Canal Insurance v. Distribution Services, Inc.

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

CANAL INSURANCE COMPANY, 
Plaintiff-Appellant,
v.
DISTRIBUTION SERVICES,
INCORPORATED; AIM LEASING
COMPANY, d/b/a Aim Nationalease;
PACIFIC EMPLOYERS INSURANCE
COMPANY; WILLIAM THOMPKINS,  No. 02-1226
Defendants-Appellees,
and
BRYAN I. LEE; SHANIA THOMPKINS, a
minor by and through her father and
next friend William Thompkins,
Defendants.

Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Dennis W. Dohnal, Magistrate Judge.
(CA-01-81-3)

Argued: January 23, 2003

Decided: February 27, 2003

Before WILLIAMS and MOTZ, Circuit Judges, and
HAMILTON, Senior Circuit Judge.

Affirmed by published opinion. Senior Judge Hamilton wrote the
opinion, in which Judge Williams and Judge Motz joined.
2 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES
COUNSEL

ARGUED: Mark Steven Paullin, SMITH & JENSEN, P.C., Rich-
mond, Virginia, for Appellant. Ronald Paul Herbert, LECLAIR
RYAN, P.C., Richmond, Virginia, for Appellees. ON BRIEF: Eric
S. Jensen, Nathan H. Smith, Michael A. Kiely, SMITH & JENSEN,
P.C., Richmond, Virginia, for Appellant. Charles G. Meyer, III,
LECLAIR RYAN, P.C., Richmond, Virginia, for Appellees.

OPINION

HAMILTON, Senior Circuit Judge:

This appeal presents the question of first impression in our circuit:
Whether an "Endorsement for Motor Carrier Policies of Insurance for
Public Liability Under Sections 29 and 30 of the Motor Carrier Act
of 1980,"1 commonly referred to as the MCS-90 endorsement,2 deter-
mines the allocation of loss among insurers. Consistent with the
majority view of our sister circuits, we answer this question in the
negative.

I.

In order to put the facts of this case in their proper perspective, we
will first set forth the relevant statutory and regulatory background.
Congress enacted the MCA, in part, to address abuses that had arisen
in the interstate trucking industry which threatened public safety,
including the use by motor carriers of leased or borrowed vehicles to
avoid financial responsibility for accidents that occurred while goods
were being transported in interstate commerce. Pierre v. Providence
Washington Ins. Co., 2002 WL 31770499 (N.Y. Dec. 12, 2002); see
generally Pub. L. No. 96-296, § 3. Accordingly, one remedial mea-
sure provided in the MCA is a liability insurance requirement
imposed upon each motor carrier registered to engage in interstate
commerce, which requirement mandates that a motor carrier file "a
1
Pub. L. No. 96-296, 94 Stat. 793 (1980) (the MCA).
2
49 C.F.R. §§ 387.7, 387.15.
 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES 3
bond, insurance policy, or other type of security" in an amount deter-
mined by the Secretary of Transportation and the laws of the State or
States in which the motor carrier intends to operate. 49 U.S.C.
§ 13906(a)(1); see also Pub. L. No. 96-296, § 30(c).

The Secretary of Transportation also has the authority to "prescribe
the appropriate form of endorsement to be appended to policies of
insurance and surety bonds which will subject the insurance policy or
surety bond to the full security limits of the" required coverage. 49
U.S.C. § 13906(f). Pursuant to this regulatory authority, the Secretary
of Transportation issued a regulation mandating that every liability
insurance policy covering a "motor carrier" contain the MCS-90
endorsement.3 49 C.F.R. §§ 387.7(a), 387.9, 387.15. The MCS-90
endorsement provides, in relevant part, as follows:

In consideration of the premium stated in the policy to
which this endorsement is attached, the insurer (the com-
pany) agrees to pay, within the limits of liability described
herein, any final judgment recovered against the insured for
public liability resulting from negligence in the operation,
maintenance or use of motor vehicles subject to the financial
responsibility requirements of Sections 29 and 30 of the
Motor Carrier Act of 1980 regardless of whether or not each
motor vehicle is specifically described in the policy and
whether or not such negligence occurs on any route or in
any territory authorized to be served by the insured or else-
where. [N]o condition, provision, stipulation, or limitation
contained in the policy, this endorsement, or any other
endorsement thereon, or violation thereof, shall relieve the
3
For purposes of the MCS-90 endorsement, "motor carrier" is defined
as:
a for-hire motor carrier or a private motor carrier. The term
includes, but is not limited to, a motor carrier’s agent, officer, or
representative; an employee responsible for hiring, supervising,
training, assigning, or dispatching a driver; or an employee con-
cerned with the installation, inspection, and maintenance of
motor vehicle equipment and/or accessories.
49 C.F.R. § 387.5.
4 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES
company from liability or from the payment of any final
judgment, within the limits of liability herein described, irre-
spective of the financial condition, insolvency or bankruptcy
of the insured. However, all terms, conditions, and limita-
tions in the policy to which the endorsement is attached
shall remain in full force and effect as binding between the
insured and the company. The insured agrees to reimburse
the company for any payment made by the company on
account of any accident, claim, or suit involving a breach of
the terms of the policy, and for any payment that the com-
pany would not have been obligated to make under the pro-
visions of the policy except for the agreement contained in
this endorsement.

