In some situations, policyholders argue that an insurance policy is “illusory.”  This can happen when coverage is denied for a risk that is tied to a significant aspect of the insured’s operations.  Think of a gas station that is denied coverage based on the pollution exclusion.  Or a bar with a policy that contains an assault and battery exclusion.

As policyholders see it, in a situation such as this, the policy is “illusory.”  Sure, it says “insurance policy” on it, they admit, but an exclusion is so wide-reaching that it provides no insurance at all.  However, courts almost always reject this argument.  True, the policy precludes coverage for risks associated with the core operations of the insured’s business.  But courts will almost never conclude that a policy is “illusory” if there are still other situations where it provides coverage.  In other words, to be “illusory,” the exclusion must negate all or virtually all coverage.  

That’s what was at issue in Travelers Prop. Cas. Co. v. H.E. Sutton Forwarding Co., No. 21-719 (M.D. Fla. Aug. 24, 2023).  Antonio de Jesus Zepeda was picking up horses and equipment from a Boeing 727-200 – known as “Air Horse One” – at Blue Grass Airport (what else would it be called) in Lexington, Kentucky.  After picking up the load, the tractor trailer that Mr. Zepeda was operating collided with the aircraft’s wing.

The plane had been chartered by Tex Sutton [how cool would it be to have the nickname Tex?] and Mr. Zepeda filed suit for injuries sustained.  There were lots of parties involved in the shipment and at issue was coverage under a Travelers excess policy, issued to Clark Aviation, which included Tex Sutton as an insured.

Travelers denied coverage to Tex based on the Aircraft Liability Exclusion: “Damages arising out of the ownership, maintenance, use or entrustment to others of any aircraft owned or operated by or rented or loaned to any insured. Use includes operation and ‘loading or unloading.’ …”

Tex did not dispute that the Aircraft Liability Exclusion applied.  But therein lies the problem.  As Tex saw it, the exclusion was so broad that it rendered coverage illusory.  After all, his entire business “involves one thing — the use of an aircraft for the transportation of horses.”

But the court took the usual path when confronted with such an argument. While acknowledging that the “Aircraft Liability Exclusion negates a lot of coverage,” the court concluded that it did not “swallow up” every claim under the insuring agreement: “For example,” the court explained, “as Travelers notes, the Policy covers — and the Aircraft Liability Exclusion does not negate coverage — for bodily injuries such as slips and falls at Tex Sutton’s leased premises, or property damage due to Tex Sutton’s negligent maintenance of its leased premises.”  The court also noted that the exclusion would not eliminate “personal and advertising injury” coverage.

I imagine [no, I’m sure] that policyholders have a hard time accepting that their liability policy precludes coverage for problems so fundamental to their need for the policy.  In such cases, where the exclusion is that significant -- and especially if they don’t learn about it until the time of a claim -- it has to be looked at as a lack of appreciation or education, at the time of purchase, for the policy’s coverage.