The California Court of Appeal has held a policy covered expenses an insured incurred in recovering an aircraft that law enforcement officials seized due to suspicion the plane was being used for criminal activity. (American Alternative Ins. Corp. v. Superior Court (2006) 37 Cal.Rptr.3d 918)
Facts
American Alternative Insurance Corporation (“American”) issued to Aero Falcons, LLC (“Aero”) a policy that covered Aero’s plane. The all-risk policy provided coverage for “physical damage” to the aircraft, and defined “physical damage” to include “direct and accidental physical loss of or damage to” the aircraft. The policy did not exclude loss caused by governmental seizure.
American’s policy required that Aero “protect damaged property whether or not” the policy provided coverage for the damage and that, if Aero did not, American would have “no obligation to pay for any further physical damage due to … [Aero’s] failure to protect the damaged property.” Further, the policy provided that American would pay “reasonable expenses incurred in affording such protection.”
A sheriff seized Aero’s plane in Florida, alleging the plane had been used in the commission of a felony and was subject to forfeiture under the Florida Contraband Forfeiture Act. Aero incurred attorney’s fees to contest the sheriff’s forfeiture claim and to secure the release of the airplane.
Thereafter, Aero submitted a claim to American, asserting American was obligated under the policy to pay all expenses (including attorney’s fees) Aero incurred “to repair and protect the aircraft.” In turn, American asserted the policy conditions (which required Aero to “protect damaged property” and which provided for “reasonable expenses incurred in affording such protection”) applied only where the “damage” involved actual “physical injury” to covered property. American further argued the policy condition did not apply where the “damage” involved the loss of property, such as forfeiture.
Holding
The Court of Appeal held the use of the word “damage” encompassed both “physical injury” and “physical loss” where, as here, the policy covered loss caused by governmental seizure. The Court also held that, because the purpose of the policy condition was to prevent further avoidable “physical damage” otherwise covered by the policy, it was objectively reasonable to interpret the requirement that the insured “protect damaged property” to include efforts to protect property from both physical injury and physical loss.
Comment
This case is somewhat unique, because most first-party property policies do exclude loss arising from governmental seizure of property. In addition, this case again demonstrates the principle that, once a court determines a policy provision is ambiguous, the court will interpret the provision in a manner consistent with the insured’s objectively reasonable expectations.