49 C.F.R. § 387.15, at Illustration I.

"It is well-established that the primary purpose of the MCS-90
[endorsement] is to assure that 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), cert.
denied, 534 U.S. 1127 (2002). Accordingly, the 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 other-
wise provides no coverage to the insured. T.H.E. Ins. Co. v. Larsen
Intermodal Servs., Inc., 242 F.3d 667, 672 (5th Cir. 2001); Harco
Nat’l Ins. Co. v. Bobac Trucking, Inc., 107 F.3d 733, 736 (9th Cir.
1997); Progressive Cas. Ins. Co. v. Hoover, 809 A.2d 353, 360 n.11
(Pa. 2002).

With this statutory and regulatory background in mind, we turn to
the facts of the present case, which facts are not in dispute. On Octo-
ber 22, 1999, William Thompkins, and his minor daughter Shania
Thompkins, suffered personal injuries as pedestrians in an accident
with a tractor-trailer that was negligently operated by Bryan Lee
(Lee). The accident took place in the parking lot of a truck stop in
Caroline County, Virginia. At the time of the accident, Lee was work-
ing within the scope of his employment for Distribution Services, Inc.
(DSI), a company engaged in the business of providing overland ship-
ping and trucking services. DSI did not own the tractor truck (i.e., the
cab) involved in the accident (the Truck), but rather leased it from
 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES 5
AIM Leasing Company (AIM), a company engaged in the business
of leasing tractor trucks and other vehicles to overland shipping and
trucking companies.

At the time of the accident, DSI and Lee, acting within the scope
of his employment with DSI, were insured by Canal Insurance Com-
pany (Canal) under a commercial automobile liability policy (the
Canal Policy) which provided $1 million of liability insurance cover-
age for certain "covered autos" and contained the MCS-90 endorse-
ment. Absent the MCS-90 endorsement, the Truck was not a "covered
auto" under the Canal Policy.

AIM was insured at the time of the accident by Pacific Employers
Insurance Company (Pacific) under a commercial automobile liability
policy (the Pacific Policy) which provided $1 million of liability
insurance coverage for certain covered autos and contained the MCS-
90 endorsement. Pursuant to the rental agreement between DSI and
AIM, DSI agreed to obtain primary liability insurance coverage for
the Truck with AIM as an additional named insured and to indemnify
and hold AIM, its agents, servants, and employees harmless from any
and all claims for injury to persons or damage to property and for any
and all expenses incurred in the defense of such claims. Pursuant to
Endorsement 15 in the Pacific Policy, the Pacific Policy expressly
conditioned coverage of leased vehicles, such as the Truck, (1) upon
the lessee (DSI) furnishing AIM with a certificate of insurance nam-
ing AIM as an additional insured on the lessee’s liability insurance
policy and (2) upon other liability insurance required by the lease
agreement being non-collectible. DSI never provided AIM with a cer-
tificate of insurance naming AIM as an additional insured on any lia-
bility insurance policy held by DSI.

Subsequent to the accident, Shania Thompkins, by her father as
next friend, brought a negligence action related to her injuries against
DSI and Lee in Virginia state court. Canal then brought a motion for
declaratory judgment in Virginia state court seeking a determination
of coverage for the underlying accident. Canal named DSI, Lee, and
Shania Thompkins as defendants. Shania Thompkins removed the
declaratory judgment action to the United States District Court for the
Eastern District of Virginia. Prior to the entry of final judgment in her
6 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES
state court negligence action, Canal settled with Shania Thompkins on
behalf of DSI and Lee for $125,000.

Canal then amended its motion for declaratory judgment to name
Pacific and AIM as defendants. Moreover, unlike Canal’s original
motion for declaratory judgment, its amended motion for declaratory
judgment named William Thompkins as a defendant individually, not
just as the father and next friend of Shania Thompkins. Canal did so
in anticipation of William Thompkins filing his own negligence
action in connection with the accident. Canal’s amended motion for
declaratory judgment sought a declaration that it "is entitled to a
determination that any policy issued to [AIM] by [Pacific] provides
coverage for the injuries alleged by Shania and William Thompkins,
and Canal is entitled to seek reimbursement from [AIM] and [Pacific]
for any settlement amounts or final judgments in favor of Shania or
William Thompkins." (J.A. 25-26).

