Jones Express, Inc. v. Watson
Filing
91
MEMORANDUM OPINION OF THE COURT: In its prior order granting the plaintiff's motion for partial summary judgment, the Court rejected Watson's argument that Jones Express's reliance on the indemnification agreement to support its claim as an "unlawful and hidden insurance obligation" as bordering on the disingenuous. Having heard from the parties, and been apprised further regarding the parties' business practices and the million-dollar deductible, the Court retreats from that position. The Court now agrees with Watson that "[t]o require an owner-operator like Ernest Watson to indemnify Jones Express [in the amount of $1,000,000] here constitutes an unlawful and hidden insurance obligation that violate s the letter and the spirit of the Truth- In-Leasing regulations," as well as the Lease itself, and that [t]o allow Jones Express to pass liability for this loss on to Watson defeats the very purpose of the federal regulations." (ECF No. 32 , at 8.) For the reasons set forth herein, the Court will vacate that portion of its earlier Memorandum and Opinion granting partial summary judgment to Jones Express on the issue of liability on the basis of the indemnification agreement. The Court finds that Jones Express is entitled to judgment in its favor on the issue of liability, but further finds that such liability is limited to the $500 set forth in Section 4 of the Lease. An appropriate order will enter. Signed by Senior Judge Thomas Wiseman on 5/15/2012. (eh)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
JONES EXPRESS, INC.,
Plaintiff,
v.
ERNEST WATSON,
Defendant.
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Civil Action No. 3:10-cv-140
Judge Thomas A. Wiseman, Jr.
MEMORANDUM
Plaintiff Jones Express seeks damages for breach of contract. Based on all the proof before the
Court, the Court finds that Jones Express, though entitled to a judgment of liability in its favor, is not
entitled to recover the full amount of the damages it seeks. For the reasons set forth herein, judgment will
enter in favor of Jones Express in the amount of $500.00.
I.
BACKGROUND
Jones Express brought suit for breach of contract against Ernest Watson in 2010, alleging that
Watson had violated an indemnification provision contained in a lease executed by the parties in 2007.
Alternatively, Jones Express claimed that Watson had breached a common-law duty to indemnify. The
complaint sought damages for breach of contract “far in excess of $75,000” (Compl. (ECF No. 1) at ¶ 9),
but did not state the precise amount of Jones Express’s damages, although it has become clear that
Jones Express knew even then exactly what its damages were.
Jones Express later sought partial summary judgment in its favor solely on the issue of liability,
on the basis of both contractual and common-law indemnity. Again, Jones Express did not present any
evidence as to the amount of its damages, as it sought judgment on liability only. Ernest Watson denied
liability, asserting that because Jones Express represented in the lease that it had liability insurance, the
plaintiff was estopped from seeking indemnification under the indemnification provision of the lease, and
that the indemnification provision and the insurance provision, read together, presented an ambiguity that
could not be resolved on summary judgment. Watson also argued that the indemnification provision
contained in the lease violated the federal Truth-in-Leasing regulations, 49 C.F.R. Part 376; alternatively,
2
Watson argued that he was not personally liable on the lease. The Court initially entered an order
denying in part Jones Express’s motion for partial summary judgment, finding that the defendant’s liability
was limited to $500.00 pursuant to the terms of the lease.
Upon Jones Express’s motion for
reconsideration, however, the Court vacated that order and entered an order instead granting the
plaintiff’s motion for partial summary judgment on the issue of liability and leaving to be determined the
amount of damages. In reaching that conclusion, the Court specifically held that Jones Express was not
entitled to recover under a theory of the common-law duty to indemnify, since the parties’ relationship was
governed by contract. The Court also held that Ernest Watson had entered into the lease in his individual
capacity. The matter was set for a bench trial on the issue of damages.
At the trial, conducted on February 16. 2012, upon hearing proof presented by both parties, the
Court communicated its inclination to again reconsider the issue of the enforceability of the
indemnification provision in the lease and directed the parties to submit briefs addressing new issues
raised during the trial, which the parties have now done.
II.
FINDINGS OF FACT
Based on the evidence presented by the parties prior to and during the hearing conducted on
February 16, 2012, the Court makes the following findings of fact:
A.
The Lease
Jones Express is a regulated motor carrier that transports property in interstate commerce under
authority of the Department of Transportation (“DOT”). It does so utilizing tractors and driving services
leased from owner-operators such as defendant Ernest Watson. On January 30, 2007, defendant Ernest
Watson, as lessor/owner, entered into a Long Term Equipment Lease (“Lease”) with plaintiff Jones
Express as lessee.1 This Lease is governed by the federal Truth-in-Leasing regulations, 49 C.F.R. Part
376.
The equipment in question was a Volvo truck, serial number 4V4NC9RH61N306252. The only
available copy of the Lease is extremely difficult to read, the print on the first page in particular being both
minute and blurred. As far as the Court can ascertain, Jones Express, pursuant to the Lease terms,
1
Exhibit 1.
The Lease is in the record as an exhibit to the complaint (ECF No. 1-1) and as Plaintiff’s Trial
3
undertook responsibility for the leased equipment “to the extent required by and in accordance with the
provisions of all applicable Interstate Commerce Commission rules and regulations,”2 for the period of the
Lease and while the “equipment” (i.e., the truck) was transporting freight in the service of Jones Express
under its federal operating authority. (Lease § 1.)
Under Section 4 of the Lease, Ernest Watson, as “Owner,” agreed to pay all the costs of
operation, including insurance costs and the first five hundred dollars of any liability claim arising from the
negligence of his drivers, as follows:
OWNER agrees to pay all expenses of his operations under this LEASE including but not
limited to expenses of repair and maintenance . . . so as to comply with all applicable
regulations of the Interstate Commerce Commission, other regulatory bodies having
jurisdiction, or the insurance company carrying the insurance risk on any described
vehicle, expenses of fuel, oil, grease, road and other tolls . . . , expenses of drivers,
helpers and other employees of OWNER, and taxes of any kind assessed against
OWNER.
