtain insurance coverage; a mere mistake or negligence is not sufficient. Leasure v. MSI Insurance Co., 65 Cal.App.4th 244, 247-48 (1998); Hyland v. Millers Nat. Ins. Co. 91 F.2d 735, 743 (9th Cir.1937), rehg. denied, 92 F.2d 462, cert. denied, 303 U.S. 645. “Preponderance of the evidence” means that the trier of fact is only required to believe that the existence of a fact is more probable or reasonable than its nonexistence, Kennedy v. Southern California Edison Co., 268 F.3d 763, 770 (9th Cir.2001) (applying California law), and that in terms of the probability of truth of evidence, when weighed with that opposed to it, the evidence has more convincing force and greater probability of truth, Leslie G. v. Perry & Associates, 43 Cal.App.4th 472, 482-83 (1996).

As is later discussed, the parties’ contract provided that it would be void if there were fraud or intentional concealment or misrepresentation; thus, a higher standard (i.e., requiring intentional misrepresentation or concealment as to a material matter) than that otherwise provided for by statute is operative in the instant case.

III. Intentional or Negligent Concealment or Misrepresentation

A. California Statutory Law

Under California statutory law, neglect to communicate that which a party knows, and ought to communicate, is concealment. Cal. Ins.Code §  330. Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract as to which he makes no warranty, and which the other has not the means of ascertaining. Cal. Ins.Code §  332.

California statutory law provides that concealment, whether intentional or unintentional, entitles the injured party to rescind the contract. Cal. Ins.Code §  331. Thus, under the statute, negligent or even innocent concealment warrants rescission. Barrera v. State Farm Mut. Auto Ins. Co., 71 Cal.2d 659, 666 n. 4 (1969); Mirich v. Underwriters at Lloyd’s London, 64 Cal.App.2d 522, 529-30 (1944).

The completion of the contract of insurance is the time to which a representation must be presumed to refer. Cal. Ins.Code §  356.

B. Contractual Interpretation

The provisions of the contract before the Court must be considered.

Unless it turns on the credibility of conflicting extrinsic evidence or on underlying facts that are in dispute, the interpretation of an insurance policy is solely a question of law. Waller v. Truck Ins. Inc., 11 Cal.4th 1, 18 (1995); Parsons v.. Bristol Development Co., 62 Cal.2d 861, 865-66 (1965); Merced Mutual Ins. Co. v. Mendez, 213 Cal.App.3d 41, 45 (1989).

Pursuant to California law, the first consideration is to look at the language of the contract in order to ascertain the plain meaning or the meaning that a layperson would ordinarily attach to the language. Waller v. Ins. Exchange, Inc., 11 Cal.4th at 18. This is in furtherance of the general principle that the mutual intent of the parties at the time of contracting is to be given effect, Cal. Civ.Code §  1636, and is to be inferred, if possible, solely from the words of the contract, Waller, 11 Cal.4th at 18. It is the clear and explicit meaning of the contractual provisions, interpreted in their ordinary and popular sense, that is to govern unless words are used by the parties in a technical sense or are given a special meaning by usage. Id.; Cal. Civ.Code § §  1636, 1638-39, 1644. Dictionary meanings, the context of the entire policy, and a commonsense view to avoiding absurd results may be useful to put the Court in the position of a layperson and understand how he or she might reasonably interpret the exclusionary language. MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 649-50 (2003).

C. The Contract

1. Two References to Fraud

The principal contractual provision in question, and the only one adverted to by the parties, is as follows:

2. CONCEALMENT, MISREPRESENTATION OR FRAUD

This Coverage Form is void in any case of fraud by you at any time as it relates to this Coverage Form. It is also void if you or any other “insured,” at any time, intentionally conceal or misrepresent a material fact concerning:

a. This Coverage Form;

b. The covered “auto”;

c. Your interest in the covered “auto”, or

d. A claim under this Coverage Form.

(Jt. Ex. 1 at 21.) Review of the policy (Jt.Ex.1) reveals that this provision appears in Section V of the policy, entitled, “Truckers Conditions,” which begins with the statement, “The following conditions apply in addition to the Common Policy Conditions.” Id. at 20. The Common Policy Conditions constitute a separate part of the policy, (id. at 31), which is not entitled as an endorsement, but appears within a series of endorsements (id. at 26- 39). The Common Policy Conditions section begins, “All Coverage Parts included in this policy are subject to the following conditions.” (Id. at 31.) Thus, the Truckers Conditions, which apply in addition to the Common Policy Conditions, appear to be intended to apply to all coverage parts of the contract. The Truckers Conditions include Loss Conditions (at 20-21), and General Conditions (at 21-22), of which the fraud provision is one.

The Common Policy Conditions refer to matters such as cancellation, changes, examination of the insured’s books and records, inspections and surveys, premiums, and transfer of rights and duties.

Terms and provisions must be read in their ordinary and popular sense, but each must be interpreted in the context of the contract as a whole and the circumstances of the case. Bay Cities Paving & Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th 854, 867 (1993).

There are no definitions in the policy pertaining to the pertinent contract terms of “concealment,” “misrepresentation,” “fraud,” or “intentionally.” (Id. at 22-24.) However, one other reference to fraud and misrepresentation appears in the policy’s “CALIFORNIA CHANGES–CANCELLATION AND NONRENEWAL” endorsement, which is prefaced by following instructions:

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

(Id. at 28.) The endorsement adds provisions to the Cancellation Common Policy Condition   and “modifies insurance provided under,” among other types, business owners policy, commercial auto coverage part, and pollution liability coverage part. Id. It is not clear that it applies to any particular coverage form in the instant policy; there is no reference to the truckers coverage form pursuant to which coverage was provided in the policy. However, it is an endorsement checked as applying to the instant policy. (Id. at 2.) With respect to “All Policies in Effect For More Than 60 Days,” it provides:

The cancellation provision in the Common Policy Conditions section states that all coverage parts are subject to cancellation by the insurer by delivery of ten days’ or thirty days’ notice, depending on the reason for cancellation; specifies the contents, effective date, and address for delivery of notice of cancellation; and provides for refund of premiums. (Jt. Ex. 1 at 31.)

… [W]e may cancel this policy only upon the occurrence, after the effective date of the policy, of one or more of the following:

….

(2) Discovery of fraud or material misrepresentation by

(a) any insured or his or her representative in obtaining this insurance; or

(b) You or your representative in pursuing a claim under this policy.

(Id. at 29.)

It might be argued that the cancellation and nonrenewal endorsement directly affects or modifies the provision regarding the policy being void for concealment, misrepresentation, or fraud that appears in the Truckers Conditions section. (Jt. Ex. 1 at 21). However, the cancellation and nonrenewal change endorsement does not state that it modifies the Truckers Conditions, the Truckers Coverage Form, or even the Common Policy Conditions in general. Instead, it expressly adds provisions to the Cancellation Common Policy Condition. (Id. at 28.) The pertinent Common Policy Condition (Jt. Ex. at 31) is the one for cancellation, which does not purport to define when the policy is void or when the insurer may seek retroactively to avoid the obligations of a policy that was never cancelled; instead, it relates only to the process of cancellation itself after the policy has been in effect for sixty days. Cancellation is a prospective phenomenon; rescission is retroactive. See Fireman’s Fund American Insurance Co. v. Escobedo, 80 Cal.App.3d 610, 619 (1978). The clear linking of the two provisions indicates that the two provisions permitting cancellation should be read together. The plain meaning of the two cancellation provisions read together is that after sixty days, the policy may be cancelled for various stated grounds, which include fraud or material misrepresentation.

The Court concludes that the endorsement regarding grounds and procedures for cancellation does not directly affect the provision in the Truckers Conditions section of the Truckers Coverage Form that concerns when the policy may be declared void.

