Physical Dispossession Is “Direct Physical Loss,” and “Accident” Is Viewed From the Insured’s Perspective Under All‑Perils Policies

Case: U.S. Specialty Insurance Co. v. D S Avionics Unlimited LLC, 320 Neb. 287 (Neb. Nov. 7, 2025)

Court: Supreme Court of Nebraska (Funke, C.J.)

Disposition: Reversed and remanded for further proceedings

Introduction

The Nebraska Supreme Court, in a significant property insurance decision, held that an insured’s physical dispossession of an aircraft qualifies as a “direct physical loss” under an all‑perils aviation policy, even if the property is later recovered. The Court further clarified that where the policy defines “accident” as a “sudden event” that is “neither expected nor intended by the insured,” a third party’s intentional act can still constitute an “accident” so long as it was not intended or expected by the insured. Finally, the Court confirmed that a conversion exclusion limited to actors to whom the insured relinquished possession does not bar coverage when the wrongdoer is a different party.

The dispute arose after the owner of a private airport blocked and then detained D S Avionics Unlimited LLC’s (DSA) Piper PA‑30 while a mechanic (to whom DSA had delivered the aircraft for maintenance) was locked out of his hangar. When the airport owner refused to release the aircraft without payment of storage charges, DSA submitted a sworn proof of loss to its insurer, U.S. Specialty Insurance Company (USSIC), under a policy covering “direct physical loss of or damage to [the] aircraft caused by an accident while the aircraft [was] not in motion.” USSIC denied coverage. The district court granted summary judgment to USSIC, finding no “accident,” no covered “loss,” and that a conversion exclusion applied. On de novo review, the Nebraska Supreme Court reversed.

Summary of the Opinion

• Accident standard tied to the insured’s perspective: Because the policy defined “accident” as a “sudden event” that is “neither expected nor intended by the insured,” the intentional act of the airport owner in blocking and detaining the aircraft could still qualify as an “accident.” The Court rejected the insurer’s contention that intentional acts can never be “accidents” when the policy’s definition is insured‑centric.
• Direct physical loss includes dispossession: DSA’s physical dispossession of the aircraft constituted “direct physical loss” within the policy’s plain meaning. Later recovery of the aircraft did not negate the initial covered loss, and COVID‑19 “loss of use” cases were distinguishable because they involved purely economic limitations without dispossession.
• All‑perils policies cover unless expressly excluded: The policy was all‑risk (“all perils”), and thus impliedly covered the claim absent an applicable exclusion.
• Conversion exclusion inapplicable: The exclusion applied only if the loss resulted from embezzlement, conversion, or secretion by a person to whom DSA had relinquished possession. The converter here was the airport owner, not the mechanic to whom DSA had entrusted the aircraft. USSIC conceded the exclusion’s inapplicability.
• Remand on bad faith and damages: Because the district court’s no‑coverage ruling was the predicate for dismissal of DSA’s bad faith claim, the Supreme Court reversed summary judgment and remanded for proceedings on bad faith and damages (including proof issues such as timing and causation of physical damage).

