Compulsory Insurance Doctrine Negates Insurer’s Late Notice and Cooperation Defenses, 8th Circuit Says

In Northwest Airlines, Inc. v. Professional Aircraft Line Service, No. 13-1754, 2015 U.S. App. LEXIS 546 (8th Cir. Jan. 14, 2015), the Eighth Circuit rejected an insurer’s attempt to deny coverage based on late notice and failure to cooperate defenses because the insured was required by county ordinance to maintain insurance.

Westchester Fire Insurance Company insured Professional Aircraft Line Service (PALS) under a hangarkeepers liability insurance policy. PALS entered into a contract with Northwest Airlines to service and maintain Northwest’s aircraft at McCarran International Airport in Las Vegas. On February 6, 2002, a PALS employee failed to properly engage a parking brake on a Northwest plane causing it to roll down an embankment. Northwest claimed more than $10 million in resultant damages.

Northwest notified Westchester of the liability claim in November 2003, approximately a year and a half after the loss. In October 2004, Northwest served PALS with a Minnesota state court complaint seeking damages for the incident. Based on PALS’ failure to respond, a default judgment in excess of $10 million was entered against PALS. Westchester was notified by Northwest of the default proceedings prior to entry of the default judgment.

In December 2005, Westchester filed a declaratory judgment action in Nevada federal court against PALS’ owner asserting there was no coverage for the loss because PALS failed to cooperate or timely notify Westchester of the incident. PALS then failed to respond to the declaratory judgment action, and Northwest intervened to protect its rights under the Westchester policy. A default judgment was ultimately entered against PALS, and the court further ruled that Northwest was bound by the default judgment. The Ninth Circuit overturned that part of the decision against Northwest. On remand, the district court instructed Northwest to institute a separate proceeding against Westchester to obtain the policy proceeds.

Northwest thereafter filed a separate garnishment lawsuit in Minnesota state court, which Westchester removed. The Minnesota federal district court granted summary judgment in Northwest’s favor for approximately $4 million, representing Northwest’s uncompensated portion of its damages. In affirming the district court’s ruling, the Eighth Circuit declined to enforce the Westchester notice and cooperation policy conditions. In relevant part, because the compulsory hangarkeepers liability insurance was intended for the protection of the general public, the court held that Westchester was obligated to pay for the damage. The Eighth Circuit noted that in the case of liability policies issued pursuant to compulsory insurance or financial responsibility statutes, the majority rule is that the insurer may not avoid coverage obligations to the injured person based on alleged breaches of conditions subsequent to the loss. The Eighth Circuit reasoned that compulsory insurance or financial responsibility statutes “are for the benefit of members of the public,” and the “beneficial purpose of compulsory insurance would be thwarted in the event the insurer be permitted technical defenses under the policy relating to conditions” beyond the injured person’s control.

This ruling is unfortunately yet another example of court’s unwillingness to enforce policy conditions.