2. Inconsistency between the Policy and California Statutory Law

Insurers and insureds are generally free to enter into contracts that provide for coverage more favorable to the insured than those permitted by statute. Utah Property & Casualty Ins. etc. Assn. v. United Services Auto. Assn., 230 Cal.App.3d 1010, 1023-24 (1991). It must be determined if by mentioning intentional conduct in the contract as a basis for voiding the contract, the parties intended to limit the rescission remedy to intentional conduct and impose a stricter standard than that permitted by statute, or whether the broad, statutory provision was intended to remain in effect despite the contractual language.

The contract does not expressly refer to the inconsistent statutes noted hereinabove.

In other respects, the contract does refer to provisions of law. In the liability coverage section of the Truckers Coverage Form, there are “Out-of-State Coverage Extensions” that increase the limit of insurance and provide for minimum amounts and types of other coverages required by laws of the jurisdiction where a covered auto is being used (Jt. Ex. 1 at 15), and there are coverage exclusions for any obligation of the insured pursuant to workers’ compensation, disability benefits, or unemployment compensation laws, (id. at 16). Endorsements also reflect “CALIFORNIA CHANGES” regarding primary coverage in cases involving insureds in the auto-related businesses, (id. at 26); cancellation and nonrenewal, (id. at 28-30); and California uninsured motorists coverage-bodily injury, (id. at 37-39). The policy also refers to uninsured motorist coverage in connection with a California Uninsured and Underinsured Motorist Coverage Selection Form and an election form concerning Uninsured Motorist-Property Damage Coverage. (Id. at 40-41.)

The Court will first consider the contractual language. The contractual provision clearly and unambiguously states that the coverage form is void in any case of fraud by the insured relating to the coverage form, and it is also void if an insured intentionally conceals or misrepresents a material fact concerning the coverage form or other specific matters. Common usage would indicate, and a reasonable layperson would understand, that “void” means of no legal force or effect; the reference to “fraud” denotes deceit or trickery; the use of “intentional” means having an intention or purpose; the reference to “concealment” denotes conscious prevention or avoidance of disclosure; and the use of “misrepresentation” means a misleading or untrue representation. See Webster’s Third New International Dictionary of the English Language, Unabridged (1986) at 2562, 904, 1176, 469, and 1445. The plain meaning of “fraud” would not include an unintentional or negligent misrepresentation. Further, a reasonable layperson would understand that the adjective “intentional” modifies both “concealment” and “misrepresentation.” See, Ward General Services, Inc. v. Employers Fire Ins. Co., 114 Cal.App.4th 548, 554 (2003); Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d 1203, 1217 (D.Kan.2001) (construing a provision virtually identical with the one in the instant policy, and noting that the goal of avoiding unreasonable results also supports this construction). The plain meaning of the provision, then, is that the coverage form is void if an insured engages in fraud (trickery or deceit), intentional concealment, or intentional misrepresentation.

A s noted, the policy states that it is void in any case of “fraud … as it relates to this Coverage Form,” and it is also void if an insured at any time “intentionally conceal[s] or misrepresent[s] a material fact concerning:

a. This Coverage Form;

b. The covered “auto”;

c. Your interest in the covered “auto”, or d. A claim under this Coverage Form.” (Jt. Ex. 1 at 21.)

Defendant argues that the policy does not state that it is void “only” where the insured has intentionally concealed or misrepresented material facts, and such a meaning is not necessarily implied; further, the policy provision speaks to when the policy is void, whereas an insurer may defend against a claim on the basis of concealment or misrepresentation without declaring the entire policy void.

It is true that the policy does not expressly state that it is void  “only” in cases of intentional misrepresentation or concealment; further, it does not address “rescission,” the distinction between void and voidable contracts, or the interrelationship of the various legal remedial concepts potentially involved in a formal legal analysis of these issues. However, the question to be determined is whether the policy is ambiguous in light of the context of the underlying California law. Arguably, the meaning of the provision is clear, and no further analysis should be required. Cf. Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d at 1217.

Whether a contract is ambiguous is a question of law for the Court.  Airborne Freight Corp. v. McPherson, 427 F.2d 1283, 1285 (9th Cir.1970); Winet v. Price, 4 Cal.App.4th 1159, 1164-65 (1992).

A policy is ambiguous when it is capable of two or more constructions, both of which are reasonable. Bay Cities Paving & Grading, Inc. v. Lawyers Mut. Ins. Co., 5 Cal.4th at 867. Defendant argues that a reasonable person could contend that even though the policy itself sets forth only one type of fraud as sufficient to avoid the contract, and thus to avoid coverage, the insurer nevertheless may in effect avoid the contract on lesser grounds not mentioned in the contract, or at least avoid any legal effect of the contract based on misrepresentation of a lesser type.

Even if it is assumed that an ambiguity is present, the goal of interpreting a contract of insurance in California is effectuating the intent of the parties. Cal. Civ.Code, § §  1636, 1641. To that end, all parts of a contract are considered with reference to each other and to the contract as a whole as well as with reference to the subject of the contract and the circumstances of contracting. Cal. Civ.Code § §  1641, 1647.

If the policy provision is considered ambiguous, then it must be interpreted in the sense that the promisor reasonably believed that the promisee understood it at the time the policy was issued, that is, whether the meaning is consistent with the insured’s objectively reasonable expectations. Bank of the West v. Superior Court (Industrial Indemnity Co.), 2 Cal.4th 1254, 1264-65 (1992). It is not reasonable to conclude that the insured would expect from the policy language that unmentioned, lesser species of nondisclosure or misrepresentation would nevertheless permit the insurer, under the rubric of a defense to specific coverage as distinct from a wholesale avoidance of the contract, nevertheless to argue that the contract was of no legal effect as to the insured. This is not within the objectively reasonable expectation of an insured layperson, who would understand from the policy language that for the contract not to be binding, the conduct would have to fraudulent or intentional.

It is established that insurance policies are subject to the rule of construction applicable to all contracts, namely, to construe them so as to give effect to all terms and not to render them surplusage. ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 17 Cal.App.4th 1773, 1785-86 (1993). The fraud provision states that the policy is void if the insured intentionally conceals or misrepresents a material matter. To interpret it to mean that unintentional, or negligent, misrepresentations also render the policy ineffectual would remove any limiting effect of the provision and render the specification of intentionality mere surplusage, a result not only precluded by the pertinent canon of construction, but also not within an insured’s reasonable expectation.

This result is consistent with decisions in other jurisdictions that have considered similar issues of construction of policy provisions that set standards that were inconsistent with, and more favorable to the insured than, analogous statutory provisions. It has been held that where statutes permit rescission or avoidance of liability under a policy on the ground of innocent or negligent misrepresentations, a policy term providing that the policy is void for fraud or intentional misrepresentation or concealment will be given effect such that intentional or fraudulent conduct is required for the insurer to rescind or defend on the basis of nondisclosure or misrepresentation. See State Farm General Insurance Co. v. Oliver, 658 F.Supp. 1546, 1550 (N.D.Ala.1987), aff’d. 854 F.2d 416, 419-20 (11th Cir.1988) (a statute that provided that misrepresentation, concealment, or omissions and incorrect statements shall not prevent recovery under the policy or contract unless either material to acceptance of the risk or the hazard, or the insurer in good faith would not have issued the policy or would not have issued it at the premium rate in question if the true facts had been known to the insurer as required either by the application or contract or otherwise, was held not to determine the meaning of the contract, where the contract by its terms provided that if an insured intentionally concealed or misrepresented a material fact, the policy was void as to the insured; the court reasoned that the insurer had contracted for something different and had contractually excused innocent misrepresentations in the application); Gainsco v. ECS/Choicepoint Services, Inc., 853 So.2d 491, 492-3 (Fla.2003) (the policy provided that it was voidable for intentional concealment or misrepresentation, whereas the statute voided a policy without regard to the whether omission or concealment was intentional); Tri-State Ins. Co. of Minnesota v. H.D.W. Enterprises, Inc., 180 F.Supp.2d 1203, 1216-17 (D.Kan.2001) (holding that a policy provision that the coverage form was void in case of fraud or intentional concealment or misrepresentation of a material fact unambiguously required intentional conduct to render the policy void such that inconsistent statutes would not be considered, but noting that the result would be the same if it were considered ambiguous because the language should be construed against the drafter); see also, Green v. Life & Health of Am., 704 So.2d 1386 (Fla.1998) (policy concerned representations made to the best of the insured’s knowledge and belief); Hauser v. Life General Security Ins. Co., 56 F.3d 1330 (11th Cir.1995) (ERISA case, policy provision that concerned the insured’s knowledge and belief); Simmons v. Conseco Life Ins. Co., 170 F.Supp.2d 1215, 1222 (M.D.Fla.2001) (unintentional misrepresentation by applicant regarding grade of prior convictions was held insufficient to permit the insurer to void the policy despite a statute permitting avoidance for innocent material misrepresentations because the policy affirmation regarding the truth of the representation was in terms of “best of the applicant’s knowledge and belief” pursuant to the insurer’s choice to draft a standard of truthfulness of representations that was less rigid than the statutory language).

