*

The Honorable Harold A. Ackerman, United States District Judge for the District of New Jersey, sitting by

designation.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 05a0229p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _________________

MERIDIAN LEASING, INC.,

Plaintiff-Appellee,

v.

ASSOCIATED AVIATION UNDERWRITERS, INC.,

Defendant-Appellant.

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No. 04-1184

Appeal from the United States District Court

for the Western District of Michigan at Grand Rapids.

No. 02-00192—Ellen S. Carmody, Magistrate Judge.

Argued: April 20, 2005

Decided and Filed: May 24, 2005 

Before: SUHRHEINRICH and GILMAN, Circuit Judges; ACKERMAN, District Judge.*

_________________

COUNSEL

ARGUED: Barry R. Smith, McCARTHY SMITH LAW GROUP, Portage, Michigan, for

Appellant. Jon R. Muth, MILLER, JOHNSON, SNELL & CUMMISKEY, Grand Rapids,

Michigan, for Appellee. ON BRIEF: Barry R. Smith, McCARTHY SMITH LAW GROUP,

Portage, Michigan, for Appellant. Jon R. Muth, Mark P. Hunting, MILLER, JOHNSON, SNELL

& CUMMISKEY, Grand Rapids, Michigan, for Appellee. 

_________________

OPINION _________________

HAROLD A. ACKERMAN, District Judge. In this case, the District Court, sitting in

diversity, was faced with the task of interpreting the language of an all-risk insurance policy that

allegedly covered damage to an aircraft engine caused by an unusual occurrence during start-up.

The insurer alleged that the policy’s exclusion for wear and tear foreclosed coverage. Applying

California law, the District Court found that the term “wear and tear” was ambiguous, and resolved

the ambiguity by requiring that damage from wear and tear result from the normal and ordinary

operation of the engine. Thus, the District Court granted partial summary judgment for the insured

and reserved for trial the question whether the damage resulted from the normal and ordinary

operation of the engine. After hearing testimony, the District Court resolved the question in the

1
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 2

1

 We will hereafter refer to Judge Carmody as the “District Court.”

2

 The Policy apparently did not contain a choice-of-law provision, and the District Court requested briefing

from the parties on the applicable law. Meridian urged application of California law. AAU conceded that Michigan’s

vested rights approach to choice-of-law questions dictated that California law should apply, but nevertheless suggested

that the court follow the “trend” toward applying the law of the forum. Def.’s Br. Choice L. at 4, Meridian Leasing, Inc.

negative and awarded damages to the insured. The insurer now appeals the District Court’s grant

of partial summary judgment resulting from its interpretation of the policy language. We conclude

that the parties did not intend the term “wear and tear” to carry a specialized meaning, that the

parties intended the policy to cover damage resulting from accidental and fortuitous occurrences,

and that the incident that caused the damage to the insured’s aircraft engine fell within the scope of

coverage. We AFFIRM.

I.

This appeal presents an intriguing question of law in the guise of a deceptively simple fact

pattern. Meridian Leasing, Inc. (“Meridian”), the Appellee in this action, owned a Piper Meridian

aircraft (“Aircraft”) that it purchased new in March 2001. On August 10, 2001, James Robins,

Meridian’s owner and the Aircraft’s authorized pilot, attempted to start the Aircraft’s engine. As

Robins was performing this multi-step process, he observed flames emanating from both of the

Aircraft’s exhaust stacks.

Robins immediately shut down the engine. When this failed to extinguish the flames, Robins

attempted to evacuate the Aircraft. Mechanic inspector David Tesser, who witnessed these events,

ran to the Aircraft and directed Robins to remain in the cockpit. Tesser then instructed Robins to

re-start the engine. This effort succeeded in extinguishing the flames. 

