The Binder; Fall 2016

VOL. 41 NO. 3 - fall 2016

THE BINDER Agent/broker’s division report:

oshkosH

for the love of aviation and liability

Aviation history:

the founding of the aia Claims division report:

you don’t want to “shoot a missed approach” from your adjuster’s desk

AIAWEB.ORG

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IN THIS ISSUE 12

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claims division

President’s message

YOU DON’T WANT TO “SHOOT A MISSED APPROACH” FROM YOUR ADJUSTER’S DESK

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OSHKOSH - FOR THE LOVE OF AVIATION AND LIABILITY

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Agent/broker’s division report

Attorney’s division report

AIA BOARD OF DIRECTORS

aia EDUCATION FOUNDATION UPDATE

Independent Contractor vs. Employee

aviation history THE FOUNDING OF THE AIA

ARE YOU COVERED?

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UNDERWRITER’S REPORT

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crossword

PRODUCTS LIABILITY

Published by the Aviation Insurance Association 7200 W. 75th St. Overland Park, KS 66204

The ideas and opinions expressed by authors of articles published in The Binder are wholly their own and do not necessarily represent those of the Aviation Insurance Association.

The articles are not provided as legal advice.

WWW.AIAWEB.ORG

Editor Nigel Wright

XL Catlin nigel.wright@xlcatlin.com

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david sales - CGNMB LLP

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ne of the many surprises I’ve received as President of the AIA is the number of obscure approaches that I get out of the blue, either by e-mail or calls to my cell phone, at all times of the day or night.

These include numerous varied press enquiries relating to things like the insurance of drones or how a particular loss will affect the aviation insurance market; I also get individuals looking for a job or a mentor; students looking for material for a thesis; political parties looking for endorsement; requests to speak, and the list goes on.

Don’t get me wrong, I am always happy to chat and I am not often that choosy with whom I chat with! I am also used to having calls from clients at unsociable hours, so if the phone rings at 2am in the morning London time, I have learned, over time, the ability to take the call, hopefully say something sensible, and then go immediately back to sleep. This frustrates Karen, my wife, immensely as once her slumber has been disturbed she will lay awake for hours.

Quite often following a media enquiry, I never get to see the end result and what my words look like in print. This, I suppose may be a good thing, especially if I have made my profound mutterings in the early hours!

Most of the time, however, when I am approached by the media, I have to politely decline to comment, as it often relates to a subject that, as your President, it is quite out of my remit to say anything about. If I were tempted to comment I know that the views I might express are most unlikely to represent all of our members’ feelings. Sometimes, I will offer to comment instead as David Sales, aviation insurance

broker in London. But, not surprisingly, the press is less interested in my personal views.

Anyway, the media topic that I face the most at the present time relates to the current state of the aviation insurance industry.

All we tend to see and hear at the moment is the constant pontificating by market luminaries about the future of the aviation insurance market; whether it can be sustained at current premium levels or, perhaps, whether a particular loss will be market changing.

I have worked in the London aviation insurance market for more than 40 years and, in truth, I can never remember a time where everyone was doing handsprings across the room in celebration of the magnificent market conditions. Maybe in hindsight, there were plenty of times when we should have been punching the air but I guess at the time we didn’t realize just how good we had it. I suppose it’s all relative.

In the past we were always in some sort of cycle. After all, the market is a classic example of supply and demand economics in action. When premiums were going down, underwriters were obviously not happy and at a certain point some would deem the market unprofitable and exit the market, thus reducing the available capacity. The less attractive risks could then not be so easily placed, and to tempt new insurers to participate, a higher price would be offered.

Overall, the trend in premiums went up and more capacity gradually entered the market. Quite often, years when the prices were at their highest would coincide with a benign period of losses and therefore

good profits were made. This attracted even more capacity into the market on a speculative basis. With the now surplus capacity, the premiums would inevitably, start their downward journey once again.

An over-simplification I know, and there were, of course, other significant factors that came into play to impact the pricing levels, especially the availability of cheap low level reinsurance protections and, previously, the high investment returns that could be obtained on unearned premiums and claims reserves.

Well, it appears that the cycle is no more and I am now even more convinced that the market, as it is at the moment, is the market that we will have to trade in for the foreseeable future. This continues to be good news for the insurance buyers but the market conditions are becoming an ever increasing challenge to those of us who want to continue to earn our living in this industry.

I know it’s not the responsibility of the AIA, nor within its power to change or try to influence the market conditions. But, as a reminder of our mission, the AIA is committed to enhancing the aviation insurance industry worldwide and the professional lives of those who work in it through a variety of programs and services.

The aviation insurance market is a ‘people’ business and where the AIA can add value, in these turbulent times, is providing the excellent networking opportunities to assist in building and enhancing those, so important, personal and business relationships that could make a difference.

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Oshkosh

For the Love of Aviation and Liability

LUKE UITHOVEN - Kimmel Aviation Insurance Agency, Inc

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very July, hundreds of thousands of airplane enthusiasts pack the grounds of Wittman Regional Airport in Oshkosh, WI for the United States’ biggest airshow. According to EAA.org, this year Oshkosh drew in 563,000 attendees, 10,000 aircraft, 5,000 volunteers, and almost 900 commercial exhibitors, some of which are members of the AIA. There were 80 international countries represented. These numbers are staggering, considering this is a 7 day event, with only 2 runways to utilize, and an economy that is unfavorable to aviation at the moment.

As a visitor, it is easy to be consumed and awestruck with all of the flying, fanfare, and smell of AvGas and Brats, but in the back of an insurance-programmed mind is: WHAT ABOUT ALL OF THIS LIABILITY? I had the opportunity to fly myself into Oshkosh this year for the first time. Following the train tracks from Ripon to Fisk, Fisk Avenue to Runway 18, while full throttle in the Aeronca Champ, struggling for every knot over 82 in order to keep up with traffic, was a memory that I will never forget. It was an absolute blast and relief to touch down on the pink dot and bail off the runway safely. As Sunday afternoon rolled on, and I was reliving all of the morning’s arrival excitement, I ended up over on the flight line watching others try the same procedure.