The fact that many of the cases cited by Plaintiff rely on law other than California law does not render them inapplicable. It is understood that California law governs the construction of the instant contract. However, the out-of-jurisdiction cases involve issues of construction of statutes and contractual provisions that are analogous in varying degrees to those involved in the present case. The decisions show that various courts, applying rules of contractual construction similar to those of California, have concluded that insurers may choose to require less rigid standards of disclosure or representation in connection with the contracts in question, and that when they do so, their drafting choices will be construed in light of the reasonable expectations of the applicant for insurance and in furtherance of the principles that all language in a contract should be given effect and that ambiguous terms will be construed against the insurer who drafted them and in favor of coverage. The Court does not read these decisions as requiring insurers affirmatively to put statutory language in their contracts in order to avail themselves of statutory rights; rather, they pertain to situations in which the insurer has included in the contracts in question language which is inconsistent with statutory provisions.

Defendant relies on Mitchell v. United National Insurance Company, 127 Cal.App.4th 457 (2005), in which the intermediate appellate court was faced with reconciling two conflicting statutes, both of which were applicable to a fire insurance policy. Cal. Ins.Code § §  331 and 359, which are applicable to the type of policy involved in the present case, declare the injured party is entitled to rescind insurance by “[c]oncealment, whether intentional or unintentional,” (§  331), or for a materially false representation (§  359).

Two other statutes were involved in Mitchell. One was Cal. Ins.Code §  2070, which provided that all fire policies “shall be on the standard form” and shall not contain additions, and that any peril coverage must be substantially equivalent to or more favorable to the insured than that contained in the standard fire insurance policy form. Cal. Ins.Code §  2080 stated that except as provided in that article, clauses imposing specified duties and obligations upon the insured and limiting the liability of the insurer may be attached to the standard form as riders. Section 2071, the standard fire insurance policy form, stated:

“Concealment, fraud: This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.”

California case law established that in order to void a policy based on the insured’s violation of this fraud and concealment provision, the false statement must have been knowingly and willfully made with the intent (express or implied) of deceiving the insurer, and the materiality of the statement would be determined by an objective standard of its effect upon a reasonable insurer. Mitchell, 127 Cal.App.4th at 634-35. Thus, the insurer’s right to void a fire insurance policy under §  2071 was more limited than the right to rescind accorded by § §  331 and 359.

In Mitchell, the court ruled that § §  2070 and 2071 did not preclude rescission by the insurer for unintentional misrepresentation under the more liberal standard of rescission set forth in § §  331 and 359 1) because of legislative intent, 2) because § §  2070 and 2071 did not expressly exclude application of other statutory provisions; 3) it made no sense to exclude a fire insurance contract from the terms afforded by other statutes; 4) the canon of statutory construction that different statutes within the same code should be interpreted to be consistent; 5) freedom of contract and the right of an insurer to make an informed decision whether or not to insure a given risk were strong policy considerations that support more liberal rescission rights for misrepresentations made at the inception of the insurance contract; and 6) § §  331 and 359 apply to misrepresentations made at any time but normally govern parties’ obligations during formation of the contract, whereas the standard fire insurance fraud and concealment provisions typically was exercised in connection with a claim for policy benefits. Id. at 471- 473. The court in Mitchell relied on cases indicating a similar reconciling of two New York state statutes permitting rescission by the insurer for material misrepresentations on the one hand but otherwise voiding fire policies in the event of the insured’s willful concealment or misrepresentation of a material fact.

In contrast, in the present case, the issue is not reconciling two conflicting statutes; rather, it is determining the appropriate construction of a contract in light of its terms. The governing object is not to attempt to reconcile inconsistent statutes, but rather to give effect to the expressed intent of the parties, and to consider statutory limitations on coverage only as appropriate in the course of construction of the contractual language.

Review by the California Supreme Court was not sought in Mitchell.

Mitchell was followed in Atmel Corporation v. St. Paul fire & Marine, 426 F.Supp.2d 1039 (N.D.Cal.2005), where an errors and omissions policy stated that the policy was void if specified persons hid important information or attempted to defraud or lie; the policy stated that everyone made mistakes and that unintentional errors or omissions would not affect the insured’s rights under the policy. The insured, who allegedly had provided inaccurate information in the application process, argued that the insurer had waived its statutory right to rescind for anything but intentional fraud. The court concluded that it was not a waiver of a statutory right to material information because the insurer asked specific questions in the application. The court relied on Mitchell as holding similar language inapplicable to rescission of a policy based on misrepresentation and concealment in a policy application. The Court followed Mitchell because even though Mitchell was different because it concerned language from two statutes, as distinct from contractual language and statutory language, there was “nevertheless no persuasive or logical reason to arrive at a different interpretation of a very similar clause in this case.” 426 F.Supp.2d at 1050. The Court also stated that common sense dictated that the fraud and misrepresentation clause, which was contained in the policy issued after the application had been approved, did not apply to misrepresentation or concealment in an insurance application. Id.

The Atmel decision is not persuasive because it really did not analyze the different canons of construction applicable in the two types of cases (construction of a contract which conflicted with statutory language, versus construction of language in a contract which was based on and required by statutes). In Mitchell, the California legislature had directed that the pertinent portion of the contract be included. In the present situation, private parties wrote the contract, which is to be construed in light of the intent of the parties as reasonably manifested in contractual language; statutory language here was not mandated as part of a contract, but rather was merely background which the parties were free to supercede by the use of contractual terms.

Mitchell has been criticized. Although Mitchell succeeded in avoiding different rescission standards for fire insurance than for other coverages in the same policy, the result may be contrary to settled rules of statutory construction because the specific provision of §  2071 dealing with fire insurance should control over contrary provisions in § §  331 and 339 dealing with insurance generally, Miller v. Superior Court, 21 Cal.4th 883, 895 (1999); and §  2071 should have controlled over the earlier enacted sections 331 and 359, see, Croskey and Kaufman, California Practice Guide: Insurance Litigation at 5:172 (Rutter, 2005).

Defendant argues that as in Mitchell, it is appropriate to give effect to the statutes giving the insurer a broader right to void a contract to the application process. However, despite the statutory policy in favor of disclosure at the inception of the contract identified in Mitchell, Mitchell also recognized the policy supporting the freedom of contracting. Here, the insurer freely chose to include language more favorable to the insured that is reasonably understood as limiting the circumstances under which the insurer may assert that the contract is of no effect based on nondisclosure or misrepresentation.

