AMBIGUITY CAN’T BE CREATED FROM WHOLE CLOTH
The Illinois Court of Appeal was asked to resolve a dispute between an insurer and its insured over the meaning of an exclusion in Sandra Knezovich, Personal Representative of the v. Hallmark Insurance Company, 2012 IL App 111677 (Ill.App. Dist.1 08/03/2012). Before the trial court was a declaratory judgment action where the parties filed cross-motions for summary judgment concerning whether Hallmark Insurance Company (Hallmark) owed a duty to defend the estate of a deceased student pilot who had rented an aircraft from Hallmark’s insured. The trial court found that Hallmark’s policy provisions concerning the exclusion of coverage for student and renter pilots were ambiguous and Hallmark, therefore, had a duty to defend and/or indemnify the estate of the student pilot in the underlying wrongful death lawsuits.
Hallmark appealed the trial court’s ruling.
This insurance coverage dispute arises out of a midair collision between two aircraft, a Cessna and a Cirrus, in Wyoming. Both pilots and the sole passenger were killed, and both planes were destroyed. Hallmark insured the Cessna, which was owned by Franklin Aviation, Inc., a fixed base operator, and, at the time of the collision, was being operated by Anthony Knezovich, a student pilot. Ralph Otto was operating the Cirrus, and C. Michael Downey was his passenger. A number of wrongful death lawsuits were filed as a result of the collision.
Plaintiff Sandra Knezovich, as the personal representative of the estate of Anthony Knezovich, filed a complaint for declaratory judgment seeking a finding that Hallmark had a duty to defend and indemnify the Knezovich estate in the underlying wrongful death lawsuits.
Hallmark moved for summary judgment, arguing there was no coverage available to Anthony Knezovich under the policy Hallmark had issued to Franklin Aviation because a provision of the policy excluded renter pilots from coverage. The affidavit of Raymond Verheydt, the owner of Franklin Aviation, was attached to the motion. Verheydt averred that Franklin Aviation operated a flight school and rented aircraft to its customers. It charged its customers for both the rental of aircraft and instruction services. Verheydt was a certified flight instructor and provided instruction to customers as requested. Anthony Knezovich held a student pilot certificate and was a customer of Franklin Aviation, renting aircraft and receiving flight training.
Verheydt informed Mr. Knezovich that he would be charged for the rental of the airplane on each flight based on an hourly rate. For those flights during which he flew with a flight instructor, he would be charged both an hourly rental fee for the use of the aircraft and the hourly rate for the instructor. When he was receiving ground instruction, he would only be charged for the instructional time. Furthermore, when he was flying without a flight instructor, he would be charged a rental fee for the use of the aircraft. Mr. Knezovich acknowledged that he understood and agreed with that arrangement.
Verheydt averred that after he authorized Mr. Knezovich to make his first solo flight on April 10, 2008, Mr. Knezovich was authorized to rent the aircraft to fly solo as long as Verheydt preapproved each solo flight. On August 10, 2008, Mr. Knezovich rented the aircraft to fly solo. During that flight, the aircraft was involved in a midair collision, resulting in fatal injuries to Mr. Knezovich and destruction of the aircraft.
Also attached to Hallmark’s motion for summary judgment was its aircraft insurance policy issued to Franklin Aviation. The named insured specified on the coverage identification page of the policy was “Franklin Aviation, Inc. and its individual shareholders and executive officers.” The definitions section of the policy, provided in pertinent part:
Student Pilot means any pilot holding a valid student pilot certificate issued by the FAA who is receiving flight instruction or operating the aircraft solo under the direct supervision and flight endorsement of a FAA Certified Flight Instructor.
Renter Pilot means any person or organization who is renting the aircraft from you.
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Who Is Not Protected
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Your bodily injury and property damage coverage does not protect:
b. Renter Pilots A renter pilot with respect to any occurrence arising out of the operation of the aircraft by a renter pilot.
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What Is Not Covered We do not cover any:
f. Student Pilots Property damage or bodily injury if the aircraft is being operated in flight by a Student Pilot with passengers unless a passenger is a pilot acting as pilot in command [and has a current and proper medical certificate, flight review, and pilot certificate with necessary ratings, each as required by the FAA].
