Filed:    March 20, 1996


                    UNITED STATES COURT OF APPEALS

                        FOR THE FOURTH CIRCUIT



                           Nos. 95-1098(L)
                            (CA-94-563-2)



USAA,

                                             Defendant - Appellant,

           versus

Royal Insurance Company of America,

                                                 Defendant - Appellee.




                              O R D E R


     The Court amends its opinion filed February 22, 1996, as

follows:
     On page 3, section 1, line 1 -- The United States Attorney's

name is corrected to read " Helen F. Fahey."

                                       For the Court - By Direction



                                          /s/ Bert M. Montague

                                                      Clerk
PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,
Plaintiff,

USAA,
Defendant-Appellant,

v.

ROYAL INSURANCE COMPANY OF
AMERICA,
Defendant-Appellee,              No. 95-1098

and

TOLLIVER GENE SWALLOW; THE
HERTZ CORPORATION; RENT-LEASE,
INCORPORATED,
Defendants.

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

v.

ROYAL INSURANCE COMPANY OF
AMERICA,
Defendant-Appellant,             No. 95-1128

and

TOLLIVER GENE SWALLOW; USAA;
THE HERTZ CORPORATION; RENT-
LEASE, INCORPORATED,
Defendants.
UNITED STATES OF AMERICA,
Plaintiff-Appellant,

v.
                                                              No. 95-1296
TOLLIVER GENE SWALLOW; USAA;
THE HERTZ CORPORATION; RENT-
LEASE, INCORPORATED; ROYAL
INSURANCE COMPANY OF AMERICA,
Defendants-Appellees.

Appeals from the United States District Court
for the Eastern District of Virginia, at Norfolk.
William T. Prince, Magistrate Judge.
(CA-94-563-2)

Argued: December 7, 1995

Decided: February 22, 1996

Before WILKINSON, Chief Judge, and RUSSELL and
NIEMEYER, Circuit Judges.

_________________________________________________________________

Reversed by published opinion. Chief Judge Wilkinson wrote the
majority opinion, in which Judge Russell joined. Judge Niemeyer
wrote a dissenting opinion.

_________________________________________________________________

COUNSEL

ARGUED: Terry Hunter Davis, Jr., HARRIS, FEARS, DAVIS,
LYNCH & MCDANIEL, Norfolk, Virginia; James A. Gorry, III,
TAYLOR & WALKER, Norfolk, Virginia, for Appellants. Susan
Marie Sleater, Civil Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellees. ON BRIEF: Frank

                    2
W. Hunger, Assistant Attorney General, Helen F. Fahey, United
States Attorney, Marleigh Dover, Civil Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee
United States.

_________________________________________________________________

OPINION

WILKINSON, Chief Judge:

Navy Captain Tolliver Gene Swallow, while acting pursuant to
military orders, rented a vehicle from the Hertz Corporation and was
subsequently involved in an automobile accident. The district court
held that the government-Hertz contract, which provides $100,000 of
insurance for government employees who rent from Hertz, did not
cover Captain Swallow. We disagree. The plain language of the
government-Hertz contract obligates Hertz to maintain $100,000 of
insurance for a government employee renting a Hertz vehicle for gov-
ernment business.

I.

The United States government entered into a rental vehicle contract
with the Hertz Corporation. The contract provides for certain rates
and benefits to government employees who rent Hertz vehicles while
on official business, including $100,000 of insurance in the event of
an accident. Captain Swallow made a reservation with Hertz to rent
a car in Norfolk, Virginia. As a Captain in the Navy reserves, Swal-
low was to report for two weeks of training at the Atlantic Fleet Com-
bat Training Center in Dam Neck at Virginia Beach, Virginia. His
orders specifically authorized "use of rental vehicle."

On June 4, 1988, Captain Swallow arrived in Norfolk and pro-
ceeded to the Hertz rental counter to pick up his vehicle. He told the
counter attendant that he would be working at the Dam Neck military
base for two weeks. Captain Swallow also mentioned his affiliations
with the American Automobile Association and U.S. Air and
expressed a desire that he receive the "best rate." Sometime during
this conversation, the attendant asked for verification of Captain

                    3
Swallow's government affiliation, and he accordingly produced his
military identification.

Captain Swallow eventually signed a Hertz rental agreement at the
"affordable weekly" or "AFW" rate of $219.59 a week. While Captain
Swallow's rental agreement notes his military affiliation, specifically
listing the Dam Neck bachelor officer's quarters as his Virginia con-
tact, his rate of $219.59 appears to be higher than the government's
"affordable weekly" rate ($199.80) and lower than the government's
ordinary rate ($222). Hertz Counter Directory, Supp. App. at 9a.
Given this discrepancy, it is not entirely clear whether Captain Swal-
low was simply overcharged for the government "AFW" rate or
whether he received some other "AFW" rate.