I looked up at one point and counted 14 aircraft in the pattern at once, landing 3 at a time on each runway. The sky was liter-

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ally full of airplanes trying to land. These weren’t professional formation and aerobatic trained pilots, these were your regular aviation enthusiasts, some planes full of passengers, trying to follow the NOTAM and Air Traffic Controller’s commands to the best of their skill in order to be as safe as possible. At that moment, the thought of immense danger and liability exposure hit me. It went from being a fun and exciting thing to fly into Oshkosh, to a realization of: WOW! Look at all the added pressure and responsibility to be safe out there and also look at all the liability if a bad decision was made.

On Sunday afternoon alone, there were two reported accidents.

Fortunately, the pilots were not badly hurt and the accidents were contained to the runways. Considering that more than 10,000 landings occurred in such a short time, it was a credit to all involved in maintaining the safety of this show that only a few accidents were reported. I did, however, run into a friend who told me that his company’s adjustor was on call the whole week; riding through the grounds and ready to jump into action if there was a patron hurt or other issues arose. With millions of dollars of aircraft and hundreds of thousands of people packed into a few square miles, anything can happen and the damage be catastrophic. There was a microburst 2 years ago the day before the show opened and a couple of staged airplanes were picked up and dropped on top of a different man-

agent/broker division report

ufacturer’s booth. Talk about an unforeseen and unavoidable insurance claim!

As the days rolled on and I walked the grounds, checking out all sorts of aircrafts, ranging from homebuilts to antiques to warbirds, it really dawned on me that the single biggest risk mitigation tool used were the 5,000 volunteers that were running the show and keeping everybody safe. Volunteers land the aircraft, direct the aircraft, set flight lines, and keep pedestrians away from moving aircraft as well as moving vehicles on the premises. Their effort and enthusiasm is top notch. They may not always let us taxi where we want, but they keep us all safe and which in turn, keeps the show insurable, and the masses coming back.

These volunteers are the insurance companies’ best line of defense in making sure that the show runs smoothly and there are as few hiccups as possible. These vol-

unteers do not get the praise that they deserve but from all of us that traveled in and out of Oshkosh safely this year, we are appreciative of their hard work.

Oshkosh is a once in a lifetime type of event to attend and for everyone that has not been yet, I would highly suggest making the trip at least once. You will get to see thousands of aircraft, suppliers, manufacturers, and enthusiasts and make memories that you will have for a lifetime. The best part is that you will be able to travel to and from the show safely and be able to tell the stories to others afterward. The hard work and professionalism of the volunteers and event coordinators ensures the utmost effort to prevent accidents from occurring. And, in case the unforeseen does happen, the insurance companies are standing by ready to jump into action. It is truly a great week and one that I look forward to every year; along with 500,000 of my closest friends.

ADVERTISE IN

THE BINDER CALL MANDIE BANNWARTH AT (913) 627-9632 FOR ADDITIONAL INFORMATION

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ATTORNEY’S DIVISION REPORT Deborah elsasser - Clyde & Co US LLP

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his summer brought some interesting legislative and regulatory developments, most notably the FAA Extension, Safety, and Security Act of 2016 (“FAA Extension Act”), which President Obama signed into law on July 15, 2016. In addition to ensuring that the FAA remains funded through September 30, 2017, the Act includes several safety and security measures affecting nearly every sector of the aviation industry, and a timeline for the FAA to issue or revise certain safety-related regulations. The Act also includes portions of the Pilot’s Bill of Rights 2 legislation which, despite strong bi-partisan support, was stalled in the House of Representatives over the past year. Reforms to the third-class medical certification process, as proposed in the Pilot’s Bill of Rights 2, were included in the FAA Extension Act and will substantially ease the medical certification requirements for pilots flying “covered aircraft” (maximum certificated takeoff weight of not more than 6,000 pounds, with up to six seats), under certain conditions.

Under the Act, the FAA has 180 days within which to issue or revise regulations that will allow an individual to operate a “covered aircraft” if: •

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•

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the individual holds a valid driver’s license issued by a state, territory, or possession of the United States and complies with all medical requirements or restrictions associated with that license; the individual holds a medical certificate issued by the FAA on the date of the Act’s enactment, held that certificate at any point during the 10-year period preceding such date of enactment, or obtains such a certificate after such date of enactment; the most recent medical certificate indicates whether the certificate is first, second or third class, is not revoked, suspended or was not withdrawn (the certificate can be expired and may include authorization for special issuance); the most recent application for airman medical certification was not completed and denied;

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the individual has completed a medical education course (as described in the Act) during the 24 calendar months before acting as pilot in command of a covered aircraft (individual must demonstrate proof of course completion); the individual has received a comprehensive medical examination from a state-licensed physician during the previous 48 months and completed a checklist to be devised by the FAA and the physician addresses the medical conditions on the checklist and any medications the individual is taking for such conditions, and signs the checklist certifying that the physician performed an examination and is not aware of any medical condition that, as presently treated, could interfere with the individual’s ability to safely operate an aircraft; the individual is operating a “covered aircraft” carrying not more than 5 passengers, at an altitude of not more than 18,000 feet above mean sea level, within the United States (unless authorized by the country in which the flight is operated), and at an indicated air speed not exceeding 250 knots; No portion of the flight is carried out for compensation or hire.

The Act contains special provisions addressing certain cardiovascular, neurological and mental health conditions.

The FAA Extension Act also addresses issues relating to cybersecurity risks, use of unmanned aircraft for emergency disaster response, commercial pilot training and mental health screening, air traffic controller hiring, laser pointing incidents, security assessment at foreign airports and repair stations, TSA Pre-Check program vetting, refund of baggage fees for delayed baggage, improving air travel for persons with disabilities, requirements for airlines transporting minors and flight attendant training for recognizing and responding to human trafficking victims. The FAA has to comply with specific time deadlines for development of various safety initiatives over the course of the next year.

Attorney’s division

In addition to the FAA Extension Act, in late June, the FAA announced New Part 107 Drone Regulations. The new rule requires a person operating a small UAS (weighing less than 55 lbs.) to hold either a remote pilot airman certificate with a small UAS rating or be under the direct supervision of a person who holds a remote pilot certificate. Part 107 does not apply to model aircraft that satisfy the criteria specified in section 336 of Public Law 112-95. Last month, the FAA published a Remote Pilot-Small Unmanned Aircraft Systems (sUAS) Study Guide (FAA-G-8082-22) for the Remote Pilot Certificate (with an sUAS rating) airman knowledge test.

Last year, the FAA announced a new “Compliance Philosophy” which it has been aggressively promoting as an alternative to enforcement proceedings. The cornerstone of the program is the self-reporting of “non-compliance events” or other potential FAA violations.