When contracting parties use terms that provide for broader coverage than that otherwise provided by reference to statute, those terms are regularly interpreted to provide broader coverage. Mission v. Coachella, 210 Cal.App.3d 484 (interpreting “efficient proximate cause” in a coverage clause as referring to a predominating cause, which resulted in broader coverage, as distinct from a triggering cause, which would have resulted in a more restrictive scope of coverage consistent with judicial interpretations of Ins.Code §  530 and 532); State Farm Casualty Co. v. Martin, 872 F.2d 319, 321 (9th Cir.1989) (interpreting a contractual term that excluded losses from concurrent causes more strictly than the statute, Ins.Code §  530, which the court noted would correctly have been implied as the meaning of the policy only in the absence of contractual language to the contrary). It is established that in the absence of any general declaration of public policy, there is no reason to interfere with the parties’ full freedom to contract for coverage on any terms not specifically prohibited by statute. National Insurance Underwriters v. Carter, 17 Cal.3d 380, 387-88 (1976).

Although statutory terms may be incorporated into a contract, this is applied to find coverage required by statutes where insurance policies otherwise do not afford coverage. Utah Property and Casualty Insurance Guaranty Association v. United Services Automobile Association, 230 Cal.App.3d 1010, 1019-20 (1991) (collecting cases). A limitation on coverage contained in a statute will not be implied into a policy that lacks such a limitation where a layperson reading the policy would have no reason to suspect the limitation would apply. Utah Property and Casualty Insurance Guaranty Association v. United Services Automobile Association, 230 Cal.App.3d 1010, 1015-16 (not implying a statutory one-year time limit for uninsured carriers to become insolvent into a policy providing for coverage of insolvent insurers’ responsibilities). Where statutory provisions set a minimum or floor amount of coverage, statutory exclusions or limitations intended to provide a ceiling must be expressly, clearly, and plainly incorporated into a policy. Utah Property, 230 Cal.App.3d at 1017. Less favorable coverage provisions of a statute will not be read into the policy to the insured’s detriment. Id. at 1018. A policy or its endorsements cannot be so interpreted as to become meaningless, or to withhold coverage normally expected by a layperson with an ordinary mind. Continental Casualty Co. v. Phoenix Construction Co ., 46 Cal.2d 423, 437-38 (1956).

Laypersons cannot be expected to know of statutory limitations or exclusions on coverage not contained in their insurance policies; a rule invalidating lay persons’ trust in the language of their policies would result in unanticipated gaps in coverage at the least. Utah Property, 230 Cal.App.3d at 1021. Insurers, who are fully capable of knowing about statutory restrictions on coverage and of incorporating those statutory restrictions in the language of their policies, may fairly be expected to use clear and express language incorporating statutory restrictions. Id. Even where a statute expressly purports to limit express contractual provisions contrary to its own terms, any limit upon freedom of contract is narrowly construed. Henricks v. Metropolitan Life Ins. Co., 7 Cal.2d 619, 632 (1936) (upholding the validity of a construction of a contract that provided an alternative different from and in addition to, but not contrary to, statute which prohibited terms “contrary to” the statute).

Focusing on the use of the word “void” in the contract, and the reference to rescinding in §  331, Defendant argues that the provision specifying that the policy is void does not impliedly negate ICW’s right under the law alternatively to rescind, or defend on grounds that the risk was misrepresented.

Defendant’s argument rests on two prongs. Defendant asserts that the statutory and decisional law in force at the time a policy is issued must be read into each policy with full binding effect. Defendant cites to Interinsurance Exchange v. Ohio Cas. Ins. Co., 58 Cal.2d 142, 147-48 (1962), in which a customer of an insured car dealer who was involved in an accident was excluded under the terms of the dealer’s policy, a policy written at a time when the applicable statutory law, public policy, and decisional law required coverage of permissive users. At the time of the accident for which coverage was sought, the statute had been amended. It was held that even if it were assumed that the amendment had changed the public policy, it could not have retroactively validated an agreement that was either void, or unenforceable, pursuant to the statutory law in effect when it was written. Id. at 146-47. The permissive user coverage discussed in Interinsurance Exchange v. Ohio Cas. Ins. Co. was minimum coverage required as a matter of public policy for the protection of insured parties and their permittees. In contrast, in the present case, the policy provision limiting the circumstances in which policies were void did not violate any public policy requiring that insurers be given enumerated rights or privileges, but rather was within the realm of matters subject to the parties’ bargaining and prerogatives to agree on coverage more favorable to the insured. Cf. National Ins. Underwriters v. Carter, 17 Cal.3d 380, 388 (1976), in which it was stated, “[I]n the absence of any general declaration of public policy … we discern no reason to interfere with the parties’ full freedom to contract for coverage on any terms not specifically prohibited by statute”; Utah Property & Casualty Ins. etc. Assn. v. United Services Auto. Assn., 230 Cal.App.3d 1010, 1023-24 (collecting cases, considering a policy that did not limit a period of insolvency protection and an uninsured motorists statute that limited it to a one-year period, and concluding that as reasonably anticipated by a layperson and consonant with public policy, the policy provided greater coverage than that required by law and did not incorporate an exclusion or limitation not stated in the policy).

Defendant does not cite, and the Court is unaware of, any authority either requiring a lay person in the position of the insured to read into a policy a statutory provision that would put more restrictive limits on coverage than those stated in a policy, or recognizing a public policy that would preclude a condition that was more favorable to the insured and provided coverage except with respect to intentional concealment in circumstances such as those in the present case. Such a position would be contrary to established principles that a policy should be interpreted in light of the expectations of a reasonable insured person, not a reasonable attorney or insurance expert, Crane v. State Farm Fire & Cas. Co., 5 Cal.3d 112, 115 (1971), and not necessarily one with knowledge of subtle legal distinctions, Safeco Ins. Co. of America v. Robert S., 26 Cal.4th 758, 765-66 (2001) (declining to conclude that an insured’s reasonable expectations would include understanding of the distinction between gross and ordinary negligence).

Defendant also argues that because the policy provision voids the policy for intentional concealment or misrepresentation, and because an insurer need not rescind for misrepresentation or concealment but may take advantage of an alternate remedy of defending against a claim on the policy on the basis of misrepresentation or concealment, the policy provision should be interpreted only to affect the remedy of rescission and not the alternate remedy of defending against a claim on the policy. Defendant cites De Campos v. State Comp. Ins. Fund, 122 Cal.App.2d 519, 528 (1954). In De Campos, the court upheld a judgment for an insurer against an insured employer. The insurer had previously unsuccessfully litigated a worker’s compensation action against heirs of an employee who died in the scope of employment. The insurer had refused to defend the insured employer in the worker’s compensation action, but no issue of fraud or misrepresentation by the insured employer had been raised in the worker’s compensation case. When the insured employer brought an action against the insurer for the employer’s costs of defending itself in the worker’s compensation action, the insurer took the position that coverage for the decedent had been excluded by various policy provisions, and that the policy had issued based on material concealment by the insured employer of 1) the decedent’s status as an excluded partner (which was found to have been an ambiguous exclusion and was resolved against the insurer), and 2) the decedent’s compensation, which was a basis for assessment of the risk and should have been figured into the premium cost. When the insured employer sued the insurer on the policy for the costs of its defense, the insurer defended because 1) the policy was not in effect because of fraud (of the intentional variety), 2) the employer waived its contractual right to a defense under the policy and was estopped to seek it because of the fraud and breach of warranty, and 3) the employer was in breach and default, and thus could not seek performance of the contract. The insurer also claimed damages from the employer for the fraud. In upholding the trial court’s judgment for the insurer based on fraud, the Court noted that the insurer had alternate, inconsistent remedies for damages or rescission; the court characterized the damages action as one on the contract for breach of contract, and it relied on the fact that insurer there had not argued that there was no contract, but in fact had argued that the contract was in effect, but that the decedent had been excluded based on his status. (Id. at 525-27.)

