United States District Court,

W.D. Michigan, Southern Division.

Joy KLINE, Personal Representative of the Estate of Jeffery Kline, Deceased,

Plaintiff/Counter-Defendant,

v.

GULF INSURANCE COMPANY, Defendant/Counter-Plaintiff and Third-Party Plaintiff,

v.

Cecil HAMLIN Third-Party Defendant

Sept. 12, 2005

OPINION

This matter is before the Court on Defendant/Counter-Plaintiff Gulf Insurance Company (“Gulf”), and Plaintiff/Counter-Defendant Joy Kline’s competing motions for summary judgment. For the reasons that follow, the Court will grant Defendant Gulf’s Motion for Summary Judgment and will deny Plaintiff’s Motion for Summary Judgment.

I. Background

The facts of this dispute have led the parties down a long and protracted road of litigation. This case began on November 3, 1997, when Plaintiff Joy Kline’s husband was killed after his automobile collided with a truck driven by Third-Party Defendant Cecil Hamlin. The truck was owned by Builders Transport, Inc., (“BTI”) and insured through Reliance National Indemnity, Company, (“Reliance”) and Defendant Gulf.

On May 21, 1998, BTI petitioned for bankruptcy protection; however, Plaintiff was given limited relief from the United States Bankruptcy Court to bring a wrongful death action in Michigan state court. In January 2001, the parties settled the wrongful death action for $3.2 million. In March 2001, Plaintiff sought writs of garnishment against both Reliance and Gulf.

Reliance filed a garnishment disclosure indicating that it owed Plaintiff $1 million, based upon its assertion that it covered BTI for $1 million over a $1 million loss-corridor deductible (“deductible”) and a $1 million self-insured retention (“self-insurance”) provided for in the policy. Gulf then filed a garnishment disclosure, assessing that it owed Kline $200,000 as its part of the $3.2 million settlement. Both insurers paid these amounts plus statutory interest to Plaintiff.

FN1. BTI was an authorized self-insurer pursuant to 49 U.S.C. § 13906(d) and 49 C.F.R. § 387.309.

Having received only $1.2 million of her $3.2 million settlement, Plaintiff filed the present suit against Gulf which was removed to this Court. Plaintiff’s First Amended Complaint contained claims of garnishment, common law and statutory bad faith, breach of contract, Michigan Consumer Protection Act violations, ordinary negligence, and negligent performance of contract. Gulf counterclaimed for declaratory relief against Kline and filed a third-party claim against Hamlin requesting a declaration regarding the extent of insurance coverage. On the parties’ competing motions for summary judgment, this Court found Gulf had fulfilled its obligation as a supplemental insurer, which then led to a grant of Gulf’s Motion and a denial of Plaintiff’s Motion for Partial Summary Judgment.

FN2. Plaintiff also sued Reliance in state court, which was also removed to this Court. However, the Reliance action has been stayed since July 19, 2001, as Reliance was placed in rehabilitative proceedings by the Pennsylvania Insurance Commissioner.

Plaintiff’s appeal to the Sixth Circuit Court of Appeals sought review of this Court’s findings on Gulf’s declaratory judgment and on her garnishment, statutory bad faith, and breach of contract claims. Kline v. Gulf Ins. Co., 98 Fed. Appx. 471, 472 (6th Cir.2004). The Court of Appeals reversed in part this Court’s grant of summary judgment in favor of Gulf. Id. at 473. While the Court of Appeals affirmed this Court’s conclusion that the umbrella insurance policy Gulf retained for BTI attached when BTI’s liability reached the $3 million mark, the appellate court disagreed with this Court’s finding that no genuine issue of material fact existed as to whether the BTI-Gulf insurance policy contained an Interstate Commerce Commission MSC-90 endorsement. Id. The Court of Appeals further disagreed with this Court’s disposition of Plaintiff’s garnishment, statutory bad faith, and breach of contract claims because of those claims connection to the existence of a MSC-90 endorsement. Id.