The program is intended to focus on corrective action rather than the imposition of punitive measures so as to foster an “open and transparent safety information exchange” that will lead to system improvements on an ongoing basis.

The FAA has embarked on an outreach initiative to better educate airman and the public and encourage participation in the Compliance Philosophy in the aviation community. As part of this outreach program, the FAA released a brochure that the FAA inspectors will be distributing when there is any question of a “non-compliance event” by an airman or other potential FAR violation. The brochure can be found on the FAA website at www.faa.gov/ about/initiatives/cp.

For additional information on the program and an interesting interview with John Duncan, FAA Director of Flights Standards Service by AIA member Alan Farkas, see www.eaa.org/ en/eaa/eaa-news-and-aviation-news/advocacy/07-07-2016-reflections-from-john-duncan-on-faa-compliance-philosophy.

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Industry news

Independent Contractor vs. Employee

Are You Covered?

Bennett Goldblum - AU-M, Commercial Pilot, SEL, MEL, SES, CFII, MEI Marketing Underwriter & Chief Pilot

Your company aircraft is scheduled for a trip in a few hours, but your employee pilot has an emergency and cannot make it. If you cancel the trip you risk losing a big contract. You have used an independent contract pilot for this type of event several times in the past and dig up their contact information. You’re in luck! You call up the pilot and he is available. A few hours later you are on your way. During the trip the independent contract pilot is injured while unloading the aircraft on the ramp. You are able to find a way to get your colleagues and aircraft back home, but a couple of weeks later you receive a letter from a lawyer. They are looking to make a claim on your workers’ compensation policy for the independent contract pilot’s injuries.

Fortunately, you had the independent contractor sign an agreement as to the nature of the relationship and agreeing upon the independent contractor status. You have also reported his compensation on a 1099. You believe you are all set, the claim will be denied. Well, not so fast. It is probably not that clear cut.

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This scenario is not an unlikely event.

The independent contractor versus employee dilemma seems to be a common question amongst agents in regards to workers’ compensation coverage.

When reviewing your client’s insurance program, how do you determine if any coverage gaps exist? When it comes to workers’ compensation, how do you determine who needs to be included for coverage? Which workers are subject to the state’s Workers’ Compensation Act? Workers’ compensation is always primary over other coverages and the independent contractor’s lawyer finds out that he was traveling, on a job for you, when the injury occurred. The lawyer determines that you carry workers’ compensation and files a claim, refuting that the injured worker was an independent contractor.

In the aviation industry it is not uncommon to see entities utilizing independent

industry news

contractors. The reasons may vary, perhaps they need a pilot to fill in a schedule periodically, there is an aircraft maintenance job where additional help is needed, or you just don’t feel there is a need for a full-time employee. There is no doubt that hiring an employee and the commitment involved, payroll withholding, benefits, insurance etc. can be an arduous and costly task. Many believe they can simplify this process by hiring independent contractors who may not be subject to many of these requirements.

Unfortunately, the solution may not be all that simple. Each state’s Workers’ Compensation Act defines these rules differently. Even if the independent contractor can pass the IRS “test” for being a true independent contractor, simply passing the IRS rules does not mean that the state’s Workers’ Compensation Act excludes that independent contractor status from Workers’ Comp coverage.

Some states mandate that independent contractors must carry workers’ compensation coverage, while others do not impose a requirement on independent contractor pilots to carry any insurance.

Some states even include uninsured independent contractors in the definition of an employee to be covered under the state’s Workers’ Comp Act. In states where the rules are not that clear or do not exist, case law usually sets the precedent. The states that treat independent contractors as subject to the Workers’ Compensation Act may do so in different ways.

For example, some states may require that a contracting entity that utilizes independent contractors provide workers’ compensation coverage for that portion of the work which was performed. In this instance, it is imperative that insureds maintain clear and accurate payment records. Other states will exclude wages paid to a true independent contractor all together. Each state’s workers’ compensation laws, as well as case law will help to determine, but a lot of times a gray area may still exist. The best starting place is the website for the state’s Department of Insurance or Workers’ Compensation Bureau.

The prudent thing to do would be to require all independent contractors to carry their own workers’ compensation coverage, obtain Certificates of Insurance yearly and ensure that those records are updated and maintained. Failing to do so may result in independent contractor wages being picked up during the workers’ compensation end of policy audit.

If your client’s independent contractors cannot obtain workers’ compensation insurance, you will want to work with your underwriter to determine if they can be included in your client’s estimated payrolls for coverage under their policy. If the underwriter is unwilling to accept the risk, the insured may have to find independent contractors who can provide their own coverage.

Nobody wants to overpay their Workers’ Comp by including payrolls that did not need to be included. However, receiving an invoice for additional premium after an audit, an unexpected claim, or letter from a lawyer is not a great outcome either. Your underwriters are here to help you. While there may not always be a clear cut rule, we can work with you to help determine a solution that satisfies both you, your client, and the carrier.

Bennett Goldblum AU-M, Commercial Pilot, SEL, MEL, SES, CFII, MEI Marketing Underwriter & Chief Pilot bennett.goldblum@beaconais.com (941) 256-7307 Direct www.beaconais.com (941) 953-5390 126 S. Osprey Ave, Ste 200, Sarasota, FL 34236

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products liability

ernest DESPAIN - W. Brown & associates

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t used to be said that technology changes every 10 years. In the most recent generation, technology is changing at a rate of almost every 2 years. For aviation, the greatest evidence of this change is inside the cockpit with Avionics and glass panels.

I remember from the days when I first learned to fly trying to manage paper charts and documents. A long cross country flight could fill the cabin with unfolding and folding of maps.

Situational awareness was only as good as what you could see out the window and identify on the map. Today my maps are all kept electronically, easily accessible in my iPad, and always up-to-date. Linked with GPS, it shows me where on the map I am at in real time, and provides an excellent array of navigation and situational awareness. In the last several years, the technology for avionics and glass panels has been rapidly changing, with some of the latest technology now including touch screens.

One of the slowest part of progress is the FAA certification program. Recently there has been an increasing debate over

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the use of non-certified equipment. Non-certified equipment is available to the experimental community. The equipment is significantly less expensive and often more sophisticated then the certified models. One might think if the equipment provided greater situational, terrain, traffic, navigation, weather and other awareness, at an affordable cost, than more pilots would be encouraged to purchase the equipment and the result would be a better safer environment. Or does the certification process provide a truly better product?

