CMV Law: Lease and Interchange

Lease and Interchange

The lease of CMVs, primarily the tractors or “power units,” constitute a significant aspect of many if not most trucking-related personal injury claims. Abuses in the trucking industry in the 1950’s, such as motor carriers that leased or hired “gypsy” independent contractor drivers, who owned their own tractors but lacked operating authority, insurance, assets, or safe operation practices, led Congress to regulate the trucking industry. Part of the regulations sought to address the problems created by uninsured owner-operators, or “O/Os.” These problems typically arose when a motor carrier used an O/O that caused an accident and thereafter disclaimed responsibility under the argument that the O/O was an independent contractor.

In an effort to clean up the mess generated by this abused system, leases of equipment were regulated and responsibility was shifted to the entity whose operating authority moved the freight, regardless of whom was dispatched to carry out the task. Thus came into being the “statutory employee,” which would be treated as an independent contractor in practically any other business. In a peculiar example of poetic justice, and as a result of the lease regulations, motor carriers have been held liable in some instances for the acts of statutory employees in situations where they would not face liability for their own employee’s actions because the conduct at issue was so clearly outside the scope of employment.
The regulations also prescribe the procedures that must be followed in order to properly cancel a lease of equipment and thus end the motor carrier’s responsibility for its operation. This component of the regulations in turn gave rise to the concept of “lease liability” and its now-disfavored red-haired stepchild, “logo liability.” These concepts essentially make the motor carrier liable for operation of equipment leased to it, regardless of whether the equipment is actually used in its business at the time of an incident. Some courts, in a mistaken application of the regulations, have held that a motor carrier is liable even after the lease was properly terminated because the O/O, either benignly or malignantly, had not removed the motor carrier’s placards (the signs with the motor carrier’s name and DOT number that are located on the doors of the power unit) from the vehicle.

Motor carriers also swap vehicles from time to time. The regulations describe how a “trip lease” is to be accomplished. This is typically referred to as a “trip lease.” When properly accomplished, these swaps should shift responsibility to the motor carrier actually using the equipment during the time of the swap. However, when not properly accomplished, the swaps creates uncertainty over who is responsible for the equipment’s operation, which breeds lawsuits, delays, appeals and other snarls that will entangle litigants and the courts before whom they appear. It is the duty of counsel to make certain all the parties are brought to the table of justice for an accounting of their roles and responsibilities.

Finally, authorized carriers may “interchange” equipment in the manner set forth in the regulations. In an interchange agreement, more than one carrier pulls a freight-loaded trailer at different points in the journey from manufacturer to purchaser, without the freight being unloaded from Carrier A’s trailer onto Carrier B’s trailer.

Lease Requirements & Implications: Overview

The implications arising from the involvement of leased equipment in an incident can be significant. On the one hand, it may provide multiple deep pockets with liability exposure. On the other hand, it may also mean finger-pointing will ensue, tying up a case for months if not years as the insurers and motor carriers seek, with seemingly deliberate glacial speed, to sort out who is the responsible party. It is the job of plaintiff’s counsel to cut the Gordian knot so that proper and timely compensation is paid and the client’s injuries are addressed. The responsible parties may then take their time dealing with the issues regarding indemnity, contribution, primary, excess, on-the-risk, off-the-risk, and the like. From a purely anecdotal standpoint, it is interesting to note how quickly those issues and allocation get addressed once a party has actually tendered money as part of a settlement or judgment.

First, one must identify whether a lease is in effect, and if so, whether the motor carrier leasing the equipment was also operating it at the time. If it was not, then there may be another motor carrier that is potentially responsible along with the lessee motor carrier. The regulations contemplate that the driver of a leased vehicle may constitute an independent contractor for the purposes of vicarious liability (or the lack thereof). While the particular regulatory language appears to have been intended to address workers’ compensation claims, it is nevertheless there and may have to be addressed. At least one case has absolved a lessee of liability for the operation of leased equipment on the independent contractor rationale, arguably harkening back to the types of situations that gave rise to the mandatory lease regulations in the first place.
Once it is determined that leased equipment is involved, the next inquiry is whether the lease was cancelled before the accident, and if so, whether the proper steps were taken by the motor carrier to absolve itself of responsibility thereby for the operation of the equipment. It must also be discovered whether the vehicle was used “in the business of’ the motor carrier at the time of the incident. While the motor carrier remains liable for its operation even when the leased equipment is used for some private reason (i.e., the driver was going to the store for bread and milk) the purpose of the use at the time of the incident may trigger “non-trucking” insurance coverage. If this is the case, there may be another layer of coverage applicable to the loss along with the motor carrier’s trucking coverage.

Leases of Equipment and Their Implications

A motor carrier may only transport property with non-owned equipment after it fully complies with the leasing regulations, which require:

1. A written lease granting use of the equipment, which contains the following required provisions:
a. The owner of the equipment and the lessee motor carrier, with the signatures of each;
b. The specific duration of the lease, including the time and date when the lease begins and ends, or the circumstances in which the lease begins and ends, coinciding with the giving of receipts;
c. That the motor carrier lessee “shall have exclusive possession, control, and use of the equipment for the duration of the lease,” and that the motor carrier lessee “shall assume complete responsibility for the operation of the equipment for the duration of the lease;” However, the regulation provides that this is not intended to affect whether the lessor or driver is an independent contractor or an employee of the motor carrier;
d. The lease must specify which party is responsible for removing identification devices (placards) upon lease termination, and when and how placards that are not painted on the vehicle are to be returned to the motor carrier;
e. If the lease requires exchange of receipts for the equipment, the lease shall “clearly specify” the manner in which a receipt will be given to the authorized motor carrier by the equipment owner when the owner retakes possession at the termination of the lease;
f. The lease shall specify that payment to the lessor shall be made within fifteen days after submission of “the necessary delivery documents and other paperwork concerning a trip in the service of the” motor carrier. The “other paperwork” that may serve as a pre-condition to payment is limited to DOT-required log books and “those documents necessary for the carrier to secure payment from the shipper;”
g. The lease may provide that, upon termination and as a condition precedent to final payment, the lessor shall remove all identification devices of the motor carrier and return them to the motor carrier, or if it has been lost or stolen, submit a letter to the motor carrier certifying that the device (placard) has been removed;
h. The lease must “clearly specify” that the lessee motor carrier is required to provide insurance for the protection of the public as required by FMCSA regulations (See section II.A.2 Supra). If the motor carrier procures any other insurance for operation, such as “bobtail” coverage, that is designated to be paid by the lessor under chargeback, the lease shall specify the amount to be charged back;

2. A receipt specifically identifying the equipment to be leased, giving date and time when possession is transferred.
a. When the equipment is taken by the motor carrier, the motor carrier must give the receipt to the owner via mail, telegraph, “or other similar means of communication.”
b. When the lease ends, and if the lease requires it, a “receipt shall be given in accordance with the terms of the lease agreement.”

3. Identification of equipment as being in service. The motor carrier who leases a piece of equipment must mark it as required by 49 C.F.R. Part 390.
a. The motor carrier must also keep either a copy of the lease in the vehicle or a statement giving information about the lease, including: the lessor’s name, the date and length of the lease, and any restrictions within the lease regarding what may be transported.

4. Records. The motor carrier using the leased equipment must keep records of its use, including:
a. the point of origin,
b. time and date of departure,
c. and the point of final destination.

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