A few days into his Hertz rental contract, Captain Swallow was
forced to vacate his room at the Dam Neck officer's quarters because
the Navy would be using it for a NATO conference. As a result, Cap-
tain Swallow needed to locate off-base accommodations to fulfill his
military obligations. On June 7, while Captain Swallow was using his
Hertz vehicle to search for housing, he struck a motorcycle, killing its
driver. A suit was subsequently brought by the driver's family. See
Jeremiah John Duffy, Etc, v. Tolliver Gene Swallow, et al., E.D. Va.
No. Civ-89-540-N. Pursuant to this claim, the United States certified
that Captain Swallow was acting within the scope of his employment,
and the district court entered a judgment in the amount of $140,000.

The United States paid the judgment and proceeded with an action
for reimbursement on June 3, 1994. The central question in this action
was whether Captain Swallow was covered by the $100,000 policy
provided by the government-Hertz contract. If Captain Swallow was
covered by this policy, Hertz would be obligated to pay $100,000 and
Captain Swallow's personal insurance company, USAA, would pay
the remaining $40,000. In the event of non-coverage, Hertz would be
liable for only $25,000 (the minimal insurance provided to all rent-
ers), Captain Swallow's insurer, USAA, would be liable for the full
amount of Captain Swallow's personal policy, $100,000, and the gov-
ernment would thus have to absorb the remaining $15,000. Hertz'
Norfolk licensee, Rent-Lease, Inc., had obtained Hertz' insurance
coverage from the Royal Insurance Company of America.

                    4
The reimbursement case was eventually tried before a magistrate
judge. The magistrate judge agreed that Captain Swallow was acting
pursuant to official government business. The magistrate judge deter-
mined, however, that Captain Swallow was not covered by the
$100,000 government-Hertz contract insurance because Captain
Swallow "did not make it clear to the Hertz representative that he was
taking advantage of this car rental agreement that the United States
Government had worked out." The result was that Hertz (through its
agent's insurer, Royal) had to pay $25,000, USAA had to meet its full
exposure of $100,000, and the government was ultimately left with a
$15,000 difference between what it had paid to the motorcycle driv-
er's family and what it had recovered from the insurance companies.
This appeal ensued.

II.

A.

The issue here is whether federal employees who rent vehicles
from Hertz while travelling on official business are entitled to
$100,000 of insurance coverage under the terms of the government's
contract with Hertz. "When interpreting contracts, courts are com-
pelled to give effect to the intent of the parties, which is measured
first and foremost by the language of the contract itself." Valtrol, Inc.
v. General Connectors Corp., 

, 152 (4th Cir. 1989) (cita-
tions omitted). The relevant provision of the government-Hertz con-
tract states:

        The Hertz Corporation shall maintain in force, at its sole
        cost or provide as a duly qualified self-insurer, insurance
        coverage for the United States Government, its employees,
        and any additional operators authorized under the terms of
        the Rental Agreement against liability for bodily injury,
        including death and property damage arising from the use of
        the vehicle as permitted by this Agreement with limits of at
        least $100,000 for each person for each accident or event
        ....

This contract unambiguously obligates Hertz to provide $100,000 of
insurance to a government employee who rents from Hertz on govern-

                    5
ment business. The purpose of the contract is just as evident: to have
insurers indemnify the United States for torts committed by its
employees in rented cars.

Here, there is no doubt that Hertz rented a vehicle to a government
employee on official business. Captain Swallow left his home in Cali-
fornia and flew to Norfolk, Virginia, under orders from the Navy to
report to the Atlantic Fleet Combat Training Center in Dam Neck for
two weeks of training. His orders specifically authorized "travel at
own expense subject to reimbursement" and "use of rental vehicle in
execution of these orders." And on the night of the accident, Captain
Swallow was in the process of securing off-base housing so that he
could continue his training.1

So too should the Hertz attendant have recognized that Captain
Swallow was renting a car pursuant to government business. Upon
arrival at the counter in Norfolk, Captain Swallow presented his
United States military identification to the attendant and explained
that he would be at the Dam Neck military base for two weeks. The
counter clerk even listed the "Dam Neck BOQ" (bachelor officer's
quarters) on the rental agreement.2

Royal contends that none of this matters; in its view its coverage
obligations only arise when the traveller receives a particular govern-
ment rate, regardless of whether he is a government employee travel-
ling on official business. The magistrate judge apparently agreed with
this interpretation of the contract. After noting Swallow's testimony
that he told the clerk he would be in military school for two weeks
with the Navy, the magistrate judge nonetheless held that Swallow
_________________________________________________________________

1 Royal Insurance argues that Captain Swallow was not travelling
within the scope of duty on the night of the accident. We reject this argu-
ment. The magistrate judge found that "[t]he government instructed
[Swallow] to vacate the housing that [the government] had made avail-
able to him and instructed him to find other housing and the accident
occurred while he was actively seeking the other housing." This finding
is supported by the record.