Canal subsequently made a motion for voluntary dismissal of
Shania Thompkins as a defendant, which motion the district court
granted. Thereafter, Pacific, AIM, and William Thompkins moved for
summary judgment with respect to Canal’s amended motion for
declaratory judgment. The district court granted summary judgment
in favor of Pacific, AIM, and William Thompkins and denied as moot
Canal’s amended motion for declaratory judgment. Following the dis-
trict court’s denial of Canal’s motion to alter or amend the judgment,
Canal filed the present appeal.

On appeal, Canal seeks reversal of the district court’s entry of judg-
ment in favor of Pacific and either: (1) entry of a declaratory judg-
ment holding that Pacific is liable to partially reimburse it for the
settlement amount that it paid to Shania Thompkins;4 or (2) issuance
of an opinion agreeing with its position as to the effect of the MCS-
90 endorsement in this case and remanding the case to the district
court for further proceedings in accordance therewith.
4
We note that Pacific represents in its brief that following the district
court’s entry of judgment in its favor, Canal settled with William
Thompkins in his individual capacity. However, Canal does not press
any arguments or claims on appeal with respect to William Thompkins.
 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES 7
II.

Whether a party was entitled to summary judgment is a matter of
law, which we review de novo. Higgins v. E.I. DuPont de Nemours
& Co., 863 F.2d 1162, 1167 (4th Cir. 1988). Summary judgment is
appropriate when the pleadings, depositions, answers to interrogato-
ries, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the mov-
ing party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c). In reviewing the district court’s grant of summary judgment,
we must construe the facts in the light most favorable to the non-
moving party. See Smith v. Virginia Commonwealth Univ., 84 F.3d
672, 675 (4th Cir. 1996) (en banc).

III.

Canal’s core argument, in support of its claim for partial reim-
bursement from Pacific in connection with the amount that it paid to
settle Shania Thompkins’ negligence action, is that the MCS-90
endorsement in the Pacific Policy nullifies the portion of Endorse-
ment 15 in that same policy which excludes coverage for autos owned
by AIM but leased to third parties. This argument raises the issue of
first impression in our circuit as to whether the MCS-90 endorsement
controls the allocation of loss among insurers as opposed to operating
only when necessary to protect injured members of the public.

The operation and effect of the MCS-90 endorsement is a matter
of federal law. See, e.g., Canal Ins. Co. v. First Gen. Ins. Co., 889
F.2d 604, 610 (5th Cir. 1989), modified on other grounds, 901 F.2d
45 (5th Cir. 1990); Ford Motor Co. v. Transport Indem. Co., 795 F.2d
538, 545 (6th Cir. 1986); Lynch v. YOB, 768 N.E.2d 1158, 1162
(Ohio 2002). The federal courts of appeals which have already con-
sidered the issue now before us are split, with the majority holding
that the MCS-90 endorsement does not control the allocation of loss
among insurers. T.H.E. Ins. Co., 242 F.3d at 673; Empire Fire &
Marine Ins. Co. v. J. Transport, Inc., 880 F.2d 1291, 1298-99 (11th
Cir. 1989); Occidental Fire & Cas. Co. of N.C. v. Int’l Ins. Co., 804
F.2d 983, 986 (7th Cir. 1986); Grinnell Mut. Reinsurance Co. v.
Empire Fire & Marine Ins. Co., 722 F.2d 1400, 1404 (8th Cir. 1983);
Carolina Cas. Ins. Co. v. Insurance Co. of North Am., 595 F.2d 128,
8 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES
140-41 (3d Cir. 1979). Accord Great West Cas. Co. v. Mallinger
Truck Line, Inc., 640 S.W.2d 479, 483-85 (Mo. Ct. App. 1982);
L.R.C. Truck Line, Inc. v. Berryhill, 390 S.E.2d 692, 694-95 (N.C. Ct.
App. 1990). See also Harold A. Weston, Annotation, Motor Carrier
Act–Loss Allocation, 157 A.L.R. Fed. 549, at 567-69 (1999) (collect-
ing cases). The rationale behind the majority view is that the purpose
of the MCS-90 endorsement, like the Motor Carrier Act of 1980, is
to protect the public, and therefore, the MCS-90 endorsement does
not control the allocation of loss among insurers. For example, as the
Fifth Circuit recently stated in T.H.E., 242 F.3d at 673,

[The MCS-90] endorsement accomplishes its purpose by
reading out only those clauses in the policy that would limit
the ability of a third party victim to recover for his loss. But
there is no need for or purpose to be served by this supposed
automatic extinguishment of [a] clause insofar as it affects
the insured or other insurers who clamor for part or all of
the coverage. Indeed, the MCS-90 states that "all terms,
conditions, and limitations in the policy to which the
endorsement is attached shall remain in full force and effect
as binding between the insured and the company." There-
fore, . . . if an insurer’s policy contained the [MCS-90]
endorsement, it would not render the insurer primary as a
matter of law. [T]he [MCS-90] endorsement is not impli-
cated for the purpose of resolving disputes among multiple
insurers over which insurer should bear the ultimate finan-
cial burden of the loss.

