Low, Ball & Lynch’s

WEEKLY LAW RESUME

September 1, 2005 Issue   By: Ray Coates

Bad Faith – Coverage – Subrogation

McKinley v. XL Specialty Insurance Company

  Court of Appeal, Third District

(August 23,  2005)

This case analyzes whether a renter of an airplane can be sued for subrogation by the insurer of the owner of the airplane when the renter allegedly causes damage to the airplane.  The renter claimed the insurer acted in bad faith in bringing the subrogation action because the renter claimed she was an insured of the insurer making the subrogation claim.

Plaintiff Melissa McKinley rented a plane from Todd Aero in order to receive flight instruction.  McKinley signed a written rental agreement with Todd Aero which encouraged McKinley to take out renter’s insurance and warned McKinley that she assumed full financial responsibility for any damage caused to the aircraft.  McKinley flew the plane with an instructor pilot.  The plane was damaged during the landing.

Todd Aero possessed an insurance policy from defendant XL Specialty Insurance Company.  XL paid Todd Aero approximately $41,000 for the damage to the plane.  Then, XL brought a subrogation action in Todd Aero’s name against McKinley.  The trial court in this subrogation action ordered the case to arbitration, where McKinley ultimately was found not liable for the plane damage.

McKinley then filed a bad faith action against XL Specialty Insurance Company.  McKinley alleged that XL Specialty acted in bad faith, because she should have been considered an insured who should have been defended and indemnified by XL for Todd Aero’s damage claim rather than be sued for subrogation by XL.  The trial court found that McKinley was not covered under the XL insurance policy for the damage to the Todd Aero aircraft.  Because XL could sue McKinley in subrogation, the trial court found that McKinley could not maintain an action for bad faith against XL.  McKinley appealed.

The Court of Appeal affirmed.  It performed an extensive analysis of Todd Aero’s XL insurance policy to determine that McKinley was not an insured under the policy’s physical damage coverages policy provisions through which XL reimbursed Todd Aero.  Because McKinley was only an insured under the third party liability coverage portion of the policy, which did not apply to Todd Aero’s claim to XL, McKinley could not maintain her bad faith action against XL.

XL paid the airplane damage claim to Todd Aero under a specific policy provision providing first party coverage for physical damage to the aircraft.  Therefore, Todd Aero’s claim for damage was a first party property damage claim.  McKinley argued that she was an insured pursuant to a separate endorsement which provided insurance for a third party’s property damage claim.  Because Todd Aero’s claim was a first-party property damage claim, the third party liability/property damage coverage which McKinley argued covered her did not apply to Todd Aero’s claim to XL for Todd Aero’s damaged plane. 

In support of its decision that McKinley could not sue XL for bad faith, the Court of Appeal noted that the definitions of the terms “property damage” and “physical damage” in the section of the XL insurance policy relating to a third party’s property damage claim did not include damage to Todd Aero’s aircraft.  Further, the Court of Appeal noted that the rental agreement signed by McKinley encouraged McKinley to take out renter’s insurance and warned McKinley that she assumed full financial responsibility for any loss or damage caused to the aircraft while being rented by her. 

COMMENT

The Court of Appeal performed an interesting analysis of the XL insurance policy provisions, which demonstrated that an insured under a third party property liability coverage portion of the policy may not be considered an insured under a first party coverage provision of the same policy.

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