2 We thus need not ask in this case whether the contract places an obli-
gation on the traveller to disclose his government status or on the com-
pany to inquire as to it.

                    6
was not covered under the contract because he had wanted "to rent a
car at the best rate."

Nothing in the contract, however, forbids a government employee
from seeking to rent at the most economical rate. Moreover, nothing
in the language of the contract indicates that Royal's coverage obliga-
tions arise only when a government employee receives a government
rate. "Implied covenants are disfavored, and must clearly arise from
the language used, or be indispensable to effectuate the intent of the
parties." 

. Nowhere does the contractual lan-
guage make the $100,000 insurance coverage contingent upon accep-
tance of a particular rate; nor is Royal's interpretation essential to the
existence of a rental contract between the government and Hertz.

The contract, in fact, does attach a condition based on acceptance
of a particular rate to a different rental benefit, the Loss Damage
Waiver ("LDW"). LDW protects a renter from liability for the rented
vehicle's loss or damage: "Government travelers on official business
and paying the rates as defined in paragraph 1 will not be subject to
any fee for Loss Damage Waiver" (emphasis added). This clause
plainly does not apply to liability insurance as"LDW IS NOT
INSURANCE." Hertz Rental Agreement, Supp. App. at 6a. If the par-
ties had intended for a similar rate-based condition to attach to the
$100,000 liability insurance provision, surely they would have used
such language in describing the terms of that coverage.

B.

Finally, Royal's interpretation would spawn additional litigation, as
parties involved in accidents would dispute obscure rate codes and
line items on rental agreements in an attempt to prove that a govern-
ment employee either did or did not receive a particular rate. Hertz
government rates alone include five classes of vehicles, three adjust-
ments based on the length of time that a vehicle is rented, and dis-
counts for "Affordable Daily rates," "Affordable Weekly rates,"
"Affordable Weekend rates," and "Economy rates." Hertz Counter
Directory, Supp. App. at 9a. Similarly complicated rate structures
appear to exist for various other groups as well as the public in gen-
eral. In practice, it may be difficult to determine what rate was
received by a particular renter.

                     7
Such was the case here. Captain Swallow's rental agreement noted
merely that he had received an "AFW" or "affordable weekly rate."
It appears, however, that Hertz offers numerous "AFW" rates. As a
result, we heard extensive argument about whether Captain Swal-
low's rate was an "AFW" rate available to the general public, a gov-
ernment "AFW" rate, or perhaps, some other "AFW" rate. To this
day, after extensive litigation, it is still not entirely clear what cate-
gory of rate Captain Swallow received. The only way to avoid these
messy inquiries is to interpret the contract's insurance as applying to
any government employee who rents a Hertz vehicle on official busi-
ness, regardless of the rate that he receives. The contract makes clear
that this is the coverage for which the government paid and bargained,
and this is what it shall receive.

III.

For the foregoing reasons, we hold that the government-Hertz con-
tract obligates Hertz to provide $100,000 of insurance coverage for
federal employees who rent Hertz vehicles on official business, that
Royal, as Hertz' insurer in this case, owes the government $100,000,
and finally, that Captain Swallow's insurer, USAA, owes the residual
$40,000. The judgment of the district court is accordingly reversed.

REVERSED

NIEMEYER, Circuit Judge, dissenting:

Under an automobile rental contract between the United States
government and The Hertz Corporation, Hertz agreed to rent automo-
biles to the government and its employees while on official business
for a specified rental rate and to provide the person renting the auto-
mobile with $100,000 insurance coverage. In this case, a government
employee rented an automobile from Hertz, but not under the Hertz-
government contract rate. The employee asked for, and was given a
lower weekly rate Hertz established for the public, which included
only $25,000 insurance coverage. Nevertheless, the majority holds
that Hertz must provide $100,000 of insurance coverage under the
Hertz-government contract because the employee was on government
business. In doing so, the majority ignores express terms in the rental
agreement between Hertz and the government employee and imposes

                     8
unassumed risks on Hertz. Respectfully, I cannot agree with such a
holding.

