United States: Illinois Appellate Court Grants Summary Judgment To Insurer Based On Insured's Noncompliance With Pilot Warranty Endorsement

This action concerned an insurance-coverage dispute for a claim arising out a June 7, 2012 crash of a LearJet 60 at Aspen-Pekin County Airport in Aspen, Colorado (the "Loss"). The Aircraft was piloted by Paul Nemetz ("Nemetz"). Following the Loss, the aircraft's owner, Performance Aircraft Leasing, Inc. ("Performance"), submitted an insurance claim (the "Claim") to its carrier, XL Specialty Insurance Company ("XL"), asserting that the aircraft was a total loss.

XL denied the Claim because Nemetz had not fulfilled the requirements of the Pilot Warranty Endorsement (the "Warranty"), which provided in relevant part:

- "[] Paul Nemetz provided [he has] successfully completed company approved ground and flight training school: for a turbine aircraft within the preceding 12 months of any date he acts as Second in Command" (the "First Warranty Part"); and

- "Any Pilot approved by the Chief Pilot of the Named Insured. With the understanding that: a) all turbine pilots are going to simulator school for the Make and Model they are operating annually; ..." (the "Second Warranty Part")

Shortly after denying the Claim, XL initiated a declaratory judgment action in Illinois against Performance, who counterclaimed. The trial court first ruled that the Warranty was a condition precedent to coverage, and that the word "company" in the First Warranty Part referred to XL. The case therefore turned on whether Nemetz's training met the Warranty requirements.

XL asserted that the requirements of the First Warranty Part were not met because XL never received, much less approved, any proposal for ground and flight training school for Nemetz. The requirements of the Second Warranty Part were not met because Nemetz's most recent training occurred in 2010. Performance argued XL's discretion to approve training under the First Warranty Part rendered coverage illusory. Performance further argued that the annual simulator school training required by the Second Warranty Part could occur after the Loss.

The trial court found for Performance based on the Second Warranty Part. Specifically, the court found that the training could occur post-Loss, provided it took place during the policy period. It was immaterial that Nemetz ultimately did not attend simulator school because XL's denial of the Claim deprived him of the opportunity to fulfill the Second Warranty Part's requirements. The trial court therefore granted Performance summary judgment, and XL appealed.

The Illinois Appellate Court, First District reversed the trial court's decision. While agreeing that postLoss training could fulfill the Second Warranty Part's requirements, the appellate court rejected the conclusion that Nemetz satisfied this requirement. In particular, the appellate court emphasized that the word "annually" implied an ongoing, recurrent action occurring each year. Because more than two years had passed since Nemetz last attended simulator school, he could not be said to attend "annually." The Court of Appeals further noted that the training requirement existed during the previous policy year, but Nemetz had not fulfilled it. Because Nemetz was not "going to simulator school ...

annually," the appellate court ruled that the requirements of the Second Warranty Part were not satisfied.

The appellate court likewise found that Nemetz did not satisfy the First Warranty Part's requirements. Performance again argued that XL's discretion to approve training rendered coverage illusory. It argued that XL could reject a program post-accident to create a basis to deny coverage. The appellate court rejected this argument, noting that the First Warranty Part contemplated completion of training occurring prior to any flight, rather than postaccident. Moreover, the implied duty of good faith and fair dealing required that XL exercise its discretion reasonably. As the appellate court noted, "the mere fact that the policy gives [XL] some discretion does not render coverage illusory." Because there was no indication that any proposed training program was submitted to XL for approval, much less approved and completed, the appellate court found that the requirements of the First Warranty Part were likewise not fulfilled. The Warranty's requirements were therefore unmet, and the Court reversed and remanded, with instructions to enter summary judgment in favor of XL. XL Specialty Ins. Co. v. Performance Aircraft Leasing, Inc., No. 1-181031, 2019 Ill. App. LEXIS 477 (Ill. App. Ct. June 27, 2019).

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