In a case of interest to motor carrier policyholders and risk managers, the Connecticut Supreme Court has ruled that a federally mandated insurance endorsement that requires insurers to pay certain liability judgments against a motor carrier even if the insurance policy otherwise excludes coverage only applies when a motor carrier is traveling in interstate commerce. The endorsement does not apply to liability arising from the carrier’s operation of vehicles in intrastate transportation. Martinez v. Empire Fire and Marine Insurance Company, SC19390 (July 12, 2016).

Background of MCS-90 Endorsements

Federal law requires motor carriers to maintain minimum levels of financial responsibility to cover liability arising from the carrier’s transportation of property in interstate commerce. Many motor carriers include an MCS-90 endorsement in their liability policies in order to comply with federal law.  The MCS-90 endorsement requires the carrier’s insurer to pay certain judgments against the carrier even if the liability insurance policy otherwise excludes coverage.

Factual Background of Coverage Dispute

The insured in Martinez, a Connecticut–based towing company that operated in Connecticut and New York, had purchased a commercial insurance policy from Empire Fire and Marine Insurance (“Empire”) that included an MCS-90 endorsement.  An employee of the towing company was involved in an accident while operating one of the company’s trucks in Connecticut while en route to pick up repair parts for the insured’s tow trucks with the intention of returning to the insured’s location in Connecticut.  The parts were to be used to repair trucks that later would be driven outside of Connecticut.  At the time of the accident, the subject truck had been deleted from the Empire policy.  After the accident, Martinez commenced a negligence action against the towing company and obtained a judgment in the amount of $693,026 based on the employee operator’s negligence.  The towing company did not pay the judgment and Martinez then sought to collect the judgment from Empire under Connecticut’s insurance subrogation statute, Conn. Gen. Stat. §38a-321, contending that Empire was obligated to pay the judgment against the towing company pursuant to the MCS-90 endorsement included with the towing company’s policy.

MSC-90 Endorsement Only Applies to Interstate Transportation

The MCS-90 endorsement in Martinez required Empire to cover liability for a motor carrier’s negligence in the operation of vehicles subject to the financial requirements under federal law, which applied to for-hire motor carriers operating motor vehicles in interstate or foreign commerce.  The Connecticut Supreme Court held that the interpretation of the endorsement was governed by federal law, not state insurance contract law, because the endorsement is a federally mandated insurance endorsement.  The Supreme Court then looked to decisions of federal courts, including the Second Circuit, and held that the MCS-90 endorsement covers liability for a motor carrier’s negligence only when the liability arises from the carrier’s transportation of property in interstate commerce.  To determine whether a particular accident occurred while property is transported in interstate commerce, the Supreme Court adopted the “trip-specific” rule used by a majority of courts, which requires one to look at the nature of the specific trip at issue.  If the nature of the trip is not directly connected with interstate commerce, then the motor carrier would not be operating in interstate commerce and the MCS-90 endorsement would not apply. 

In Martinez, the court held that the MCS-90 endorsement did not apply because the towing company’s truck was being operated in Connecticut and transporting property in Connecticut at the time of the accident.  The court rejected a claim that the trip could be considered as interstate transportation because the repair parts would be installed in trucks that would later be used to transport property in interstate commerce.  The court recognized that a trip within only one state may be considered interstate in nature if the trip is one leg of a continuous interstate movement.  To be considered continuous interstate movement, however, the court ruled that goods being transported within the borders of one state must be involved in “practical continuity of movement in the flow of interstate commerce.”  The Connecticut Supreme Court ruled that the trip at issue in Martinez was not part of a larger interstate movement as a result of the repair parts being installed in trucks that would subsequently be driven in interstate commerce.  The court concluded that any later movement of the repair parts across state lines after the parts were installed in trucks would be a new independent journey and not part of the trip in which the accident occurred.

The Martinez decision is significant for motor carriers and other businesses that transport property or persons for hire in interstate commerce because in order for the motor carriers to shift liability for a judgment or settlement to their insurers under an MSC-90 endorsement, the liability must be public liability arising from the transportation of goods in interstate commerce.  Otherwise, the motor carriers will be responsible for any settlements or judgments arising from accidents for which they are liable in negligence if their policies do not otherwise cover the liability.