Avemco Insurance Company v. Auburn Flying Service, Inc. Ruth Norvell, Personal Representative of the Estate of Fred E. Farington, Deceased Brian L. Smith, Co-Personal Representative of the Estate of Vera Mae Smith, Deceased Janelle Briner, Co-Personal Representative of the Estate of Vera Mae Smith, Deceased Laverne Norvell, Personal Representative of the Estate of Augusta Norvell, Deceased Edward Drillon Cheryl Bevirt, Personal Representative of the Estate of Edward Debourbon, Deceased, Intervenors/defendants

Citation: 242 F.3d 819Docket: 00-1646

Court: Court of Appeals for the Eighth Circuit; March 12, 2001; Federal Appellate Court

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Avemco Insurance Company initiated a declaratory judgment action to ascertain if a noncommercial aviation policy provided coverage for an accident involving an aircraft operated by Auburn Flying Services, Inc. (AFS). The incident occurred during a "fly-in" event at Auburn airport on October 5, 1997, where attendees could pay for short airplane rides. During the ninth flight, the plane, piloted by Fred Farington, crashed after colliding with a semi-truck, resulting in the deaths of three passengers and later, Farington himself.

Avemco's policy explicitly excluded coverage for accidents occurring while the aircraft was used for commercial purposes, defined as any use for which an insured person receives or intends to receive money or benefits, except for sharing operating costs among occupants. The district court granted Avemco's summary judgment motion, concluding that the accident fell under this exclusion since the funds collected did not cover flight operating expenses.

The Eighth Circuit Court affirmed the district court's decision, reviewing the summary judgment de novo and applying Nebraska law, which interprets insurance policies as contracts intended to reflect the parties' intentions. The court emphasized that ambiguities must be understood from the perspective of a reasonable insured at the time the contract was made. The appeal was filed by the personal representatives of the deceased pilot and passengers, contesting the applicability of the policy exclusion.

Parties to an insurance contract can negotiate lawful coverage, and insurers may limit liability through conditions consistent with public policy. Clear terms are to be interpreted with their ordinary meaning, and efforts should be made to avoid creating ambiguities. If an insurance contract is open to multiple interpretations, it is deemed ambiguous and must be construed in favor of the insured. Courts must first determine if a contract is ambiguous as a matter of law. The Nebraska Supreme Court has not addressed similar language, prompting reliance on precedents from other jurisdictions.

Appellants argue that the "commercial purpose" exclusion in the policy is ambiguous, citing cases where similar exclusions were found ambiguous. However, the court finds the policy unambiguous, as it includes a "shared expense" exception, distinguishing it from the cited cases. Even if isolated readings suggested ambiguity, the shared expense clause clarifies the exclusion. The court emphasizes the importance of interpreting the insurance contract as a whole. Prior cases have established that "for charge" exclusions do not apply when payments only cover operating costs, a principle already addressed by the current policy's language, which explicitly permits shared expense flights.

The interpretation of the exclusionary clause is a legal question, as it is not ambiguous. The distinction between receiving money for aircraft use and sharing operating costs is central. The clause aims to mitigate risk by limiting flight frequency, with the receipt of money potentially increasing flight numbers. Courts have found that the relationship between payments and direct operating expenses is crucial; payments exceeding fuel costs or resembling commercial rates often indicate a "for charge" flight. A quid pro quo, where fees motivate the flight, also suggests a "for charge" classification, whereas voluntary payments that cover only partial expenses do not. The inquiry should focus on whether a reasonable person would view the arrangement as "shared expenses" or for monetary gain, considering factors like payment relation to expenses, community interest, payment voluntariness, and quid pro quo indications. Overall, a comprehensive, totality-of-the-circumstances approach is necessary in distinguishing between these arrangements.

In the case of Meridian Mutual, the court evaluated multiple factors to determine if a driver's transportation arrangement constituted a "shared car pool expense" under the insurance policy. Key considerations included whether the driver presented herself as providing transportation to the general public or a limited group, the formality of the arrangement, the driver's purpose for the trip, and her personal use of the vehicle. Courts generally found that arrangements among individuals with a common goal, limited participation, and where the driver would have made the trip regardless, qualified as shared expenses.

In this particular case, Farington's intent to use funds to cover costs was noted but did not create a factual dispute since other undisputed evidence suggested the flight was more commercial than shared. Passengers had no understanding of an expense-sharing agreement, and Farington advertised the flights publicly for a fee, indicating a commercial intent. The lack of a community interest among passengers and the public offering of flights were critical factors. Examples were provided where personal arrangements among friends or family might qualify for shared expenses, but Farington's situation, characterized by public solicitation for payment, deviated from this. Ultimately, the court concluded that Farington's flight was a paid service rather than an expense-sharing arrangement, increasing risk beyond what the insurance policy covered.

The decision of the district court is affirmed. The parties acknowledge that there are no precedents interpreting the specific contractual language at issue. The relevant policy language varies in form but not substance and is collectively referred to as "for charge" exclusions, which eliminate coverage, with exceptions that can restore it. Under Nebraska law, the reasonable expectations of the insured are only considered if the contract language is deemed ambiguous. Only two cases address a shared expense exception in insurance contracts, with one cited case providing insight into the ambiguity of "for charge" policies. The court does not determine whether the exclusion is ambiguous but emphasizes that each case should be evaluated based on the specific wording of the exclusionary clause and its unique facts. Previous decisions on "for charge" exclusions, lacking a clear "shared expense" exception, can still inform this case. The court clarifies that a profit motive is not necessarily required for the flight, and insights from cases interpreting automobile liability policies with similar exclusions may be relevant, despite differences in context. Factors indicating a driver’s primary motivation for a trip are relevant in assessing whether an arrangement qualifies as "for charge" or "shared expense."