For several seconds as the fire burned, the engine operated at a temperature beyond the range

in which the engine was designed to operate safely. Indeed, although not part of the District Court’s

factual findings, there is evidence in the record that the temperature reached 2,260 degrees

Fahrenheit for a period of 11 seconds, causing the compressor blade tips to melt and splatter molten

metal onto the inside of the engine casing. The excessive internal temperature caused the engine

to suffer extensive damage. Meridian subsequently had the engine repaired at a cost of $224,165.53,

plus $8,326.36 for engine removal and replacement and $5,356.50 for substitute transportation costs.

Meridian insured the Aircraft under a policy (the “Policy”) issued by Associated Aviation

Underwriters, Inc. (“AAU”), the Appellant in this matter. Coverage F of the Policy provided

“Physical Damage Coverage” on an “All Risk Basis,” Joint Appendix (“J.A.”) at 154, whereby AAU

would “pay for any physical damage loss to the aircraft, including disappearance of the aircraft,”

J.A. at 157. Meridian filed a claim with AAU for the damage to the Aircraft. AAU denied the claim

on the ground that the damage fell within the Policy’s exclusion for wear and tear. 

Meridian brought this suit against AAU in the United States District Court for the Western

District of Michigan, seeking a declaration that the damage to the Aircraft was not wear and tear and

that the Policy therefore covered Meridian’s claim. The District Court had subject matter

jurisdiction over this matter pursuant to 28 U.S.C. § 1332. Shortly thereafter, the case was assigned

to Magistrate Judge Ellen S. Carmody, and the parties consented to the Magistrate Judge exercising

full judicial authority pursuant to 28 U.S.C. § 636(c) and Fed. R. Civ. P. 73.1

 Meridian then moved

for partial summary judgment on the proper interpretation of the Policy’s wear and tear exclusion.

The District Court found that the Policy did not define the term “wear and tear.” Applying

California law,2

 the District Court held that the term must be given its “ordinary and popular”
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 3

v. Associated Aviation Underwriters, Inc., 297 F. Supp. 2d 972 (W.D. Mich. 2004) (No. 02-192). Noting that “the only

apparent connection which the state of Michigan has with this dispute is that it is a state in which [Meridian] was able

to obtain personal jurisdiction over [AAU],” the District Court held that the law of California—the state in which the

Policy was executed—governed the court’s interpretation of the contract. Meridian Leasing, Inc. v. Associated Aviation

Underwriters, Inc., No. 02-192, slip op. at 7 (W.D. Mich. Feb. 14, 2003). Neither party disputes this ruling on appeal;

therefore, we will assume that California law governs the interpretation of the Policy. 

meaning, which required that the wear and tear arise from “ordinary” or “normal” operation of the

Aircraft. Meridian Leasing, Inc. v. Associated Aviation Underwriters, Inc., No. 02-192, slip op. at

10-11 (W.D. Mich. Feb. 14, 2003) (hereinafter “Meridian Leasing I”). Accordingly, the District

Court granted in part and denied in part Meridian’s motion for summary judgment, reserving for trial

the sole question whether the damage to the Aircraft arose from “ordinary” or “normal” usage.

On September 24, 2003, the District Court held a bench trial. An Opinion and Factual

Findings followed on January 5, 2004. See Meridian Leasing, Inc. v. Associated Aviation

Underwriters, Inc., 297 F. Supp. 2d 972 (W.D. Mich. 2004) (hereinafter “Meridian Leasing II”).

The District Court concluded that the events that caused the damage to the Aircraft were not

“normal” or “ordinary” and awarded Meridian $295,333.45 in damages. AAU timely appealed on

February 5, 2004. The only issue on appeal is whether the District Court erred in interpreting the

wear and tear exclusion so as to require normal or ordinary operation of the Aircraft. This Court has

jurisdiction over the present appeal pursuant to 28 U.S.C. § 1291.

II.

