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September 1, 2005
By John S. Yodice
John S. Yodice and his associates serve as AOPA's legal counsel.
Understanding aviation insurance continues to be a bugaboo for aircraft owners and pilots. We often are told to "read the policy."
Certainly that is good advice, but policies are so difficult to follow that most people don't do it, not even lawyers. Even reading the policy doesn't always give us the understanding we are looking for. That is why, from time to time, we devote this column to law cases interpreting important typical insurance provisions. As we will see, even the courts' interpretations vary.
This case involves the "physical damage coverage" of an aircraft insurance policy. It is also called hull insurance, adopting the marine term. This coverage is intended to pay for the damage to the insured aircraft itself, as distinguished from liability to third persons and the other coverages of the policy. It is similar to the physical damage coverage written for automobiles. This physical damage coverage always excludes damage resulting from normal wear and tear. The intent of the provision as limited by the exclusion is to cover only "fortuitous and extraneous" events, for example, accidents, but not cover "certain and inevitable losses" such as obsolescence and depreciation. Losses that are not accidental or fortuitous are not covered because they don't have the risk feature that is basic to insurance.
While what constitutes normal wear and tear is in many instances obvious, in other instances, as in this case, it can be heatedly arguable.
A brand-new Piper Meridian aircraft was purchased in March 2001 and titled in the name of a corporation. A few months after the purchase, when the pilot-owner of the corporation was starting the aircraft's engine he saw flames coming out of both exhaust stacks. He immediately shut down the engine, hoping to put out the flames. When that didn't work, he started to evacuate the aircraft until a mechanic saw what was happening and ran to the aircraft. The mechanic told the pilot to stay in the aircraft and to restart the engine. The restart put out the flames.
During the several seconds that the fire burned, the engine was operated at temperatures beyond the range in which the engine was designed to operate. As a result, the compressor blade tips began to melt, splattering molten metal onto the inside of the engine casing. The engine was extensively damaged. The cost of repairing the engine was more than $220,000, plus almost $14,000 for removal, replacement, and transportation costs.
The aircraft was insured under a policy issued by a leading aviation underwriter. It provided "physical damage coverage" on an "all risks basis." The corporate owner of the aircraft filed a claim with the underwriter for the damage to the aircraft. The underwriter denied the claim on the grounds that the damage fell within the policy's exclusion for wear and tear. The corporate owner then sued the underwriter, seeking a legal declaration that the damage to the aircraft was not wear and tear and that the policy therefore covered his claim. The owner ultimately prevailed in the litigation, but this was by no means a foregone conclusion.
The lawsuit involved the interpretation of fairly typical policy language. First, the relevant part of the "Exclusions" section of the policy says that "this policy does not apply...to physical damage...caused by and confined to (a) wear and tear, (b) deterioration, or (c) mechanical or electrical breakdown or failure of equipment, components or accessories installed in the aircraft." Then later in the policy, specific to the engine, under the heading of "Limit of the Company's Liability," it says that "with respect to damage to the aircraft engines and auxiliary power units insured under this policy...damage caused by heat which results from the operation, attempted operation or shutdown of the engine shall be considered to be wear and tear." Nowhere in the policy is the term "wear and tear" defined.
The case went in favor of the aircraft owner because the court, applying California law that is more liberal in finding ambiguity, found this language to be ambiguous. Finding this ambiguity, the court was free to look outside the policy terms and to look at the intent of the parties. The court said, "Where, as here, a policy broadly purports to indemnify against accidental damage to an aircraft, excluding damage caused by wear and tear, and gives no indication that wear and tear carries a specialized meaning that encompasses the type of unusual incident that occurred here, we think that California law requires a construction consistent with the reasonable expectations of the insured." The court concluded that the parties intended the policy to cover damage resulting from accidental and fortuitous occurrences, and that the incident that caused this damage fell within the scope of coverage. As the court explained it, the conclusion seemed reasonable and inevitable.
But consider a similar case noted and distinguished by the court, decided under Florida law, which resulted in a different outcome. A pilot didn't secure an oil cap properly before flight. The loss of oil caused excessive heat that damaged the engine. The oil cap case involved a wear-and-tear provision (similar to the Meridian's, but not identical, and of a different underwriter) that excluded from the scope of coverage "damage caused by heat that results from the operation, attempted operation, or shutdown of the engine." In the oil cap case, the court found no ambiguity in the language. It therefore interpreted the language of the policy strictly, without looking outside the language to the intent or expectations of the parties. The court found the language clear. It ruled for the insurance company. There is no coverage for the damage to the engine caused by heat in the operation of the engine.
What is the difference in the two cases that accounts for the different results? The Meridian court attempted to distinguish the oil cap case in part because the oil cap case did not turn on an interpretation of the term "wear and tear" but focused more on the meaning of the phrase "caused by." This, however, may be a distinction without a difference.
The more critical difference seems to be that in the Meridian case the court found the language of the policy ambiguous, resolving the ambiguity against the underwriter that wrote the wording of the policy and in favor of the intent and expectation of the insured. In the oil cap case the court found no ambiguity and decided the case on a strict interpretation of the policy language itself. Notice that there is a subtle difference in the wording of the exclusions. In the Meridian case, "damage caused by heat which results from the operation, attempted operation or shutdown of the engine shall be considered wear and tear." The reference to "wear and tear," not being defined, merely restates the ambiguity created by the undefined term. By contrast, what is excluded in the oil cap case is "damage caused by heat that results from the operation, attempted operation, or shutdown of the engine." There is no ambiguity. The only proper consideration in the interpretation of this exclusion, according to the court, is whether the damage was caused by heat. If it was, and it was, the claim was properly denied. As I say, "subtle."
Are these subtle differences something that the aircraft owners should have been able to understand in advance by "reading the policy"? I doubt it. As these cases foreshadow, fully understanding our insurance coverage will continue to bedevil aircraft owners and pilots. And so, I will continue to highlight important cases in an effort to try to better understand this bedeviling subject.
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