Chapter § 5.09 TRAVEL INSURANCE AND PERFORMANCE BONDS: COVERAGE ISSUES

• Jurisdiction: United States
• Publication year: 2021

§ 5.09 Travel Insurance and Performance Bonds: Coverage Issues

There are several different types of travel insurance and travel performance bonds which may provide coverage for common travel problems including physical injuries sustained while on a carrier, at a hotel or resort, while participating in sports or on recreational equipment, trip cancellation, lost, damaged or delayed baggage, supplier, tour operator or travel agent insolvency or default and a failure to deliver all the travel services paid for and the losses and consequential damages arising therefrom.

Insurance policies or travel performance bonds may be obtained by airlines,¹¹⁷³ cruise lines,¹¹⁷⁴ dive boats,¹¹⁷⁵ rental car companies,¹¹⁷⁶ tour bus companies¹¹⁷⁷ , hotels and resorts,¹¹⁷⁸ tour operators,¹¹⁷⁹ sponsoring organizations¹¹⁸⁰ and travel agents.¹¹⁸¹ Some or all of these insurance policies or travel performance bonds may provide coverage for traveler claims arising from common travel problems.

In addition to travel insurance and trip interruption or cancellation insurance sold by airlines,¹¹⁸² travel agents,¹¹⁸³ cruise lines,¹¹⁸⁴ rental car companies,¹¹⁸⁵ and others to travelers,¹¹⁸⁶ tour operators may have commercial insurance policies¹¹⁸⁷ or consumer protection plans.¹¹⁸⁸

Employers,¹¹⁸⁹ banks¹¹⁹⁰ and credit card companies¹¹⁹¹ may provide travel insurance coverage to their employees or customers.

[1] Travel Agent's and Tour Operator's Professional Liability Policies

Several insurance companies have issued Travel Agent's Professional Liability Policies and Tour Operator's Professional Liability Coverage to travel agents, tour operators and informal travel promoters.¹¹⁹² These policies provide coverage, as well as a defense in actions brought by travelers, which involve "any negligent act, error or omission of the insured . . . in the conduct of travel agency operations." In addition, these policies invariably contain exclusionary language denying coverage in the event of the insured's fraud or unlawful conduct.¹¹⁹³ The impact of this exclusionary language on the issue of coverage was demonstrated in American Home Assurance Company v. Diamond Tours & Travel, Inc.¹¹⁹⁴

In 1975, approximately, 250 travelers purchased a package tour featuring accommodations at Club Islandia located in Jamaica.¹¹⁹⁵ The package tour had been marketed by Diamond Tours & Travel, Inc., a tour operator and part owner of the hotel/resort, Club Islandia. The travelers discovered upon arrival that Club Islandia had been grossly misrepresented in the brochures created by Diamond Tours. In subsequent class action litigation, the travelers obtained a judgment on a breach of contract theory.¹¹⁹⁶ Diamond Tours had obtained a Travel Agent's Professional Liability Policy from American Home Assurance Company which provided coverage for "any negligent act, error or omission" in the sale and marketing of travel services. Upon receiving a demand for the provision of a defense attorney, the insurance company refused and disclaimed liability on the grounds of the insured's fraud. In the American Home case, an appellate court upheld the disclaimer of liability and found that neither coverage nor a defense attorney was provided for in light of Diamond Tour's apparent fraud.¹¹⁹⁷

Claims against tour operators and travel agents may be covered by professional liability policies if they fall within the scope of negligence. In the case of a class action on behalf of several hundred consumers victimized by a defunct tour operator,¹¹⁹⁸ the plaintiff sought recovery from an insurance company that had issued a $5 million professional liability policy. The complaint alleged breach of contract, breach of fiduciary duty, civil RICO violations, negligence, and negligent misrepresentation. The insurance company disclaimed both a duty to defend and a duty to indemnify and sought to dismiss the complaint on the following grounds: (1) swindling customers was not within the scope of professional tour operator services; (2) none of the allegations in the complaint were forms of negligence; (3) breach of contract claims were excluded:

(4) the entire complaint was "bottomed on fraud" and excluded under the willful misconduct exclusion; and (5) co-mingling of monies was excluded. The court denied the dismissal motion and found coverage for some of the claims to include:

". . . allegations that Linblad Travel: (1) misrepresented the financial health of the company; (2) mishandled consumer deposits and failed to use monies for their intended purpose; (3) breached contracts in failing to deliver travel services already paid for; (4) terminated a United States Tour Operators Association . . . security plan, without indicating such in it's advertisements and (5) disregarded instructions to the United States Treasury Department not to sell tours to Vietnam . . ."

