According to a recent decision by a federal appellate court interpreting an Aviation General Liability policy, a relatively minor crack in the side window of an aircraft can be far more than it is cracked up to be.
The United States Circuit Court of Appeals- for the First Circuit, in Oxford Aviation, Inc. v. Global Aerospace, Inc., 680 F.3d 85 (1st Cir. 2012)), recently examined an insurer’s duty under such a policy to provide a defense and indemnification related to allegations of damage due to faulty workmanship by an aircraft repair and refurbishing company. The appellate court, in vacating the decision of the district court on summary judgment, held that the insurer was obligated to defend its insured against allegations of defects caused by apparent faulty workmanship, including a cracked side window discovered after repair work had been completed.
The insured, Oxford Aviation, Inc., is a company that repairs and refurbishes aircraft at its facility in Oxford, Maine. One of Oxford’s customers, Airlarr, Inc., brought an action against Oxford for breach of contract and related claims, alleging that it had discovered several defects in repairs and installations performed by Oxford on its plane. Airlarr alleged that following the completion of Oxford’s work, it discovered many defects and other substandard work, including uncomfortable seats, leaking fuel injectors, a cracked turbocharger, and an improperly installed carpet. Airlarr also alleged that one of the plane’s side windows cracked while en route from Maine to Pennsylvania.
Oxford tendered a request for defense and indemnity of Airlarr’s claims to its GL insurer. The insurer denied the claim on various grounds including that: (a) Airlarr’s complaint did not allege that Oxford caused “property damage” to anything other than Oxford’s work product; (b) none of the damages asserted by Airlarr arose from an “occurrence,” which was defined in the policy as an “accident”; and (c) even if Airlarr alleged “property damage” arising from an “accident,” the combined operation of several exclusions (particularly, four common business risk exclusions – “your work,” “your product,” “product-completed operations hazard” and “impaired property”) prevented coverage of claims of faulty workmanship. Oxford then filed a declaratory judgment action against the insurer, arguing that the denial of a defense was improper and that Airlarr’s complaint alleged property damage caused by an occurrence that was within the policy’s coverage and did not fall under the scope of any of the policy’s exclusions.
The district court, granting summary judgment in favor of the insurer, held that each of the counts alleged in Airlarr’s complaint related entirely to deficiencies in Oxford’s work, which fell under the scope of the policy’s various business risk exclusions. Oxford appealed the decision.
Appellate Court Decision
In what the appellate court identified as a “curious case,” it sympathized with the district court judge who had agreed with the insurer’s interpretation of the policy, holding that while the uncomfortable seats, ill-fitting carpet, leaking fuel injector, and turbocharger were not property damage caused by an “occurrence” or “accident,” the cracked side window was. The appellate court stated: “Perhaps common parlance might not describe an uncomfortable seat as an ‘accident,’ but a sudden unintended crack in a plane window fits comfortably within that term.” Citing to established Maine law that has placed a broad duty to defend upon insurers, the court noted that an insurer must defend as long as the claims in the complaint create even a remote possibility of coverage. See Me. Bonding & Cas. Co. v. Douglas Dynamics, Inc., 594 A.2d 1079, 1081 (Me. 1991). The court found that the insurer’s duty to defend Oxford “is triggered by any realistic possibility of any damage that might be within the coverage and outside the exclusions and the damaged window creates that prospect.”
Having concluded that there was the possibility of coverage under the insuring agreement for the damaged side window, the court next analyzed each of the “business-risk” exclusions and determined that none of them definitively precluded coverage for damages related to the cracked side window. The “your work” exclusion did not apply because the exclusion could not be said to apply to property damage that occurred away from Oxford’s premises in Maine where the window sealing work was performed. The “your product” exclusion did not bar coverage because the Airlarr complaint did not allege that the side window was a product that was “installed” by Oxford, and therefore was not “your [Oxford’s] product.” The “products-completed operations hazard” exclusion did not apply, because again, the cracked side window was not alleged to be, nor was it included in, Oxford’s work on the aircraft. The court acknowledged that Oxford’s promise to “seal” the window could imply an application of a sealant or a film around the window, but since Airlarr only sought damages for the loss of the cracked window itself, which Oxford did not furnish or install, the “products-completed operations hazard” exclusion did not apply. Finally, the court determined that the “impaired-property” exclusion was inapplicable because while the exclusion could bar a loss of use (of the aircraft) claim resulting from the damaged window, it does not bar a claim for the loss of the window itself.
Having found that the allegations of the Airlarr complaint ultimately fell within the scope of the insuring agreement and that none of the exclusions barred coverage, the appellate court vacated the district court’s judgment that the insurer had no duty to defend, and remanded the case so that judgment could be entered for Oxford. The court’s opinion, however, hinted that this was the narrowest of victories for Oxford, and warned of some turbulence ahead for Oxford’s prospects for indemnity. The court stated that in analyzing the applicability of the policy’s exclusions, “one must agree with the district judge that the underlying liability is only to Airlarr; that the alleged property damage to Airlarr, if proved as charged, likely traces back to defective work by Oxford; and that such damage to the insured’s client resulting from such a cause is what the business-risk exclusions taken together hope to cabin, limit and usually preclude.” Moreover, the appellate court squarely rejected Oxford’s request for attorneys’ fees, which alleged that the insurer lacked a good faith basis in refusing to defend Oxford. Later in the opinion, the court stated that the “potential for coverage here is a close call: it focuses on one claim and a close parsing to preserve the possibility of liability.” The appellate court further opined that even if Airlarr prevailed in its case against Oxford, it seemed unlikely that there would be much, if any, indemnification since most of the claimed injuries appeared likely to fall within the policies’ exclusions.
Thus, the First Circuit Court determined that (1) a window that cracked in flight constituted an “occurrence” under the policy; (2) none of the “business risk” exclusions applied to the cracked window to definitively preclude coverage; and (3) the insurer therefore had a duty to defend the insured in the underlying lawsuit consisting largely of uncovered allegations of property damage. While the law in each state in the U.S. varies slightly, the prevailing view is that the duty to defend is broader than the duty to indemnify, a view applicable to General Liability policies written by specialty aviation carriers. Although the insurer in this case was unlikely to have any indemnity obligations, the appellate court held that it had a duty to defend its insured in what could become a significant litigation with substantial defense costs. Therefore, where, as here, only one of several allegations is potentially covered, an insurer will in all likelihood be obligated nonetheless to provide a defense for all of the allegations against its insured.