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2D CIRCUIT COURT OF APPEALS REVERSES FORTUNOFF CASE

(Or...there still is a difference between common carriage and contract carriage, at least for insurance purposes under BMC 34/32.)

 You may recall in June 2001 a US District Court in New York ruled in favor of a shipper (M. Fortunoff of Westbury Corp) upholding a cargo damage claim against Peerless Insurance Company, the insurer of an insolvent motor carrier stating that since the ICCTA had eliminated the distinction between common and contract carriage, and since the carrier had both common and contract operating authority, the insurance company was liable under the BMC 32/34 endorsements which it had issued. Since the 2001 decision this case has often been cited as proof of the elimination of the distinction between common and contract carriage. Whoops! The US Court of Appeals for the 2d Circuit reversed the district court decision on December 13, 2005. (2005 WL 3387698)

The court provides an excellent ( and long)  review of the legislative history of the insurance ICC regulations  and the changes brought about by the passage of ICCTA, (The ICC Termination Act of 1995.), and acknowledges the elimination of the distinction between common and contract carriage. However according to the 2d Circuit , under ICCTA, the law allowed the Secretary of Transportation the discretion to decide which carriers were required to have cargo insurance and which ones did not.

As you know, prior to 1995 the Motor Carrier Act provided for two different types of motor carriers:  common and contract motor carriers. (49 U.S.C. § 10102(15)-(16) (1994) (omitted 1995). According to the 2d Circuit

 “....... Generally, whether a carrier was common or contract was determined by the type of relationship it had with customers as well as the type of authority it held. Common carriers held themselves out to provide shipping services to the general public-usually unsophisticated shippers with little bargaining power-according to fixed tariff rates and with no negotiated contracts. Common carriage ordinarily involved individual transactions typically LTL, occurring from time to time as need arose rather than as an ongoing course of business between the shipper and carrier. Contract carrier shipping services pursuant to bilateral contracts that were individually negotiated with more sophisticated shippers that bargained with the carrier at arm's length. A contract carrier entered into individualized,  written agreements with shippers that provided for ongoing shipping services either exclusively for the shipper's benefit or in satisfaction of the shipper's “distinct needs.” See49 U.S.C. § 10102(16) (1994) (omitted 1995); 49 C.F.R. § 1053.1 (1991). “It is the ongoing relationship, service commitment, and commercial link between a carrier and its shippers that render contract carriage inherently different from common carriage service alternatives”

The Second Circuit then described the rationale for common carriage cargo insurance as follows:

ADVANCE \d4“The different insurance requirements for common and contract carriers made economic sense. As the FMCSA explained in its amicus brief, shippers employing the services of a contract carrier were usually experienced business people who negotiate a contract with the carrier to ship large quantities of goods on a regular basis, whereas customers seeking the services of a common carrier were usually less experienced in transporting goods and more in need of default insurance protection.  Accordingly, a sophisticated shipper using contract carriage could provide for insurance by contract if it wished-either supplying more insurance than provided by the common carrier provisions of former § 10927(a)(3) and 49 C.F.R. § 1043.2© or rejecting insurance if it was more cost effective for the shipper to self-insure. The smaller shippers who usually employed common carriage had no opportunity to contract individually for their needs, and the insurance requirements set forth in 49 C.F.R. § 1043.2© and reprinted in the BMC-32 endorsement provided a reasonable safety net for the potential loss a small shipper using that type of carriage might incur.”

The court then goes on to state,

 “The Secretary of Transportation delegated the authority to require filings of security [insurance] for payment to the FMCS. That agency, acting pursuant to the so-called “transition rule” in 49 U.S.C. § 13902(d) (2000), continued to register transportation providers as “common carriers” and “contract carriers” pending the completion of rulemaking that fully implements § 13902(a). As of the oral argument in this appeal, the agency continued to register common carriers and contract carriers separately, despite the fact that the authority to do so under the transition rule had expired on January 1, 1998. See49 U.S.C. § 13908(e) (2000) (stating that the Secretary “shall conclude the rulemaking under this section” no later than “24 months after January 1, 1996”). After this appeal was taken, Congress provided new authority for the Secretary to promulgate rules, see49 U.S.C. § 13902(f) (2005). This does not change the fact that the Secretary was acting without authority between January 1, 1998 and August 9, 2005. (Writer's emphasis). 

 Note: The issue in this case was NOT whether the FMCS was acting within the scope of its authority by continuing to REGISTER motor carriers as common or contract. In legal parlance this is known as “dicta”and is not the ruling of the court. However the court goes on to comment on this matter as follows:

 “We have already commented that the authority conferred on the agency by the transition rule expired seven years ago. Thus, we are wholly unpersuaded that the FMCS could lawfully continue to register common and contract carriers under separate licensing regimes. Rather, all carriers were motor carriers under the ICCTA, and the agency's formal designation of certain carriers as common and others as contract was therefore without effect. (Writer's Emphasis)

“This does not mean, however, that the functional differences between the two types of carriage are irrelevant to the exercise of the agency's discretion to require cargo liability insurance. Congress' creation of one type of motor carrier did not also create only one type of carriage. [What does this mean?] Indeed, common carriage services, that is, those services offered to the general public at fixed rates without negotiated bilateral contracts, continue to be different from contract carriage services, which are those services performed on an ongoing basis for a shipper pursuant to a contract individually negotiated at arm's length. This fundamental distinction remains explicit in the terms of the Termination Act. See 49 U.S.C. § 14101 (2000) (requiring motor carriers to perform common carrier services and permitting them to perform contract carrier services).”