In the present case, the Defendant insurer is not defending against a claim brought by a policy holder; rather, it is resisting a third party insurer’s claim for reimbursement or contribution. The basis of Defendant’s resistance is that Defendant’s obligation under the policy, or policy coverage, may be avoided because of the insured’s concealment or misrepresentation of a material matter; Defendant is not seeking damages on the contract. To the extent that Defendant is relying on the contract, it is resorting to the provision that permits the policy to be declared void for fraud or intentional concealment or misrepresentation.

In any event, under the pertinent California law, the intricacies of the terminology and substance of the law of remedies do not necessarily determine the interpretation of the policy provision according to the reasonable expectations of a lay insured, who is not in the position to recognize and appreciate fine distinctions pertaining to alternate legal remedies not referred to in the contract. A reasonable insured would understand the provision to exclude coverage on the basis of fraud, and not to constitute a partial reference to one of a multitude of legal remedies. Likewise, a reasonable insured layperson would not expect the provision to describe situations in which the contract is void, as distinct from voidable or subject to rescission, or to distinguish among remedies which are based on the invalidity of the contract due to fraud but which arise in different procedural contexts or differ in some manner with regard to legal scope or effect.

Finally, if there is ambiguity with respect to coverage, a contract may be interpreted most strongly against the party who caused the uncertainty to exist, Cal. Civ.Code §  1654, and specifically against the insurer, in order to protect the insured’s reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy. Accordingly, coverage language is interpreted in its most inclusive sense, and exclusions in a policy are narrowly interpreted. Mission National Insurance Co. v. Coachella Valley Water District, 210 Cal.App.3d 484, 496-7 (1989). An insurer has an obligation to use such language as to make the conditions, exceptions and provisions of a policy clear to the ordinary mind engaging in a plain, commonsense reading of the terms; if the insurer’s language should fail, any ambiguity or reasonable doubt must be resolved in favor of the insured and against the insurer. It is established that ambiguous terms are resolved in the insured’s favor, consistent with the insured’s reasonable expectations. Safeco Ins. Co. of America v. Robert S., 26 Cal.4th 758, 763 (2001); Pacific Heating and Ventilating Co. v. Williasmburgh City Fire Ins. Co. of Brooklyn, 158 Cal. 367, 370 (1910); Paramount Properties Co. v. Transamerica Title Ins. Co., 1 Cal.3d 562, 569 (1970).

Applying these canons, Plaintiff’s construction, namely, that the contract provided for the insurer to avoid coverage on the basis of concealment or misrepresentation only for intentional or fraudulent conduct, should be adopted because Defendant drafted, or was responsible for the wording of, the contract, and the Defendant is the insurer. Had Defendant wanted to have a broader ground upon which to avoid the contract for merely negligent or fully innocent conduct, Defendant could have said nothing, or Defendant insurer could have specifically provided that all forms of nondisclosure and misrepresentation would have been a basis for voiding the contract.

The Court concludes that in order to prevail on its defense, Defendant must show that the insured engaged in intentional concealment or intentional misrepresentation with respect to the coverage form.

IV. Intentional Concealment or Misrepresentation

The Defendant asserts that G & P misrepresented that Pannu was the only driver and concealed the fact that Inderjit was also a driver.

Plaintiff argues that the intentional element of intentional misrepresentation or concealment is defined by California Jury Instructions, Civil, Book of Approved Jury Instructions [BAJI], January 2005 Edition, §  12.31, which defines the essential elements of a claim of fraud by an intentional misrepresentation as including a false representation with respect to which:

3. The defendant (here G & P) must have known that the representation was false when made [or must have made the representation recklessly without knowing whether it was true or false];

4. The defendant (here G & P) made the representation with an intent to defraud the plaintiff, that is, [he][she] (here G & P) must have made the representation for the purpose of inducing the plaintiff to rely upon it and to act or to refrain from acting in reliance thereon….

Id., BAJI 12.31. The Court notes that BAJI 12.35 states that the essential elements of a claim of fraud by concealment include concealment or suppression of a material fact that the defendant was under a duty to disclose to the plaintiff and as to which:

3. The defendant (here G & P) intentionally concealed or suppressed the fact with the intent to defraud the plaintiff.

The Court further notes that California Jury Instructions, Civil, January 2005 Edition, CACI 335 governs the affirmative defense of fraud that vitiates consent and prevents formation of a contract. It states in pertinent part that to succeed in the defense, the defendant must prove with respect to the plaintiff’s representation:

2. That [G & P] knew that the representation was not true;

3. That [G & P] made the representation to persuade [ICW] to agree to the contract;

4. That [ICW] reasonably relied on this representation; and

5. That [ICW] would not have entered into the contract if [it] had known that the representation was not true.

Plaintiff also cites to Kentucky Cent. Life Ins. Co. v. Marin Bay Park Trust, 958 F.2d 377 (9th Cir.1992) (unpublished disposition) (TABLE, TEXT IN WESTLAW, NO. 91-15004, 91-15276), to the effect that although an insured must read the contract and report any misrepresentations or omissions, a contract may not be rescinded by an insurer if the insured in good faith gives answers that are truthful but, owing to the fraud, mistake, or negligence of the insurance company’s agent filling out the application, are incorrectly transcribed, or if the agent gave the insured the impression that additional responses were unnecessary.

Here, there does not appear to be evidence that Mirko was the insurer’s agent; rather, she was the insured’s agent.

Defendant argues that the requirements for making out the defense should be governed by California Jury Instructions, Civil, January 2005 Edition, CACI 2308 (revised October 2004), rescission for misrepresentation or concealment in an insurance application, which does not necessarily require intentional misrepresentation or concealment. Defendant also criticizes Plaintiff’s citation of an unpublished case (Kentucky Cent. Life Ins. Co. v. Marin Bay Park Trust ), and Defendant notes that the case involved life and disability insurance, which by statute (Cal. Ins.Code §  10380) requires intentional falsity in an insurance application. However, these points are based on an assumption that Cal. Ins.Code §  331 governs the Defendant’s right to rescind, and it is untenable in light of the Court’s previously discussed construction of the contract to provide more favorable insurance coverage than that provided by Cal. Ins.Code §  331.

The BAJI and CACI instructions regarding intentional misrepresentations or concealment accurately reflect California law, namely, that a representation or concealment must be accomplished “with intent to deceive another party thereto, or to induce him to enter into the contract”; and the action may be either “[t]he suggestion, as a fact, of that which is not true, by one who does not believe it to be true … or “[t]he suppression of that which is true, by one having knowledge or belief of the fact….” Cal. Civ.Code §  1572. A fraudulent misrepresentation is one made with the knowledge that it is or may be untrue. Seeger v. Odell, 18 Cal.2d 409, 414 (1941).

V. Materiality of Misrepresentation or Concealment

The materiality of a representation is determined by the same rule as the materiality of a concealment. Cal. Ins.Code §  360.

Materiality is a question of law. Merced County Mut. Fire Ins. Co. v.State of California, 233 Cal.App.3d 765, 772 (1991).

The California Insurance Code contains multiple provisions regarding disclosures that are required. Cal. Ins.Code §  332 provides:

Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.

Cal. Ins.Code §  333 provides that absent inquiry, neither party is bound to communicate things that are waived or which pertain to risks excluded by warranty, or which the other knows or ought to know and of which the party has not reason to suppose the other ignorant.

Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries. Cal. Ins.Code §  334. The question is whether or not the matter misstated or concealed could reasonably be considered in affecting the insurer’s decision as to whether or not to enter into the contract, in estimating the degree or character of the risk, or in fixing the premium. Holz Rubber Co. Inc. v. American Star Ins. Co ., 14 Cal.3d 45, 61 n. 16 (1975). Materiality has been found where had the true facts been disclosed, the insurer would not have provided coverage without an exclusion of the misrepresented matter. Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co., 64 Cal.App.3d 261, 272-74 (1976) (materiality established where a professional liability insurer demonstrated that a policy that had issued based on concealment of a pending claim would have contained an exclusion for the concealed claim).