OWNER shall obtain at his own expense all license tags, and drivers [illegible] . .
. . OWNER shall calculate, acknowledge and file/pay all Highway Use Taxes, fuel taxes,
road taxes, or Axle Taxes, quarterly where necessary, unless otherwise indicated by law.
If said law requires that the taxes be paid by the COMPANY, OWNER authorizes the
COMPANY to deduct any such amounts from any amounts due OWNER.
Further, OWNER shall pay all costs of operation in addition to the above including but not
limited to repairs, fuel taxes, tires, damages to the equipment, payment for injury or
damages to the operator, driver and/or helper, insurance coverage for collision, fire, theft,
or other occurrence or catastrophe, registration fees, excess empty mileage costs,
[illegible] required of or on the equipment or [illegible] the use or operation thereof
including all reports connected with such matters, the first five hundred ($500.00) dollars
of damage to or loss of cargo or the first five hundred ($500.00) dollars relating to any
type of liability claim caused by the fault or negligence of the OWNER and/or driver or
helper. OWNER shall pay all fines and penalties arising out of the use of said equipment
and ferries . . . .
It is further understood that, except as hereinafter set forth, in the event the
COMPANY is called upon to pay any of the foregoing expenses, fees or other taxes, the
amount thereof paid by the COMPANY shall be deducted from amounts due OWNER
under this LEASE. . . . As to any insurance programs which may be made available to
him, OWNER authorizes the COMPANY to deduct the cost of any such programs from
any amounts due OWNER.
(Lease § 4.)
The Lease required Jones Express to maintain public liability insurance in its own name, but
placed the responsibility for procuring other types of insurance on Watson:
2
In 1995, the Interstate Commerce Commission transferred the regulation of motor carrier
functions to the Department of Transportation and to the Surface Transportation Board. 49 U.S.C. §
13501.
4
COMPANY will maintain public liability, property damage and cargo insurance, for the
protection of the public naming COMPANY as the insured for the vehicles while operating
from and to points specified by COMPANY. . . .
All other insurance covering the vehicle or vehicles furnished during the time it or
they are operating under this LEASE if any, shall be obtained at OWNER’S expense.
(Lease § 8.) Appendix “A” to the Lease reflects that Watson elected to purchase non-trucking and
unladen liability insurance through Jones Express. Notably, although the Lease specifies that Jones
Express is to procure liability insurance, the Lease does not state a minimal amount of insurance
coverage required, nor does it place any express limitations on the amount of the deductible for such
insurance.
As discussed below, Jones Express obtained liability insurance from Zurich American
Insurance Company (“Zurich”).
The Lease also includes an indemnification provision, which states in pertinent part as follows:
Section 9. Indemnification. In addition to any other indemnification agreements
set forth herein, OWNER hereby agrees to indemnify and save COMPANY harmless
from any and all cost, expenses or loss caused COMPANY by OWNER, his agents,
servants, employees, or leased drivers. OWNER hereby agrees to assume all risks and
to indemnify and save COMPANY harmless from any injury claims made by OWNER’S
employees or leased drivers. It is understood that OWNER assumes all risks of damage
or loss to the described vehicles and to all parts, accessories, materials and supplies
furnished by OWNER hereunder . . . .
(Lease § 9.)
The Lease further specifies that it is to be construed in accordance with the laws of the
Commonwealth of Pennsylvania. (Lease § 13.) In addition, both parties to the Lease agreed to be bound
by all applicable ICC rules and regulations. (Lease § 2.)
B.
The Accident and Resulting Claim
The parties operated under the Lease or its predecessors without a problem from 2003 through
the spring of 2008. In April 2008, the truck that was the subject of the Lease was dispatched to haul a
load in Georgia. On April 15, 2008, the driver, in the course and scope of the performance of his duties
as Watson’s employee, was involved in an accident (the “Accident”) that resulted in one fatality. The
record reflects that the driver’s negligence caused the Accident; he ran a red light and struck a vehicle in
an intersection, killing the driver of the other vehicle. The truck driver was charged with second degree
vehicular homicide and failure to obey a traffic control device.
The husband of the woman killed in the Accident pursued a wrongful-death claim (the “Claim”)
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against Jones Express. The Claim, which never resulted in the filing of a lawsuit, was referred to Zurich.
Zurich ultimately settled the Claim for $2,050,000; upon Zurich’s payment of that amount to the
decedent’s husband, the husband executed a comprehensive release that covered Jones Express, the
driver, Ernest Watson, and Zurich. (Pl.’s Trial Exh. 10.)
It is undisputed that the insurance policy issued by Zurich (the “Policy” or “Zurich Policy”) was
procured by Jones Express to satisfy its obligation under the Lease to obtain “public liability. . . insurance,
for the protection of the public naming COMPANY as the insured for the vehicles while operating from
and to points specified by COMPANY,” as set forth above. (Lease § 8.) The Policy was a fleet policy,
and Watson’s truck was just one of many trucks covered by the Policy. Under that Policy, Jones Express
had a “deductible” of $1,000,000. (Pl.’s Trial Exh. 2.) Pursuant to the terms of the Policy, Zurich paid the
full amount of the settlement, and Jones Express reimbursed Zurich for the deductible amount, plus, for
some unexplained reason, an additional $46,597.56.3 Jones Express also introduced evidence at trial
showing that it incurred approximately $46,278 in attorneys’ fees and costs in connection with resolution
of the Claim on top of the funds paid to Zurich.4 In this action, Jones Express seeks to recover from
Watson all amounts it paid in settlement of the Claim plus the attorneys’ fees and costs incurred in the
course of settling the Claim, on the basis of the Indemnification provision in the Lease.5
C.
