Sept. 12, 2023 – An airplane insurance policy authorized an insurer to deny coverage because the pilot didn’t have a medical certificate from the Federal Aviation Administration (FAA) when he crashed, the U.S. Court of Appeals for the Seventh Circuit has ruled.

In Jadair International, Inc. v. American National Property and Casualty Company, No.22-3053 (Aug. 9, 2023), the Seventh Circuit also held that Wis. Stat. section 631.11(3), concerning rescission of an insurance policy, did not apply to the insured’s claim.

Insurance Policy for Plane

In 2019, David Schmutzler applied to American National Property and Casualty Company (American National) for an insurance policy on a Cessna Centurion airplane.

On the application, Schmutzler, the owner and president of Jadair International, Inc. (Jadair), listed himself as the only authorized pilot for the Cessna. Schmutzler also said on the application that he was a licensed pilot and had a FAA medical certificate.

Schmutzler initialed a section on the application that said that there was no coverage unless: 1) the plane was being flown by the pilot listed on the application; and 2) that pilot had “at least the certificates, ratings, and pilot experience indicated, and who … is/are properly qualified for the flight involved.”

American National issued Jadair the policy in June 2017.

Pilot Killed in Crash

In May 2020, during the policy’s coverage period, Schmutzler was killed when the Cessna crashed near Burlington Municipal Airport in Walworth County. The crash was apparently caused by a mechanical failure.

Jadair failed a claim under the policy. But because Schmutzler’s medical certificate was expired at the time of the crash, American National denied the claim.

Jadair sued American National in the U.S. District Court for the Eastern District of Wisconsin. The district court granted summary judgment for American National. Jadair appealed.

Substantive Law of Wisconsin

Writing for a three-judge panel, Judge John Lee began his opinion by explaining that the Seventh Circuit would apply state substantive law because the court was sitting in diversity (Jadair is headquartered in Wisconsin and American National in Missouri).

Under Wisconsin Supreme Court caselaw, Lee pointed out, a court will enforce an insurance contract provision if it’s unambiguously worded.

Judge Lee noted there was no question that under the American National policy, the company had made an initial grant of coverage to Jadair.

But, Lee pointed out, the policy contained an exclusion, titled “Item Nine,” that specified that there was no coverage if the pilot didn’t have a FAA medical certificate.

What Effect Endorsement?

Jadair argued that an endorsement to Item Nine created an exception to that medical certificate exclusion. In support of that argument, Jadair pointed to the first line of the endorsement, which states that the endorsement “CHANGES [THE] POLICY.”

But Judge Lee pointed out that the endorsement also stated that it “completes or changes” Item Nine.

“The word ‘completes’ indicates that the Endorsement may be read as adding to, rather than displacing, Item Nine’s provision,” Lee wrote.

Jadair further argued that the endorsement failed to re-state the medical certificate requirement, meaning it abrogated the medical-certificate exclusion specified in Item Nine. But that argument missed the mark, Judge Lee concluded.

“While it is true that the Endorsement does not repeat Item Nine’s explicit statement that coverage is excluded if the Cessna’s pilot does not have a medical certificate, nothing in the Endorsement is inconsistent with that statement either,” Lee wrote.

Judge Lee also pointed out that the endorsement’s header stated that it “completes or changes” Item Nine.

“The best way to read the endorsement-specific requirements is to interpret them as additional requirements that the pilot of the Cessna must meet under the policy,” Lee wrote.

“Thus, even though Schmutzler satisfied the endorsement-specific requirements, he was still bound by Item Nine and the Endorsement’s medical-certificate requirement, and he failed to satisfy it,” Judge Lee wrote.

Extrinsic Evidence

Lee concluded that the result would be the same even were the Seventh Circuit to find that the policy was ambiguous on its face, because under Wisconsin law, a court may look to extrinsic evidence to clarify an ambiguous provision in an insurance contract.

Schmutzler’s application was such extrinsic evidence, Judge Lee reasoned.

“Schmutzler initialed a section called ‘Minimum Pilot Requirements,’ which clearly states that ‘there is no coverage’ under the policy unless the Cessna’s pilot is both ‘designated’ on the application and has ‘the certificates … indicated’ and is ‘properly qualified for the flight involved,’” Lee wrote.

Exclusion vs. Failure of Condition or Breach of Warranty

Jadair argued that Wis. Stat. section 631.11(3) applied to its claim.

That section specifies that neither the failure of a condition prior to a loss or the breach of a promissory warranty affects an insurer’s obligation under a policy unless it: 1) existed at the time of the loss; and 2) either increases the risk at the time of the loss or contributes to the loss.

Jadair argued that under section 631.11(3), it was illegal for American National to deny coverage unless it could show that Schmutzler’s failure to maintain a FAA medical certificate increased its risk or contributed to the crash.

But Judge Lee concluded that section 631.11(3) didn’t apply because it applied only to the failure of a condition or the breach of a promissory warranty.

“The policy’s medical-certificate requirement is not a condition subsequent,” Lee wrote. “Rather … it is an exclusion of coverage in cases where the requirement is not satisfied.”

Lee pointed out that while the failure of a condition or the breach of a warranty allow an insurer to avoid liability under existing coverage, an exclusion declares that no coverage ever existed.