We review the District Court’s grant of partial summary judgment de novo. Ability Ctr. of

Greater Toledo v. City of Sandusky, 385 F.3d 901, 903 (6th Cir. 2004). Our review is limited,

however, to the evidence before the lower court at the time of its ruling. Bush v. Rauch, 38 F.3d

842, 846 (6th Cir. 1994). Questions of contract interpretation, such as those that formed the basis

of the District Court’s grant of partial summary judgment, generally are considered to be questions

of law subject to de novo review. Campbell v. Potash Corp. of Sask., Inc., 238 F.3d 792, 797 (6th

Cir. 2001). Accordingly, the existence of ambiguity is a de novo question for this Court. Id.

Nevertheless, “[t]he trial court’s resolution of ambiguity based on extrinsic evidence may not be

overturned unless clearly erroneous.” Id. 

Insurance policies are contracts and are interpreted as such. Palmer v. Truck Ins. Exch., 21

Cal. 4th 1109, 1115, 988 P.2d 568, 572 (1999). Under California law, a court’s primary directive

in interpreting a contract is to give effect to the intent of the parties as it existed at the time of

contracting. Cal. Civ. Code § 1636; Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 763, 28 P.3d 889,

893 (2001). A court must look first to the language of the contract to derive the parties’ mutual

intent, so long as the language is clear and explicit and does not involve an absurdity. Cal. Civ.

Code §§ 1638, 1639; Cont’l Heller Corp. v. Amtech Mech. Servs., Inc., 61 Cal. Rptr. 2d 668, 670

(Ct. App. 1997). California law also requires a court to take the whole of the contract together,

giving effect to every part if reasonably practicable to do so. Cal. Civ. Code § 1641; Ticor Title Ins.

Co. v. Rancho Santa Fe Ass’n, 223 Cal. Rptr. 175, 177 (Ct. App. 1986) (“An interpretation which

renders part of the instrument to be surplusage should be avoided.”). A court shall give the words

of a contract their “ordinary and popular” meaning, unless they are used in a technical sense or a

special meaning is given to them by usage, in which case the court shall adhere to the latter meaning.

Cal. Civ. Code § 1644; AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822, 799 P.2d 1253, 1264

(1990). If a contract employs technical terms, a court shall interpret them as they are commonly

understood by persons in the business or profession to which they relate, unless the terms are clearly

used in a different sense. Cal. Civ. Code § 1645; see Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th

1070, 1073, 70 P.3d 351, 353 (2003) (involving interpretation of “collapse” in insurance contract

that explicitly defined the term). 
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 4

California has erected a low threshold for finding ambiguity in an insurance contract. “A

policy provision is ambiguous when it can have two or more reasonable constructions.” Safeco, 26

Cal. 4th at 763, 28 P.3d at 849; see also Kilroy Indus. United Pac. Ins. Co., 608 F. Supp. 847, 852

(C.D. Cal. 1985) (“An insurance policy is ambiguous if the meaning of the terms is uncertain or

capable of being understood in more than one manner.”) (internal quotation marks omitted); S. Cal.

Edison Co. v. Superior Court, 44 Cal. Rptr. 2d 227, 232 (Ct. App. 1995) (stating that the question

for the court is whether the contract is “reasonably susceptible” to the meaning urged). Ambiguities

must be resolved “in accordance with the objectively reasonable expectations of the insured.”

Farmers Ins. Exch. v. Knopp, 58 Cal. Rptr. 2d 331, 335 (Ct. App. 1996). This requirement comports

with the statutory provision and longstanding rule of contract interpretation that ambiguities in a

contract must be construed against the party who drafted their terms. Cal. Civ. Code § 1654;

Victoria v. Superior Court, 40 Cal. 3d 734, 739, 710 P.2d 833, 835 (1985). In addition, coverage

clauses are interpreted broadly and exclusions are interpreted narrowly. Garvey v. State Farm Fire

& Cas. Co., 48 Cal. 3d 395, 406, 770 P.2d 704, 710 (1989).