Hearing Testimony
At the hearing, Kenneth Lacey, vice president of Jones Express and vice president of safety and
3
The record shows that Jones Express reimbursed Zurich by way of two separate checks, one in
the amount of $500,000, and the other in the amount of $546,597.56. Jones Express did not offer any
evidence or testimony to explain why it reimbursed Zurich for any amount in excess of the $1,000,000
deductible.
4
Inexplicably, although the original intent of the hearing was to provide Jones Express the
opportunity to establish its damages, Jones Express did not present a firm request for a specific amount
of damages at trial. Instead it introduced exhibits, verified by Mr. Ken Lacey who testified for Jones
Express, in the form of a number of random invoices and checks. In addition to the two checks payable
to Zurich, referenced in Footnote 2, Jones Express presented other canceled checks documenting
payments related to settlement of the Claim in the total amount of $46,300.38, according to the Court’s
calculation. The total amount paid by Jones Express, as reflected by the checks, does not precisely
correlate with the invoices presented as exhibits along with the checks, nor does it match the amount
sought by Jones Express ($46,278), which is stated only in its post-trial brief (ECF No. 85, at 2).
5
Zurich is not a party or even an interested party in this suit. Jones Express seeks to recover
only the amounts it paid out of pocket to Zurich, plus the amounts it paid in attorneys’ fees and costs.
6
risk management for Jones Motor Group, testified on behalf of Jones Express. Mr. Lacey was involved in
procuring public liability insurance for Jones Express through Zurich, and testified regarding the milliondollar deductible in the Zurich Policy. He testified that Mr. Watson would not have received a copy of the
entire Policy, but that he should have received a certificate of insurance. The certificate would have
stated Jones Express’s name, the insurer, and the levels of insurance coverage, and named Mr. Watson
as the certificate holder. However, the only certificate of insurance introduced at trial (Def.’s Trial Exh. 1)
indicated that the coverage provided by the policy it referenced expired in November 2007, some five
months prior to the Accident. This certificate references a $1,000 deductible for physical damage to the
Volvo truck, but does not state that the underlying liability Policy had a million-dollar deductible. Ernest
Watson, who testified at the trial on his own behalf, confirmed that the certificate of insurance introduced
at trial was the most recent certificate he had received from Jones Express, and that this particular
certificate was in the truck at the time of the Accident.
In response to the question of whether Mr. Watson had been given notice of the million dollar
deductible, Mr. Lacey could only respond that, “[i]n the course of his sign-on as an agent, he should have
been notified by Ron Williams. . . . Ron Williams was our regional vice president that would have
originally struck the deal with Ernest [Watson].” (Trial Tr. 41:19–23.) Mr. Lacey also testified, however,
that Mr. Williams is now deceased, and Mr. Lacey himself was not present at those meetings. He stated
that he believed Wayne Smith, Mr. Williams’ successor, “routinely reminds our agents and contractors
about the million dollar deductible that’s out there. And we certainly talk about it at driver meetings just to
remind everyone what’s going on.” (Trial Tr. 41:23–42:2.)6
Mr. Watson, however, testified that he was never notified that the liability insurance Policy
procured by Jones Express carried a million-dollar deductible, either at the time of entering the contract or
later. He also averred that he had never received a copy of the entire Zurich Policy, and that the
6
Jones Express indicated at the hearing that, because it believed the hearing would address only
the issue of damages, it did not list Wayne Smith as a witness or make him available to testify. Jones
Express, in its post-hearing brief, insists that if permitted to do so Mr. Smith would testify that Mr. Watson
had notice of the million-dollar deductible prior to the date of the Accident, that Mr. Smith discussed the
deductible in meetings attended by Mr. Watson prior to the Accident, and that Mr. Smith reminded Mr.
Watson about the deductible in a conversation that occurred immediately after the Accident. (ECF No.
85, at 16.)
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certificate of insurance he did receive did not reference any deductible other than the $1,000 deductible
on the Volvo tractor. He further testified that he would not have been in business with Jones Express if
he had known he could be liable for damages up to a million dollars in the event his truck was involved in
an accident. (Trial Tr. 46:19–47:2.)
At the hearing, the Court queried Mr. Lacey regarding whether it was “common in the industry for
an owner-operator to separately insure against a deductible that he is obligated to pay you under . . . the
agreement . . . to cover expenses.” (Trial Tr. 40:20–25.) Mr. Lacey responded that such insurance is
probably available on the market, but that Jones Express did not provide it and had no intention of making
it available to its independent contractors:
I know that it happens . . . . I have been approached by numerous brokers, insurance
brokers, about selling policies to make available to independent contractors to allow them
coverage to pay back to us what they have to pay. We have also steered clear of that
because we wanted to insure that the independent contractor had an interest and that
they wouldn’t operate with some sort of a moral disregard if they had – forgive the term –
no skin in the game. But it does happen. If not, I wouldn’t be approached by insurance
brokers selling the product.
(Trial Tr. 41:4–15.)
In other words, Jones Express carried a million-dollar deductible on its liability
insurance policy, knowing that Watson and presumably its other independent contractors could be liable
up to that amount under the indemnification provision in Jones Express’s standard equipment lease, and
knowing also that the independent contractors were not separately insured to cover that amount. But
Jones Express chose not to disclose that fact to Watson in the Lease or in any other writing.