When considering the risk of the products liability, does the certification change the risk or the exposure?

On April 19, 2016, the U.S. Court of Appeals for the Third Circuit published its opinion in a case involving whether or not the FAA regulations provided a standard of care for the design and manufacture of aviation products and prevent lawsuits form being asserted against based on state law design theories.

The court concluded that the FAA regulations as they apply to products certification are not sufficiently pervasive to prevent

state court lawsuits.

One might think if the equipment provided greater situational, terrain, traffic, navigation, weather and other awareness, at an affordable cost, then more pilots would be encouraged to purchase the equipment and the result would be a better safer environment.

In a case in Philadelphia involving an aircraft carburetor, the court concluded that the issuance of an FAA type establishes both the FAA standard of care for design defect, and that the standard of care was satisfied as a matter of law. In reversing the judgment, the Third Circuit found that Congress did not intend for the Federal Aviation Act or regulations to preempt product liability claims. The court explained that the Act does not govern the manufacture and design of the aircraft, that the standards require for a type certificate do not provide a comprehensive system of regulations sufficient to determine in-flight safety, and that the Act does not provide a comprehensive standard of care.

the FAA contended that the Act and its regulations occupy the field of design and safety so pervasively that the federal standards of care should apply to all claims in state court lawsuits.

Other courts have also refused to find that the type certificate precludes state law cause of actions.

An underwriter would hope that the extensive process of certification would conclude that the product has met a higher standard as set forth by the FAA, but the reality is certification does not preclude a claim for products defect or liability. FAA reform in the coming years may establish a process in which some of the non-certified products can become qualified as the demand for keeping up technology that benefits the aviation community continues to rise.

The Third Circuit court rejected the FAA’s argument for which

UNDERWRITER’S REPORT

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you don’t want to “Shoot a Missed Approach” from Your Adjuster’s Desk david Mcgovern

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he first report of loss comes in indicating that the insured pilot attempted to take off downwind on a hot day in a fully-loaded Cessna 182. There is evidence that he may have knowingly exceeded the aircraft’s weight and balance limits as well, and there is no initial information implicating the aircraft or the engine. As a result of the ensuing overrun of the departure runway, the aircraft incurred substantial damage and the pilot and three passengers all received significant, although not life-threatening injuries.

The insured’s policy carries passenger limits of $100,000 per seat. As the investigation proceeds, medical records and bills reflect that all passengers incurred broken bones, some necessitating surgery. As to the latter, there are significant medical bills and two of the passengers are also claiming to be suffering from post-traumatic stress disorder.

The passengers all bring suit. There’s the possibility of declining coverage under the deliberate acts exclusion since the pilot may have known the aircraft was overweight. Additionally, the passengers are all friends of his and, while their demands are well in excess of the $100,000 per seat policy limits, the pilot tells you that he thinks they would be willing to accept a settlement within limits if you make the offer. What do you do?

If you faced this situation in the state of California, you might need to react differently than you would in other states. An insurer cannot decide too quickly to decline coverage without

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Judy Marotti

running the risk of a bad faith denial. Two recent cases, not in the aviation area, exemplify this need for caution.

Below are two cautionary tales. Our first story involves the loss of a beautiful backyard oasis and the second involves the loss of a whole lot more than just a backyard. The common thread tying these two stories together is football and the California courts’ willingness to expand the duties of insurance carriers facing third party claims. The stories differ, though, in the choices made by the insurance professionals involved.

The Duty to Settle Without a Policy Limits Demand Once upon a time, a lovely married couple bought a lovely expensive home in Southern California. The husband, former NFL (and hair product) star Troy Polamalu was particularly thrilled with his professional style backyard barbecue and other backyard delights sitting atop tropical grounds including a pool and spa. After a heavy rain, the entirety of his backyard just disappeared into an adjacent canyon and the suits unfurled.

Insured Tenders to Carrier Among the defendants was Willis Allen, the real estate firm that handled the sale of the house to the Polamalus. Willis Allen tendered its defense to its insurer, Aspen, which agreed to

Frances O’Meara

defend under a reservation of rights, and a settlement negotiation ensued.

Willis Allen allegedly made Aspen aware of the possibility that the case could result in liability above its $2 million policy limits. It also told the insurer of a possibility of settling the Polamalus’ case for substantially less than the policy limits, but the insurer refused to grant authority to settle.

Instead, Aspen negotiated to ill-effect by offering an amount that the claimants found unreasonably low and that failed to create a constructive negotiation strategy. The ultimate settlement maxed out the remaining policy limits, and Willis Allen paid an additional amount to the Polamalus out of pocket. Thereafter, Polamalu and his wife, who initially sued for $7.5 million, were awarded $4.25 million in punitive damages against the construction company defendant.

Insurer Sought to Void Policy while Insured sued for Bad Faith However, before the settlement concluded, the insurer sued to void the policy with Willis Allen. The insured countersued, asserting claims for bad-faith failure to settle and breach of contract against Aspen. Aspen moved to dismiss the counterclaims, arguing that, as the Polamalus never put forth a settlement figure within the policy limits, the insurer could not rightly be accused of bad-faith failure to settle.

claims division

“Aspen contends the injured party must express an interest in settlement to trigger an insurer’s duty to pursue good-faith settlement discussions,” Judge Burns wrote. “Aspen is mistaken.”

Aspen Speciality Ins. Co. v. Willis Allen Real Estate (S.D. Cal., June 15, 2015, No. 14CV105-LAW WVG) 2015 WL 3765008, at *3. The Court denied Aspen’s motion and the matter proceeded to determine whether Aspen acted in bad-faith.

Aspen’s Duty to Settle was Triggered Even though there was No Policy Limits Demand Made.

In California, insurers have a duty to settle claims against the insured pursuant to the covenant of good faith and fair dealing implied in all policies. The covenant of good faith obligates the insurer to accept a reasonable settlement within policy limits where there is a substantial likelihood of a recovery in excess of those limits”. Rappaport –Scott v Interinsurance Exch. of the Auto Club (2007) 146 Cal. App 4th 831. The insurer must determine whether the settlement is reasonable “without regard to any coverage defenses.” Id. An insurer can be held liable for the bad faith failure to settle a claim absent a demand within policy limits if there is some “other manifestation the injured party is interested in settlement.” Reid v. Mercury Ins. Co., 162 Cal. Rptr. 3d 894, 897 (Cal. Ct. App. 2013), as modified on denial of reh’g (Nov. 6, 2013), review denied (Jan. 21, 2014).