Plaintiff’s remaining claims were not appealed.

Regulations promulgated by the Interstate Commerce Commission, now administered by the Department of Transportation, require that authorized carriers must have insurance or some other form of surety conditioned to pay any final judgment against the motor carrier for any of the injuries it may cause under the carrier’s licence. 49 C.F.R. § 1043.1(a) (1995). A MCS-90 endorsement is a way of meeting DOT requirements. Id. at § 387.7(d).

In remand, the Court of Appeals narrowed the issues on the MCS-90 endorsement to whether an endorsement existed, and if so, what effect such an endorsement has on an umbrella insurer’s attachment point. Id. at 477.

II. Standard of Review

Deciding a motion for summary judgment requires the Court to determine if there is no genuine issue as to any material fact such that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must consider the record as a whole by reviewing all pleadings, depositions, affidavits, and admissions on file. Matsuhita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The facts are to be considered in a light most favorable to the non-moving party, and “… all justifiable inferences are to be drawn in his favor.” Schaffer v. A.O. Smith Harvestore Prod., 74 F.3d 722, 727 (6th Cir.1996) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)) (other citations omitted).

Once the movant satisfies his burden of demonstrating an absence of a genuine issue of material fact, the non-moving party must come forward with specific facts showing that there is a genuine issue for trial. Kramer v. Bachan Aerospace Corp., 912 F.2d 151, 153-54 (6th Cir.1990). The non-moving party may not rest on its pleading but must present “specific facts showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(e)). It is the function of the Court to decide “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251-52. The question is “whether a fair-minded jury could return a verdict for the [non-moving party] on the evidence presented.” Id. at 252.

III. Analysis

The Court has reviewed the pleadings and record and does not believe that oral argument would assist in reaching a decision. W.D. Mich. L. Civ. R. 7.2(d).

The essence of this dispute involves a layered insurance scheme wherein BTI staggered its risk incrementally in the following fashion: the first $2 million of any loss remained with BTI (through a $1 million deductible and $1 million of self-insurance); the next $1 million was insured by Reliance; losses after $3 million were Gulf’s responsibility. Thus, as stated earlier the attachment point for the Gulf policy was $3 million; however, the question for the Court to answer is whether the existence of a MCS-90 endorsement alters Gulf’s obligations as an umbrella insurer.

A. The MCS-90 Endorsement.

The Court of Appeals found that a material issue of fact existed as to whether the BTI-Gulf insurance policy contained a MCS-90 endorsement. Kline, 98 Fed. Appx. at 471. The parties have submitted lengthy briefs, accompanied by numerous exhibits, which mostly work to contradict or refute the other’s submission. If a material issue of fact existed on appeal–one certainly exists now–as the parties’ efforts have only galvanized the Court of Appeals’ assessment.

Historically, interstate roadway carriers had taken advantage of a loose regulatory structure whereby trucks were leased or interchanged to avoid safety regulations and to shirk financial responsibility for the resulting accidents. Empire Fire & Marine Ins. Co. v. Guar. Nat’l Ins. Co., 868 F.2d 357, 362 (10th Cir.1989) (internal citations omitted). Congress responded by authorizing the Interstate Commerce Commission to promulgate regulations to curb these abuses. Id. One such regulation requires interstate carriers to maintain insurance or a surety to pay any judgment recovered against it as a result of its accidents. Id; see also supra note 4. The MCS-90 is a form endorsement included in the interstate carrier’s insurance policy that ensures someone will pick up the tab when the public is injured by the carrier’s accident and the policy terms deny coverage.

The endorsement provides in pertinent part that:

In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of sections 29 and 30 of the Motor Carrier Act of 1980…. It is understood and agreed that no condition, provision, stipulation, or limitation contained in the policy, this endorsement, or any other endorsement thereon, or violation thereof, shall relieve the company from liability or from the payment of any final judgment, within the limits of the policy herein described, irrespective of the financial condition, insolvency or bankruptcy of the insured.

