Insurers Must Write Their Policies Carefully

All Risks Covers Everything Not Clearly and Unambiguously Excluded

All risk policies cover every possible risk of loss except those specifically and unambiguously excluded. It is difficult to write clear and unambiguous exclusions and when they are written a court can, and often does, find an ambiguity. As a result some insurers should prefer a named peril policy to avoid a court compelling payment of a claim the insurer did not intend to pay.

In Bologna v. Marnell, Slip Copy, United States District Court, E.D. Louisiana 2016 WL 3877975, CIVIL ACTION NO. 15-2329 (07/18/2016) Old Republic Insurance Company (“Old Republic”) moved the court for summary judgment.  Plaintiffs’, Francis O. Bologna and Advanced Technological Training, LLC (“ATT”) sought coverage.

FACTS

Bologna is the sole owner and member of ATT, the owner of a 1973 Piper Challenger, PA-28-180 (“the Aircraft”). ATT insured the Aircraft with Old Republic under an aviation insurance policy (“the Policy”) with an insured value of $80,000, effective from June 1, 2014 to June 1, 2015. In the “EXCLUSIONS” section of the Policy, Exclusion No. (2) states:This policy does not apply: ¶ … ¶  2. To any Insured while the aircraft is in flight ¶ (a) If piloted by other than the pilot or pilots designated in the Declarations; ¶ (b) If piloted by a pilot not properly certificated, qualified and rated under the current applicable Federal Aviation Regulations for the operation involved, whether or not said pilot is designated in the Declarations[.]” As stated in the “DECLARATIONS” section, “Pilots” is defined as follows: “When in flight, the aircraft will be piloted only by the following pilots, provided he/she has a valid pilot’s certificate and a valid medical certificate, each appropriate to the flight and the aircraft …”

On or about September 13, 2014, Bologna leased the Aircraft to Eamonn Marnell under an Aircraft Dry Lease Agreement. The next day, Marnell crashed the Aircraft in St. Petersburg, Florida.  At the time of the crash, Marnell had less than 300 total logged flying hours. Plaintiffs submitted proof of loss to Old Republic, but Old Republic did not pay the first party claim for physical damage to the Aircraft.

Defendant argues that the Policy is clear that all coverage is excluded under Exclusion No. (2) when the Aircraft is flown by an individual not defined as a pilot in the declarations section. Defendant further maintains that Marnell was not a pilot as defined in the declarations section of the Policy, as proven through Plaintiffs’ own complaint, as well as other discovery.

DISCUSSION

Interpretation of an insurance policy is a question of law. A federal court sitting in diversity applies local Louisiana rules of policy interpretation in this case.  Louisiana law is clear that the interpretation of insurance policy provisions is to be governed by the rules pertaining to the interpretation of other types of contracts.

The words of a contract must be given their generally prevailing meaning and when they are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. However, words susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract.

Interpreting the words of the Policy in light of their generally prevailing meanings, while remaining mindful of the Policy as a whole in assessing its phrases, the court found that the Policy does not unambiguously include or exclude physical damage coverage. In the Policy’s “DECLARATIONS” section, it is clear that an individual is not a pilot under the terms of the Policy so as to trigger coverage if he or she is neither Francis M. Bologna nor a pilot certified as having a minimum of 300 total logged flying hours.

Because Plaintiffs allege in their complaint that Marnell did not have 300 total logged hours, did not object to Defendants’ statement of the same, and did not dispute that Marnell crashed the Aircraft, it is clear that Marnell was operating the Aircraft but was not a pilot so as to trigger coverage of “any Insured.”

“All Risk” Insurance Policies

Principles relevant to the type of insurance coverage at issue favor a finding of coverage. Physical damage to the Aircraft is covered under the Policy’s Coverage F, which affords an “All Risk Basis” for coverage. Under Louisiana law courts have held that under an “all risk” policy all risks are covered unless clearly and specifically excluded. This is because a policy of insurance insuring against “all risks” creates a special type of coverage that extends to risks not usually covered under other insurance.

The Policy did not expressly exclude the loss from coverage for damage to the aircraft and is, at the very least, ambiguous so as to warrant construing it in favor of coverage. In the instant Policy, the “All Risk Basis” for Physical Damage Coverage under Coverage F states that it is “[t]o pay for any physical damage to or loss of the aircraft, including disappearance of the aircraft.” (emphasis added). Thus, all risks that result in physical damage or loss are covered unless clearly and specifically excluded or if they are the result of misconduct or fraud.

Exclusion No. (2) does not clearly and specifically state that the Policy is inapplicable to claims of damage or loss when the Aircraft is flown by a “non-pilot,” so as to expressly exclude the loss.

Though the Named Insured is defined with respect to Coverages F and G, this is further proof that Exclusion No. (2), and its reference only to “any Insured,” bars claims concerning persons – albeit natural or juridical –for liability coverage for bodily injury, property damage, or medical expenses.

First Party Physical Damage Coverage Disputes

While it is clear that coverage is barred as to claims concerning those defined under the Policy as Insureds (e.g., for bodily injury for pilot and passengers, property damage, and medical services), it is not clear that coverage is similarly excluded as to claims associated with the Aircraft (e.g., for physical damage or loss).

There is no question that Exclusion No. (2) bars liability coverage for bodily injury or property damage. However, the Policy does not expressly exclude coverage for physical damage to or loss of the aircraft.

Accordingly, the court concluded that the “language of the Policy seems to afford coverage for physical damage to or loss of the Aircraft under Coverage F as Exclusion No. (2) appears inapplicable. Although this Court is wary to conclusively state that this was the intent of the parties, it notes that Defendant had the burden of proving that the loss fell within Exclusion No. (2) and failed to do so.”

Exclusion No. (2), is at the very least ambiguous. The ambiguity must be construed against Defendant and in favor of coverage and therefore the insurer’s motion for summary judgment failed.

ZALMA OPINION

Writing insurance policies is difficult. This case revealed that although the insurer did not want to insure pilots with less than 300 hours experience it failed to make its policy clear enough for the USDC judge. Had the insurer wrote Exclusion No. 2, to read: “This policy does not apply to bodily injury, property damage, and damage to the aircraft if not operated by a person qualified as a pilot as defined.”

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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