Under the Fair Claims Practice Act which references Insurance Code Section 790.03(h) (5), it is an unfair practice for an in-

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surer to fail to attempt “in good faith” to effectuate prompt, fair, and equitable settlement of claims in which liability has become reasonably clear.” As was made clear in Aspen Speciality Ins. Co., this is true even where the plaintiff does not formally issue a policy limits demand to the defendant.

The Duty to Defend Potentially Excluded Claims AIG Property Casualty Company (“AIG”) issued two homeowners policies and a personal excess liability policy to former actor, Bill Cosby.

In 2014, Janice Dickinson claimed that Cosby “’intentionally drugged’ [her] and sexually assaulted her in 1982.” AIG Property Casualty Company v. Cosby (C.D. Cal., Nov. 13, 2015, No. CV 15–04842–BRO (RAOx) 2015 WL 9700994, at *1. Cosby issued a statement regarding Ms. Dickinson’s version of the contact between them, claiming, among other things, that “the alleged rape never happened.” Id., at *2. Ms. Dickinson then brought suit against Cosby in Los Angeles Superior Court alleging defamation, false light, and intentional infliction of emotional distress.

Insured Tenders to Carrier Cosby tendered the claim to AIG, requesting that the lawsuit should be covered by AIG as defamatory and injurious to his reputation. The policies issued by AIG provided that the insurer would defend and indemnify Cosby as to defamation, libel or slander actions “unless … an exclusion applies.” The policies all contained sexual misconduct exclusions which provided that the policies do not provide coverage for “personal injury

arising out of any actual, alleged, or threatened by any person ... sexual molestation, misconduct, or harassment.” Id., at *1.

Insurer Defends While Bringing a Declaratory Relief Action AIG, in looking at the allegations of gross sexual misconduct against Cosby, adopted the position that each and every claim against Cosby arose from “actual” or “alleged” sexual misconduct and thus there was no coverage for the claim under the policies. AIG wisely agreed to defend, subject to a reservation of rights, including the right to seek reimbursement for amounts paid for claims for which there was no potential for coverage, and promptly filed a declaratory judgment action seeking the reimbursement of all amounts paid in the defense Cosby as is proper under California law.

The California Fair Claims Practices Act requires an insurer, upon receiving proof of a claims, to “immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part.” Cal. Code Regs., Title 10, § 2695.7. The decision to defend must be made quickly in California but the ability to bring suit for reimbursement of amounts paid in the defense of claims for which there is no potential for coverage provides a remedy for insurers who choose to defend actions that seem likely to be excluded from coverage in whole or in part. Buss v. Superior Court, 16 Cal.4th 35 (Cal. 1997). AIG acted properly in providing a defense while challenging coverage and seeking reimbursement of amounts spent for claims for which there was no potential for coverage.

Misconduct Exclusion Does Not Relieve Insurer of Duty to Defend This decision to provide a defense reserving the right to seek reimbursement was vindicated when the Court disagreed with AIG’s interpretation of the sexual misconduct exclusion. “Sexual misconduct may be the subject matter of Defendant’s statements,” the Court held, “but Defendant’s statements, not his alleged sexual misconduct, directly caused the injury for which Dickinson now seeks relief. Accordingly, Dickinson’s claims arise out of Defendant’s statements, not

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out of any actual or alleged sexual misconduct.” Id., at *6 David C. McGovern practices aviation litigation, defending fixed base operators, sightseeing tour operators, air carriers, charter airlines, film and television studios, production companies, aerial coordinators, contractors, and product manufacturers in major wrongful death and bodily injury litigation. He served in the United States Navy and in the Naval Air Reserve, retiring with rank of Commander. During that time, he logged over 1,200 hours and 225 carrier arrested landings in the F4 Phantom II.

The sexual misconduct exclusion did not unambiguously preclude coverage for Ms. Dickinson’s suit against Cosby and thus AIG remained on the hook for all attorneys’ fees incurred by Cosby in defending his statements denying the occurrence of a sexual assault. However, AIG was not liable for any extra-contractual damages as it provided a defense for its insured while disputing coverage and did not permit potential coverage defenses to color its settlement decisions.

Judy Marotti has worked extensively on insurance coverage actions and counsels her clients in matters of policy contract rights and obligations, good faith duties to insureds and settlement and allocation issues involving single and multi-carrier cases.

The Moral of the Story The moral of these cautionary tales is that an insurer cannot sit back and hope for the best when faced with complex insurance coverage predicaments in California. Whether faced with a disappearing backyard or a pudding spokesman gone wrong, an insurer must always be aware that, to California courts, a “reasonable settlement within policy limits” does not necessarily require a policy limits demand and a policy exclusion must unambiguously preclude coverage before it can be relied upon.

Extreme care must be taken in analyzing the policy terms and the underlying facts of a claim before determining that a claim cannot be settled within policy limits or that there is no duty to provide a defense to the insured.

Applying these cases to our hypothetical Cessna accident, in California, you would be wise to explore the possibility of settling the passengers’ claims within the policy limits, even without a prior policy limits demand. If there is the potential for coverage, some indication that the claimants are interested in settlement within policy limits, and a potential for an excess verdict, a claims professional would be wise to take action and attempt to resolve the claim.

Frances O’Meara works directly with major insurance carriers throughout the United States. She advises both professionals and law firms on legal professional and ethical issues, and issues relating to risk management and loss control.

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Answers to puzzle on page 24.