The test is subjective in the sense that the critical question is the effect truthful answers would have had on ICW, not on some average reasonable insurer. Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d 169, 181 (1988).

It has been held in California that if an insurer asks specific questions on an application, this is usually sufficient to establish that the answer is material as a matter of law because the insurer asked for the information. Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904, 916 (1973) (quoting Cohen v. Penn Mutual Life Ins. Co., 48 Cal.2d 720, 726 (1957)(where the insured, in applying for a life insurance policy, had misrepresented his history of a heart condition, and where the insurer had asked specific questions regarding not only diagnosed conditions, but also suspicious circumstances or symptoms)). However, it does not appear that the single circumstance of the insurer’s having asked a question on an application is sufficient to determine the materiality issue because courts have undertaken further analysis of additional pertinent circumstances. Ransom v. Penn. Mutual Life Ins. Co. 43 Cal.2d 420, 426-27 (1954); Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 180-81.

Even where lip service is given to the determinative character of the factor of asking for information, the California courts nevertheless complete a more thorough analysis of the materiality question, Cohen, 48 Cal.2d at 726-28 (focusing on the nature of the misrepresentation); Thompson, 9 Cal.3d at 916-918 (considering the questions, the testimony of medical witnesses, and all inferences).

It is acknowledged that an incorrect answer on an insurance application does not alone give rise to the defense of fraud where the true facts, if known, would not have made the contract less desirable to the insurer. Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904, 916 (1973); California-Western States Life Ins. Co. v. Feinstein, 15 Cal.2d 413, 423-24 (1940); Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal.App.3d at 181.

It has also been emphasized in connection with such analysis that the trier of fact is not required to believe the “post mortem” testimony of an insurer’s agents that insurance would have been refused had the true facts been disclosed. Thompson at 916.

Thus, the more reasoned view is that the fact that information was solicited on an application for insurance is a factor to be considered in determining materiality, but it is not the sole factor; determination of materiality remains a question to be determined based on a multitude of factors.

A misrepresentation of loss history or drivers’ qualifications may be material. Certain Underwriters at Lloyd’s v. Montford, 52 F.3d 219, 222 (9th Cir.1995) (concealment of history of a previous total loss claim in application for marine insurance); Civil Service Employees Ins. Co. v. Blake, 245 Cal.App.2d 196, 198 (1966) (casualty policy, driver’s health history and history of driver’s license revocation and denial); Allstate Ins. Co. v. Golden, 187 Cal.App.2d 506, 512 (1960) (auto policy, concealment of prior suspension of driver’s license for speeding).

If the applicant for insurance had no present knowledge of the facts sought or failed to appreciate the significance of information related to him that formed the basis of his answers, his incorrect or incomplete responses would not constitute grounds for rescission. Thompson, 9 Cal.3d at 916.

As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other. Cal. Civ.Code §  2332. Awareness of an insured’s agent that information is important or material may be imputed to the insured; thus, a duty to communicate information pursuant to Cal. Ins.Code §  332 may rest upon the agent’s knowledge, and belief in the materiality of withheld facts may be based on the belief of an authorized agent. Merchants Fire Assurance Corp. v. Lattimore, 263 F.2d 232, 240-41 (9th Cir.1959).

The burden of proving misrepresentations is on the insurer. Thompson 9 Cal.3d at 919.

VI. Agency

The existence and scope of an agency is generally a question of fact,  Brokaw v. Black-Foxe Military Institute, 37 Cal.2d 274, 278 (1951), unless the essential facts are undisputed and subject to only one inference, in which case it is a question of law, Van’t Rood v. County of Santa Clara 113 Cal.App.4th 549, 562 (2003).

A. Broker

An insurance broker is a person who, for compensation and on behalf of another person, transacts insurance other than life insurance with, but not on behalf of, an insurer. Cal. Ins.Code §  33. Insurance brokers who lack authority to bind the insurance company are not agents of the insurance company, but rather are independent contractors acting only on behalf of the insured and not the insurer. Rios v. Scottsdale Ins. Co., 119 Cal.App.4th 1020, 1026 (2004); Marsh & McLennan of Calif., Inc. v. City of Los Angeles, 62 Cal.App.3d 108, 117-18 (1976).

B. Agent

The most definitive characteristic of an insurance agent is the agent’s ability to bind the agent’s principal, the insurer. Marsh & McLennan of Calif., Inc. v. City of Los Angeles, 62 Cal.App.3d at 118.

VII. Language Difficulty and Duty to Read the Contract

Generally an insured has a duty to read a policy and report any misrepresentations or omissions as part and parcel of the duty to engage in fair dealing with respect to the contract. Telford v. New York Life Ins. Co., 9 Cal.2d 103, 107 (1937).

Even where misrepresentation or concealment need not be intentional to constitute a defense, rescission of a contract is not permitted for an incorrect or incomplete response if the applicant had no present knowledge of the facts sought or failed to appreciate the significance of information related to him. Trinh v. Metropolitan Life Insurance Co., 894 F.Supp. 1368, 1373 (N.D.Cal.1995). Where an applicant, acting in good faith, does not understand the significance of the information he fails to disclose, the applicant is not at fault. Id. Further, an illiterate applicant, or one who does not speak the language in which the policy is written, may not be charged with failing to read the insurance application of agreement. See id. (and California authorities there cited).

VIII. Named Driver Exclusions

Cal. Ins.Code §  11580.1(b)(4) and (d)(1) requires that every policy of automobile liability insurance shall contain insurance for any person using a covered motor vehicle, provided the use is by the named insured or with his or her permission, express or implied, and within the scope of the permission; however, exceptions may be effected by designating an excluded driver by name. This requires coverage for all permissive users and only authorizes exclusions for specifically named drivers.

Assuming for the sake of argument that this provision applies to the policy in issue in the present case, the Court notes that ICW cites several cases (ICW F. & C. at 25-26) which concern coverage that was inconsistent with that mandated by statute, not coverage limited by a named driver exclusion within the scope of the statute. See Metz v. Universal Underwriters Ins. Co., 10 Cal.3d 45, 50-53 (1973) (exclusion of coverage of vehicles while rented to others, or used by permissive users with other insurance); Hertz Corp. v. Home Ins. Co., 14 Cal.App.4th 1071, 1078 (1993) (driving while intoxicated); C.S.A. etc. v. Gong, 162 Cal.App.3d 518, 528 (1984) (concerning limitations of liability for permissive use of non-owned vehicles); Contreras v. America, Compania General De Seguros, S.A., 48 Cal.App.3d 270, 281 (1975) (exclusion of liability for injuries to occupants of the insured vehicle found invalid); Glens Falls Ins. Co. v. Globe Indemnity Co., 276 Cal.App.2d 643, 645-48 (1969) (provision regarding permissive users loading or unloading a vehicle). Thus, although a policy limitation against permissive users would have been inconsistent with statute and in contravention of the public policy to protect permissive users and third parties, it is not clear that the same could be said about a warranty by G & P not to permit Inderjit Singh to drive, coupled with a named driver exclusion within the terms of the statute.

IX. Cancellation

Cancellation is termination of coverage by an insurer (other than termination at the request of the insured) during a policy period. Cal. Ins.Code §  660(g). Policies of insurance generally may be cancelled only by mutual consent or if the right to do so is reserved in the policy or is authorized by statute. Spott Electrical Co. v. Industrial Indem. Co., 30 Cal.App.3d 797, 806 (1973). Subject to legislative restriction, parties may agree on the cause, method, and means of cancellation. Jensen v. Traders & General Ins. Co., 52 Cal.2d 786, 790 (1959). Although a statute limits the grounds upon which an insurer may cancel automobile insurance for nonpayment of premiums, fraud, or material misrepresentation affecting the policy or the insured, or a substantial increase in the hazard insured against, Cal. Ins.Code §  1861.03(c), this statute does not apply to commercial motor vehicles, as distinct from private passenger vehicles, National Indemnity Co. v. Garamendi, 233 Cal.App.3d 392, 404-06 (1991).