It is of course axiomatic that extrinsic evidence may be used to interpret a contract when the

terms of the contract are in some respect ambiguous. See, e.g., Morey v. Vannucci, 75 Cal. Rptr. 2d

573, 578 (Ct. App. 1998) (stating that California law requires admission of extrinsic evidence to

resolve ambiguities). California’s leading case on the use of extrinsic evidence in contract

interpretation is Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d

33, 442 P.2d 641 (1968). In that case, Chief Justice Roger Traynor set forth a very permissive

standard for the use of extrinsic evidence: “The test of admissibility of extrinsic evidence to explain

the meaning of a written instrument is not whether it appears to the court to be plain and

unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which

the language of the instrument is reasonably susceptible.” Id. at 37, 442 P.2d at 644. Chief Justice

Traynor continued: “A rule that would limit the determination of the meaning of a written instrument

to its four-corners merely because it seems to the court to be clear and unambiguous, would either

deny the relevance of the intention of the parties or presuppose a degree of verbal precision and

stability our language has not attained.” Id.

The Pacific Gas court noted that many other courts have held that a contract may be

unambiguous on its face. Id. at 38 & n.4, 442 P.2d at 644 & n.4 (citing examples from the Second

Circuit and Williston on Contracts). However, the California Supreme Court explicitly chose to

depart from that authority.

In this state, . . . the intention of the parties as expressed in the contract is the source

of contractual rights and duties. A court must ascertain and give effect to this

intention by determining what the parties meant by the words they used.

Accordingly, the exclusion of relevant, extrinsic evidence to explain the meaning of

a written instrument could be justified only if it were feasible to determine the

meaning the parties gave to the words from the instrument alone.

Id. at 38, 442 P.2d at 664 (footnote omitted). 

Subsequent decisions of other courts have criticized the breadth of the Pacific Gas holding.

For instance, the Ninth Circuit made the following observation:

California does not follow the traditional rule. Two decades ago the California

Supreme Court in [Pacific Gas] turned its back on the notion that a contract can ever

have a plain meaning discernible by a court without resort to extrinsic evidence. The

court reasoned that contractual obligations flow not from the words of the contract,

but from the intention of the parties.
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 5

3

 We note that the Trident decision was itself criticized by a panel of the California Court of Appeals, which

characterized the decision as an “unfortunate and, in our view, inaccurate characterization of California law.” Banco

Do Brasil, S.A. v. Latian, Inc., 285 Cal. Rptr. 870, 893 n.53 (Ct. App. 1991).

Trident Ctr. v. Conn. Gen. Life Ins. Co., 847 F.2d 564, 568–69 (9th Cir. 1988). The court continued:

Under Pacific Gas, it matters not how clearly a contract is written, nor how

completely it is integrated, nor how carefully it is negotiated, nor how squarely it

addresses the issue before the court: the contract cannot be rendered impervious to

attack by parol evidence. If one side is willing to claim that the parties intended one

thing but the agreement provides for another, the court must consider extrinsic

evidence of possible ambiguity. If that evidence raises the specter of ambiguity

where there was none before, the contract language is displaced and the intention of

the parties must be divined from self-serving testimony offered by partisan witnesses

whose recollection is hazy from passage of time and colored by their conflicting

interests.

Id. at 569.3

 Similarly, the Southern District of New York recognized that Pacific Gas represented

a departure from the law of New York. See Hanson v. McCaw Cellular Communications, Inc., 881

F. Supp. 911, 916–17 (S.D.N.Y. 1995) (noting that the California approach differs from the law of

New York and has been “sharply criticized,” but reluctantly applying the standard set forth in

Pacific Gas in interpreting a license governed by California law); see also Bowers v. Jefferson Pilot

Fin. Ins. Co., 219 F.R.D. 578, 583–84 (E.D. Mich. 2004) (noting the variation among states

regarding use of extrinsic evidence in contract interpretation, and citing Pacific Gas). We think that

these authorities illustrate that California has adopted a comparatively expansive approach to

contract interpretation.

Against this legal backdrop, we turn our inquiry to the specific language of the Policy. Like

most insurance contracts, the Policy contains exclusions as well as coverages. The section of the

Policy titled “Exclusions” provides as follows:

This policy does not apply:

. . . .