Mr. Watson testified that he was 69 years old and had been involved in the trucking industry since
1988. Prior to 2003, he was in business for himself and had as many as twelve trucks at one time. In
2003, he began contracting with Jones Express, and continued working as an independent contractor
with Jones Express from 2003 through the date of the Accident in 2008. He went into business with
Jones Express specifically because he “couldn’t afford insurance on 12 pieces of equipment. It was just
so high, I couldn’t do it.” (Trial Tr. 55:2–3.) At the time of the Accident, he only owned two trucks.
Mr. Watson stated that when he first entered into a Lease agreement with Jones Express, he was
told: “I could buy from them any type of insurance that I needed. So I took everything they had,
everything they had to offer, even including tags and everything.”
(Trial Tr. 49:13–16.)
By taking
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“everything” that Jones had to offer, Mr. Watson stated he meant that he had “bobtail insurance,7 cargo
insurance, liability, whatever else” he could obtain through Jones Express. (Trial Tr. 53:23–54:1.) In the
course of Watson’s relationship with Jones Express, Jones Express deducted the cost of the insurance
premiums and other expenses from the amount it owed Watson under the Lease. As a result, Mr.
Watson believed there was no reason for him to go out and get additional insurance. (Trial Tr. 54:17–19.)
Mr. Lacey likewise confirmed that, among the other expenses covered by Mr. Watson, including the
separately purchased insurance, Watson paid a prorated amount to reimburse Jones Express for the cost
of the liability insurance premium. (Trial Tr. 29:5–19.) Watson’s reimbursement to Jones Express for the
cost of the liability insurance was in accordance with the Lease provision specifically stating that Watson
would be responsible for the cost of “insurance coverage for collision, fire, theft, or other occurrence or
catastrophe.” (Lease § 4.)
With respect to the Accident and resulting Claim that gave rise to this lawsuit, Mr. Watson
testified that he was aware of the Accident but was not notified about the Claim or the settlement. The
record does not indicate when he was first notified about the million-dollar deductible as it applied to the
Claim.8 The parties did not introduce any type of written demand into the record. The Court asked Mr.
Watson whether he ever considered obtaining separate insurance to cover anything that was not covered
by Jones; Mr. Watson responded, “I really thought that I was 100 percent covered and I had my
deductible for each particular thing, and that all that – never even crossed my mind. But I did – when I
was in my business, I had a $2 million umbrella, when I had my own business. But with Jones, as big as
they were, I figured I was safe.” (Transcript 56:19–24.)
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“Bobtail” or “non-trucking” insurance covers a tractor when the trailer is unloaded and headed
home.
8
In a “Supplemental Filing to Defendant’s Response to Plaintiff’s Motion for Summary Judgment”
(ECF No.35), filed on March 3, 2011 (just after the filing of his response in opposition to the plaintiff’s
motion for summary judgment (ECF No. 33)), counsel for Watson noted that “informal discovery” had
revealed that Jones Express sought to recover $1,000,000 from Mr. Watson “in the form of
reimbursement of a deductible.” (ECF No. 35, at 1.) Watson asserted at that time that Jones Express
had violated the disclosure requirements of the Truth-in-Leasing regulations when it represented to
Watson that it had public liability insurance but did not disclose in the Lease that Watson could potentially
be liable for up to $1,000,000 in the form of a deductible. The Court apparently overlooked this filing in
ruling on the plaintiff’s motion for summary judgment, and in any event neither party presented actual
evidence of the million-dollar deductible that the Court could have taken into consideration in ruling on the
motion for summary judgment.
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For its part, Jones Express put forward no evidence to suggest that a million-dollar deductible is
common in the industry or that Mr. Watson should have anticipated that Jones Express would choose to
self-insure up to that amount and count on Watson to reimburse it for any expenditures for accidents in an
amount less than that. Watson’s testimony establishes that he reasonably believed, based on the parties’
interactions, that he was fully covered. The deductibles of which he was aware were in the range of $500
to $1,000, as is evidenced by the deductible referenced in the certificate of insurance introduced at trial
and by the cap on liability referenced in Section 4 of the Lease. The Court has no difficulty in concluding
based on the evidence presented at trial that Jones Express’s decision to maintain a million-dollar
deductible was outside the range of the normal business risks that Ernest Watson could or should have
contemplated at the time of executing the Lease.
III.
LEGAL CONCLUSIONS
The federal Truth-in-Leasing regulations (“the TIL regulations”), 49 C.F.R. Part 376, govern
leases between federally regulated motor carriers and independent owner-operators of trucks. These
regulations were initially promulgated pursuant to 49 U.S.C. §§ 13301 and 14102. With the Motor Carrier
Safety Improvement Act of 1999, Congress transferred to the new Federal Motor Carrier Safety
Administration (“FMCSA”) all “duties and powers related to motor carriers or motor carrier safety” that
were vested in the Secretary of Transportation, including the Secretary’s authority over the federal leasing
regulations to FMCSA.
Owner-operators such as Ernest Watson are generally small business men and women who own
or control truck tractors used to transport property on the country’s highways. Owner-operators either
transport commodities exempt from DOT regulations or, as independent contractors, lease their
equipment and services to registered motor carriers, like Jones Express, who possess the legal operating
authority under DOT regulations to enter into contracts with shippers to transport property. Under the TIL
regulations, the relationship between independent truck owner-operators and regulated carriers is
regulated by the DOT. See 49 U.S.C. § 14102 (authorizing the secretary to promulgate regulations
governing the leasing of transport vehicles by motor carriers); 49 C.F.R. pt. 376.
