Pilot Counsel

Aircraft insurance and the denial of coverage

December 1, 2006

John S. Yodice and his associates provide legal counsel to the Aircraft Owners and Pilots Association.

Understanding aircraft insurance is often a challenge for owners and pilots. You have frequently heard the good advice — "read your policy" — given by lawyers and insurance brokers/agents. It is advice that is difficult to follow and, understandably, largely ignored. That's why I like to tell of actual litigated cases that, as one would expect, involve the more problematic provisions of an aircraft insurance policy, the ones that probably deserve the most attention. And, as we will see, even a careful reading of the policy doesn't always predict whether a loss will be covered by the policy. Here are two similar recent cases, decided about two weeks apart by different courts, reaching seemingly opposite results that illustrate the point.

The issue in both cases was whether a failure to strictly meet the provisions of an aircraft insurance policy could be a basis for the insurance company to deny coverage, regardless of whether the violated provision had anything to do with the accident that caused the loss. In the majority of jurisdictions that have addressed the issue, an insurance company can deny coverage under the policy even if the loss had nothing to do with the provision that was violated. In other jurisdictions, an insurance company can deny coverage only if the violation had some causal connection with the loss.

In a case decided on April 26, 2006, a Texas intermediate appellate court held that a helicopter owner could recover under an aircraft insurance policy even though, at the time of the loss, the helicopter was being flown by a pilot who did not have the flight experience required by the policy. The Texas court held that in order to justify a denial of coverage, the insurance company must show some causal connection between the pilot's lack of experience and the accident resulting in the loss.

The policy in this case insured a Robinson R22 Beta II helicopter and had a typical declarations section stating who was permitted to pilot the helicopter. The section contained a "named" pilot warranty clause that said the helicopter was covered while it was being piloted by the named owner or two other named employee pilots. The declarations also contained an "open" pilot warranty clause that provided coverage if the aircraft was being flown by "any commercial pilot with rotary wing ratings properly certificated by the FAA having a minimum of 1,000 logged flying hours in rotary wing aircraft, including 100 hours of which are in Robinson R22 model aircraft." The policy had a companion exclusion that reaffirmed that "this policy does not apply...to any insured while the aircraft is in flight...if piloted by other than the pilot or pilots designated in the Declarations."

The helicopter crashed while herding cattle. At the time, it was being piloted by an employee of the aircraft owner. The employee had the required certificate and ratings, but he was not one of the named pilots, and he had logged only 685 of the required 1,000 hours of flying experience.

In reaching its conclusion favoring the helicopter owner, the Texas intermediate appellate court relied on a precedent established by the Texas Supreme Court in 1984. The Texas Supreme Court held in favor of an owner in a case involving the crash of an insured aircraft that was one month out of annual inspection. In the precedent case, the insurance policy stated, "There is no coverage under the policy if the aircraft...airworthiness certificate is not in full force and effect." An annual inspection is required in order to maintain an airworthiness certificate in effect. It was undisputed that the lack of a valid airworthiness certificate was not the cause of the crash.

In reading the insurance policy it was clear that it did not require a causal connection between the breach and the accident in order to justify a denial of coverage. Yet, the Texas Supreme Court held that "an insurer cannot avoid liability under an aviation liability policy unless [the breach] is either the sole or one of the several causes of the accident." How come? How come the policy was not interpreted literally? The "how come" is that the Supreme Court said that to deny coverage would be unconscionable and against public policy. The Supreme Court was not convinced by the insurance company's argument that the majority of jurisdictions do not require causation.

Only two weeks after the Texas pilot qualification case related above, the Supreme Court of Nevada held differently. The Nevada court held that "insurers need not establish a causal connection between an aviation policy exclusion and the loss in order to avoid liability so long as the exclusion is unambiguous, narrowly tailored, and essential to the risk undertaken by the insurer."

In the Nevada case, the owner had purchased his aircraft just a few months before it crashed into a residential back yard, injuring the homeowner. The homeowner sued the aircraft owner in Nevada state court. The insurance company that insured the aircraft denied coverage. It filed a lawsuit in federal court asking for a declaration that it had no obligation to pay damages to the injured homeowner or to the aircraft owner because of an insurance policy exclusion.

Like the 1984 Texas case, the insurance policy in this case excluded coverage when "the Airworthiness Certificate of the aircraft is not in full force and effect" or when "the aircraft has not been subjected to the appropriate airworthiness inspection(s) as required by current applicable Federal Aviation Regulations for the operation involved." The owner initialed a clause in the insurance application stating that there would be no coverage for his aircraft "unless a standard airworthiness certificate [was] in full force and effect."

Although the aircraft had a current inspection and airworthiness certificate when the insurance policy came into effect, the certificate had lapsed and was not "in full force and effect" at the time of the accident.

In this case, the federal court agreed with the insurance company. On appeal to a federal appellate court, the federal court asked the Nevada Supreme Court to authoritatively answer the question under Nevada law. The court did so, saying that it was joining the majority of jurisdictions, citing cases from Georgia, Louisiana, New Mexico, and Oklahoma. It held that Nevada law does not require a causal connection between the exclusion and the loss in order for the insurance company to avoid liability. The court, offering a public policy of its own, said, "Aviation safety is enhanced when policy exclusions relating to safety are upheld, regardless of causal connection."

So, here we have two real-life cases reaching seemingly opposite results, but nevertheless helping us better understand aircraft insurance in a fairly typical problem area. The advice to "read your policy" is still good advice, but in this instance it wouldn't get us there.

John S. Yodice