(f) Under coverages F, G and H, to physical damage . . . .

(ii) caused by and confined to (a) wear and tear, (b) deterioration or (c) mechanical

or electrical breakdown or failure of equipment, components or accessories installed

in the aircraft . . . .

J.A. at 158 (bold type in original). Two pages later, under the heading “Limit of the Company’s

Liability,” the Policy states the following:

With respect to damage to aircraft engines and auxiliary power units insured under

this policy:

. . . . 

(b) damage caused by heat which results from the operation, attempted operation or

shutdown of the engine shall be considered to be “wear and tear” . . . .

J.A. at 160. 

The District Court concluded, in its February 14, 2003 Opinion and again in its January 5,

2004 Opinion, that the Policy did not define the term “wear and tear.” Meridian Leasing I at 10;

Meridian Leasing II, 297 F. Supp. at 980–81. In reaching this conclusion, the court expressed
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 6

reluctance to give broad construction to the limitation language, which, the court posited, would

result in exclusion of coverage for any damage caused by heat. Had this been AAU’s intention, the

District Court noted, it could have explicitly stated so in the Policy. Instead, the court found, the

Policy left the term “wear and tear” undefined, and the limitation had the effect of excluding

“coverage for damage caused by heat which results from (or is properly characterized as) ‘wear and

tear.’” Meridian Leasing I at 10. Having identified an ambiguity, the District Court then consulted

various on-line dictionaries for the “ordinary and popular” meaning of “wear and tear.” As a result

of this exercise, the court held that “wear and tear” does not encompass all damage, but only damage

that results from “normal” or “ordinary” usage. Id. Accordingly, the District Court resolved the

perceived ambiguity by interpreting the heat limitation as to require “normal” or “ordinary”

operation or attempted operation of the engine. Id. at 11. 

We take issue with one aspect of the District Court’s ruling. By declaring that the Policy

does not define wear and tear, and suggesting that the heat limitation excluded only heat damage that

is properly characterized as wear and tear, we think that the District Court effectively rendered the

heat limitation superfluous. If the Policy expressly excludes wear and tear, and the subsequent heat

limitation applies only to damage that would otherwise be considered to be wear and tear, we fail

to see what purpose the heat limitation would serve. The District Court’s suggested reading of the

heat limitation therefore runs afoul of the principle of California law requiring an interpreting court

to give effect to every part of a contract if reasonably practicable to do so. See Cal. Civ. Code

§ 1641. We do not believe, however, that the District Court’s reading of the heat limitation was

necessary to its ultimate finding of ambiguity. 

With respect to the District Court’s broader holding that the Policy was ambiguous, we are

in agreement. Our finding of ambiguity flows from the primary mandate of any court interpreting

a contract under California law: to give effect to the mutual intent of the parties as it existed at the

time of contracting. Cal. Civ. Code § 1636. To this end, a court must give terms their “ordinary and

popular” meaning unless they are used in a technical sense or are given a special meaning by usage.

Id. § 1644. An interpreting court may not focus on the perceived ambiguity of a term or expression

in the abstract, but must interpret a policy holistically and in the context of the circumstances of the

case. Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18, 900 P.2d 619, 627 (1995). “The proper

question is whether the word is ambiguous in the context of this policy and the circumstances of this

case. The provision will shift between clarity and ambiguity with changes in the event at hand.”

Bay Cities Paving & Grading, Inc. v. Lawyer’s Mut. Ins. Co., 5 Cal. 4th 854, 868, 855 P.2d 1263,

1271 (1993) (internal citations and quotation marks omitted). 