Under federal law, motor carriers are required to register with the DOT in order to ship most types
of cargo. 49 U.S.C. §§ 13901, 13902. Once registered, common carriers are legally obligated to comply
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with certain DOT regulations. 49 U.S.C. § 13902(a)(1); 49 C.F.R. § 367.1. “A primary goal of this
regulatory scheme is to prevent large carriers from taking advantage of individual owner-operators due to
their weak bargaining position.” Owner-Operator Indep. Drivers Ass’n v. Swift Transp. Co., 367 F.3d
1108, 1110 (9th Cir. 2004). In that regard, the Eighth Circuit has noted:
A review of the development in the Truth in Leasing regulations indicates that they were
intended to remedy disparities in bargaining positions between independent owner
operators and motor carriers. The regulations were originally developed by the Interstate
Commerce Commission (ICC), and the ICC’s notice of proposed rulemaking noted “the
Commission’s deep concern for the problems faced by the owner-operator in making a
decent living in his chosen profession.”
Owner-Operator Indep. Drivers Ass’n v. New Prime, Inc., 398 F.3d 1067, 1070 (8th Cir. 2003) (citations
omitted). Thus, for example, the statute authorizes the DOT to require that all leases between motor
carriers and owner-operators be in writing and contain certain basic information, such as the duration of
the lease and the compensation to be paid the owner-operator. 49 U.S.C. § 14102(a); see 49 C.F.R. §
376.11(a) (requiring that leases be in writing); id. § 376.12(b) (requiring that leases “specify the time and
date . . . on which the lease begins and ends”); id. § 376.12(d) (requiring that the amount to be paid to the
owner-operator be “clearly stated on the face of the lease”).
In the present case, Mr. Watson does not dispute the reasonableness of the settlement of the
underlying Claim resulting from the Accident. Rather, he contests the amount of the damages sought by
Jones Express on the basis that he did not have notice of the million-dollar deductible on the Zurich
Policy, and that failure to notify him of this deductible violated the Truth-in-Leasing regulations that govern
the parties’ Lease, 49 C.F.R. Part 376, and violated the covenant of good faith and fair dealing implied in
every contract under Pennsylvania law. Watson also argued, in opposition to Jones Express’s motion for
summary judgment on the issue of liability, that the Lease was ambiguous insofar as the Indemnification
provision cannot be read consistently with the Insurance provision and the clause in the Lease which
seems to limit Watson’s personal liability to “the first five hundred ($500.00) dollars relating to any type of
liability claim caused by the fault or negligence of the OWNER and/or driver or helper.” (Lease § 4.)
Having previously rejected those arguments and ruled that Mr. Watson was liable to Jones
Express for the full amount of the damages sought by Jones Express, based on the language of the
Indemnification provision in the Lease, the Court anticipated that the sole issue to be resolved at trial was
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the amount of Mr. Watson’s liability. The Court reached its holding on the issue of liability, however,
without the benefit of a critical piece of evidence: that Jones Express, although technically covered by a
liability insurance policy through Zurich, carried a million-dollar per-occurrence deductible on that policy.
Based on that new evidence, the Court will (again) reconsider its interpretation of the Lease, and will
consider the new arguments raised by Watson at trial.
A.
Whether the Insurance Provision in the Lease Complied with the TIL Regulations
Watson argues that 49 C.F.R. § 376.12(j) applies to the issue presented here, and that Jones
Express violated the regulation by failing to disclose the deductible amount to Watson in writing.
The referenced regulation states in part: “The lease shall . . . specify who is responsible for
providing any other insurance coverage for the operation of the leased equipment, such as bobtail
insurance. If the authorized carrier will make a charge back to the lessor for any of this insurance, the
lease shall specify the amount which will be charged-back to the lessor.” 49 C.F.R. § 376.12(j)(1). In
compliance with this section, the Lease states that Mr. Watson as lessor was responsible for providing
any other insurance coverage for the operation of the leased equipment, such as bobtail insurance.
Subsection (j)(1) also requires that, if the carrier “charged back” to the lessor the cost of any of the
insurance, whether the liability insurance or other types, the lease is to specify the amount to be charged
back.
Kenneth Lacey testified that the cost of both the liability insurance and the other insurance
purchased by Mr. Watson was charged back to Mr. Watson, but the Lease does not specify the amount of
the charge-back. In that regard, the Lease does not appear to be in compliance with § 376.12(j)(1), but
Mr. Watson has not shown that he was damaged by that failure.
Mr. Watson also argues that the million-dollar deductible was a form of charge back the amount
of which should have been stated in the Lease. The parties’ usage of the term “charge-back” indicates,
however, that a charge-back is to cover the monthly cost of maintaining the insurance. The Court finds
that million-dollar deductible was not a charge-back, so the failure to include reference to it in the Lease
did not violate 49 C.F.R. § 376.12(j)(1) specifically.
Ernest Watson also argues that Jones Express breached 49 C.F.R. § 376.12(f)(2), which states:
(2) If the lessor purchases any insurance coverage for the operation of the leased
equipment from or through the authorized carrier, the lease shall specify that the
authorized carrier will provide the lessor with a copy of each policy upon the request
12
of the lessor. Also, where the lessor purchases such insurance in this manner, the
lease shall specify that the authorized carrier will provide the lessor with a certificate
of insurance for each such policy. Each certificate of insurance shall include the
name of the insurer, the policy number, the effective dates of the policy, the amounts
and types of coverage, the cost to the lessor for each type of coverage, and the
deductible amount for each type of coverage for which the lessor may be liable.
49 C.F.R. § 376.12(j)(2).
Subsection (j)(2) specifically pertains only to those types of insurance that Mr. Watson, as lessor,
purchased through Jones Express. It does not specifically pertain to the liability insurance that Jones
Express was required, by the regulation and the Lease, to take out in its own name. Even though Jones
Express apparently passed on to Mr. Watson the cost of the liability insurance, Watson did not “purchase”
this insurance coverage “through” Jones Express. Id. Mr. Watson did purchase bobtail insurance and
unladen liability insurance through Jones Express; it is these policies to which subsection (j)(2) pertains.
