WHEN SEIZURE TRANSFORMS INTO THEFT

Rather than an insurance solution,

a more prudent approach … would have been rigorous vetting.

Ironically, in U.S. Specialty Ins. Co. v. DS Avionics Unlimited LLC, a company suffered a loss caused by a dispute involving two other parties that erupted during an attempt to have work performed on their aircraft. We dig deeper into a situation between a plane owner, DS Avionics (DSA), which attempted to have maintenance performed on a 1964 Piper aircraft, a mechanic, and a small airport owner.

The plane was put in the possession of a mechanic to perform his magic. Depending upon the type of maintenance, it could take up to a couple of months to properly perform, particularly if it was a heavy maintenance check. Normally, such a project requires the craft to be disassembled, cleaned, and inspected. The next step would be to make any needed repairs that may have been identified. Finally, the craft is reassembled and returned to the owner. Unfortunately, this was not a normal situation.

DSA’s plane was delivered to an airport hangar that the airport owner rented to the mechanic. Unknown to DSA, the airport owner and the mechanic were in a dispute over unpaid rent. Unable to resolve the dispute, the mechanic was locked out of the hangar. Later, the mechanic was able to move the plane outside. However, the airport owner then strategically parked a large truck in a manner that the plane could not be retrieved.

DSA was barred from retrieving its property for so long that it filed for loss with its insurer, U.S. Specialty Ins. Co. (USSIC). It requested full payment of its property limits for, essentially, theft. Two levels of courts held contradictory opinions. A lower court reasoned that DSA’s inability to access the plane was caused by the intentional act of the airport owner. Therefore, it ruled that the loss trigger was not accidental and the insurer had no coverage obligation.

The higher court’s view was the opposite. It ruled that, from the standpoint of DSA, they suffered an eligible loss as it was caused by a third party’s action. Since it could be interpreted, from its point of view, accidental, the case was sent back down to the lower court for rehearing.

In the lawsuit, the only course of action that was pursued involved the insured (DSA) seeking coverage under its own policy. It may very well be that, in light of the higher court’s decision, a re-trial could result in a full recovery. However, we have the luxury of looking outside of the rigid parameters that frame legal actions.

In hindsight, what party was likely to hold financial responsibility for DSA’s loss? The choices to con-sider are USSIC (DSA’s insurer), the mechanic (or his insurer) and the airport owner (or its insurer). The court case came to the conclusion that DSA’s insurer may have an obligation to cover the loss as theft.

What about the mechanic? It was this party’s predicament of unpaid rent that triggered the problem. The mechanic in this situation is a bailee, a person who holds temporary custody/control of property that belongs to other parties. In this case, DSA’s plane.

Bailees have a legal responsibility to protect property that is placed in their care and the exposure can be substantial. A case could be made that DSA should have directed their efforts to get compensation for their loss from the mechanic. Bailees generally secure coverage for this risk in the form of bailee’s liability insurance.

Bailee insurance policies are intended to protect against the liability for damage or loss to property that is left in a business’s care or custody. Typically, it covers loss involving fire, theft and natural calamities that occur while it is in the hands of the bailee. This coverage would be critical for a professional such as the mechanic discussed in our featured case. Of course, while being culpable for DSA’s loss, it is a wholly different question whether actual insurance protection would be available.

It was the mechanic’s failure to make timely rental payments that initiated everyone’s problems. Delinquent rents that cause lockouts aren’t likely to be considered an eligible hazard under any coverage he might hold. Also, the mechanic could argue that his rent problem was an indirect cause of DSA’s problem. Also consider that, without his having a line to coverage, any recovery action that the plane owner (or his insurance company via subrogation) took would likely be fruitless.

The other possible avenue for recovery was the airport owner. That party’s actions were the direct cause of DSA’s loss. The airport owner specifically blocked access to the plane when it was inside the hangar and then doubled down by the use of a truck to stop any attempt to retrieve the plane once it was outside the hangar.

While denying the mechanic’s access to the hangar was justified by the lack of rent payments, seizing DSA’s property was not. In fact, it may have been far more productive to have met with the mechanic and DSA to allow the maintenance work to be performed contingent upon subtracting the amount of the unpaid rents from the maintenance pay.

As was the case with the mechanic, any pursuit by DSA (or its insurer) for recovery from the airport owner would likely be absent from insurance as a payment source. Any liability policies held by the airport owner would be able to excuse themselves from participation.

Again, what covered peril existed? Blocking access to the plane was a deliberate act. Any recovery from the airport owner would have to be made on an out-of-pocket basis. Rather than an insurance solution, a more prudent approach by DSA would have been rigorous vetting for a source of plane maintenance.

The author

Bruce D. Hicks, CPCU, CLU, is an Indiana-based insurance coverage expert. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and most recently served on its International Interest Group Committee and as Chair of its Publications Committee.