Pilot Counsel

The aircraft insurance application

April 1, 2006

John S. Yodice and his associates act as legal counsel for the Aircraft Owners and Pilots Association.

In past columns I have tried to help pilots and aircraft owners deal with the complexity of their aircraft insurance. I have done so mainly by looking at actual court cases interpreting insurance policies. The reality is that most of us don't take the trouble to read our policies (good advice, but difficult to follow), and even reading the policies, as we have seen in past columns, doesn't often help us understand the typical "denial of coverage" problems. The court cases frequently do.

Here is a case that illustrates that the application for insurance could be a basis for denial of insurance coverage. In this particular case, the decision of the court was mostly favorable for the parties trying to uphold coverage, but only because of unusual circumstances. The favorable result shouldn't undercut the important message of the case to us — insurance applications could be troublesome.

Here is what happened. There was a crash in Minnesota of a 1977 Beechcraft Baron 58P owned by an LLC (a legal entity known as a "limited liability company"). The pilot was the person who had arranged for the insurance on the aircraft. The crash killed the pilot and the front-seat passenger, and severely injured the two backseat passengers.

At the time of the accident the insurance policy covering the Baron had been arranged through an insurance agent. The agent, on behalf of the LLC and the pilot, sent out a quote request to seven insurance companies. The quote request indicated that the pilot, who was named as a pilot of the aircraft on the request, had not suffered any "losses/violations" within the past five years. In response to the request, one of the insurance companies faxed back a quote. The quote was accepted and the coverage was bound. A few days later the pilot filled out and signed a formal application for the insurance. In that application, the pilot represented that the LLC had not had any aircraft or aviation losses or claims during the previous three years and that none of the pilots listed in the application, including the pilot completing the application, had been involved in any accident or incident.

In truth, the pilot had been involved in an earlier accident. He had damaged a rented Mooney earlier that summer. Because of heavy crosswinds on landing, the wing of the Mooney struck the ground. Although no one was injured, the resulting damage to the aircraft was such that it was a total loss.

Now to the litigation. Based on these facts, the insurance company sued in court seeking a legal declaration that the policy was void and afforded no coverage because the pilot made material misrepresentations when applying for the insurance. The suit was based on the "voidance for fraud" provision in the policy that said:

"This policy shall be void if the Named Insured has concealed or misrepresented any material fact or circumstance concerning this insurance or subject thereof or in case of any fraud, attempted fraud or false swearing by the Named Insured touching any matter relating to this insurance or the subject thereof, whether before or after the loss."

The insurance company was so sure of its position that it filed a motion for summary judgment, essentially arguing that there is no dispute about any material facts, and that the court should decide the case without the necessity of a trial. Ordinarily, that should have been the end of the case, except for some unusual circumstances. I'll explain those circumstances because it makes for an interesting story involving insurance law, court procedure, and more about how the policy was written. At this point we must not lose sight of the message of the case for us that is already apparent — the representations on an insurance application could be the basis for denial of insurance coverage after the loss.

If you don't want to get involved in the mind-twisting legal situation that follows, you can stop here.

What was unusual in this case is that the insurer for both aircraft — the Baron and the Mooney — was the same insurance company. A wholly owned subsidiary of the insurance company was very much involved. The subsidiary was the managing general agent for the insurance company, and it issued the insurance on the Baron. It was also the same company that acted as the insurance adjuster for the Mooney loss. The managing general agent/insurance adjuster knew who was piloting the Mooney aircraft because of the investigation and claims adjustment of the Mooney accident — the same pilot who later applied for insurance on the Baron. In fact, in a totally separate transaction, when the rental company that rented the Mooney to the pilot applied for a renewal of its policy through the managing general agent for the insurance company, the rental company's premiums were increased by 30 percent based on the Mooney accident. The insurance company did not dispute that, as the principal of the managing general agent/insurance adjuster, it is charged with its knowledge.

How does all of this play into the insurance company's motion for summary judgment? The pilot's estate and the representatives of the persons injured in the accident, all of whom had an interest in having the policy apply, argued that the insurance company cannot legally rescind the policy. Based on Minnesota law, they argued that not only must the insurance company prove that the misrepresentation was made with intent to deceive and defraud, but it must also prove that the insurance company reasonably relied on the material misrepresentation when making its decision to issue the policy. They argued that the misrepresentation was not material because the insurance company knew the facts when it issued the policy. The other parties, representing the "innocent third-party tort victims," argued, in addition, that a Minnesota statute precludes an insurance company from rescinding a policy after an accident with respect to any individual injured in an aviation accident.

The court, in considering these arguments, denied the insurance company's motion for summary judgment. The court said that a reasonable fact finder (a judge or jury in a trial) could conclude that the insurance company knew that the pilot had been involved in a prior aviation accident and that the representations in his application to the contrary were false. The court said that a reasonable fact finder could conclude that the insurance company did not rely on the pilot's alleged misrepresentations and that the misrepresentations therefore were not material. Essentially, the court said that a trial is needed to make findings about these matters.

I don't know if the case will, or has, actually gone to trial. But don't let the inability to report the final result of this case obscure the important message — any representations on an insurance application could be the basis for denial of insurance coverage after the loss.

John S. Yodice