U.S. Court of Appeals, First Circuit

In Oxford Aviation, Inc. v. Global Aerospace, Inc., 680 F.3d 85 (1st Cir. May 18, 2012), the First Circuit Court of Appeals vacated a Maine federal court’s summary judgment ruling in favor of Global Aerospace Inc. and concluded that that Global had a duty to defend its insured, Oxford Aviation Inc., in a lawsuit by its customer, Airlarr, for alleged negligent repairs.

Airlarr sued Oxford, a Maine-based aircraft repair company, for breach of contract and warranties, violation of the Maine Unfair Trade Practices Act and deceptive trade practices law, unjust enrichment, promissory estoppel, fraud, and negligent misrepresentation. Oxford had performed approximately $70,000 worth of repairs and installations on Airlarr’s aircraft. Allegedly, after Airlarr picked up the plane, one of the plane’s side windows cracked during the flight back to Pennsylvania. Airlarr alleged that it sustained damages caused by Oxford’s faulty repairs, including the cracked window, and several other defects in Oxford’s work such as uncomfortable seats, leaking fuel injectors, a cracked turbocharger, and improperly installed carpet.

Global denied coverage and any duty to defend Oxford in the Airlarr suit. Global alleged that it had no duty to defend based the policy’s “business risk” exclusions, including an exclusion for property damage for property in the care, custody or control of the insured. Oxford thereafter filed a declaratory judgment action against Global in Maine state court, which Global removed to federal court. Granting summary judgment in favor of Global, the district court held – without addressing whether the claims fell within the policy’s insuring agreements – that the policy’s exclusions barred coverage for damage relating to Oxford’s repairs and work. Oxford appealed.

The First Circuit noted the parameters of the duty to defend under Maine law, which – common to the majority of jurisdictions – is broader than the duty to indemnify. An insurer must defend its insured even if only one of the claims in the underlying action creates a possibility of coverage. Then, although the district court bypassed consideration of whether the claims fell within the coverage of the policy and instead based its dismissal on the exclusions, the court found that at least a portion of the claim fell within Coverage A for “property damage … resulting from your aviation operations” and caused by an “occurrence.” While recognizing that some courts hold that the terms “property damage,” “accident” or “occurrence” do not include faulty workmanship, the court concluded: “Perhaps common parlance might not describe an uncomfortable seat (one of the problems alleged by Airlarr) as an ‘accident,’ but a sudden unintended crack in a plane window fits comfortably within that term.” The court observed that, in contrast to courts holding that “occurrence” does not encompass faulty workmanship, Maine “construes coverage terms like ‘accident’ and ‘occurrence’ generously.” Thus, the court concluded that a duty to defend would exist unless an exclusion barred coverage.

Turning to the policy’s exclusions, the court focused its attention on the cracked window, which occurred after the aircraft had been redelivered to Airlarr and therefore was outside the scope of the policy’s exclusion for damage to property in the care, custody or control of the insured. The court then found that the remaining business risk exclusions also did not apply. The crack occurring in-flight was outside the policy’s “your work” exclusion, which expressly did not apply to damages occurring away from the insured’s premises. Because the complaint did not allege that the window was a product installed by Oxford, the policy’s “your product” exclusion did not negate the duty to defend. Similarly, the “products-completed” exclusion did not apply because Oxford did not furnish or install the window that cracked. At most, Oxford applied a seal or film to the window, but the court noted that no claim was being made for damage to the seal or film. Finally, the court determined that the “impaired property” exclusion would only apply to loss of use of the window and did not negate the duty to defend.

The court noted that the majority of the claims asserted by Airlarr arose from Oxford’s faulty workmanship, but “at least one scenario relating to the cracked window, occurring in flight and away from Oxford’s facilities, does fall within coverage and could plausibly avoid all cited exclusions.” However, while Global had a duty to defend the entire claim, any indemnification would be limited to the cracked window.