Under Illinois law, if an insurer contends that a complaint does not allege a covered claim and the insurer neither defends the lawsuit under a reservation of rights nor seeks a declaratory judgment that there is no coverage, then the insurer may be estopped from raising policy defenses to coverage if the insurer is later found to have wrongfully denied coverage.
First, the record establishes that Hallmark sought a declaration of noncoverage by filing a declaratory judgment action in Wyoming, but that case was ultimately dismissed after the Knezovich estate filed the instant coverage action in Illinois. Furthermore, Hallmark is not raising a policy defense to coverage but, rather, is asserting that Mr. Knezovich is not even an insured under the policy.
When construing the language of an insurance policy, a court’s primary objective is to ascertain and give effect to the intentions of the parties as expressed by the words of the policy. Because the court must assume that every provision was intended to serve a purpose, an insurance policy is to be construed as a whole, giving effect to every provision and taking into account the type of insurance provided, the nature of the risks involved, and the overall purpose of the contract. If the words used in the policy are clear and unambiguous, they must be given their plain, ordinary, and popular meaning, and the policy will be applied as written, unless it contravenes public policy. Although policy terms that limit an insurer’s liability will be liberally construed in favor of coverage, this rule of construction only comes into play when the policy is ambiguous.
With respect to the nature of the risk insured against, Hallmark’s policy makes a critical distinction between who is protected under Franklin Aviation’s liability coverage and what types of uses and risks are covered under the policy. In addition to covering Franklin Aviation as the named insured, the policy also provides coverage to “someone we [i.e., Hallmark] protect.” Persons included within that someone we protect category are determined by looking under the provisions entitled “Who Is Protected” and “Who Is Not Protected.” The clear language of the policy protects any person riding in the aircraft with Franklin Aviation’s express permission and any employee of Franklin Aviation acting within the scope of his employment, but renter pilots are specifically excluded from protection under the policy. A renter pilot is simply any person or organization who rents the aircraft from Franklin Aviation. Furthermore, the policy defines instruction and rental as Franklin Aviation’s use of the aircraft for the instruction of, or rental to, others for their pleasure and business purposes.
Here, the affidavit of Mr. Verheydt established that Mr. Knezovich paid money to Franklin Aviation to rent its aircraft for a solo flight. The fact that Mr. Knezovich was operating the aircraft as a student pilot in no way negated the fact that he was renting the aircraft from Franklin Aviation while he was furthering his training as a pilot. Renter pilot and student pilot are not mutually exclusive designations. We conclude that Mr. Knezovich is specifically excluded from being an insured because he was a person who was renting the aircraft from Franklin Aviation.
A court must not strain to find an ambiguity where none exists and the trial court’s attempt to read some ambiguity into the provisions concerning policy coverage and the renter pilot exclusion is unavailing. The interpretation ignored the very clear provisions in part 3, paragraphs 2 and 3(b), of the policy, which establish that renter pilots are excluded from the persons insured and have no coverage under the policy. Because Mr. Knezovich, as a renter pilot, is not an insured under the terms of the policy, other provisions concerning the scope of Franklin Aviation’s coverage are not implicated and are not taken into consideration to determine the identity of who is insured under the terms of the policy. Finally, there was no need for Hallmark to expressly exclude coverage for student pilots because any student pilot renting a covered aircraft falls within the definition of renter pilots and does not constitute a protected person under the policy.
Because Mr. Knezovich was not a protected person under the policy, Hallmark does not owe a duty to defend the Knezovich estate.
Three dead people pull at the heart strings when there are no deep pockets in which the heirs may dip their hands to recover for their loss. The trial court, faced with such a massive loss of life, attempted to do “justice” rather than the law and found an ambiguity in the policy so that the heirs could draw from the insurer’s deep pockets rather than the estate of the pilots. The Court of Appeal had empathy for those who died and their heirs but applied the law and contract of insurance as written. The insurer did not want to insure the risks of loss caused by rental pilots, probably because there was no way to underwrite the risks of each rental pilot, so they excluded any losses caused by rental pilots and clearly stated that the insurer would not insure rental pilots.
The appellate court read the entire policy and found, therefore, that there was no coverage.
When faced with a no coverage case, unless absolutely sure, the insurer must either defend under a reservation of rights or file a declaratory judgment action to avoid finding it has no policy defenses if found to be wrong on the decision to defend.
© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.
He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.