On the basis of the amended complaint . . . I cannot say, as a matter of law, that none of the alleged acts were 'necessary' or incidental to Lindblad Travel's business. Nor can I conclude that all the alleged wrongful acts were necessarily intentional and willful rather than negligent. Although the complaint alleges intentionally fraudulent conduct, its allegations would also cover negligent misrepresentation . . ."

This decision,¹¹⁹⁹ is very helpful to victimized travelers since it expands coverage under tour operator/travel agent professional liability policies to include common events such as the financial collapse of a tour operator. Charges of negligence in misrepresenting the financial health of the tour operator and failing to reveal information regarding financial difficulties are covered by professional liability policies. Should the insurance company deny coverage the traveler's attorney should name the insurance company in a direct action on the policy.

[2] Public Charter Tour Operator Surety Bonds

Tour operators marketing charter tour programs pursuant to the Public Charter Regulations of the Civil Aeronautics Board¹²⁰⁰ have been required to obtain surety bonds which seek to guarantee the faithful performance by the tour operator of contracts entered into with travelers.¹²⁰¹ Several surety companies have vigorously disclaimed liability and denied coverage for a variety of otherwise bona-fide traveler complaints.

[a] Scope of Coverage

The typical language in Charter Tour Operator Surety Bonds states that coverage is provided to those tour . . . participants (to whom) the Principal (a tour operator) may be held legally liable by reason of the Principal's failure to faithfully perform, fulfill and carry out contracts, agreements and arrangements . . . for the supplying of transportation and other services. Despite the broad nature of this language, surety companies have sought to deny coverage for all breach of contract claims with the exception of those arising from a complete cancellation of the charter tour vacation. In Dupack v. Nationwide Leisure Corporation¹²⁰² and Reiken v. Nationwide Leisure Corpo- ration¹²⁰³ (seven consolidated cases on the coverage issue), an appellate court rejected the effort to limit coverage and found that surety bond coverage would apply to any breach of contract on the part of the tour operator.¹²⁰⁴

In Irving Trust Com pany v. Nationwide Leisure Corporation,¹²⁰⁵ an interpleader action¹²⁰⁶ involving several travel consumer class actions alleging various causes of action to include fraudulent misrepresentation, negligence, breach of contract and the violation of federal charter regulations, the court found that the surety bonds provided coverage for any malfeasance on the part of the tour operator.¹²⁰⁷

In addition to denying coverage for particular types of traveler claims, surety companies have also sought to limit the class of claimants to which coverage may apply. In Miller v. Jet & Cruise, Ltd.,¹²⁰⁸ a certified class action lawsuit by 249 travelers against a charter tour operator arising from substantial flight delays, the surety company, which intervened in the action, sought to limit its liability on a $190,000 charter tour operator surety bond to $10,000 or one-nineteenth of the bond amount. The surety's rationale for asserting this affirmative defense was that the governing regulations provided for a minimum surety bond coverage of $10,000.00 per flight up to $200,000 maximum for a series of twenty or more flights. The tour operator, Jet & Cruise Ltd., had planned to market nineteen separate flights to the same locale. The surety, therefore, issued one surety bond in the sum of $190,000.00 and listed in the bond the nineteen flights to which the bond applied. The Miller case, however, involved just one flight and the plaintiffs sought to recover against the entire $190,000.00 surety bond amount. The surety moved for summary judgment seeking to limit its liability to $10,000.00 as against the 249 travelers. The court, after noting that the surety's position would "allow each of the 249 persons on the one subject tour only $40 a piece," denied the surety's motion and gave plaintiffs an opportunity to present this issue to the ears of a sympathetic jury.¹²⁰⁹

[b] Time Limitations

Charter Tour Operator Surety Bonds contain a standard provision to the effect that a claim must be filed within sixty days of the termination of a charter tour program otherwise the surety has no liability under the bond.¹²¹⁰ It is a standard defense for surety companies to deny liability to all claimants who have failed to file a written claim within sixty days of the termination of the charter tour in issue. To enforce this time limitation, however, the surety must affirmatively demonstrate that claimants received effective notice of the requirement. This affirmative burden was enunciated in Irving Trust Com pany v. Nationwide Leisure Corporation¹²¹¹ a complex interpleader action¹²¹² involving several travel consumer class actions against a tour operator which alleged hotel switching and flight delays.¹²¹³

In the Irvin...