Kline, 98 Fed. Appx. at 474 (citing 49 C.F.R. § 387.15 (1995)) (emphasis in original).

The public policy goals behind the MCS-90 endorsement also guide the Court’s analysis. “It is well established that the primary purpose of the MCS-90 [endorsement] is to assure injured members of the public are able to obtain judgment from negligent authorized interstate carriers.” John Deere Ins. Co. v. Nueva, 229 F.3d 853, 857 (9th Cir.2000); Harco Nat’l Ins. Co. v. Bobac Trucking Inc., 107 F.3d 733, 736 (9th Cir.1997) (referencing Canal Ins. Co. v. First Gen. Ins. Co., 889 F.2d 604, 611 (5th Cir.1989)) (“The purpose of the MCS-90 is to protect the public, not create a windfall for the insured.”). With this public policy in mind, the Court turns to the effect a MCS-90 has on an umbrella insurer.

The Court notes that this is an issue of first impression in this Circuit, and further notes that it knows of no court of any jurisdiction that has had this precise issue before it.

When construing a MCS-90 endorsement’s effect on an insurance policy, the great weight of authority have found that it operates as a suretyship for the benefit of the public. See, e.g., Travelers Indem. Co. v. Western Am. Specialized Trans. Co. Inc., 409 F.3d 256, 260 (5th Cir.2005) (approving of district court’s characterization of a MCS-90 endorsement as a suretyship); Canal Ins. Co. v. Distribution Servs. Inc., 320 F.3d 488, 490 (4th Cir.2003) (“… MCS-90 endorsement creates a suretyship by the insurer to protect the public when the insurance policy to which the MCS-90 endorsement is attached otherwise provides no coverage to the insured.”); Canal Ins. Co. v. Carolina Cas. Ins. Co., 59 F.3d 281, 283 (1st Cir.1995) (“we consider the [MCS-90] endorsement to be, in effect, suretyship by the insurance carrier to protect the public–a safety net…. [I]t simply covers the public when other coverage is lacking.”); Harco, 107 F.3d at 736 (approving of the district court’s comparison of an insurers obligation under a MCS-90 endorsement to that of a surety).

District Court of Appeal of Florida,

Third District.

EAST FLORIDA HAULING, INC., Appellant,

v.

LEXINGTON INSURANCE COMPANY, Appellee.

Sept. 21, 2005.

CORTIÑAS, Judge.

The plaintiff, East Florida Hauling, Inc. (“EFH”) appeals from a final order granting the defendant’s, Lexington Insurance Company’s (“Lexington”), motion for summary judgment finding that Lexington owed no duty to defend and that Lexington’s liability, if any, is limited by the “limitation on certain commodities” clause (“target commodities endorsement”). We affirm.

EFH is in the business of transporting trailers throughout the United States. Under applicable federal law, EFH is required by the Federal Motor Carrier Safety Administration to maintain commercial auto liability and cargo liability insurance coverage for the protection of both the public and the owner of the cargo entrusted to EFH for transportation. EFH was covered by a motor truck cargo liability insurance policy (“policy”), which was written by Lexington. Subject to limitations, that policy assumed EFH’s legal liability for the property of others under EFH’s bill of lading while the property was in transit and in the custody of EFH.

On October 5, 2002, a sealed trailer was stolen from EFH’s possession near Tallahassee, Florida, while the trailer was enroute from Miami, Florida to Laredo, Texas. The stolen cargo belonged to Robinson Company, Inc. (“Robinson”). On October 21, 2002, EFH made a claim to Lexington under its motor cargo insurance policy for the theft of the cargo. At that time, Lexington began investigating the claim.

