An insured must strictly comply with a warranty provision in order to obtain coverage when the subject matter of the warranty bears directly on the risk underwritten by the policy. ( Trishan Air Inc. v. Federal Ins. Company (2011) WL 540532)
Facts
Trishan Air, Inc. purchased an aviation insurance policy from Federal Insurance Company. The policy contained a pilot warranty requiring a two-person pilot crew at all times any covered aircraft was in operation. In addition, the warranty required both pilots, including the back-up second-in-command pilot, to complete ground and flight courses, including simulator training, for the make and model of the covered aircraft within the 18 months prior to operating the aircraft.
After an accident involving one of Trishan’s corporate jets, Trishan submitted a claim to Federal. Federal denied coverage because the co-pilot had not undergone the training mandated by the policy’s pilot warranty. Indeed, Federal argued that the co-pilot had never attended any formal course relative to the type of aircraft involved in the accident.
Trishan counter-argued that the co-pilot had over 45 years and 15,000 hours of flight experience, such that even if he had performed the simulator training he would not have learned any new information or received any training that would have affected any of the actions he took with respect to the accident. Furthermore, one of Trishan’s experts testified that the 8-10 hours of cockpit simulation training the co-pilot did receive in the covered aircraft was very similar to simulator training, and in some cases better. Accordingly, the expert opined that the co-pilot’s failure to undergo the training would not have affected his qualifications to operate the aircraft and would not have prevented the accident.
Following the denial of coverage, Trishan filed a federal court lawsuit against Federal for breach of contract, bad faith, reformation, and declaratory relief. The district court granted summary judgment in favor of Federal, holding that Trishan did not strictly comply with the pilot warranty, thus precluding coverage under the policy.
Holding
The Ninth Circuit Court of Appeals upheld the district court’s grant of summary judgment to Federal, stating that California courts have recognized the necessity of “strict compliance” with warranty provisions to invoke coverage. In so doing, the Court of Appeals rejected Trishan’s argument that the warranty was a mere condition of the policy requiring only substantial compliance.
In its discussion, the Court generally noted that strict compliance with a warranty is necessary when the warranty serves as a factor bearing directly on the underwritten risk. In this type of situation, an insurer is within its rights to limit coverage as it sees fit by including warranty provisions in its policy. This was particularly true in the case of aviation policies because the identity and qualifications of the pilots operating the aircraft are elements of the fundamental risk insured.
The Court rejected Trishan’s argument that the training the co-pilot received served as a substitute for simulator training in substantial compliance with the warranty provision. The Court observed that the substantial compliance doctrine typically requires that the insured’s non-compliance be minor and that the insured comply with at least some of the specific requirements at issue. Since Trishan had failed to comply with any of the training requirements of the co-pilot warranty, the Court held that coverage would have been precluded even if the substantial compliance doctrine applied.
Comment
This decision upholds an insurer’s ability to rely upon an insured’s strict compliance with warranty provisions to invoke coverage as long as the subject matter of the warranty bears directly on the actual risk insured.
However, if the subject matter of the warranty provision does not bear directly on the risk (i.e., a record keeping warranty in most circumstances), substantial compliance may be sufficient to invoke coverage.