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board of directors PRESIDENT

Director of International Division

david Sales

Bruce Carman

vice PRESIDENT

Director of Reinsurance Division

Paul Herbers

Ian Wrigglesworth

SEcretary

Director, Underwriters Division

James Gardner

Ernest De Spain

Treasurer

Director-elect, Underwriters Division

Christopher R. Zanette

greg sterling

Director of Agent & Brokers Division

Director-At-Large

Luke Uithoven

Matt Rowley

Director, Attorneys’ Division

Director-at-large

Deborah Elsasser

john doolittle

Director- elect, Attorneys’ Division

Executive Director

nicole wolfe stout, esq,

Mandie Bannwarth

Director of Claims Division

aia general counsel

Ed Broking LLP david.sales@edbroking.com

Cooling & Herbers pherbers@coolinglaw.com

The James A. Gardner Company, Inc. jim.gardner@jagardner.com

ZANETTE Aviation Insurance Service, Inc. chris@jet-insurance.com

Kimmel Aviation Insurance Agency, Inc luke@kimmelinsurance.com

Clyde & Co US LLP deborah.elsasser@clydeco.us

Strawinski & Stout, P.C. nws@strawlaw.com

Steve Teller

Aviation LS steve.teller@aviationls.com

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Cathedral Underwriting Ltd bruce.carman@cathedralcapital.com

Guy Carpenter & Company Ltd ian.wrigglesworth@guycarp.com

W. Brown & Associates edespain@wbais.com

AIG greg.sterling@aig.com

Berkley Aviation, LLC mrowley@berkleyaviation.com

Sutton James, Inc. jdoolittle@suttonjames.com

Aviation Insurance Association mandie@aiaweb.org

ray mariani

Murray, Morin & Herman, P.A. rmarianilaw@gmail.com

Education FOUNDATION UPDATE C. Alan Smith - Chairman, AIA Education Foundation This current year continues to be very productive at the AIA Education Foundation.

Again I will begin by thanking those of you, both corporate and individual, who have so generously contributed to your AIA Education Foundation. Those of you who have not done so already, please give the AIA Education Foundation serious consideration in your future planning for giving.

Your generous support allows us to develop NEW Scholarship and Award Programs such as the following new initiative:

The Walter C. Wattles Fellowship at Lloyd’s of London In our efforts to support the Aviation/Aerospace Insurance Industry’s development of young people entering the insurance business community as a career path we are pleased to have joined together with the Walter C. Wattles Fellowship (Founded in 1969) to support graduate students who have identified Aviation/Aerospace Insurance as their professional career path.

qualifications. We are pleased to be part of this highly successful program where former Fellows remain within the Aviation Insurance Industry (retention levels are in the high 90 percentiles) to pursue their careers.

We hope to have one or both of the Interns, Rachel and/or Grace, attend our next AIA Annual Conference in San Diego to share their experience with all our conference attendees. This is the first year supporting the Walter C. Wattles Fellowship and we look forward to many future years of continued alliance. Additional information on the Fellowship can be found by visiting their website at: WWW.WATTLESFELLOWSHIP.COM Finally, we are always looking for future AIA Education Foundation Initiatives. Help us by becoming one of, what we are calling, AMBASSADORS for the AIA Education Foundation. If you think you might be interested in joining us please email me at alan.smith@usi.biz or call me at 786-454-2103.

We need your ideas in our continuing efforts in support of Academic Excellence.

The AIA Education Foundation is currently providing additional financial support to 2 of the 3 Walter C. Wattles Fellowship recipients for 2016 who are now actively engaged in a one year internship program within the Aviation Insurance Market in London.

Both recipients are being provided $2,500. each to help defray living expenses during their Internship in London. Rachel Magary is currently working at XL Catlin within the Aviation Department while Grace Higgins is spending her Internship at JLT Aerospace.

Both are graduates of Vanderbilt University with high academic achievements.

Approximately 60 women apply annually and are required to submit a resume and thoughtful essay about why she should be selected as a Wattles Fellow. Former Fellows and the Fellowship Board conduct two rounds of interviews and select the finalists based on their academic performance, student leadership, internship experience, community service, essay content and personal

David Sales, President AIA, Grace Higgins, Walter C. Wattles Fellowship recipient, Claire Vincent, JLT Aerospace and Alan Smith, Chairman-AIA Education Foundation

aia education news 17

NOW AVAILABLE

The Aviation Insurance Association has replaced the Aviation Insurance and Risk Management textbook with its own up-to-date version, Aviation Insurance Core Principles and Concepts. This is the only textbook written by aviation insurance professionals for aviation insurance professionals and because it is an electronic version, it will continuously be updated as the industry evolves with new regulations and technology. You may purchase this course text for $50 on the AIA website.

Those individuals wishing to earn their Certified Aviation Insurance Professional (CAIP) designation will now be required to take the Aviation Insurance Core Principles and Concepts course as well as pass the final exam with a score of at least 75 percent.

AIA would like to thank our education chairman, Doug Johnson, as well as the other aviation insurance professionals and the AIA Education Committee for their work in bringing this textbook to fruition.

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Thank you!

A C KN OW L E DGM E N T S A project of this magnitude could not have been accomplished without the full support of the AIA Board of Directors and the AIA Education Foundation. Thank you to the Board and the Foundation.

The AIA Education Committee was the driving force behind this project. Thank you to the members of the Education Committee.

AIA EDUCATION COMMITTEE Eric Barfield, Hope Aviation Insurance, Inc. Dr. Bruce Chadbourne John Cunningham, Beacon Aviation Insurance Services Mary D’Alauro, Aviation Insurance Agency, Inc. Paul Davis, Old Republic Aerospace Christopher Fostiak, Hays Aviation James Gardner, The James A Gardner Company Inc. Katherine Graeter, Arlington/Roe & Co., Inc. Nancy Gratzer, Marsh USA Inc. Brenda Jennings, AOPA Insurance Agency, Inc. Doug Johnson, JSL Aviation Insurance Frank Kimmel, Kimmel Aviation Insurance Agency, Inc. Bryan Kutcher, Global Aerospace Mike McGrory, SmithAmundsen Aerospace

Erin McManus, Beacon Aviation Insurance Services Nicholas Methven, Global Aerospace Thomas Murphy, XL Catlin Cindy Peck, Nason Associates, Inc. Jason Riley, Halton Hall & Associates, Inc. Lamont Rosemond, Allianz Global Corporate & Specialty Scott Ross, Global Aerospace C. Alan Smith, USI Insurance Services Luke Uithoven, Kimmel Aviation Insurance Agency, Inc. Dr. Alexander Wells Kyle White, Aviation Solutions, LLC Steven Whitlock, AirSure Limited, LLC Mitchell Young, USAIG

In addition to the committee members, a large number of AIA members from all disciplines volunteered their time and talent to this project as writers, proofreaders, editors and even critics. We are profoundly grateful to each and every one.

