Trucking Subrogation And The MCS-90 Endorsement

MCS-90 EndorsementThe MCS-90 Endorsement is an endorsement that is found in insurance policies issued to trucking companies operating interstate. This endorsement allows the trucking company to comply with certain government mandated public financial responsibility regulations. Specifically, the federal government mandates that trucking companies operating interstate comply with their financial responsibility obligations by having an insurance policy including a MCS-90 Endorsement, a qualifying surety bond, or a sufficient business operation for self-insurance. By far, the most common mode of compliance is the MCS-90 Endorsement. This endorsement requires the issuing insurance carrier to pay a claim when an injured party obtains a judgment against their insured, in circumstances when coverage is denied or not otherwise warranted. This endorsement shifts the risk of loss away from the public by guaranteeing that an injured party will be compensated, even if the insurance carrier has a valid defense based upon a condition in the policy.

History of MCS-90

To truly understand MCS-90, it is essential to comprehend the historical developments which led to its creation. From the late 1800s to the 1970s, the trucking industry operated in a system of ever increasing red-tape, bureaucracy, and inefficiency. The interstate Commerce Act of 1887 (ICA) was crafted to regulate the railroad industry and break-up railway monopolies by limiting price-fixing. The U.S. government established this monolithic regulatory scheme to combat monopolies, but as time progressed these well-intentioned regulations became obsolete and began negatively influencing the transportation industry and economy as a whole. Specifically, the ICA was established when the clear majority of cargo transportation was accomplished by railway and was not drafted to account for the then non-existent motor-carrier/trucking industry. Accordingly, many regulations that worked well for rail transport, did not have a corresponding benefit to the trucking industry.

The ICA had the unintended consequence of greatly holding down competition and significantly increasing and inflating prices to consumers. Under the ICA, trucking companies had to operate under certain authorities, routes, and charters, whereby a load may need to be transported 500 miles in a completely different direction in order to abide by authorized routes. For example, a load traveling from Philadelphia to Atlanta may need to be transported through Cincinnati in order to comply. This, combined with numerous other costs of compliance, made it nearly impossible for small trucking companies to operate. Accordingly, the industry was dominated by large companies who had the capacity and financial ability to comply with onerous regulations. However, things were bound to change, and in the 1980s the federal government recognized their errors and began a process of general deregulation. They recognized that costs to the consumer were too high and that it was time to inject competition into the trucking industry by doing away with the ridiculous regulations of the ICA.

In 1980, Congress passed the Motor Carrier Act (MCA) to deregulate the trucking industry and allow room for smaller companies to operate. The MCA did many things, including allowing carriers to publish their own rates, set prices within a “zone of reasonableness”, allowed more flexibility in service agreements, and reduced compliance regulations. As a consequence of greatly reducing the barriers of entry, many new and smaller companies began operating, which in turn greatly increased the number of trucks on the roads and reduced costs to the consumer.

More vehicles and less regulation created the potential for major safety concerns. The MCA took a proactive approach to these issues, requiring that every motor carrier, operating a commercial motor vehicle in interstate commerce, must have certain minimum levels of financial responsibility as established by the Federal Motor Carrier Safety Administration (FMCSA). Specifically, the financial responsibility rules require that the motor carrier obtain a policy of public liability insurance or self-insurance/surety bond of between $750,000 (for standard transport) and $5,000,000 (for transport of hazardous materials). In order to comply, each motor carrier may obtain an MCS-90 Endorsement, self-insurance (limited to large companies), or a qualified surety bond. The vast majority of motor carriers achieve compliance through MCS-90.

What Is MCS-90?

The MCS-90 Endorsement states that “the insurer agrees to pay, within the limits 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 the MCA 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 elsewhere.”

In short, MCS-90 applies when (1) there is interstate commerce; (2) there is a negligent action that causes injury to public persons or property; and (3) the insurance coverage is denied for one of a variety of reasons. Examples of common denials implicating MCS-90 would involve non-listed autos, non-listed drivers, improper cancellation, and environmental or pollution exclusions.

What MCS-90 Does?

The MCS-90 Endorsement makes the insurance carrier a surety to the public and guarantees that an injured party will have recourse against a trucking company that causes property damage or injury. This means that the MCS-90 Endorsement acts as a type of “cover-all insurance,” coming into play when coverage has been denied under a series of conditions. So, if the trucking company is negligent in causing an accident or injury, and the loss is somehow not covered by the policy, then the MCS-90 Endorsement may be on the hook and act as a “created coverage.”

