In a recent decision, McKinley v. XL Specialty Insurance Company, the California Court of Appeals held that an insurer did not act in bad faith when it asserted a subrogation claim against the pilot who rented and damaged an aircraft owned by its insured, since the pilot was not insured under the policy for the damage caused by the pilot.
Plaintiff McKinley rented a plane from Todd Aero for the purpose of receiving advanced flight instruction. While McKinley was flying the aircraft, it was damaged during a gear-up landing. Todd Aero’s insurer, XL Specialty Insurance Company, paid approximately $41,000.00 to repair the aircraft and XL Specialty then brought a subrogation action in the name of Todd Aero against McKinley to recover the amount it paid. The subrogation action was referred to judicial arbitration where the arbitrator ultimately concluded that McKinley was not at fault for the damage to Todd Aero’s aircraft.
McKinley then sued XL for bad faith, claiming that XL shouldn’t have sued her in subrogation because she was an insured under Todd Aero’s policy. The trial court dismissed McKinley’s action finding that McKinley was not covered under the XL Specialty policy for the damage to the Todd Aero aircraft. As a result, XL Specialty could sue her in subrogation and she could not maintain an action for bad faith against XL Specialty for having done so.”
The Court of Appeals analyzed the XL Specialty insurance policy and determined that McKinley was not an insured under the policy´s physical damage coverages policy provisions upon which it based its payment for Todd Aero’s loss. The Court noted that “Todd Aero’s claim for damage under the policy is a first-party property damage claim (to pay for physical damages to its own aircraft), and not a third-party liability claim (to pay for property damage to a third party’s property caused by the aircraft). Because McKinley was only an insured under the third-party liability coverage portion of the policy, which did not apply to Todd Aero´s first-party claim to XL Specialty, McKinley could not maintain her bad faith action against XL Specialty.
The Court went on to explain that “[i]f an equipment rental company has an insurance policy that provides third-party liability/property damage coverage to an equipment renter, the renter cannot transform that policy into one providing first-party physical damage coverage; otherwise, the renter could wreck the rented equipment and claim coverage for that damage under the liability/property damage coverage.” The Court concluded that, “[i]n the end, an insurer who has paid a claim for damage to rented equipment cannot be said to have acted in bad faith in seeking subrogation from a renter reasonably believed to have caused that damage.”