In April 2004, Robinson sued EFH for breach of contract for non-delivery, seeking over $300,000 for the value of the cargo contents and alleging that the cargo contained “electronic goods” (“main lawsuit”). EFH promptly forwarded the main lawsuit to Lexington asserting that Robinson’s allegations fell within the coverage provisions and demanding that Lexington defend the suit. On April 7, 2004, Lexington notified EFH that it declined to defend EFH and that its maximum exposure under the policy was $20,000 because the policy contained a clause setting forth a target commodities endorsement which stated, in relevant part:

FN1. This amount represents ten percent (10%) of the $250,000 policy limit per vehicle minus the $5,000 deductible.

H. LIMITATION ON CERTAIN COMMODITIES

In the event of “loss” by theft of the following commodities from a vehicle, we will not be liable for more than 10% of the Limit of Insurance applying to that vehicle:

a. Audio and Video Equipment.

Lexington further noted that, since EFH’s bill of lading provided for a 50 cents per pound limitation, the limit of liability would be $16,220 as the cargo weighed 32,440 pounds. Therefore, Lexington offered EFH a settlement of $16,220 minus $5,000 deductible for a net amount of $11,220. However, prior to offering to settle with EFH for $11,220, Lexington offered to resolve the claim with Robinson for $25,000, but Robinson refused.

Lexington’s refusal to defend EFH was based on the “Commercial Inland Marine Conditions” section of the policy which stated, in relevant part:

H. PRIVILEGE TO ADJUST WITH OWNER

In the event of “loss” involving property of others in your care, custody, or control, we have theright to:

1. Settle the “loss” with the owners of the property. A receipt for payment from the owners of that property will satisfy any claim of yours.

2. Provide a defense for legal proceedings brought against you. If provided, the expense of this defense will be at our cost and will not reduce the applicable Limit of Insurance under this insurance. (emphasis added).

On July 1, 2004, EFH filed a Third Party Complaint against Lexington, seeking declaratory relief and alleging that Lexington breached its contract with EFH when it failed to: 1) defend EFH; 2) investigate and resolve the subject claim directly with Robinson; 3) apply the correct principles of contract interpretation to the target commodities endorsement; 4) fulfill its obligation to EFH; and 5) act in good faith. EFH also sought indemnity for its costs to defend and investigate claims under the main lawsuit.

On October 15, 2004, Lexington filed a motion for summary judgment, attaching the affidavit of Mamie S. Landers (“Landers”), Lexington’s claims professional. The motion and affidavit were supported by three commercial invoices submitted by Robinson to EFH. Based on the invoices, Landers concluded that the contents contained in the cargo constituted audio and video equipment. This classification reduced Lexington’s coverage to ten percent (10%) of the policy limit.

In response to Lexington’s motion, EFH filed the affidavit of Robert Acuna, president of EFH, admitting his knowledge of the target commodities endorsement in the policy since it had been the subject of Lexington’s prior reservation of rights letters. Acuna stated that, over the course of several years that Lexington provided cargo insurance to EFH, Lexington defended over five cargo claims filed against EFH similar to the instant claim. Lexington had never declined to defend EFH, although it had issued reservation of rights letters. Acuna also asserted that he was never advised that the duty to defend clause was exercised solely at the discretion of Lexington nor was he advised of any standards, rules, or guidelines by which the duty to defend was either exercised or refused.

On January 6, 2005, the trial court granted Lexington’s motion for summary judgment and dismissed EFH’s Third-Party Complaint. The trial court found that Lexington had “no duty to defend EFH in the main lawsuit and that Lexington’s liability, if any, is limited to a net amount of $20,000, 10% of $250,000 = $25,000, less the $5,000 deductible….”