Section 1644 of the California Civil Code was the focus of the California Supreme Court’s

recent decision in E.M.M.I. Inc. v. Zurich American Insurance Co., 32 Cal. 4th 465, 84 P.3d 385

(2004), an insurance coverage dispute arising from the theft of a jewelry salesman’s vehicle

containing two bags of jewelry while the salesman was inspecting the vehicle’s exhaust pipe. The

salesman’s employer had insured the jewelry under a so-called “jeweler’s block” insurance policy,

but the policy excluded from coverage any jewelry stolen from a vehicle except when the insured’s

representative was “actually in or upon the vehicle at the time of the theft.” Id. at 469, 84 P.3d at

388. The insurer denied coverage on the theory that “actually in or upon” was a legal term of art

that required strict construction and did not extend, as the insured had argued, to instances where

the insured was merely in close proximity to the vehicle. California’s Supreme Court rejected this

argument, however, noting that “neither the phrase ‘actually in or upon’ nor the term ‘upon’ was

enclosed in quotation marks.” Id. at 471–72, 84 P.3d at 390. There was nothing in the policy, the

court found, that indicated or suggested that the parties intended the exception to the vehicle theft

exclusion to carry a specialized or technical meaning. Id. Accordingly, the court found that the term

“upon” was ambiguous, and resolved the ambiguity in favor of the insured.
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 7

4

 The Definitions section of the Policy makes clear that special meaning attaches to terms in the Policy that

appear in bold typeface. 

The instant case is closely analogous to E.M.M.I. Where the term “wear and tear” first

appears in the Exclusions section of the Policy, there are no quotation marks to denote that the

expression is a term of art or carries a specialized meaning. Whereas other terms in the exclusion,

such as “physical damage” and “aircraft,” appear in bold typeface to indicate that they are defined

in the Definitions section of the Policy,4 the term “wear and tear” appears in an undistinguished

typeface. Indeed, “wear and tear” is nowhere defined in the Definitions section of the Policy, as one

would expect it to be if AAU and Meridian had intended the term to convey a special meaning.

Under these circumstances, we find nothing to indicate that the parties understood “wear and tear”

to convey a meaning other than its ordinary and normal meaning.

We are likewise mindful of the type of insurance at issue here, which we believe sheds

further light on the parties’ mutual intent. All-risk insurance coverage, which Coverage F purports

to provide, is a type of coverage that traditionally provides indemnification for “fortuitous and

extraneous” events. See Andrew C. Hecker & M. Jane Goode, Wear and Tear, Inherent Vice,

Deterioration, etc.: The Multi-Faceted All-Risk Exclusions, 21 Tort & Ins. L.J. 634, 634 (1986)

[hereinafter “Hecker & Goode”]; see also Kilroy Indus., 608 F. Supp. at 857 (“Under all-risk

insurance policies, losses which are not fortuitous are not covered because the risk feature inherent

in insurance is lacking.”). “This so-called fortuity requirement was designed to assure that an

insurer would not be required to reimburse its insured for certain and inevitable losses.” Hecker &

Goode at 635. Wear and tear exclusions have long been a feature of all-risk insurance contracts.

See id. at 644 (noting that wear and tear has been “continually cited as one of the all-risk

exclusions”); see also Mellon v. Fed. Ins. Co., 14 F.2d 997, 1002 (D.C.N.Y. 1926) (involving an

exclusion for wear and tear). Courts frequently interpret wear and tear exclusions to connote the

popular meaning of the expression, and may imply adjectives such as “ordinary” and “natural” to

limit the breadth of exclusions. See, e.g., Cyclops Corp. v. Home Ins. Co., 352 F. Supp. 931, 936

(W.D. Pa. 1973) (“We do not find that the modifiers ‘ordinary’ or ‘natural’ add anything to the

commonly understood meaning of ‘wear and tear.’ . . . We find the use of the modifiers ‘natural’ or

‘ordinary’ to be a typical lawyer’s redundancy.”).

Under all-risk insurance policies covering machinery, coverage typically extends to damage

caused by “accidents.” Hecker & Goode at 644. The requirement of an accident is substantially

equivalent to the fortuity requirement. Id. Hence, in the instant Policy, where Coverage F insures

against “any physical damage loss to the aircraft,” J.A. at 157, “physical damage” is expressly

defined as “direct and accidental physical loss of or damage to the aircraft,” J.A. at 161 (emphasis

added). Stated another way, the express purpose of Coverage F of the Policy is to indemnify against

accidental damage to the Aircraft. 