CONTRIBUTORS Geff Anderson, Anderson & Riddle LLP Edwin Baez, Berkley Specialty Underwriting Managers Mark Banovetz, Tressler LLP Brian Bodkin, Allianz Global Corporate and& Specialty Mark Breitenbach, XL Catlin Mike Chevrette, Great American Insurance Company Victor D’Avanzo, USAIG Gary D. Eklund, Marsh USA Inc. Deborah Fitzmaurice, Marsh USA Inc. BJ Goodheart, AirSure Limited, LLC Nancy Gratzer, Marsh USA Inc. Meghan Griffin, Old Republic Aerospace Peter Guy, Starr Aviation Howard Hamilton, Allianz Global Corporate & Specialty Andrew Houghton, Skarzynski Black LLC Doug Johnson, JSL Aviation Insurance Bob Kern, Kern Wooley, P.C. Bryan Kutcher, Global Aerospace Richard Maher, Allianz Global Corporate & Specialty

Mark McManaman, USAIG Bob McManus, Beacon Aviation Insurance Services Nick Methven, Global Aerospace Philip J. Metz, Allianz Global Corporate and& Specialty Tom Murphy, XL Catlin Gordon Murray, Old Republic Aerospace Steve Murray, Global Aerospace Paul Ratte, USAIG Josh Ray, Allianz Global Corporate & Specialty Jason Riley, Halton Hall & Associates, Inc. Lamont Rosemond, Allianz Global Corporate & Specialty Tony Sandfrey, Marsh USA Inc. John J. Sheppard, C.A. Shea & Co. Inc. Denny Shupe, Schnader Harrison Segal & Lewis LLP Ray Stanton, RES Aviation Services, Inc. Jon Stern, Schnader Harrison Segal & Lewis LLP Kim Stufflet, Preferred Aviation Underwriters Glenn Vallach, USAIG James E. Van Meter, Allianz Global Corporate an

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founding of the aia alexander t. wells, ed.d - AIA Education Consultant

T

he Aviation Insurance Association (AIA) was founded in 1976 when a handful of underwriters from the National Aviation Underwriters, Aviation Office of America, Omni Aviation, Southern Marina and Aviation, and Crump Aviation Underwriters met in the backyard of E.R. (Butch) Kinnebrew’s home in Memphis, Tennessee. They called themselves the Association of Independent Aviation Insurers (AIAI).

Additional individuals joined the small group when they met in Dallas in 1977 and New Orleans in 1978. Butch Kinnebrew was selected president for the first two years. Despite the tremendous growth in all segments of the aviation industry during the 1960’s and 1970’s, the AIAI grew very slowly during the early years. This period was still dominated by AAU and USAIG and to a lesser extent by INA and Royal-Globe.

This concentration came to the attention of the Judiciary Committee of the U.S. Senate who held hearings in 1958. The major concern was obviously the implication of monopoly and possible anti-competitive practices. While no recommendations resulted from the committee hearings, it put everyone in the industry on notice to avoid any appearance of impropriety.

There were comical instances reported where underwriters from different companies would actually cross a street to avoid eye contact with a competitor. While this does appear to be

20

frivolous, trade associations are subject to high standards under federal and state antitrust laws.

While the organization grew with the large number of new aviation insurance brokers, agents, and companies entering the market during the 1960’s and 1970’s, there was still an over-riding feeling about joining the organization and possibly showing any evidence of collusion. However, many other individuals joined the organization, including lawyers and representatives from non-domestic markets, particularly Lloyds Brokers. Unfortunately, during those early years there was still not enough capacity in the domestic market to complete coverage. Many agents and brokers traveled to London to complete the line.

As the organization matured, bylaws were established as well as a Board of Directors. Bill Alderman and Joe Benero, two former presidents and Pinnacle Award recipients, played a particularly significant role during these early years. The Pinnacle Award, first awarded in 1993, is the most prestigious award given by the AIA to individuals for their career achievement and exemplary efforts in promoting the goals of the AIA. Education plays an important role in any trade association and continuing education courses were introduced to agents and

brokers at the annual conventions during the early 1980’s. Filings with the individual states for approval were performed by the Nason Insurance Agency in Kansas City.

Darrell Hyde, president in 1982 and a subsequent Pinnacle Award winner, was a strong proponent of education and introduced one of the first aviation insurance courses through Georgia State University in Atlanta, Georgia where he taught part-time.

The name was changed to the Aviation Insurance Association in 1988 to reflect the make-up of the organizations’ wide variety of members from the aviation insurance community. Divisions were established including underwriters, agents/brokers, international, reinsurance, claims and attorneys.

The purpose of the AIA remained basically the same over the years: to promote the general welfare of the aviation industry, to present educational opportunities and programs for its members, and create a forum for discussion and

aviation history

expression of individual opinions concerning matters of interest to the aviation insurance industry.

Bob Cannon was appointed Executive Director of the AIA in the mid 1980’s and held that position until the early 1990’s when John Donica, a non-member, took over as Executive Director and handled the day-to-day operations of AIA and arranged for the annual conferences. He also established the first website, www.AIAweb.org.

Education plays an important role in any trade association and continuing education courses were introduced to agents and brokers at the annual conventions during the early 1980’s.

There was still some reluctance by the major markets to join any association.

Nancy Gratzer, a former underwriter at Universal Aviation, joined AIA and took a major interest in promoting continuing education courses offered at the annual confer-

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ences. She led this effort by forming a small group of individuals to identify speakers at the annual conference. She invited Dan Izard, President of AAU to give a speech before the conference in Atlanta in 1994. This milestone event really began the start of bringing the two major markets into the organization.

Nancy later became the first female president of AIA in 1996 and a Pinnacle Award winner in 2013.

Another strong proponent of AIA’s educational efforts was Courtney (Corky) Nason. We had known each other from the early 1960’s when he worked for Fairfax Underwriters and I worked for Royal-Globe. Years later I wrote a book entitled, “Introduction to Aviation Insurance and Risk Management.”

He, along with several other board members, felt very strong about developing a certification program for members. I gave a speech at the 1992 convention in Scottsdale, Arizona discussing a course in aviation insurance at the collegiate level.

As president of AIA in 1993, Corky pursued the idea to develop the Certified Aviation Insurance Professional (CAIP) program using my textbook.

The AIA Board of Directors in 1997 at its annual conference in Tampa, Florida unanimously voted to create the AIA Educational Institute as the organization to handle the association’s educational programs. President David McCredie was strongly in favor of the concept.