The Seventh Circuit has determined that factors like the voluntariness of payments or the presence of quid pro quo are not particularly useful in assessing whether an arrangement qualifies as a charge or shared expenses. Specifically, it noted that in some shared expense scenarios, payments may not be voluntary because contributing one's share can be a prerequisite for participating in the flight. While an involuntary payment does not inherently classify an arrangement as being "for charge," a fully voluntary payment likely indicates a genuine sharing of expenses. However, such factors do not provide definitive evidence in many cases.

The court chose not to consider whether varying payment amounts or the failure of one passenger to contribute impacted the equality of expense-sharing under the contract, as it deemed this inquiry unnecessary for its decision. The court concluded that the arrangement in the present case was neither a "shared expense" nor "equally shared expense."

In dissent, Circuit Judge Lay expressed concern that the majority's ruling constitutes a significant injustice for the families of deceased passengers and the plane’s owner, arguing that it is unreasonable to assume the owner did not expect full insurance coverage for non-commercial flights. The owner incurred losses on these flights and did not have a commercial motive for having passengers share minimal expenses. Lay criticized the majority's interpretation of the insurance policy as overly rigid, leading to a forfeiture of coverage that contradicts established principles of insurance policy construction in Nebraska law, which typically favors the insured and discourages forfeitures. The insurance policy specifically excludes coverage for "commercial" purposes, defined as any use for which the insured receives or intends to receive compensation. The parties agreed that no profit was made on the flights in question.

The Nebraska Supreme Court's interpretation of the commercial purpose clause is scrutinized for its ambiguity. The majority compares this case with precedents from other jurisdictions regarding "for charge" exclusions, citing that when passenger payments exceed operating costs, coverage is denied, while equal payments allow for coverage. This reasoning fails to consider the present case, where passengers paid less than operating costs, thus revealing an overlooked ambiguity. The majority attempts to clarify this ambiguity by referencing the equal sharing provision, which defines what does not constitute a commercial purpose. However, this approach does not negate the potential for multiple interpretations of "commercial purpose."

The policy states that the commercial purpose exclusion is inapplicable when there is equal sharing of expenses, but it is flawed to assume that any deviation from equal sharing equates to a commercial purpose. Here, although Farington collected insufficient funds to cover flight expenses, this does not inherently imply a commercial purpose. The pivotal question is whether Farington intended to gain any benefit despite the loss.

The majority's conclusion suggests that if expenses are not equally shared, but passengers pay less than the total expenses, it still indicates a commercial purpose. This interpretation is criticized as unreasonable, as it implies that unequal payment leads to a commercial use, contradicting logical construction principles. Furthermore, the majority disregards the inherent ambiguity and misapplies the legal maxim expressio unius est exclusio alterius, a principle the Supreme Court has previously deemed inappropriate in similar contexts where different misconducts are involved.

The majority opinion concludes that there is no patent ambiguity in the exclusionary clause of the insurance policy. However, a patent ambiguity is defined as one visible on the contract's face, and this analysis lacks nuance. A contract may be unambiguous regarding one type of loss but ambiguous concerning another, such as when passengers pay less than their fair share of operating expenses. The assertion that the policy is unambiguous in one context does not eliminate ambiguity in a different context. 

The interpretation of the contract has been overly constrained, leading to the potential for multiple reasonable interpretations—one that denies coverage and another that mandates it. Under Nebraska law, ambiguous terms must be construed against the insurer. 

Moreover, the Nebraska Supreme Court maintains that words should be understood in their ordinary sense unless doing so leads to an absurd result or contradicts the intent of the parties. Courts will not enforce strict policy language if it causes unreasonable forfeitures or absurd outcomes. Narrow interpretations of insurance policy clauses are discouraged, and the plain language rule does not apply if it results in unreasonable results or thwarts the contract's purpose.

The majority's interpretation suggests that Farington needed to calculate each passenger's exact contribution to establish coverage, a nearly impossible task that could lead to coverage denial in most cases. Therefore, whether considering ambiguity or the unreasonable result of the majority's interpretation, the conclusion is that summary judgment was inappropriate, leading to a recommendation to reverse and remand the case for further proceedings.

An insurance policy must be interpreted based on the reasonable expectations of the insured at the time the contract was made, with a liberal construction favoring the insured in cases of doubt. The majority opinion is critiqued for its internal inconsistencies, particularly in its reliance on cases with "for charge" exclusions that lack a "shared expense" exception, leading to circular reasoning regarding the ambiguity of terms. The equal sharing provision applies when aircraft occupants equally share operating costs; however, contributions from Farington's passengers did not cover the operating expenses, resulting in Farington assuming more than his equal share. The majority acknowledges the reasonableness of this interpretation through cited cases, which clarify that a "for charge" exclusion applies when money received exceeds direct operating costs. Conversely, if payments merely reimburse expenses in a noncommercial context, the exclusion may not apply.