Pursuant to Cal. Ins.Code §  676.2(b), an insurer may cancel commercial insurance for any reason in the first sixty days; the statute limits the form of cancellation notices and the grounds for cancellation or policies that have been in effect for more than sixty days. After sixty days of the policy being in effect, no notice of cancellation shall be effective unless it complies with Cal. Ins.Code §  677.2   and is based on the occurrence, after the effective date of the policy, of nonpayment of premium; a judgment by a tribunal that the named insured has violated a California law by an act that materially increases any of the risks insured against; discovery of fraud or material misrepresentation by the insured or his or her representative in obtaining the insurance or in pursuing a claim under the policy; discovery of willful or grossly negligent acts or law violations which materially increase the risk; failure to implement loss control; a change by the named insured or his or her representative in the activities or property of the commercial or industrial enterprise which results in a material added risk, a materially increased risk or a materially changed risk, unless the added, increased, or changed risk is included in the policy; or various determinations by the insurance commissioner. After a policy has been in effect for more than sixty days, no increase in rate or change in conditions of coverage shall be effective unless written notice is delivered at least thirty days prior to the change. §  676.2(c). The same statute limits the procedures for implementing a premium or rate increase; a premium increase may occur if it is calculated on the basis of a current rating manual and is justified by a physical change in the insured property or by a change in the activities of the commercial or industrial enterprise which materially increases any of the risks insured against. Cal. Ins.Code §  676.2(c), (e).

Section 677.2 requires all notices of cancellation to be in writing, be mailed to the named insured at a specified address, state the effective date of cancellation and the reasons therefor, and be given at least thirty days prior to the effective date of the cancellation (except notice ten days before the effective date is sufficient for cancellation for fraud or nonpayment of premiums).

Witnesses testified that a policy could be cancelled for a material increase in hazard. The policy permitted this (Cancellation and Nonrenewal Endorsement), as did statute (Cal. Ins.Code §  676.2 [violation of law causing serious accident, resulting in material increase of hazard] ).

ICW argues that the failure to cancel was not probative of a lack of materiality because ICW would in any event have the option to keep the policy in effect and defend any later claim of loss on the basis of fraud. During the period of time in question, however, ICW asserts that it did not discover the alleged fraud. Thus, it is not clear how ICW’s asserted right to determine which remedy to utilize is material to this period of time. However, if it were material, one logical possibility regarding ICW’s lack of awareness of the alleged fraud is that ICW did not know because it did not bother to investigate the status of Inderjit as a driver. The Court has rejected the factual claim that ICW was informed or knew that Inderjit no longer was driving for G & P. Thus, the failure to investigate as well as the failure to cancel would seem to be pertinent to the issue of materiality of the alleged concealment.

Further, even if it is true that an insurer could choose to maintain the policy but not accept the risk because of a failure or breach of condition (ICW’s term, post-trial brief p. 37), here the issue is not a choice of remedy, but rather a question of drawing an inference as to materiality based on post-application conduct (failure to ascertain drivers, investigate, cancel). Although there might not have been an obligation to cancel, that should not negate the probative force of an inference from the failure to investigate or cancel when legally entitled to do so.

The authorities cited by ICW go more to waiver than to lack of an inference of non-materiality. The cases cited by ICW are factually distinct. Purefoy v. Pacific Auto Indem. Exchange, 5 Cal.2d 81 (1935) held that the trial court correctly ruled that an insurer could defend against the suit of a third party, which had sued and received a favorable judgment against the insured for an injury otherwise covered by insurance, based on the insured’s failure to give timely notice of the claim as required by the policy, even though the insurer retained the premium after it knew that the accident had happened; retention of the premium may not have been a waiver of the earlier failure to give notice, but rather a waiver of right to rescind and thereby not cover future accidents at all; and it should be noted that the insured was still unavailable/unlocated for a substantial portion of the policy period thereafter); Allstate Ins. Co. v. Golden, 187 Cal.App.2d 506, 512 (1960) was a case where the insured misrepresented his driver’s license history; the insurer reserved rights because of that with respect to an accident while investigating the accident and then instituted an action to rescind three months after the accident, cancelling the policy pursuant to a policy provision at a later time (thereby considering the policy in force at some time period after the accident); it was held that some coverage that existed during the cancellation notice period (between the sending of the cancellation letter and the effective date of the cancellation) did not preclude the insurer’s reliance on the misrepresentation earlier); Resure, Inc. v. Superior Court, 42 Cal.App.4th 156, 161 (1996), involved the insurer’s suit to rescind the contract, and the court interpreted a California Insurance Code provision requiring an insurer to exercise the right to rescind before action on the contract to mean that the rescission had to be exercised before the insured sued to enforce the contract in an action at law; the statute was also interpreted to require an insurer being sued on the contract at law to raise the contract as a defense in the action at law instead of beginning a new action in equity; it was not a bar that the insurer had not offered to return the premium earlier, had defended against a third party who had sued the insured on the merits and had initiated another coverage action earlier, and had defended other actions against the insured with a reservation of rights; the insurer could be made whole regardless); in Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co., 64 Cal.App.3d 261 (1976), it was held that the insurer could not be forced to pay for costs of defense and indemnification, even though when it learned of the concealment on the claim in question, it undertook defense of another claim and renewed coverage for another term; it was permissible to reform the policy to exclude the concealed matter because rescission was not the only remedy, and the insurer could be made whole); in Barrera v. State Farm Mut. Automobile Ins. Co., 71 Cal.2d 654, 681 (1969), it was held that the insurer’s failure to undertake a reasonable and prompt investigation of insurability resulted in loss of the insurer’s right to rescind (which would affect responsibility to injured third parties), but it did not preclude cancellation regarding the future; further, as against the insured, the insurer might still prosecute a cause of action for damages for wrongful misrepresentation after satisfying the injured person’s claim, or, in an action brought by the insured, after he has satisfied a judgment against him by the injured person, might defend on the ground of misrepresentations in the application).

The fact that multiple remedies for a claimed misrepresentation exist does not preclude looking at the entire course of conduct undertaken by the insurer with respect to the circumstances surrounding the alleged misrepresentation or concealment in determining not whether the insurer can raise the issue, but rather, whether the alleged misrepresentation or concealment concerned a material matter. The test of materiality is subjective. The fact that an insurer was not legally required to cancel does not render irrelevant to the subjective test of materiality a decision not to cancel or investigate circumstances that could in turn give rise to a right to cancel or rescind.

X. Bad Faith and Cancellation

ICW argues that it did not cancel the policy because of a fear of being perceived as proceeding in bad faith.

Asserting that fraud with respect to one risk does not necessarily affect the enforceability of the remaining insurance, ICW cites (ICW post-trial Brief at 42) Coca Cola Bottling Co. v. Columbia Casualty Ins. Co., 11 Cal.App.4th 1176, 1188 (1992), in which it was held that fraud regarding coverage of products liability was not material with respect to coverage of automobile liability to which a claim related and which was a separately rated subject of insurance. This does not appear to be pertinent to ICW’s asserted desire to avoid the appearance of proceeding in bad faith.