The Lease was apparently not in strict compliance with (j)(2), because it does not spell out Mr. Watson’s
right to obtain copies of the insurance policies that he purchased through Jones Express or Jones
Express’s obligation to provide certificates of insurance stating the coverage provided and the deductible
on each such policy. However, Mr. Watson has not alleged that he was damaged by that failure, and the
record does not reflect whether these other insurance policies were implicated by the Accident.9
Regardless, subsection (j)(2) did not expressly require that Jones Express provide Ernest Watson with a
copy of the Zurich Policy, a certificate of insurance for that policy, or written information about the milliondollar deductible.
However, the Court does find that the Lease was out of compliance with § 376.12(j) for a different
reason. The referenced regulation also states, in pertinent part:
Except as provided in the exemptions set forth in Subpart C of this part [which do not
apply], the written lease required under § 376.11(a) shall contain the following provisions.
...
(j) Insurance.
(1) The lease shall clearly specify the legal obligation of the authorized carrier to
maintain insurance coverage for the protection of the public pursuant to FMCSA
regulations under 49 U.S.C. 13906.
9
The Court notes that it is likely that Mr. Watson owed a deductible after having repairs made to
remedy damage to his truck that were incurred in the accident, but the parties did not put on evidence in
that regard.
13
49 C.F.R. § 376.12(j)(1) (emphasis added). The referenced FMSA regulations under 49 U.S.C. § 13906
provide for a minimum level of responsibility of $750,000, thereby requiring either that the motor carrier be
insured up to $750,000, or that it present a bond or other security evidencing its ability to pay a judgment
up to at least that amount. See 49 U.S.C. §§ 13906(a) (providing that a carrier may not be registered for
interstate transportation unless it files a bond, insurance policy, or other type of security approved by the
Secretary in the minimum statutory or regulatory amount), and 31139(b)(2) (directing the Secretary to
prescribe regulations establishing the minimum levels of financial responsibility at no less than $750,000);
49 C.F.R. § 387.9(1) (establishing $750,000 as the minimum level of financial responsibility for for-hire
carriage in interstate transport of nonhazardous property).
In this case, the Lease did not “clearly specify” Jones Express’s “legal obligation . . . to maintain
insurance coverage for the protection of the public pursuant to FMCSA regulations under 49 U.S.C.
13906.” 49 C.F.R. § 376.12(j)(1). In the Lease, Jones Express simply agreed that it would “maintain
public liability insurance, for the protection of the public naming [Jones Express] as the insured for the
vehicles while operating from and to points specified by [Jones Express].” (Lease § 8.) The Lease did
not include reference to the regulations governing the parties’ relationship, which themselves require
insurance coverage in the minimal amount of $750,000. In the absence of insurance up to that amount,
Jones Express had to present a bond or other security to the Security to maintain its authority to function
as a motor carrier. The Lease did not spell out these obligations, nor did it disclose that Jones Express’s
insurance policy was completely outside the parameters of the coverage required by the regulations,
since it did not provide coverage at all until and unless Jones Express incurred a liability in excess of one
million dollars. As a result, the Lease did not “clearly specify” Jones Express’s obligation to maintain
liability insurance.
This non-disclosure, besides being a technical violation of the regulations, was material,
particularly in light of the fact that one of the express goals of the TIL regulations was “to prevent large
carriers from taking advantage of individual owner-operators due to their weak bargaining position.” Swift
Transp. Co., 367 F.3d at 1109; New Prime, Inc., 398 F.3d at 1070. The regulations governing the
relationship between motor carriers and independent contracts espouse a goal of insuring that owneroperators such as Watson are informed of all potential costs and liabilities they may incur as a result of
14
entering into an equipment lease. That Jones Express failed to disclose the million-dollar deductible at
the time Watson executed the Lease meant that Mr. Watson was not fully apprised of the possibility that
he might be liable to Jones Express up to that amount pursuant to the indemnification provision in the
Lease. Thus, the failure either to have insurance coverage for losses up to one million dollars or to
disclose that fact in the Lease violated the spirit as well as the letter of the TIL regulations.
B.
Whether Jones Express Complied with its Contractual Obligation to Maintain
Liability Insurance
Jones Express maintained the Policy from Zurich with the million-dollar deductible, ostensibly in
satisfaction of its obligation under the Lease to “maintain public liability . . . insurance.” (Lease § 8.)
However, the million-dollar deductible on the Zurich Policy effectively meant that Jones Express was
uninsured (or self-insured) for any amount of liability up to one million dollars. If the Accident had been
less serious and resulted in a settlement or judgment of less than a million dollars, Jones Express would
have been required to pay the entire amount out of pocket, despite its representation in the Lease that it
maintained liability insurance for the protection of the public. Cf. Maxus Exploration Co. v. Moran Bros.,
Inc., 773 S.W.2d 358, 361 n.3 (Tex Ct. App. 1989) (“With regard to the insurance policy, Diamond
Shamrock asserts that because it contained a Million Dollar deductible provision this was tantamount to
no insurance.”). Because the Accident resulted in damages in excess of a million dollars, Jones Express
did benefit from the insurance coverage, but nonetheless maintains that Watson is obligated by the
indemnification provision to reimburse it for the payment of the million-dollar deductible, plus other
expenses related to the Claim.
Jones Express’s failure to maintain a reasonable deductible on the liability insurance policy
constituted a violation of its obligation under the Lease to maintain insurance. Jones Express may argue
that its obligation to maintain insurance was for the “protection of the public,” not for the protection of
Ernest Watson. The fact remains that Jones Express covenanted in its agreement with Mr. Watson to
maintain liability insurance. This representation gave rise to a reasonable expectation on the part of Mr.