Where an insurance policy employs broad coverage language, California law demands that

the exclusionary language be exacting. 

[A]n insurer cannot escape its basic duty to insure by means of an exclusionary

clause that is unclear. As we have declared time and again[,] any exception to the

performance of the basic underlying obligation must be so stated as clearly to apprise

the insured of its effect. Thus, the burden rests upon the insurer to phrase exceptions

and exclusions in clear and unmistakable language. The exclusionary clause must

be conspicuous, plain and clear. This rule applies with particular force when the

coverage portion of the insurance policy would lead an insured to reasonably expect

coverage for the claim purportedly excluded. 
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 8

MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648, 73 P.3d 1205, 1213 (2003) (internal citations

and quotation marks omitted). Thus, in E.M.M.I., the California Supreme Court took particular note

of the fact that under a jeweler’s block insurance policy, “all risks of loss or damage to jewelry may

be insured, subject to certain exceptions.” E.M.M.I., 32 Cal. 4th at 469–70, 84 P.3d 385, 388–89.

The jeweler’s block insurance policy in E.M.M.I., we think, is closely analogous to the allrisk insurance policy here. Both policies broadly purport to cover all risks of loss not expressly

excluded. It is therefore of critical importance that AAU express its exclusions with a clarity that

will leave no doubt in the mind of the insured as to the types of occurrences that are not afforded

coverage. But where, as here, a policy broadly purports to indemnify against accidental damage to

an aircraft, excluding damage caused by wear and tear, and gives no indication that wear and tear

carries a specialized meaning that encompasses the type of unusual incident that occurred here, we

think that California law requires a construction consistent with the reasonable expectations of the

insured. See Safeco, 26 Cal. 4th at 763, 28 P.3d at 849. To this end, we do not believe that Meridian

reasonably would have expected the wear and tear exclusion to preclude coverage for the damage

that occurred on August 10, 2001, particularly given the District Court’s finding that the damage did

not result from the “normal” or “ordinary” operation of the aircraft. Meridian Leasing II, 297 F.

Supp. at 982–83.

Furthermore, AAU was on notice that its wear and tear exclusion was susceptible to an

interpretation requiring ordinary or normal operation of the engine. In Carlson Cos. v. Associated

Aviation Underwriters, No. 89-819, 1989 WL 124372 (Minn. Ct. App. Oct. 24, 1989), an unreported

case involving precisely the same Policy language under consideration here, the Minnesota Court

of Appeals found ambiguity in the term “wear and tear” and interpreted the term in accordance with

its common usage. Although that decision is nonprecedential under Minnesota law, we nevertheless

find Carlson to be probative of the fact that AAU knew at the time of contracting with Meridian that

the limitation language of the Policy was ambiguous.

AAU relies upon Arawak Aviation, Inc. v. Indemnity Insurance Co., 285 F.3d 954 (11th Cir.

2002), a case that involved an airplane engine on which the pilot neglected to secure the oil cap

properly before flight. The subsequent loss of oil caused excessive heat, which damaged the engine.

Like the instant case, Arawak involved a wear and tear provision that excluded from the scope of

coverage “damage caused by heat that results from the operation, attempted operation, or shutdown

of the engine.” Id. at 956. On appeal to the Eleventh Circuit, the insured argued that the words

“caused by” were ambiguous because they could be interpreted to admit of the possibility that the

pilot’s negligence was the efficient cause of the damage. In light of the possibility that the damage

was “caused by” the pilot’s negligence, the appellant argued, Florida law compelled the Eleventh

Circuit to construe the ambiguity in favor of the insured. The Eleventh Circuit acknowledged that

it must first determine whether the specific policy language was ambiguous before considering

whether Florida law permitted application of the efficient-cause doctrine. Id. The court found no

ambiguity, however, because application of the efficient-cause doctrine to the policy would create

a perverse incentive for policyholders to forgo proper maintenance of their aircraft in order to ensure

maximum insurance coverage. Id. In the face of such a result, the court concluded that the only

reasonable interpretation of the exclusionary language was a narrow reading.