The policy’s California cancellation endorsement stated that the grounds for cancellation were essentially those permitted by statute (see preceding discussion). Improper or ineffective attempts to cancel coverage may expose the insurer to liability for breach of its implied covenant of good faith and cooperation with the insured. However, a cancellation accomplished in accordance with statutory and contractual requirements normally will not breach the insurer’s implied covenant. Williams v. State Farm Fire & Cas. Co., 216 Cal.App.3d 1540, 1549 (1990). The cases cited by ICW do stand for the proposition that a bad faith action against an insurer will lie for wrongful or tortious cancellation. See, McLaughlin v. National Union Fire Ins. Co., 23 Cal.App.4th 1132, 1157 (1994) (referring to a tortious or wrongful attempt to cancel coverage when such action was arbitrary); Spindle v. Traveler’s Ins. Companies, 66 Cal.App.3d 951, 955-56 (1977) (involving an allegedly tortious cancellation of medical malpractice insurance of one doctor for the improper purpose of intimidating others covered by a master coverage agreement to agree to higher premiums). However, there is no basis for anticipating a charge of bad faith based upon a proper cancellation effectuated upon grounds, and pursuant to policies, acceptable under the contract and statute. An insurer who had notice of the involvement of an unreported driver of allegedly insufficient age, and who was involved in a serious accident and reported by authorities to be at fault, within sixty days of the effective date of the policy, had an opportunity to cancel the policy.

Further, although there was testimony of Barbot that it would have been vengeful and inappropriate to cancel for nonpayment of the premium, it would appear that cancellation for nonpayment was a perfectly valid reason for cancellation. The concern of Schwarz that cancellation would have required a discussion with ICW does not render cancellation for a valid reason inappropriate; no authority is presented that demonstrates that the fact of the accident eliminated an otherwise appropriate option to cancel.

XI. Duty to Investigate

An automobile liability insurer must undertake a reasonable investigation of the insured’s insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy. Barrera v. State Farm Mutual Ins. Co., 71 Cal.2d 659, 663 (1969). This duty directly inures to the benefit of third persons injured by the insured; the third party, who has obtained an unsatisfied judgment against the insured, may properly proceed against the insurer; the insurer cannot then successfully defend upon the ground of its own failure reasonably to investigate the application. Id. at 663-64.

XII. Waiver and Estoppel

The insured has the burden of proof to establish the facts necessary to demonstrate a waiver or estoppel. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 31, 33-34 (1995).

Waiver is the intentional relinquishment of a known right and exists where an insurer intentionally relinquishes its right to rely on an exclusion; it depends on the intent of the insurer, and it is not made out by evidence that an insurer merely failed to specify the exclusion in a letter reserving rights. State Farm Fire & Cas. Co. V. Jioras, 24 Cal.App.4th 1619, 1628 n. 7 (1994).

California courts will find waiver when a party intentionally relinquishes a known right after knowledge of the facts; the burden is on the party claiming a waiver to prove by clear and convincing evidence that it does not leave the matter to speculation. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 31 (1995). A waiver will be found when a party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished. Waller, 11 Cal.4th at 33-34; Lunardi v. Great-West Life Assurance Co., 37 Cal.App.4th 807, 824 (1995). An insurer does not waive its right to rescind a policy on the ground of false representations if it was unaware of the falsity of those representations. Lunardi, 37 Cal.App.4th at 824. In order for there to be a waiver of the right to rescind, there must be actual knowledge of a misrepresentation. Maggini v. West Coast Life Ins. Co., 136 Cal.App. 472, 477-79 (1934) (knowledge of falsity regarding health five years before the policy may have been a basis for suspicion but did not amount to actual knowledge sufficient to estop insurer from asserting fraud).

Waiver may be found where the insurer neglects to make inquiries as to material facts where they are distinctly implied in other facts of which information is communicated. Cal. Ins.Code §  336.

It has been held that an insurer does not waive any right to withdraw from a defense or dispute an obligation to indemnify claims simply because the insurer agrees to defend the underlying lawsuits and fails promptly to reserve rights. See, Ringler Associates Inc. v. Maryland Casualty Co., 80 Cal.App.4th 1165, 1188-90 (2000) (no waiver found despite payment of defense costs for over two years before reserving rights and then withdrawing from the defense), and cases there cited. Denial of coverage on one ground does not impliedly waive grounds not stated in a denial absent clear and convincing evidence otherwise. Id.

The elements of an equitable estoppel are 1) the party to be estopped must know the facts; 2) such party must intend that its conduct will be acted on, or must so act that the party asserting the estoppel had a right to believe that it was so intended; 3) the party asserting the estoppel must be ignorant of the true state of facts; and 4) the party asserting the estoppel must rely on the conduct to his injury. Insurance Company of the West v. Haralambos Beverage Company, 195 Cal.App.3d 1308, 1321 (1987). Estoppel requires proof by the insured of detrimental reliance, Waller, 11 Cal.4th at 33-34, as well as proof of a reasonable belief that the insurer would provide coverage, State Farm Fire & Casualty Co. v. Jioras, 24 Cal.App.4th at 1627-28 ns. 7,8.

Failure to contest a reservation of rights by a declaratory relief action or other means evinces a lack of reliance. Ringler, 80 Cal.App.4th at 1190-91.

Failure to retain separate counsel by itself, and particularly the failure absent a showing that separate counsel might have obtained a more advantageous settlement, does not show detriment. State Farm Fire and Casualty Co. v. Jioras, 24 Cal.App.4th 1619, 1628-29 (1994). On the other hand, detrimental reliance would be indicated by placing counsel in a conflict of interest position in the preparation and pretrial conduct of the defense and depriving the party of separate counsel at the insurer’s expense, or of an opportunity to request such counsel (pursuant to San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984)) until trial was at hand and it would have been too late for an attorney representing solely the interests of the insured to have replaced the attorney who was representing the insurer’s interests as well. Stonewall Ins. Co. v. City of Palos Verdes Estates, 46 Cal.App.4th 1810, 1838-39 (1996) (where three years passed after the reservation of rights without a declaratory relief action).

Cal. Civ.Code §  2860(b) provides in part:

For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist….

A mere reservation of rights does not necessarily create a conflict of interest that requires the appointment of independent counsel; rather, it depends on the nature of the coverage issue and its relationship to the issues in the underlying case. Blanchard v. State Farm Fire and Casualty Co., 2 Cal.App.4th 345, (1991) (where the insurer accepted defense of the insured contractor in a construction defects action and reserved its right to deny coverage for damages excluded by the policy language (specifically, the (uncovered) cost of replacing faulty workmanship, as distinct from (covered) costs of replacing damaged property), it was held that it was appropriate for the insurer not to have provided independent counsel because unlike Cumis, in which the underlying suit against the insured contained allegations in part that the conduct of the insured was intentional and thus would not be covered, and in which the attorney selected by the insurer would have to deal with clearly divergent interests, in Blanchard the issue upon which coverage turned was independent of the issues in the underlying case). A conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim. Id.

The conflict must be actual and significant, not merely potential and theoretical; no right to cumis counsel arises where the issue is independent of and extrinsic to the issues in the underlying action such that the retained attorney was not in fact subject to conflicting interests and had no actual incentive to attach liability to the insured. Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 79 Cal.App.4th 114, 130 (2000) (where the theory of liability was not such that liability could have been transferred from covered claims to uncovered claims).

Here, the issue of misrepresentation by G & P regarding who was a driver has not been shown to be an issue in the underlying tort actions which ICW defended. In the underlying actions, it was to the advantage both of G & P and ICW to minimize the liability of G & P; there is no showing that the defense attorney could have controlled the outcome of the coverage issue to the detriment of the insured.

The question of the existence of a conflict is a question of law unless there is a dispute over an underlying fact. Blanchard, 2 Cal.App.4th at 350-51.

FINDINGS OF FACT

I. Introduction

After hearing the proofs of the parties, considering the testimony of all witnesses, the exhibits received into evidence, the statements and arguments of counsel, the stipulations of the parties, and all the submissions concerning proposed findings of fact and conclusions of law submitted by the parties, the Court enters the following findings of fact and conclusions of law. In making a finding of fact, the Court intends to rely on all evidence in the record that is consistent with or supports the Court’s finding. If the Court