Watson that the truck was fully covered for liability insurance, and that any accident would require him, at
most, to reimburse Jones Express under the indemnification agreement in the amount of a reasonable
deductible. Notwithstanding its contractual obligation, Jones Express did not maintain insurance covering
15
any losses up to one-million dollars. And the only deductibles of which Mr. Watson had been made
aware, again, were the $1,000 deductible referenced in the certificate of insurance (for damage to the
truck), and the $500 referenced in the Lease itself: “Owner shall pay all costs of operation . . . including
but not limited to . . . the first five hundred ($500.00) dollars of damage to or loss of cargo or the first five
hundred ($500.00) dollars relating to any type of liability claim caused by the fault or negligence of the
Owner, and/or driver or helper.” (Lease § 4.)
The failure to maintain insurance for losses up to one-million dollars was compounded by Jones
Express’s failure to disclose this fact in writing, in the Lease. The failure to disclose the amount of the
deductible constituted a material misrepresentation that induced Watson to execute the Lease, and also
constituted a breach of the implied covenant of good faith and fair dealing. According to the Restatement
(Second) of Contracts, “a person’s non-disclosure of a fact known to him is,” under limited circumstances,
“equivalent to an assertion that the fact does not exist,” including “where he knows that disclosure of the
fact would correct a mistake of the other party as to a basic assumption on which that party is making the
contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with
reasonable standards of fair dealing,” and “where he knows that disclosure of the fact would correct a
mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement
in whole or in part.” Restatement of Contracts (2d) § 161. A non-disclosure that falls within these
parameters may make the contract voidable if the disclosure was either fraudulent or material, if it
induced the recipient to make the contract, and if the recipient was justified in relying on the
misrepresentation.
Id. § 164.
For the reasons already set forth herein, the Court has no difficulty
concluding that it was commercially unreasonable for Jones Express to assume that Watson would have
anticipated the possibility of a loss in excess of a million dollars, or that he would have the financial
capacity to cover that type of loss. Jones Express, acting through the deceased Ron Williams, knew or
should have known that disclosure of the million-dollar deductible would have corrected Watson’s basic
assumption that he had full insurance coverage.
Further, Jones Express’s failure to disclose the deductible amounted to a failure to act in good
faith and in accordance with reasonable standards of fair dealing. Id. at § 161. Under Pennsylvania law,
which governs construction of the contract, there is a covenant of good-faith and fair dealing implied in
16
every contract. Kaplan v. Cablevision of Pa., Inc., 671 A.2d 716, 722 (Pa. Super. Ct. 1996) (“Every
contract in Pennsylvania imposes on each party a duty of good faith and fair dealing in its performance
and its enforcement.”); see also Bedrock Stone & Stuff, Inc. v. Mfr. & Trader's Trust Co., No. 04-2101,
2005 WL 1279148, at *7 (E.D. Pa. May 25, 2005) (noting that “state and federal courts[ ] have repeatedly
stated that every contract in Pennsylvania imposes on each party a duty of good faith and fair dealing in
the performance and enforcement of the contract”); Long v. Valley Forge Military Academy Found., No.
05-4454, 2008 WL 5157508, at *9 (E.D. Pa. Dec. 8, 2008) (collecting cases standing for this proposition).
The Lease provision requiring Jones Express to procure liability insurance implicitly granted
Jones Express a substantial amount of discretion in obtaining such insurance, at least within the
parameters of the law. Courts considering the issue of a party’s exercise of discretion under a contract
have consistently held that such discretion is not “unbridled”; rather, it is “tempered by the implied
covenant of good faith and fair dealing and the reasonable expectations of the parties.”
Wilson v.
Amerada Hess Corp., 773 A.2d 1121, 1130 (N.J. 2001). A party exceeds the discretion authorized by the
law, and breaches the implied contractual covenant of good faith and fair dealing, “if a party uses its
discretion for a reason outside the contemplated range [or] unilaterally use[s] that authority in a way that
intentionally subjects the other party to a risk beyond the normal business risks that the parties could
have contemplated at the time of contract formation.” Seidenberg v. Summit Bank, 791 A.2d 1068, 1078
(N.J. Super. Ct. 2002) (citations omitted)); cf. LaSalle Bank Nat’l Ass’n v. Paramont Props., 588 F. Supp.
2d 840, 857 (N.D. Ill. 2008) (“To establish a breach of the duty of good faith and fair dealing, the
complaining party must show that the contract vested the opposing party with discretion in performing an
obligation under the contract and the opposing party exercised that discretion . . . in a manner
inconsistent with the reasonable expectations of the parties.” (citations omitted)).
In Philadelphia Plaza-Phase II v. Bank of Am., N.A., No. 3725, 2002 WL 1472337 (Pa. Ct. Com.
Pl. Jun. 21, 2002), the plaintiff was found to state a claim for a declaratory judgment that the defendant,
Bank of America, was in breach of the covenant of good faith and fair dealing, based on the Bank’s
attempt to enforce a provision in the parties’ Loan Agreement that required the plaintiff (as borrower) to
maintain certain expressly identified forms of insurance as well as “[s]uch other insurance as Bank may
require.” Id. at *1. If the plaintiff failed to secure all the insurance required by the Loan Agreement, the
17
agreement gave the Bank the right to procure the insurance and demand reimbursement from the
plaintiff. The plaintiff, pursuant to its obligations, maintained an “all-risk” insurance policy, but the renewal
of that policy, issued after the tragedy of September 11, 2001, expressly excluded coverage for terrorism.
The Bank advised the plaintiff that the proposed renewal of the policy was unacceptable and demanded
that the plaintiff obtain additional terrorism insurance coverage in an amount equal to the full replacement
value of the property covered by the loan.