The Arawak case is distinguishable in several important respects. Looking beyond the

simple fact that Arawak involved Florida law, rather than California law, the Arawak court was

concerned with whether the insured’s reading of “caused by” yielded an interpretation to which the

contract was susceptible. Unlike the instant case, the insured in Arawak never argued that the

damage sustained was not wear and tear. Instead, the insured argued that the damage to the engine

was not “caused by” heat, but rather, by the pilot’s negligence. Thus, Arawak was not, as here, a

dispute over the proper characterization of damage under the terms of an insurance policy.
No. 04-1184 Meridian Leasing, Inc. v. Associated Aviation Underwriters Page 9

Even if the Eleventh Circuit had reached the question whether “wear and tear” was

ambiguous, we think it would have encountered a materially distinct set of circumstances. In

Arawak, the insurance policy contained two relevant exclusionary clauses. The first clause stated,

in relevant part, the following: “Wear and tear. We will not cover wear and tear or depreciation.”

Id. at 956. The second clause went on to state, in relevant part, as follows: “Wear and tear to

engines. We will not cover the following types of damage to your aircraft’s engines or auxiliary

power units: damage caused by heat that results from the operation, attempted operation, or

shutdown of the engine.” Id. The second exclusionary clause stands on its own. A court need only

determine that damage was caused by heat to find that coverage was properly denied. By contrast,

the Policy in the instant case casts the heat limitation as a subset of wear and tear when it states that

“damage caused by heat which results from the operation, attempted operation or shutdown of the

engine shall be considered to be ‘wear and tear.’” J.A. at 160. In this manner, AAU’s Policy shifts

the inquiry back to the exclusion for wear and tear. As we have already noted, the Policy does not

indicate with a sufficient degree of precision that the term “wear and tear” is meant to carry a

specialized meaning. We therefore find that the Arawak policy’s use of self-contained, independent

exclusionary clauses achieves a degree of precision lacking in the instant case.

III.

Accordingly, we find a lack of evidence that the parties intended “wear and tear” to carry

a specialized meaning, coupled with significant circumstantial evidence tending to show that the

parties never intended the wear and tear provisions of the Policy to exclude coverage for the type

of event that occurred on August 10, 2001. Under the circumstances of this case, we hold that the

District Court did not err in finding the language of the Policy to be ambiguous with respect to the

scope of coverage afforded and construing the ambiguity in favor of the objectively reasonable

expectations of Meridian. The interpretation advocated by AAU stretches “wear and tear” beyond

any semblance of its ordinary meaning and is at odds with the requirement that exclusions must be

interpreted narrowly. Such a broad interpretation would overlook evidence that the parties never

intended to give “wear and tear” a special meaning and would be contrary to the traditional purpose

of all-risk insurance. By interpreting the limitation so as to require “ordinary” or “normal” operation

or attempted operation of the engine, the District Court followed established precedent in

interpreting wear and tear exclusions. See Cyclops Corp., 352 F. Supp. at 936.

Our holding is also in keeping with the requirement of California law that we interpret the

Policy as a whole, giving effect to every part of the contract. Cal. Civ. Code § 1641. We do not

believe that requiring the wear and tear to result from the ordinary and normal operation of the

engine renders the heat limitation superfluous. An interpretation requiring ordinary and normal

engine operation leaves intact the heat limitation because the Policy’s limiting language captures

damage from heat generated through normal operation of the engine, which one might not ordinarily

consider to be wear and tear.

For the foregoing reasons, the District Court’s finding of ambiguity in the terms of the Policy

and resolution of that ambiguity by requiring wear and tear to result from the ordinary and normal

operation of an aircraft engine is hereby AFFIRMED.