Vargas v. Insurance Co. of North America
651 F.2d 838 (1981)
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Rule of Law:
When an insurance policy contains an ambiguous territorial limitation, the ambiguity is construed in favor of the insured. A policy covering occurrences 'within' specified geographical areas can be reasonably interpreted to include coverage for travel on a reasonably direct route between two covered points.
Facts:
- Joseph Khurey purchased an aviation insurance policy from the Insurance Company of North America (INA) for his single-engine Piper Arrow aircraft.
- The policy stated it applied to occurrences "within the United States of America, its territories or possessions, Canada or Mexico," and an endorsement later added the Bahama Islands.
- In his insurance application, Khurey indicated he would use the aircraft for vacations outside the continental United States.
- Khurey, along with his wife and daughter, was flying from New York to Puerto Rico, a U.S. territory.
- After making stops in Miami and Haiti, the plane crashed into the sea approximately 25 miles west of Puerto Rico on the final leg of the journey.
- INA denied coverage, asserting the crash did not occur 'within' a covered territory.
Procedural Posture:
- The estate of Joseph Khurey brought a declaratory judgment action against the Insurance Company of North America (INA) in federal district court to determine coverage under the policy.
- INA moved for summary judgment, which the district court granted, finding that the policy did not cover the loss.
- The plaintiffs (appellants) appealed the district court's grant of summary judgment to the United States Court of Appeals.
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Issue:
Does an aviation insurance policy, which covers losses 'within' the United States and its territories, provide coverage for a crash in international waters during a reasonably direct flight between two covered geographical areas?
Opinions:
Majority - Sofaer, District Judge
Yes, the policy can be construed to provide coverage. Under New York law, ambiguous terms in an insurance policy must be construed most favorably to the insured, and the insurer bears the heavy burden of proving its interpretation is the only fair and reasonable one. The term 'within' is ambiguous; it can mean strictly inside the physical borders of the named locations, or it can reasonably mean inside a broader area that includes travel on a reasonably direct route between those locations. Given that the policy insures an airplane, a mode of transportation, it is reasonable to assume the policy covers flights between covered destinations, especially since the insurer could have used more precise language to exclude over-water travel if it had intended to do so. The realities of aviation, where direct routes between covered locations often cross international waters, support the insured's interpretation as a reasonable one.
Analysis:
This decision significantly reinforces the doctrine of contra proferentem in insurance law, which holds that ambiguities in a contract are construed against the drafter—in this case, the insurer. It establishes a precedent that for mobile subjects like aircraft, territorial limitation clauses should be interpreted in light of the subject's intended use. The ruling pressures insurers to draft their policies with much greater specificity if they wish to exclude coverage for routes between named territories, as a general limitation to being 'within' a territory may not suffice to exclude the journey itself.
