Kavanaugh on Surety

Surety Bond Wording Compelled by Regulation Must be Enforced

Since the President has nominated Brett M. Kavanaugh to be a Justice of the U.S. Supreme Court I decided it would be interesting to digest an insurance case written by Judge Kavanaugh while sitting by designation in the Ninth Circuit.

Surety bonds for truck brokers are mandated by Federal Regulations. They are there to protect truckers against defaulting truck brokers.

In RLI Insurance Company v. All Star Transportation, Inc., et al., No. 09-7027, No. 1:08-cv-00695-JR, United States Court Of Appeals For The District Of Columbia Circuit (June 22, 2010) judge Kavanaugh of the DC Circuit Court of Appeals wrote an opinion applying the terms and conditions of the Surety Bond.

FACTS

The trucking industry consists of three main players: (i) shippers, who typically are manufacturers sending goods to retailers or others; (ii) truckers, who transport the goods; and (iii) brokers, who act as intermediaries between shippers and truckers. When a shipper needs to send goods, it hires a broker. The broker arranges for shipment by finding a trucker to transport the goods. The broker receives money from the shipper and, after taking a cut for itself, pays the trucker.

The problem at the root of this case is that the broker sometimes fails to pay the trucker. To protect the trucker, a fourth player is brought in: the surety. Federal regulations require brokers to obtain a surety bond-akin to a guarantee-in the amount of $10,000. Therefore, if a broker does not pay a trucker, the surety does so, at least up to $10,000.

Sam’s Transportation Services, a broker that went into bankruptcy, acquired a surety bond from RLI Insurance Company. The face value of the bond was $10,000. Because of Sam’s pending insolvency, Sam’s failed to pay numerous truckers that it owed. Some of the truckers filed claims with RLI to recover payment under the surety bond. RLI refused to pay more than a total of $10,000 and instituted an interpleader action in court where it deposited the $10,000 limit. The truckers assert that, under the bond, RLI must pay up to $10,000 on each claim. RLI counters that it need only pay $10,000 total for all claims combined.

Sixty eight truckers filed claims with RLI to recover under the bond. Most of their claims ranged from $350 to $7800. But together, the claims came to $161,823.50. The total value of the claims therefore far exceeded the $10,000 face value of the bond.

RLI asked the court to distribute the sum among truckers with valid claims. only seven of the 68 truckers that had filed claims with RLI bothered to file claims with the court. Those seven claims totaled $15,060. Six of the seven truckers then moved to dismiss the interpleader action, arguing that RLI’s duty under the surety bond was to pay up to $10,000 on each trucker’s claim, not $10,000 for all claims combined.

ANALYSIS

The parties apparently have no actual copy of the bond agreement. But surety bonds must conform to the terms of their governing statutes and regulations.

The applicable regulation reads: “A property broker must have a surety bond or trust fund in effect for $10,000.” 49 C.F.R. § 387.307(a). That text seems to suggest that a bond “for $10,000” imposes a total liability of $10,000, not a vastly more uncertain and potentially greater amount.

The standardized federal form that governs these surety bonds removes any lingering doubt on the disputed issue in this case. This form, known as Form BMC 84, was promulgated by the Interstate Commerce Commission, a predecessor of the Federal Motor Carrier Safety Administration. Federal regulations require sureties to use the form or an electronic version of it. The form provides a set of standard terms and conditions. Those terms say quite plainly that the face value of the bond is “the sum of $10,000”; that the surety’s liability is “discharged” when payments under the bond “amount in the aggregate” to that value; and “in no event shall the Surety’s obligation hereunder exceed” that value.

Form BMC 84 is consistent with the regulations; it was promulgated by the Interstate Commerce Commission; the form’s content was authenticated by the District Court, which relied appropriately on the Form BMC 84 reproduced in the Matthew Bender appendix of forms, that are printed by the industry; and federal regulations require RLI to use the form.

At the motion to dismiss stage, the District Court may consider a document such as Form BMC 84 where the complaint relies heavily upon its terms and effect, and the further discovery the truckers seek is unnecessary as a practical matter because the truckers already submitted a FOIA request to the relevant federal agency and found out that RLI had filed its form electronically, not on paper.

ZALMA OPINION

The BMC 84 is to the trucking industry what the New York Standard Fire Insurance Policy is to fire insurance. The insurer has no choice, it must issue the BMC 84 when it provides a surety to a truck broker, and the broker has no choice as to what language governs the surety. Justice Kavanaugh read the wording, identified the existence of an aggregate limit and applied the wording of the contract to the facts of the case. RLI’s obligation was limited to $10,000 in the aggregate.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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