We review the trial court’s interpretation of an insurance policy and entry of summary judgment de novo. Volusia County v. Aberdeen at Ormond Beach, L.P., 760 So.2d 126 (Fla.2000); Siegle v. Progressive Consumers Ins. Co., 788 So.2d 355, 357 (Fla. 4th DCA 2001) aff’d, 819 So.2d 732 (Fla.2002). When granting a motion for summary judgment, the trial court must determine that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law.Volusia, 760 So.2d at 130. The moving party bears the burden of conclusively demonstrating the absence of triable issues. Moore v. Morris, 475 So.2d 666, 668 (Fla.1985). In reviewing a summary judgment, this court views the evidence in a light most favorable to the nonmoving party, drawing all reasonable inferences derivable from the evidence in favor of the nonmoving party. See Cox v. CSX Intermodal, Inc., 732 So.2d 1092, 1095 (Fla. 1st DCA 1999).

The first issue on appeal is whether the lower court properly determined that Lexington’s insurance policy created a right rather than a duty to defend EFH. Either a statute or a contract may confer on the insurer a duty to defend. Allstate Ins. Co. v. RJS Enters., Inc., 692 So.2d 142, 144(Fla.1997). Since there is no applicable statute, this court must examine the policy language to determine whether the trial court erred in granting summary judgment in favor of Lexington. When the language of an insurance policy is clear and unambiguous, a court must interpret it according to its plain meaning, giving effect to the policy as it was written. See Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161, 165 (Fla.2003). However, if the language of the policy is susceptible to more than one reasonable interpretation, it is ambiguous, and a court will resolve such ambiguity in favor of the insured. Auto-Owners Ins. Co. v. Anderson, 756 So.2d 29, 34 (Fla.2000).

EFH argues that the policy language regarding Lexington’s right to defend creates doubt as to whether there is an obligation, rather than an option to defend, and that such doubt must be resolved in favor of EFH. It further argues that Lexington’s fiduciary obligation to its insured forbids it from exercising an option, at its unilateral discretion, to refuse to defend its insured when the claim clearly falls within the policy’s coverage provisions.

Lexington, on the other hand, contends that the insurer does not have an absolute duty to defend in every instance where a claim falls under the coverage provisions. Lexington further contends that the nature and scope of the duty to defend is created in the insurance contract, which may relieve the insurer of any obligation to defend. “Since the contract terms govern the duty, an insurance policy may relieve the insurer of any duty to defend, or give the insurer the right, but not the duty, to defend.” 14 Lee R. Russ & Thomas F. Segalia, Couch on Insurance 3D 200:5 (1999). Lexington also contends that the clause at issue, “Section H, Privilege to Adjust with Owner,” is clear and unambiguous. It claims that the clause creates a right, rather than a duty to defend, as made clear by the language “if [defense is] provided,” thus confirming the discretionary nature of the subject section of the policy. We agree.

EFH relies on Rad Source Techs. Inc. v. Essex Ins. Co., 902 So.2d 264, 267 (Fla. 4th DCA 2005), to illustrate that, when policy language is determined to be ambiguous, such an ambiguity will be resolved in favor of the insured. However, the provision in question in Rad Source involved policy language which is distinguishable from the instant case. In Rad Source, the policy provided that “[t]his Company reserves the right as its sole option to defend … and will pay all legal expense incurred by this Company in connection with any action it undertakes to defend….” Id. at 265 (emphasis added). The Fourth District found that language to be ambiguous because the provision could be reasonably interpreted in at least three different ways: (1) “as its sole option” could mean that the insurer’s only option is to defend; (2) “it undertakes to defend” could refer to claims that the insurer could refuse to defend on the basis that the claims are not covered under the policy; or (3) the language could also mean that the insurer is reserving the right to defend to prohibit the insured from independently proceeding with its defense. Id. at 266-67. The policy language in our case is clearly different from the language in Rad Source and does not lend itself to more than one reasonable interpretation.