The plaintiff maintained that the Loan Agreement did not give the Bank the right to demand
terrorism insurance coverage and asserted that the Bank’s actions constituted a breach of the covenant
of good faith and fair dealing implied in the covenant. In light of the plaintiff’s research that demonstrated
that the cost of terrorism insurance was difficult to procure and so prohibitively expensive as to be
commercially unreasonable, the court found that the plaintiff stated a claim for breach of the covenant of
good faith and fair dealing based on the Bank’s allegedly unreasonable exercise of its discretion under
the contract to demand that the plaintiff procure terrorism insurance. Id. at * 7; see id. at * 6 (citing Burke
v. Daughters of the Most Holy Redeemer, Inc., 26 A.2d 460, 461 (Pa. 1942), in support of the proposition
that the covenant of good faith may be breached when a party exercises discretion authorized in a
contract in an unreasonable way).
The facts of Philadelphia Plaza differ materially from those presented here only insofar as it is
apparent that Jones Express knew at the time the Lease was executed that the insurance policy it would
procure or had already procured to cover the fleet had a million-dollar deductible. Jones Express thus
incurred the obligation to reveal that information at the time of contract formation, despite the fact that
Jones Express’s obligation to maintain liability insurance for the protection of the public was not precisely
defined except by the federal regulations requiring a minimum of $750,000 in coverage. The Court finds
as a factual matter that Jones Express abused the discretion permitted by the Lease in obtaining
insurance with a million-dollar deductible and not disclosing that fact to Watson at the time the parties
executed the Lease. Further, in light of the regulatory requirements, it is clear that Watson had no reason
to anticipate that Jones Express would procure liability insurance with a million-dollar deductible. In short,
Jones Express’s procurement of a liability insurance policy with a million-dollar deductible constituted an
exercise of its “authority [under the Lease] in a way that intentionally subject[ed] [Ernest Watson] to a risk
18
beyond the normal business risks that the parties could have contemplated at the time of contract
formation,” Seidenberg, 791 A.2d at 1078, and “in a manner inconsistent with the reasonable
expectations of the parties.” LaSalle Bank Nat’l Ass’n, 588 F. Supp. 2d at 857.
Jones Express’s proffered evidence regarding alleged subsequent disclosures of the milliondollar deductible are simply not relevant to the Court’s analysis.
The pertinent question is what
information was disclosed to Mr. Watson at the time of the formation of the contract. Later disclosure of a
purported million-dollar deductible was not adequate to alter the terms of the contract, because there was
obviously no separate consideration exchanged to support the addition of that term.
Mr. Watson’s
alleged later knowledge of or purported acquiescence to that term did not have the effect of waiving his
rights under the contract, again because the term was not a bargained-for provision of the contract, and it
was a completely hypothetical representation until and unless Jones Express came forward and tried to
enforce it, as occurred here. Kenneth Lacey testified that he believed the deductible was something Ron
Williams should have discussed with Mr. Watson at the time he entered into the agreement, but Mr. Lacey
conceded that he was not present during those conversations and so has no first-hand knowledge of
what was discussed. Further, according to Mr. Lacey, Ron Williams is deceased. Ernest Watson testified
unequivocally and credibly that he was not informed about the million-dollar deductible at the time he
executed the Lease, and that he would not have entered into the agreement if he had been apprised of
that information.
C.
Remedies and Construction of the Lease in Light of the Non-Disclosure
In the present case, Mr. Watson has not stated a counterclaim for breach of contract or breach of
the covenant of good faith and fair dealing, nor has he sought a declaration to either effect. Instead, he
raises defenses to Jones Express’s contract claims based on the plaintiff’s breach of contract and
violation of the TIL regulations.
On the basis of these defenses, he asserts that Jones Express is
“estopped” from enforcing the indemnification provision in the Lease. The Court previously rejected this
argument; now, in possession of a more complete version of the facts, the Court finds it to have merit.
The decision to purchase an insurance policy with a million-dollar deductible coupled with the failure to
disclose that information in writing at the time of contracting meant, as set forth herein, that (1) Jones
Express was in violation of both the letter and the spirit of the TIL regulations; (2) Jones Express
19
breached an express contract term and breached the implied covenant of good faith and fair dealing; and
(3) Jones Express committed a material misrepresentation that induced Mr. Watson to enter into the
contract. As a result, Jones Express is estopped from enforcing the Lease indemnification provision
beyond the $500 cap expressed in Section 4 of the Lease, as a commercially reasonable deductible
amount that was within the contemplation of the four corners of the Lease as an amount Watson might be
required to pay out-of-pocket.
IV.
CONCLUSION
In its prior order granting the plaintiff’s motion for partial summary judgment, the Court rejected
Watson’s argument that Jones Express’s reliance on the indemnification agreement to support its claim
as an “unlawful and hidden insurance obligation” as bordering on the disingenuous. Having heard from
the parties, and been apprised further regarding the parties’ business practices and the million-dollar
deductible, the Court retreats from that position. The Court now agrees with Watson that “[t]o require an
owner-operator like Ernest Watson to indemnify Jones Express [in the amount of $1,000,000] here
constitutes an unlawful and hidden insurance obligation that violates the letter and the spirit of the TruthIn-Leasing regulations,” as well as the Lease itself, and that “[t]o allow Jones Express to pass liability for
this loss on to Watson defeats the very purpose of the federal regulations.” (ECF No. 32, at 8.)
For the reasons set forth herein, the Court will vacate that portion of its earlier Memorandum and
Opinion granting partial summary judgment to Jones Express on the issue of liability on the basis of the
indemnification agreement. The Court finds that Jones Express is entitled to judgment in its favor on the
issue of liability, but further finds that such liability is limited to the $500 set forth in Section 4 of the Lease.
An appropriate order will enter.
Thomas A. Wiseman, Jr.
Senior U.S. District Judge
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