Example of MCS-90

To grasp this issue, I find it illustrative to provide an example. Let’s begin by considering an imaginary company named Billy’s Trucking. Billy has worked for another carrier for 20 years and has finally saved up the money to start his own trucking company. Billy knows that in order to begin transporting cargo, he will need to obtain sufficient insurance coverage. Billy reaches out to his local insurance agent and is sold a policy through Bald Eagle Insurance Company (BE Insurance). Billy hopes to carry loads throughout the entire country (interstate), so he recognizes that he will need a typical general liability policy that includes an MCS-90 Endorsement. BE Insurance issues the policy.

Now, imagine that six months later, Billy decides to purchase a brand new Peterbilt tractor. He buys the tractor in the morning, but then realizes that he needs to immediately go pick up a load. Due to time constraints, Billy fails to call BE Insurance to inform them of the tractor purchase, thereby failing to list the vehicle on the policy. Now, imagine that on this same day, while transporting a load from Wisconsin to Ohio, Billy (or his employee) rear-ends another vehicle and severely injures the occupants.

Following the accident, the injured party brings a demand against Billy’s Trucking and the claim is tendered to BE Insurance. BE reviews the policy and summarily denies the claim for lack of coverage, citing that the new Peterbilt was a non-listed auto. Here is where many might stop pursuit because it would appear that the injured party is without recourse since coverage was denied and Billy’s Trucking has insufficient assets to cover even a percentage of the total damages. But, wait! The savvy attorney or claims adjuster has read this article and recognizes that the BE Insurance policy likely includes an MCS-90 Endorsement. Accordingly, they file suit against Billy’s Trucking, obtain a judgement, and enforce this judgment against BE Insurance. In the end the world is right and BE Insurance is responsible for paying the damages, despite the coverage issues.

To recap, in litigating your MCS-90 claim, you have to obtain a judgement against the motor carrier and then enforce this against the insurance carrier. Note that this insurer has no duty to defend the insured, however, in practice it will be in their best interest to do so because failing to defend will typically result in an undefended claim and default judgment.

In handling these claims, you should consider the following steps: (1) make demands on the trucking company and insurance carrier; (2) conduct investigative research to determine financial capacity of the trucking company; and (3) educate the adverse adjuster. Remember that the adverse adjuster may not fully understand the MCS-90 Endorsement or may even play stupid hoping that you will close your file upon their issuance of a coverage denial. Therefore, always consider MCS-90 and be prepared to stand up to the adverse adjuster.

This article has provided you with a general understanding of MCS-90 subrogation, now let us briefly touch upon the growing industry of MCS-90 Reimbursement.

MCS-90 Reimbursement

MCS-90 reimbursements run on a parallel track and is important to consider for those who work with a carrier that insures trucking companies. Interestingly, the MCS-90 Endorsement provides for a right of reimbursement from the insured when any funds are paid out under MCS-90. For example, let’s say BE Insurance paid out $200,000 to satisfy the claim against Billy’s Trucking. BE Insurance would then have a right to pursue Billy’s Trucking, their own insured, for the $200,000 that was paid.

The reimbursement language is found within the endorsement, which states that “[t]he insured agrees to reimburse the company for any payment made by the company on account of an accident, claim, or suit involving a breach of the terms of the policy, and for any payment that the company would have been obligated to make under the provisions of the policy except for the agreement contained in this endorsement.”

These claims are often very difficult to pursue in an economically effective manner. Practically speaking the insurance carrier, like BE Insurance, would not have paid the claim for their insured, Billy’s Trucking, unless the insured lacked the ability to pay themselves. In practice, most reimbursement claims will amount to pennies on the dollar or the bankruptcy or closure of the insured’s business. That being said, I have successfully recovered six-figure settlements on such claims and the difficulty does not foreclose the ability to recover.

With any MCS-90 reimbursement claim, you should promptly conduct asset checks on the insured’s business and the owner and conduct a review of the operation status. Beyond this, you should monitor company movements to be sure that the insured does not change corporate entities in order to escape debts. In many states, this would subject the new company or even the owners to liability under the theory of “piercing the corporate veil.” However, that is a conversation for another day.

This article should serve as a brief overview of MCS-90. I am hopeful that you now have a basic knowledge of its meaning and application, which will allow you to conduct the research necessary to utilize this tool in future claims practices. I am happy to serve as a resource, so if you should have any questions regarding MCS-90 or subrogation in general, please contact me at [email protected].

Ashton T. Kirsch

Ashton T. Kirsch is an insurance litigation attorney and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C., concentrating his practice on litigation of subrogation cases involving large loss casualty, commercial auto, transportation and cargo, and workers’ compensation.