The facts, established by findings of the magistrate judge, are not
challenged on appeal. Counsel confirmed as much at oral argument.
Tolliver Gene Swallow, a captain in the Naval Reserve, resided in
California and worked in civilian life as a pilot for USAir. He
received orders from the Navy to serve his two-week reserve officer
summer training at Dam Neck, Virginia, in June 1988. His orders
authorized him to obtain housing and a rental car for the two-week
period.

After receiving his orders, Captain Swallow called Hertz and
reserved an automobile for pick up at the Norfolk International Air-
port. When he arrived at the Hertz counter in Norfolk, Captain Swal-
low requested the "best available" rental rate, discussing discounts
through AAA and USAir. He indicated that Hertz had an "outstanding
program for USAir employees," and this is why he rented from Hertz.
During his conversation with the Hertz sales representative, Captain
Swallow mentioned that he was in Norfolk with the Navy to attend
military school. The Hertz representative rented Swallow a full-size
automobile under the "AFW" ("Affordable Weekly") rate of $219.59
per week, purportedly the lowest rate available to Swallow.

While Hertz had an agreement with the government under which
it agreed to rent the same full-size automobile to government employ-
ees for $222 per week, Captain Swallow did not ask for, nor did the
Hertz representative give him, the government rate. The magistrate
judge explicitly found: "Swallow did not identify himself as traveling
under the government orders, that is, the military orders; nor did he
seek the government rate." The magistrate judge also found that the
Hertz sales representative did not rent Swallow the vehicle under the
government rate. Thus, he concluded: "I am finding that in this case
there was no rental agreement reached between Mr. Swallow and
[Hertz] that was entered into under this [Hertz-government contract]."

The record establishes not only that the "AFW" and government
rates were different, but also that each rate included different benefits.
The AFW rate, which was the lower rate, only included, for example,
$25,000 of insurance coverage. On the other hand, the government

                     9
rate included $100,000 of insurance coverage. Moreover, the two
rates had different daily charges if the vehicle was returned before the
expiration of a week. After the accident in this case, when Swallow
returned the damaged vehicle before having used it for an entire
week, he was charged a daily rate of $50, which is the amount charge-
able under the "AFW" rate. The government daily rate would have
been $37.

Even though Swallow did not rent under the government rate, the
majority would have Hertz and its insurer provide Swallow with the
benefits of the government rate. The logic implied by the holding is
that when any government employee rents a vehicle, even if he says
"I do not want to rent under the government contract," Hertz must
insist on charging the employee the government rate in order to
recoup the cost of providing the benefits included in that rate.* This
notion violates fundamental principles of contract law by dishonoring
the will of the parties to the actual rental agreement. I submit that it
also abandons common sense.

The majority relies on the contract provision which obligates Hertz
unconditionally to provide $100,000 of insurance to the government
and its employees who rent from Hertz. It concludes in essence that
this agreement is an insurance contract, providing insurance to all
government employees using Hertz rental vehicles, regardless of the
circumstances of each rental agreement. This reading, I believe, fails
to acknowledge all of the terms of the contract.

The terms of the Hertz-government contract are set forth in a five-
page, single-spaced document that includes rates, benefits, and condi-
tions. It begins, "The Hertz Corporation agrees to the terms and con-
_________________________________________________________________

* Hertz obtained its insurance from Royal Insurance Company, and
Hertz agreed to pay premiums based on "actual exposures." The insur-
ance contract provided that the premium "shall be upon a rate applied to
each Rental." Even though such premiums would have to be based on
data about persons renting under the Hertz-government contract, the
majority renders that calculation impossible when it concludes that Hertz
agreed to provide such insurance "to any government employee who
rents a Hertz vehicle on official business, regardless of the rate he
receives." (Emphasis added).

                    10
ditions set forth in this agreement and offers the following vehicle
rental rates." That language clearly connects benefits with rates. In
addition, the contract specifies that "rates do not include . . . Personal
Accident Insurance and Personal Effects Coverage." But it does state
that Hertz will provide $100,000 liability insurance in connection
with the "use of the vehicle as permitted by this Agreement." Finally,
the contract provides, "It is understood that the Government and its
employees are not obligated to purchase any services offered by The
Hertz Corporation under the terms of this agreement." And indeed, as
the magistrate judge found, Captain Swallow did not purchase the
benefits and conditions provided under that contract.

The common sense reading of the Hertz-government contract leads
to the conclusion that for the quoted rates, Hertz agreed to provide the
stated benefits, including $100,000 of insurance coverage. If a gov-
ernment employee refuses to pay the rate, but instead invokes some
other lower rate, it follows that the employee does not get the benefits
agreed to between the government and Hertz.

I would thus affirm the judgment of the district court, and accord-
ingly I dissent.

                     11