U.S. District Court, Southern District of Florida

In St. Paul Fire & Marine Ins. v. Luke Ready Air, LLC, No. 9:11-cv-80121, 2012 WL 3126356 (S.D. Fla. Aug. 1, 2012), the U.S. District Court for the Southern District of Florida held that an aircraft insurance policy’s “conversion” exclusion barred coverage for the disappearance of the insured’s aircraft in Mexico, despite the insured’s attempts to evade the exclusion by differentiating between a “theft” and a “conversion.”

In October 2009, the insured, Luke Ready Air, LLC, engaged the services of a broker in order to sell one of its aircraft. After being approached by a man named Jorge Reynoso Prado, who expressed an interest in purchasing the aircraft on behalf of the municipal government of Guadalajara, Mexico, the broker submitted the purchase offer to Luke Ready. On March 23, 2010, Luke Ready and Reynoso executed an agreement whereby a purported Mexican corporation agreed to purchase the aircraft. On April 13, 2010, Reynoso presented Luke Ready’s broker with a “Licitation Order,” written in Spanish, as proof of authority to purchase the aircraft on behalf of the Mexican government. Thereafter, Luke Ready hired two pilots to fly the aircraft to the Guadalajara airport to close on the deal. Upon arrival, Reynoso insisted that certain repairs be made to the aircraft. Upon completion of the repairs, Luke Ready’s broker received a $100,000 payment to his escrow account. Apparently believing the remaining balance would assuredly be forthcoming, Luke Ready’s broker advised the pilots to leave the aircraft and return to the United States. Reynoso subsequently advised Luke Ready that the remaining balance had been wired. However, the wire transfer numbers provided by Reynoso were invalid and no additional payment was ever made. Upon investigation, Luke Ready learned that the aircraft had been removed from the Guadalajara airport without its permission. The location of the aircraft was unknown.

On September 15, 2010, Luke Ready submitted a proof of loss to St. Paul under its aircraft insurance policy in the amount of $1.1 million (the insured value of the aircraft), stating that the loss was caused by “theft and subsequent seizure, restraint and/or detention under the order of a government, public or local authority.” Luke Ready had apparently uncovered evidence that the aircraft was stolen from the Guadalajara airport and flown to Venezuela, where it was then confiscated by the Venezuelan government after drugs were found on the aircraft.

After its investigation, St. Paul filed suit seeking a declaratory judgment that it had no obligation to provide coverage on the grounds that Luke Ready’s loss fell under the “conversion” and “voluntary parting” exclusions in the policy. In its response, Luke Ready did not admit that Reynoso was behind the theft, only that the aircraft was stolen. Essentially, Luke Ready alleged that the transaction with Reynoso was never completed, and that the aircraft was removed from the Guadalajara airport without its permission. Thus, argued the insured, the loss was a covered “theft,” as that term was used in the aircraft policy’s definition of “total loss.” Alternatively, Luke Ready argued that the loss was covered by the War Risk Endorsement in the policy because the aircraft was seized by the Venezuelan government after being stolen.

The court noted “there is no dispute that there has been a direct physical loss of the Aircraft—the Aircraft is nowhere to be found.” Thus, the court turned to St. Paul to prove the loss was specifically excluded by the policy. As stated in the policy’s exclusion section, there was no coverage for “wrongful conversion of the covered Aircraft,” with “conversion” defined as “taking property of others, and assuming the rights of ownership and control in the property, either permanently or for an indefinite period of time, without permission of the owner.” Additionally, the policy excluded loss for “voluntary parting with any property by you or anyone else to whom you entrusted the property if induced to do so by any fraudulent scheme, device or false pretense.”

The court found that all the evidence pointed toward the fact that Reynoso conned Luke Ready into turning over the aircraft by disguising himself with authority he apparently did not have. Thus, the court noted that the voluntary parting exclusion would likely apply to preclude coverage. However, the court did not end its analysis there because “Luke Ready...in an apparent attempt to avoid the application of the voluntary parting exclusion, refuses to affirmatively acknowledge Reynoso’s role in the theft.” Luke Ready asserted that the aircraft was stolen by some unnamed person, subsequently taken to Venezuela without Luke Ready’s permission, and then confiscated by the Venezuelan government. The court found this argument unpersuasive, stating that even if the conduct did not come within the “voluntary parting” exclusion, the proposed conduct nonetheless fell within the unambiguous “conversion” exclusion, regardless of whether Reynoso was involved.

Analyzing Luke Ready’s attempt to distinguish a “theft” from the language in the “conversion” exclusion, the court held that even “theft of the Aircraft does not constitute a covered cause of loss.” Luke Ready had made the distinction in order to seize upon the word “theft” as it appeared in the policy’s definition of “total loss” within the policy’s Hull Physical Damage Coverage Conditions section. The court did not accept Luke Ready’s attempt to use the word “theft” as it appeared in the “total loss” definition in order to establish coverage: “While it is true that the policy’s definition of ‘total loss’ includes theft of the Aircraft, it is clear that whether or not the loss constitutes a ‘total loss,’ as opposed to a ‘partial loss,’ affects only the amount of payment as set forth in the coverages conditions ... and has nothing to do with the scope of coverage.” Thus, according to the court, the insured is entitled to payment only if the loss is a “covered ‘total loss’ or a covered ‘partial loss,’ which in this case simply means that the loss is not subject to any of the policy’s exclusions.” Despite Luke Ready’s attempt to avoid affirmatively admitting Reynoso had converted the aircraft, the aircraft had certainly been converted by someone, thus the loss fell within the conversion exclusion and the insurer owed no payment.

Finally, because of the absence of any limiting language in the conversion exclusion, the court held that there was no need to examine Luke Ready’s argument for coverage under the War Risk Endorsement. According to the court, “coverage terminated upon conversion of the Aircraft, and it cannot be revived even if the subsequent seizure by the Venezuelan government falls within the War Risk Endorsement.”