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Smith Duggan Prevails in Case of First Impression Interpreting Aviation Insurance Policy

Before First Circuit Court of Appeals

Smith Duggan represented United States Aircraft Insurance Group in a case of first impression in the First Circuit, interpreting the scope of coverage under a Hull & Casualty Insurance Policy. The case involved the meaning and application of the phrase “legally obligated to pay” in the omnibus clause of a policy subscribed to by several Lloyds syndicates and managed by United States Aviation Underwriters. The case presented the issue whether the phrase “legally obligated to pay” in the coverage clause included the insured’s obligations under contract or only those that were imposed by law under a tort theory. The federal and state courts interpreting the phrase have split on the interpretation and the case has industry-wide ramifications for aviation insurers, who might see their coverage obligations expand greatly if the court sided with the insured and the claimant.

The plaintiff, a Puerto Rican travel agency, claimed more than $10 million in damages when a charter airline terminated a contract with the agency to bring passengers to vacation resorts in Latin America. When the charter airline terminated the contract for alleged non-payment, Lopez & Medina brought suit against USAU and the subscribing syndicates under Puerto Rico’s “Direct Action” statute that allows an injured or damaged party to bring an action to establish coverage against the defendant’s insurer. The stakes were high, because the charter carrier had since become insolvent, leaving the insurers as the sole target defendant for a potential eight-figure recovery.

Lopez & Medina argued that the aviation policy made no distinction between tort or breach of contract theories – if the insured was “legally obligated to pay” a judgment, then the insurer was obligated to cover that obligation regardless of the underlying theory. The circuits were split on this issue, and Lopez Medina stressed the argument that any ambiguity in the policy language must be read in favor of extending coverage.

Smith Duggan handled the appeal at the First Circuit. We carefully traced the evolution of the phrase “legally obligated to pay” almost from the founding days of the Lloyds of London to prove that the phrase had a specific meaning in the insurance industry for decades, and that it was crafted specifically and only to provide coverage for accident claims. We also explained how this phrase formed part of an integrated whole of the coverage scope, including the exclusions.

The First Circuit Court of Appeals unanimously agreed that the phrase at issue applied only to tort and tort-like claims and not claims arising out of contract disputes. In so doing, it settled the meaning of this long-used policy language in the First Circuit. For the Court’s opinion, see Lopez & Medina Corp v. Marsh USA, Inc., et al, 667 F.3d 58 (1st Cir 2011) or click here. To hear Chris Duggan’s argument on appeal, click here.