Id. (internal quotation marks and citations omitted) (second alteration
in original).

The minority view is that the MCS-90 endorsement applies to
determine allocation of loss among insurers. Prestige Cas. Co. v.
Michigan Mut. Ins. Co., 99 F.3d 1340, 1348-49 (6th Cir. 1996);
Empire Fire and Marine Ins. Co. v. Guaranty Nat. Ins. Co., 868 F.2d
357, 361-64 (10th Cir. 1989). Accord Nolt v. U.S. Fid. and Guar. Co.,
617 A.2d 578, 583 (Md. Ct. App. 1993); Transport Indem. Co. v.
Carolina Cas. Ins. Co., 652 P.2d 134, 143-45 (Ariz. 1982). See also
Annotation, Motor Carrier Act–Loss Allocation, 157 A.L.R. Fed. at
567-69 (collecting cases). Those courts espousing the minority view
 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES 9
recognize that the purpose of the MCS-90 endorsement is to provide
financial protection to injured members of the public, but reason that
this fact alone does not lead to the conclusion that the MCS-90
endorsement modifies the policy vis-a vis the public but not vis-a-vis
insurance companies. Prestige Cas. Co., 99 F.3d at 1342-43, 1348-49;
Empire Fire and Marine Ins. Co., 868 F.2d at 362-63, 366 n.13.
According to the minority view:

[s]uch a chameleon-like quality of a clause in a commercial
contract that changes character depending on who is seeking
to apply it should not be favored unless compelled by the
language of the instrument. The [MCS-90] endorsement is
not written in special ink which appears for cases involving
the public and disappears in cases involving other insurers.
Here, the clause is physically attached to the policy and
must be given effect.

Empire Fire and Marine Ins. Co., 868 F.2d at 366 n.13 (internal quo-
tation marks omitted).

We agree with and adopt the majority view of our sister circuits
that the MCS-90 endorsement does not apply to determine the alloca-
tion of loss among insurers. Critically, the majority view, as com-
pared to the minority view, is faithful to the express language of the
MCS-90 endorsement which states: "However, all terms, conditions,
and limitations in the policy to which the [MCS-90] endorsement is
attached shall remain in full force and effect as binding between the
insured and the company." 49 C.F.R. § 387.15, at Illustration I. This
language makes clear that the MCS-90 endorsement operates to pro-
tect the public but does not alter the relationship between the insured
and the insurer as otherwise provided in the policy. Similarly, the
MCS-90 endorsement cannot reasonably be read to alter the terms of
the policy for the benefit of other insurers.

Here, Canal seeks to enforce the MCS-90 endorsement in the
Pacific Policy in its favor. According to Canal, if we affirm the dis-
trict court, we will "insulate Pacific forever from any responsibility
for a vehicle owned by its insured and subject to Pacific’s MCS-90
[endorsement]." (Canal’s Opening Br. at 9).
10 CANAL INSURANCE CO. v. DISTRIBUTION SERVICES
Canal’s argument misses the mark. By virtue of Canal’s settlement
payment to Shania Thompkins, pursuant to the MCS-90 endorsement
in the Canal Policy, the public protection purpose of the MCS-90
endorsement has been served. Therefore, the MCS-90 endorsement in
the Pacific Policy does not come into play. Canal’s claim for reim-
bursement then is subject to the actual terms of the Pacific Policy,
which terms expressly exclude liability coverage for the Truck
because DSI, at a minimum, failed to furnish AIM with a certificate
of insurance naming AIM as an additional insured on a liability insur-
ance policy issued to DSI.5 In other words, for purposes of Canal’s
claim for reimbursement, the Truck is excluded from coverage.
Therefore, the district court correctly granted summary judgment in
favor of Pacific.

For the reasons stated, we affirm the judgment of the district court.

AFFIRMED

5
Canal also takes issue with the district court’s statement in its memo-
randum opinion that "coverage under the Canal Policy is ‘collectible’
under the applicable MCS-90." (J.A. 282). Canal contends that the dis-
trict court should have made clear that its obligation under the MCS-90
endorsement is one of suretyship rather than providing insurance cover-
age per se.
Canal is not entitled to any appellate relief on this point. The district
court made the statement merely in the context of observing that the sec-
ond condition precedent of Endorsement 15 under the Pacific Policy had
not been satisfied. At most, the statement was dicta because the district
court had already held that Canal’s claim against Pacific failed because
the first condition of Endorsement 15 had not been satisfied. Burdine v.
Dow Chemical Co., 923 F.2d 633, 635 n.2 (8th Cir. 1991) (refusing to
review dicta).