Loss of Physical Possession of Aircraft Held the Efficient Physical Cause of Loss

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Under New York law, where an insurance policy provides coverage for physical loss or damage of property caused by enumerated causes of loss or perils, the policyholder must establish that the loss was proximately caused by one of the enumerated causes of loss or perils. Often the question is what determines the proximate cause of the loss and how far back should the inquiry into the proximate cause go. In a recent motion court decision, a New York trial-level court discussed the limits of the proximate cause inquiry in a complicated case of confiscation of a leased aircraft by a foreign government.

In The CIT Group/Equipment Financing, Inc. v. Starr Surplus Lines Insurance Co., No. 654448/2018 (N.Y. Sup. Ct., N.Y. Co. Sept. 24, 2020), the court had before it a coverage dispute over a series of similar aviation hull policies. The insured had leased an airplane and the airplane was subject to various proceedings in Brazil where the federal government of Brazil was alleging wrongdoing by the lessee. The airplane became the subject of those proceedings when the government sought to seize the airplane. Please read the decision if you are interested in the details of the various underlying claims.

These disputes lasted for several years and ultimately culminated in an order confiscating the airplane. The coverage dispute in New York Supreme Court was over whether the insurance policies had to cover the insured for the loss of the airplane because of the confiscation.

In granting summary judgment to the leasing company insured and denying the insurers’ motions for summary judgment, the court addressed the requirement discussed above concerning proving the proximate cause of the loss of the airplane. The court first quoted various cases establishing that the search for the proximate cause is one for the efficient physical cause of the loss. Courts do not look back to the beginnings of the loss, but stop at the cause nearest to the loss.

Here, the court held that the undisputed evidence demonstrated that “the efficient cause of the loss, that is, the cause nearest to the loss,” was the Brazilian court order that forced the insured to relinquish possession of the airplane to the lessee to use and hold under color of the government’s order without having to make lease payments. It was at that point, said the court, that the insured lost physical possession of the airplane as a result of confiscation by the Government of Brazil triggering coverage under the relevant insurance policy.

The court rejected arguments that earlier court orders were the proximate cause of the loss as those orders threatened confiscation, but no actual confiscation took place because of appeals and other actions. The known loss doctrine also was rejected as inapplicable because there was no physical loss prior to the relevant policy period.

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