Corky and I visited Harold Clark, president of USAIG in New York in 1998. He was very much in favor of an industry certifcation program. The Certified Aviation Insurance Professional

(CAIP) program was developed by Dr. Bruce Chadbourne from Embry-Riddle Aeronautical University and me.

The CAIP designation was designed to elevate the aviation insurance industry’s professional standards and recognize those individuals who have demonstrated the knowledge essential to a career in the aviation insurance industry. The first course was offered to USAIG employees in New York with Corky Nason and Harold Clark in attendance. Over the next 16 years, Bruce and I taught the course, offered on weekends, at different cities throughout the country. By 2015 there were 118 recipients of the designation.

For their timeless efforts in convincing the Board and pushing the program, Corky was awarded the Pinnacle Award in 1997 and Dave received the award in 2000.

In 2003, the Robstan Group took over from John Donica. Gary Hicks was made Executive Director and Mandie Bannwarth was his Associate Director. In 2007 Mandie was appointed Executive Director and has guided the organization in the subsequent years. Onyx Meeting and Events took over management of AIA in 2013.

The AIA Education Foundation was established in 2008 for the purpose of funding academic scholarships and other educational programs, such as continuing education courses at the annual con-

Nancy Gratzer, a former underwriter at Universal Aviation, joined AIA and took a major interest in promoting continuing education courses offered at the annual conferences...

Nancy later became the first female president of AIA in 1996 and a Pinnacle Award winner in 2013.

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ference. Between 2012 and 2014, three online courses offered

by AIA through WEB CE were developed by Dr. Chadbourne and me. The Foundation also funded these courses. It is a 501C(3) not-for-profit corporation and all contributions are tax deductible.

Over the years, the textbook used in the CAIP program has been updated three times, the last in 2007, when members of AIA under the direction of Tom Fry assisted in revising the book. However, it was still basically a college textbook and covered a great deal of material that was of an introductory nature.

In 2014, the Aviation Education Committee decided that a new course was needed that would focus entirely on subjects directly related to aviation insurance. It was also felt that the present method of holding the course in various locations throughout the country was expensive and inhibited the growth of the CAIP program.

Under committee chair, Doug Johnson, a select group of AIA members were assigned the task of writing individual sections which would be a living document that could be updated periodically. It was anticipated that the course would be offered on a webinar (web-based seminar) format in which individuals located around the country could participate. For his efforts

as principal architect behind the new approach to broaden the CAIP program and make it more accessible to members, Doug was awarded the Pinnacle Award in 2016.

Recognizing the contributions that many members have made to the AIA over the years, the organization has established the AIA Eagle Society in which members with a minimum of ten years-service are singled out at the annual conference and awarded a plaque evidencing their service.

Over the years, AIA’s volunteer leaders have built the foundation that the association stands upon today, making it an organization in which members from the smallest agency and broker to the largest aviation insurer can be heard and have a hand in its leadership. At the annual conference, now hosting over 500 members, speakers representing the private sector and government, focus on issues such as aviation safety, claims administration, advances in aviation technology, FAA reform, unmanned aerial systems, space insurance, environmental liability, pollution, pilot training and international issues. The underlying theme continues to be enhancing membership, educational opportunities and information. The AIA has also become an organization that fosters the development of lifelong professional and personal bonds among its members and leaders.

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ACROSS 1 4 10 12 14 16 17 18

19 20 22 24 29

31 32

A lengthy lyrical poem, usually rhymed The “desert fox” of WWII fame Pilot of the epic cross-country flight in 1911 in a Wright Flyer A financial obligation Manufacturer of commercial aircraft Used for fishing Not healthy Portion of a premium for which the policy protection has already been given during the policy term Texting symbol for “there I was” for “three times in a week” Initials of a popular country-western singer Years in a decade The party to the insurance contract who agrees to pay losses Any of the 24 longitudinal divisions of the earth’s surface in which a standard time is kept Abbreviation for additional education A navigational system used during marginal weather conditions

33 Abbreviation for the angular distance north or south of the equator, measured in degrees along a meridian, as on a map 35 ________ Ipsa Loguiture 36 The right of ownership of property 38 An extended narrative poem, such as the Iliad 40 The wife of the ninth President of the United States, William H. Harrison 42 Oldest insurance company in the United State acquired by ACE Limited in 1999 45 Fish eggs 46 WWII Marine pilot and medal of honor winner 47 Navigator on Amelia Earhart’s round the world flight in 1937 48 A professor’s aide (Abv) 49 Package delivery service 53 Largest airline in the United States in terms of revenue (abv) 55 The amount that must be carried as a liability in a financial statement of an insurer 57 To write off (expenditures) by prorating over a certain period

DOWN 1 The path of a satellite as it revolves around another body 2 Led the first flight of B-25’s to bomb Japan in 1942 3 A plant found in mountainous regions in the Alps 4 To extend an insurance contract after its expiration date 5 A company with specific responsibilities or purpose to provide products or a service 6 Stennis Space Station is located in this state (abv) 7 Initials of Adolf Hitler’s wife 8 A king 9 The likelihood of one thing occurring rather than another 11 An enlisted man or veteran of any United States armed forces (abv) 13 Not at all 15 Position upon and above the surface of 21 Football conference of teams predominantly in the southeastern United States 27 Prominent University of Scotland (abv) 26 Seaman (abv) 28 To give up a right or claim 30 Elevation (abv)

32 34 37

39 41 43 44 49 50 51 52 53 54 55 56

The “crocodile hunter” on TV Chief of the US Army Air Service after WWI A military from a country north of Israel that chose not to fight during the 1967 six-day war (abv) To make a fervent request The two poles (abv) Airport notice to all pilots Former aviation insurance pool located in Dallas Texas (abv) A man’s unique felt cap, usually red with a black tassel Opposite of West North West on a compass DuPont, one of the worlds largest chemical companies is located in this State (abv) Roman numeral fifteen Degree from a community college (abv) Home office State for Walmart This was the first of the 13 colonies to renounce its allegiance to the British Crown (abv) Busy room at a hospital (abv)

crossword puzzle 1

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aviation insurance association

the binder 7200 W. 75 th street

overland park , ks 66204

SAN DIEGO HOTEL DEL CORONADO APRIL 29 - MAY 2, 2017 REGISTRATION OPENS IN JANUARY