Continuing on the court states,

“As is clear from the above discussion, requiring cargo liability insurance for common carriage but not contract carriage is not an arbitrary distinction. Instead, it makes economic sense because of the different types of services performed, and the customers served, by common carriage. Although the licensing distinction between common and contract carriers was abolished by the ICCTA, such occurred in large part because most carriers had a common carrier certificate and a contract carrier permit and provided both types of services anyway. But the functional distinction between the two types of carriage survives, and is still highly relevant to deciding which motor carriers must have cargo liability insurance.” (Writer's emphasis)

And now for the decision! Drum roll please!

The Court stated its conclusion as follows: 

“ In sum we hold that the FMCSA’s discretionary decision to require motor carriers to supply default cargo liability insurance only when performing common carriage services is consistent with the terms of ICCTA, and agencys’s decision is entitled to respect....”( Writer's emphasis.)

In what would appear to be circular reasoning the FMCS in its amicus brief, argued that the requirement for cargo insurance for common carriers was based on the separate licensing requirements for common and contract carriers which still persists today under the transition rule 49 USC 13902(d).

“As is clear from the above discussion, requiring cargo liability insurance for common carriage but not contract carriage is not an arbitrary distinction. Instead, it makes economic sense because of the different types of services performed, and the customers served, by common carriage. Although the licensing distinction between common and contract carriers was abolished by the ICCTA, such occurred in large part because most carriers had a common carrier certificate and a contract carrier permit and provided both types of services anyway. But the functional distinction between the two types of carriage survives, and is still highly relevant to deciding which motor carriers must have cargo liability insurance. The agency, in its amicus brief, relied heavily on these functional differences in justifying its decision to continue registering common carriers and contract carriers under 49 USC § 13902(d) ICCTA's transition rule and requiring cargo liability insurance only for common carriers. Although the transition rule no longer provided authority for the separate registration of common and contract carriers, this did not prevent the FMCS from differentiating between the two types of services when requiring cargo liability insurance, and the agency's brief convinces us this was its intent.”(Writer's emphasis)

The second Circuit court remanded the case back to the US District court together with the following comments which raises an issue related to language found in most broker/carrier and shipper c/carrier contracts being used in today. Namely, the parties contractual agreement that cargo liability will be controlled by the Carmack amendment without consideration of whether the transportation services are “common” or “contract”. The Court stated,

“ Fortunoff has consistently maintained an alternative ground for summary judgment in its favor, ..........”“ It declares that Frederickson [ the defunct motor carrier] agreed in the Transportation Service Agreement to be liable as a common carrier, even though Frederickson provided transport services to Fortunoff under its contract carrier permit. Peerless {the insurance company} contests this, arguing that common carriage insurance requirements may only attach to common carriage services, and that Fortunoff and Frederickson cannot impose obligations on Peerless by agreeing-between themselves and without Peerless' consent-that Frederickson's cargo liability coverage applies to services otherwise outside the scope of the insurance policy.The district court granted summary judgment for Fortunoff solely on the ground that the ICCTA mandated the extension of BMC-32 endorsements to all motor carriers, regardless of the Secretary of Transportation's discretionary decision not to do so. This judgment, as just discussed, is an error of law which we reverse. The district court did not consider the terms of the Transportation Service Agreement and made no factual findings as to its meaning and the intent of the parties. We must therefore remand to the trial court to consider the terms of the Transportation Service Agreement between the shipper and the carrier.” 

Hundreds if not thousands of contracts in use today contain agreements ( intended by the parties) between carriers who have both common and contract operating authority, and brokers or shippers, that adopt as a matter of choice, the Carmack cargo liability regimen found in 49 USC 14706. No court has yet to rule that such an agreement is illegal or unenforceable. We watch with great interest for the outcome of this case on remand to district court since it has huge consequences for the shipping community. If the insurance company has its position upheld: (a)  agreements to apply Carmack liability to contract carriage agreements will not be binding or enforceable against the insurance company without its consent.; and (b) For purposes of proof in order to collect on a BMC 34/32 endorsement a shipper will have to prove that the shipment was being transported by the carrier under its “common carrier” authority.  Looking at the definitions provided by the court at the beginning of this article should make you wonder how, as a practical matter that can be done. The only “clear” way to collect will be if the carrier had only common carrier authority. It should be noted that even a ruling in favor of the insurance company should not prevent the parties from adopting as between themselves the Carmack regimen of damages and burden of proof requirements.