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.
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.
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.
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 email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Books from Full Court Press
Insurance Law Deskbook: Learn the insurance basics that are essential to every civil practitioner. The Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, state appellate courts, and foreign courts that have molded the American insurance law, as well as vital explanatory chapters, historical context, form letters, and more.
California Insurance Law Deskbook: California has long led the way when it comes to insurance jurisprudence in the United States, and few know more about California insurance law than Barry Zalma. The California Insurance Law Deskbook is intended to help law students, practitioners, insurance lawyers, professional claims personnel, insured persons, and anyone else involved in insurance. Similar to Barry Zalma’s general Insurance Law Deskbook, this title focuses on the state where the author has long resided and practiced as an expert in California law. The book, published for the first time under Full Court Press, includes the full texts or digests of insurance-related decisions of the U.S. Supreme Court, the U.S. District Courts of Appeal, and California appellate courts, as well as vital explanatory chapters and historical context.
Insurance Bad Faith and Punitive Damages Deskbook: Understand the relationship between insurance, the tort of bad faith, and why punitive damages are awarded to punish insurers. Previously, a person suing an insurance company in the United States could only recover contract damages, but when the tort of bad faith was created by the courts contract law was enormously affected, allowing insureds to sue insurers for both contract and tort damages, including punitive damages. Read a thoughtful analysis of how punitive damages apply in the United States to insurance bad faith suits, and why some states allow judges and juries to award punitive damages against insurers in civil litigation.
Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/
Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma
The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.