Although Florida courts have not interpreted the specific clause at issue in the instant case, Florida law has recognized that an insurance policy may relieve the insurer of an obligation to defend its insured by reserving a right, at the insurer’s discretion, to defend an action. See PT Indonesia Epson Indus. v. Orient Oversees Container Lines Inc.,No. 99CV3373, 2002 WL 561376, at *3 (S.D.Fla.2002). PT Indonesia involved an insurance provision which stated, in relevant part:

The insured shall not voluntarily admit any liability nor settle any claims … without the specific authority of this [c]ompany, nor shall they interfere with any negotiations for settlements…. In the event of legal action brought against the insured … which might constitute a claim under this policy, the insured shall give immediate notice … and this [c]ompany reserves the right at its sole option to defend such action.

Id. at *1 (emphasis added). The court concluded that the unambiguous language of the policy plainly meant that the insurer had the option not to provide a defense. Id. at *2. Thus, even when the insured agrees to relinquish control of the investigation to the insurer, the insurer may exercise the right to refuse to defend the insured.

Moreover, case law from other jurisdictions guides this court in its construction of the policy provision in the instant case. A state court in Nebraska and a federal court in Illinois addressed the exact same insurance provision at issue. Both courts were in agreement that where policy language creates a right to defend, it is clear and unambiguous that it does not create a duty on the part of the insurer. Centennial Ins. Co. v. Transittal Servs., Inc., No. 00C1383, 2001 WL 289879, at *3 (N.D.Ill.2001); Ohio Cas. Ins. v. Carman Cartage Co., Inc., 636 N.W.2d 862, 867 (Neb.2001).

The court in Centennial held that, even when the complaint in the underlying lawsuit alleges facts within the coverage of the policy, if the policy confers on the insurer only a right to defend, the insurer is not obligated to defend the insured.Centennial, 2001 WL 289879, at *3. It further held that the permissive language of the policy does not render the policy meaningless because the insurer is obligated, under a different provision, to pay for any loss covered under the policy.Id. In the instant case, even if it elects to refuse to defend EFH, Lexington will have to pay for any loss covered under the policy when liability is determined, because the duty to defend is separate from the coverage provisions of the policy.See Colony Ins. Co. v. G & E Tires & Serv., Inc., 777 So.2d 1034, 1036 (Fla. 1st DCA 2000).

Similarly, the Carman court concluded that the “Privilege to Adjust with Owner” provision at issue in that case, which contained the same language as the provision in the instant case, “clearly and unambiguously gives [the insurer] a right to defend claims against its insured and a right to settle such claims, but does not impose a duty upon it to do either.”Carman, 636 N.W.2d at 867. EFH’s attempt to cast Carman as inapplicable because the insurance contract involved inCarman was an inland marine policy providing for motortruck cargo coverage, rather than liability, is a distinction without a difference.

The second issue on appeal is whether the target commodities endorsement restriction applies to the goods that were contained in the stolen cargo. The burden is on the insured to prove that the insurance policy covers a claim against it.Hudson Ins. Co. v. Double D Mgmt. Co., Inc., 768 F.Supp. 1542 (M.D.Fla.1991). Once the insured shows coverage, the burden shifts to the insurer to prove an exclusion applies to the coverage. LaFarge Corp. v. Travelers Indem. Co., 118 F.3d 1511, 1516 (11th Cir.1997). If there is an exception to the exclusion, the burden once again is placed on the insured to demonstrate the exception to the exclusion. Id.

Here, Lexington submitted Landers’ affidavit, as well as three commercial invoices provided to EFH by Robinson and subsequently forwarded to Lexington as support for EFH’s claim. The invoices reflected that the cargo contained such items as “Sharp … Viewcam, 16X Zoom, … JVH SVHS-C Camera w/ … LCD-Light-Stabilizer, … Panasonic VHS-C Camcorder.” The relevant policy provision clearly and unambiguously reduced coverage for “Audio and Video Equipment,” and the items listed on the invoices squarely fall within this provision. EFH failed to present evidence demonstrating that there is a genuine issue of material fact as to whether an exception to the exclusion exists, or to dispute that it was transporting these items. Therefore, we find that the target commodities endorsement is clear and unambiguous and must be construed according to its plain meaning.

Affirmed.