This insurance coverage case involved a tug-of-war over an aircraft in Brazilian courts. The dispute about ownership involved its owner (CIT Group), the company that leased it (Savon), and the Brazilian government. The question before the New York court in the coverage litigation was whether and when in the course of eleven years the owner suffered a physical loss of the aircraft, and whether that loss was compensable under a war and allied perils coverage provision in the insurance policies it obtained for the aircraft.
CIT Group, owner of a Hawker Beechcraft Premier 1A aircraft, leased its aircraft to Savon, Industria, Comercio, Importacao e Exportancao Ltda., Inc. in 2008 for 60 months for operations in Brazil. At about the same time, the Brazilian Federal Revenue Service ("FRS") began investigating Savon in connection with importation irregularities.
In March 2012, the FRS issued a preliminary order prohibiting Savon from operating the aircraft and ordering that the aircraft was to remain grounded pending the results of its investigation.
CIT Group first found out about the FRS investigation of Savon and the preliminary order about a year later (in April 2013) from a third-party company hired to maintain the aircraft. CIT Group promptly issued a notice of circumstances to the insurers that issued policies regarding the aircraft, identifying the risk that the Brazilian government might seize the aircraft.
Within a month of CIT Group's notice of circumstances, the FRS issued an administrative confiscation order.
CIT Group learned of the confiscation order a few months later in July 2013. At about that time, the 2008 60-month lease of the aircraft to Savon was expiring. CIT Group entered a new lease of the aircraft to Savon for an additional 30 months—subject to numerous protective provisions and conditions considering the considerable risk that the Brazilian government might seize and dispose of the aircraft— to ensure Savon would have standing to challenge the confiscation order in court.
Savon then challenged the confiscation order in federal court in Brazil. Within a few weeks, the Court granted Savon preliminary injunctive relief barring the FRS from disposing of the aircraft before Savon's federal case was resolved. At about the same time in 2013, CIT Group filed its own lawsuit in federal court in Brazil to prevent the FRS from seizing the aircraft. In 2014, the court hearing Savon's lawsuit accepted a cash collateral guarantee from Savon, enjoined the FRS from confiscating the aircraft, and released the aircraft to Savon pending the resolution of the lawsuit. However, Savon then stopped making lease payments to CIT Group, which placed Savon in default.
Savon did not cure its default under the 30-month lease, and CIT Group brought action in Brazilian state court to obtain an order of repossession, which the state court granted in August 2014. Within a few weeks, CIT Group representatives went to the hangar where Savon was storing the Aircraft. There, they took possession of the official log books. The CIT Group representatives made arrangements to transport the aircraft to an adjacent hangar, where they stored the aircraft while satisfying administrative requirements to repatriate the aircraft to the United States. Savon appealed the state court ruling and argued that CIT Group could not obtain possession of the aircraft because the 2013 administrative confiscation order made the aircraft the property of the FRS. The appellate court granted Savon's appeal in part, vacating the lower court's order of repossession pending the outcome of the litigation. Savon got the aircraft back and resumed using it without making payments to CIT Group.
Meanwhile, CIT Group appealed from its federal lawsuit to bar FRS from confiscating the aircraft, which had been unsuccessful. In 2015, the federal appellate court denied CIT Group's appeal. CIT Group then sought to intervene in Savon's federal lawsuit to require Savon to post additional collateral; however, the federal court hearing Savon's lawsuit denied CIT Group's petition.
Savon continued to operate the aircraft without paying CIT Group until it turned the aircraft over to the FRS, which ultimately sold the aircraft at auction in 2019.
CIT Group tendered a claim for the losses resulting from the confiscation to the aircraft's insurers, which denied coverage. CIT Group brought suit in New York state court to obtain coverage.
The insurers raised numerous defenses and argued that they were entitled to summary judgment in their favor for a number of reasons:
- The evidence established that the FRS restrained and controlled the aircraft as a result of the 2012 preliminary order and its chain of restraint and control continued unbroken until the FRS sold the aircraft at auction in 2019 (claiming that the courts merely granted Savon a temporary and limited right to use the aircraft for the term of the guaranty and that CIT never completed its repossession of the aircraft);
- CIT could not have suffered a physical loss of the aircraft during the 2014-2015 policy period because by that time the FRS was already the owner of the aircraft;
- CIT's claim was barred under the "known loss" doctrine and the 2014-2015 Policy's Government of Registry Exclusion; and
- The 2014-2015 policy should be rescinded because CIT failed to disclose that the aircraft had been confiscated in 2012.
The court rejected all of insurers' arguments, finding that Savon—not the FRS—had possession of the aircraft for the entire period from 2008 until 2019 with the exception of the month it was in CIT Group's possession in 2014. The court ruled that the loss of use of the aircraft following the 2012 FRS preliminary order was not a "physical loss" under the policies but a loss of use. Thus, any actual loss occurred sometime after the 2014-2015 policy period, and only when the FRS finally arrested the aircraft from Savon and sold it. This fact led the court to conclude that CIT Group did not violate the known loss doctrine: CIT Group did not have knowledge of a loss in the 2014-2015 timeframe because then-pending litigation—both its own and Savon's federal lawsuits—could have resulted in vacation of the confiscation order (i.e., no actual loss). The court explained that knowledge of risk of a loss is not knowledge of a loss for purposes of the "known loss" doctrine.
Similarly, the notice of circumstances CIT Group issued to its insurers in 2013 put the insurers on notice of the potential loss and the 2012 confiscation of the aircraft, the court observed, and the insurers underwrote the 2014-2015 policy anyway despite the risk.
Finally, the court ruled that the Government of Registry coverage exclusion was nullified by a policy Savon procured in the 2014-2015 period that named CIT Group as an additional insured and wrote back coverage for the risk of governmental seizure of the aircraft.
In sum, the case demonstrates that aircraft insurers must be exceptionally careful to gather facts and take notice of all potential elements of risk to an aircraft before underwriting a policy covering the aircraft. Here, the insurers might have narrowed coverage considering the risks of confiscation by taking into account the CIT Group's notice of circumstances and the Savon-obtained policy that wrote coverage back that the Government of Registry Exclusion was designed to exclude. CIT Group / Equip. Fin., Inc. v. Starr Surplus Lines Ins. Co., 2020 N.Y. Misc. LEXIS 6422, 130 N.Y.S.3d 648 (N.Y. Sup. Ct. Sept. 24, 2020).
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