Pilot Counsel

Insurance and airworthiness

February 1, 2004

One of the worst disasters that can befall an aircraft owner is to be involved in a serious aircraft accident. No argument. Secondary to that disaster is to have the insurance company that insures the aircraft deny coverage for the accident. Both of these disasters are involved in this recent federal court case out of Nevada. The case tells an interesting story. But, more important to us as aircraft owners and pilots is the educational value of the case. It teaches us about an important exclusionary clause that we most likely have in our aircraft insurance policies, and it teaches us that an important principle of insurance law, one that applies to such clauses, is decided differently in different jurisdictions.

The story involves an aircraft owner who bought his single-engine Piper Cherokee 235 late in June 2001. When he bought it, the aircraft had a current annual inspection, but it was due to expire at the end of July. The owner, in routine fashion, bought aircraft insurance to cover himself and the aircraft.

Shortly after buying the Cherokee the owner noticed that the engine was running rough. On July 25, he took the Cherokee to a local fixed-base operator to have the engine inspected and repair the problem. At the time that the aircraft was left with the FBO, it still had a current annual inspection, but the annual was due to expire six days later. As by now you have guessed, a major point of contention between the parties was whether the FBO was told to perform an annual inspection. The owner believed that he had asked the FBO to perform the annual inspection because he told the FBO's mechanic to do "everything necessary to make the aircraft safe." The mechanic acknowledged discussing the annual inspection with the owner, but the mechanic denied that the owner instructed him to perform an annual inspection.

The pilot picked up the aircraft on August 8, after the repairs to the engine were complete, but at a time when the annual inspection had expired. The pilot believed that the annual inspection had been accomplished. He didn't pick up the logbooks at that time, which would have shown that the Cherokee was out of annual. Nothing unusual. The FBO expected the owner to take the logbooks when he paid for the repairs. At the time of the pick-up, the owner did not get the completed work order and an invoice for the work completed. They were mailed to the owner some weeks later. They made no mention of an annual inspection.

On September 1 the owner and his wife were returning from a flight, when on final approach to the airport, the aircraft rapidly lost power and crashed short of the runway. Both the owner and his wife were injured and the aircraft was destroyed. There was an investigation. The cause of the accident could not be determined. The owner speculated that shortly before crashing he either switched to the wrong fuel tank, presumably an empty one, or a problem developed in a fuel line or other part of the fuel system.

The aircraft crashed in the backyard of a home, damaging property and seriously injuring the homeowner. The individual sued the aircraft owner for compensation. The insurance company refused to provide insurance coverage or to defend the aircraft owner in the lawsuit, relying on an exclusionary clause in its policy. It excluded coverage "if the airworthiness certificate of the aircraft is not in full force and effect" or "if the aircraft has not been subjected to appropriate airworthiness inspection(s) as required under applicable Federal Aviation Regulations for the operations involved." Most general aviation aircraft insurance policies have similar provisions.

The insurance company filed a lawsuit asking the court to declare that it had no liability under the policy, citing the above policy provisions. The owner defended the lawsuit. One of the arguments that the owner made was that the policy provisions do not apply in this case because there must be a causal connection between the crash and the claimed violation of the policy in order for coverage to be excluded under the policy. The owner argued that there is no "causality." He argued that he either switched to the wrong fuel tank or there was a problem with a fuel line. Either way, an annual inspection would not have revealed the problem that ultimately caused the accident.

Here is where we find that the law on this issue varies from state to state. The majority of the states hold that there doesn't have to be a causal connection between the accident and the breach of an aviation policy provision. The exclusionary provision of the policy applies regardless of causality. Other states, a minority, hold that there must be a causal connection between the accident and the violation of the provision in order to exclude coverage.

In deciding this case, the federal court was required to apply the substantive law of the jurisdiction in which it sits — Nevada. But, this was an issue of first impression in Nevada. So, the federal court had to use its own best judgment in predicting how the Nevada Supreme Court would decide the issue. The federal court decided to follow the majority rule. It decided the case in favor of the insurance company. Applying the majority rule, the court held that a causal connection need not exist, and that the insurance company has no liability under the policy it issued to the aircraft owner.

Bad news for the owner. Important lessons for us.