Nature & Amount of Security Required: Overview
The regulations prescribe what form the “evidence of financial responsibility” shall take, how it may be cancelled, and how it may be obtained by a member of the public. Further, the regulations prescribe certain levels of financial responsibility based on the nature of the freight transported. The type of instrument used to provide evidence of financial responsibility may create exposure for the entity issuing the instrument above and beyond that created by an insurance policy. The “MCS-90” endorsement, a form prescribed by the FMCSRs, is the most important and most common instrument used to collect against a motor carrier who causes injury but for whatever reason does not have coverage, whether because the vehicle was not covered or the motor carrier itself breached a policy condition. It is important to understand this endorsement and it is therefore the focus of this chapter.
Nature and Amount of Security Required
1. An insurance policy, surety bond (Form MCS-82), or endorsement to a policy providing evidence of financial security may only be cancelled by 35-days written notice. Unless and until it is properly cancelled, the instrument at issue remains in effect.
2. If a motor carrier obtains a replacement policy of insurance or surety bond, the policy or bond which is replaced is considered cancelled on the effective date of the replacement instrument or at the end of the 35-day cancellation period described above, whichever is sooner.
3. The proof of financial responsibility shall consist of either:
- An “Endorsement for Motor Carrier Policies of Insurance for Public Liability Under Sections 29 and 30 of the Motor Carrier Act of 1980”, also known as the MCS-90
- A “Motor Carrier Surety Bond for Public Liability Under Section 30 of the Motor Carrier Act of 1980”, also known as an MCS-82
- A written decision, order or authorization of the FMCSA allowing a motor carrier to self-insure, contingent on the motor carrier maintaining a satisfactory safety rating.
4. The proof of minimum level of financial responsibility shall be considered public information and be produced for review upon reasonable request by a member of the public.
5. A for-hire motor carrier of general, non-hazardous freight must maintain proof of financial responsibility in an amount of at least $750,000.
6. A for-hire and private motor carrier of certain hazardous substances must obtain evidence of financial responsibility of $1 million to $5 million dollars.
The various types of proof of financial responsibility may lead to very different outcomes when a judgment is obtained against a motor carrier. The MCS-90 endorsement has been construed to require the insurer issuing the endorsement as part of an insurance policy to pay even where the first notice of a third-party claim is clearly untimely under the provisions of the policy contract.
This component of the claim makes it important to know what a claimant may face should the motor carrier’s insurer contend that either the vehicle was not covered or its driver excluded under the policy.
While this blog post is not intended to be a complete treatise on the effect of the MCS-90 endorsement, a working knowledge of the endorsement is important. The MCS-90 is probably the most common form used to establish proof of financial responsibility. It is used more frequently than the surety bond (MCS-82) and far more frequently than an approved plan of self insurance. A copy of the form of the endorsement is found in the FMCSRs at 49 U.S.C. It provides that an insurer issuing a policy to which the endorsement is attached may not deny coverage for a judgment entered against the motor carrier “whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.” The MCS-90 has thus been further interpreted by the courts to invalidate practically any exclusion or condition found in the policy in order to ensure that the public is protected. Thus, the requirement of notice of a claim may not be a defense by an insurer whose insured suffers judgment, which in turn is sought to be satisfied through payment under the MCS-90.
Note that coverage remains in place until properly cancelled or replaced by other conforming evidence of financial responsibility. A motor carrier may fail to obtain replacement coverage and in fact subject itself to personal exposure without penalty. That is, at least until the motor carrier is caught. The penalties for a violation of the minimum financial requirements can be quite high. The FMCSA can levy fines of up to $11,000 per offense, with each day in violation constituting a separate offense. Any person who knowingly violates the rules, other than an employee acting without knowledge, is subject to the penalty. There are other implied penalties that, while not in the form of a FMCSA fine, are equally if not more severe. For example, an insurer that previously issued coverage to a motor carrier but has not complied with the cancellation requirements of regulation may find itself still on the hook months or even years after it considered the coverage terminated. As noted above, this was the situation which developed into a nightmare of truly epic proportion for Canal Insurance Comapny in the Barbarula cases.
Under the FMCSRs, an insurer that has terminated coverage yet failed to comply with the 35-day cancellation rule will nevertheless be protected from continuing exposure if the motor carrier obtains replacement coverage on its own.
However, in some states, coverage for intrastate operations (typically evidenced by the filing of a “Form F” with the state PSC or equivalent agency and the attachment of a “Form E” to the policy) may not be terminated by the acquisition of replacement coverage by the motor carrier. Instead, in a sharp departure from the rule pertaining to cancellation of the federal MCS-90 endorsement, the coverage remains in force until properly cancelled. Arguably such “continuing coverage” must be examined on a primary-excess basis relative to coverage being provided by an actual “on-the-risk” insurer that is actively collecting premiums under a policy that by its own terms is currently in effect at the time a claim arises. Yet, some state requirements for the insuring of intrastate operations have been interpreted to impose a duty to defend on an insurer who has not had a policy with the defendant motor carrier for several years.
A motor carrier may fulfill its obligation to maintain the minimum level of financial security by aggregating layers of insurance, with each layer to include a separate MCS-90 endorsement. Thus, it may be necessary to assemble a number of pieces to make certain the entire spectrum of insurance coverage available to a motor carrier has been identified. When more than one layer of insurance is stacked to provide the required minimum, the MCS-90 includes a section where the policy to which the endorsement is attached may be designated as primary or excess.
The USDOT has issued an interpretation of Form MCS-90 that limits its effect to the motor carrier named on the endorsement, even though the policy itself may have an omnibus clause that extends coverage to additional entities. Thus, where coverage is lacking and recovery is sought under the MCS-90, the judgment arguably should be obtained against the named motor carrier, not its driver. However, the applicable definition of “motor carrier” specifies that it “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 concerned with the installation, inspection, and maintenance of motor vehicle equipment and/or accessories.” The motor carrier’s “agent” should necessarily include its driver, particularly because it is usually the driver’s acts and omissions on the highway that create actionable claims that necessitate the insurance coverage in the first place. In light of the express purpose behind the financial responsibility regulations of the FMSCRs (i.e., “to create additional incentives to motor carriers to maintain and operate their vehicles in a safe manner”, it would seem both arbitrary and unjust to exempt a driver from the effects of a MCS-90 form endorsement. Unfortunately, several courts have already disagreed.