Analysis

Precedents Cited and Their Influence

• Standards of review:
  • Ricker v. Nebraska Methodist Health Sys., 319 Neb. 628, 24 N.W.3d 344 (2025) — Summary judgment reviewed de novo with inferences in favor of the nonmovant.
  • North Star Mut. Ins. Co. v. Miller, 311 Neb. 941, 977 N.W.2d 195 (2022) — Insurance policy interpretation is a question of law decided independently on appeal.
  These standards set the stage for the Court’s fresh look at the policy language and undisputed facts.
• Policy construction principles:
  • City of Lincoln v. County of Lancaster, 297 Neb. 256, 898 N.W.2d 374 (2017) — Coverage determinations turn on the clear language of the policy; the insured must bring the claim within coverage and no exclusion may apply.
  • Merrick v. Fischer, Rounds & Assocs., 305 Neb. 230, 939 N.W.2d 795 (2020) — Clear terms receive their plain and ordinary meaning as understood by a reasonable insured.
  • State Farm Fire & Cas. Co. v. TFG Enters., 308 Neb. 460, 954 N.W.2d 899 (2021) — Avoid manufacturing ambiguity; do not torture language to create coverage disputes.
  • State v. Gilliam, 292 Neb. 770, 874 N.W.2d 48 (2016) — Courts may consult dictionaries for ordinary meaning.
  • Kaiser v. Allstate Indemnity Co., 307 Neb. 562, 949 N.W.2d 787 (2020) — All‑risk policies cover all fortuitous risks unless expressly excluded.
  These authorities anchored the Court’s textual approach—looking first to policy language, using dictionaries to define “event” and “sudden,” and applying the all‑risk default rule.
• “Accident” and intentional acts:
  • City of Lincoln and Austin v. State Farm Mut. Auto. Ins. Co., 261 Neb. 697, 625 N.W.2d 213 (2001) — In prior settings, when “accident” was undefined or defined without reference to the insured’s perspective, intentional acts were held not to be “accidents.”
  • Jones v. Norval, 203 Neb. 549, 279 N.W.2d 388 (1979) — Public policy discussion about insuring intentional wrongdoing by the insured.
  The Court distinguished these earlier decisions because the policy in this case explicitly tethered “accident” to what was “neither expected nor intended by the insured,” shifting the focus away from the actor’s intent and undercutting any categorical bar based on the third party’s intentional conduct.
• Prior proceedings in this very dispute:
  • U.S. Specialty Ins. Co. v. D S Avionics, 301 Neb. 388, 918 N.W.2d 589 (2018), modified on denial of rehearing, 302 Neb. 283, 923 N.W.2d 367 (2019) — Earlier remand because coverage could turn on whether the airport owner’s detention was lawful (i.e., conversion questions intertwined with the claim).
  • O’Daniel Flight Service v. Edquist, 304 Neb. xix (No. S‑19‑325, Jan. 22, 2020) — Related litigation over the airport owner’s lien claims and the mechanic’s suit.
  The Court acknowledged its earlier caution that the aircraft’s eventual return might affect coverage analysis, yet clarified here that later recovery does not erase the initial “direct physical loss” by dispossession.
• Bad faith predicate:
  • LeRette v. American Med. Security, 270 Neb. 545, 705 N.W.2d 41 (2005) — If a lawful basis for denial exists, bad faith fails as a matter of law; conversely, when the premise for “lawful basis” disappears, a bad faith claim can proceed.
  • Henderson State Co. v. Garrelts, 319 Neb. 485, 23 N.W.3d 444 (2025) — Appellate courts need not reach unnecessary issues.
  These authorities inform the remand: with coverage established and no applicable exclusion, the district court’s ground for rejecting bad faith no longer holds.
• Comparable coverage decisions on dispossession and “loss”:
  • Apex Solutions v. Falls Lake Ins. Mgmt., 100 Cal. App. 5th 1249, 319 Cal. Rptr. 3d 833 (2024) — “Direct physical loss” includes physical displacement or loss of possession.
  • Endurance Am. Ins. Co. v. StoneX Commodity Solutions, LLC, 235 A.D.3d 489, 227 N.Y.S.3d 307 (2025); Peterson v. Homesite Indemnity Co., 287 Neb. 48, 840 N.W.2d 885 (2013); American Alternative Ins. v. Superior Court, 135 Cal. App. 4th 1239, 37 Cal. Rptr. 3d 918 (2006); Union Planters Nat. Bank v. American Home Assurance Co., 2002 WL 1308344 (Tenn. App.); Intermetal Mexicana v. Insurance Co. of N. America, 866 F.2d 71 (3d Cir. 1989); Security Ins. Co. v. Commercial Credit Equip., 399 So. 2d 31 (Fla. App. 1981) — Courts have recognized coverage notwithstanding the insured’s knowledge of the item’s location or the availability of civil remedies to recover it.
  • COVID‑era “loss of use” cases distinguished: WP6 Restaurant Mgmt. Group v. Zurich, 595 F. Supp. 3d 973 (D. Nev. 2022); Cordish Companies v. Affiliated FM, 573 F. Supp. 3d 977 (D. Md. 2021); Till Metro Ent. v. Covington Specialty, 545 F. Supp. 3d 1153 (N.D. Okla. 2021); Real Hospitality v. Travelers, 499 F. Supp. 3d 288 (S.D. Miss. 2020) — These involved purely economic use restrictions, not physical dispossession by a third party. The Nebraska Supreme Court found them inapposite.
  Collectively, these reinforce that physical dispossession is qualitatively different from a mere inability to use property and can be a covered “direct physical loss.”

Legal Reasoning

The Court began from first principles: an insurance policy is a contract, governed by its text. It reaffirmed Nebraska’s rule that clear language receives its ordinary meaning as understood by a reasonable insured and that an all‑perils policy covers fortuitous risks unless an exclusion squarely applies.

Applying those principles, the Court parsed the policy’s definition of “accident”—“a sudden event during the policy period, neither expected nor intended by the insured, that involves the aircraft and causes physical damage to or loss of the aircraft during the policy period.” Consulting ordinary‑meaning dictionaries, the Court read “event” to mean something that happens or occurs, and “sudden” to denote abruptness. The airport owner’s act of blocking the aircraft with a truck and then removing it from sight was a discrete occurrence during the policy period. Critically, the policy’s definition keyed “accident” to the insured’s perspective—“neither expected nor intended by the insured.” USSIC did not argue (and had no evidence) that DSA intended or expected the detention; its reliance on the actor’s intentionality was therefore misplaced under this policy’s wording.

The Court then tackled “direct physical loss.” USSIC argued that because DSA eventually recovered the aircraft, there was no covered loss; and it analogized to COVID‑19 closure cases that construed “direct physical loss” narrowly. The Court rejected both moves. First, the later return of the property does not retroactively erase the initial physical dispossession. Coverage is determined when the covered peril occurs; an insurer’s bad‑faith analysis likewise focuses on the information available at the time of denial. Second, COVID‑19 business interruption decisions were factually different: they involved loss of use without physical dispossession or third‑party control over the insured property. The Court also made clear that “loss of possession” is not the same as a policy’s excluded “loss of use”; the latter typically addresses consequential economic damages, not the core deprivation of dominion and control that occurs when a third party takes or holds the property.

Finally, the Court addressed exclusions. Because the policy was all‑risk, coverage attached unless an exclusion applied. USSIC had invoked a conversion exclusion limited to embezzlement, conversion, or secretion “by anyone to whom [the insured] relinquished possession.” The undisputed facts showed that DSA entrusted the aircraft to a mechanic; the wrongful detention was by the airport owner. USSIC conceded on appeal that the exclusion did not apply—consistent with its text. The district court’s contrary ruling (tying the exclusion to the mechanic’s alleged negligence) misread the exclusion’s focus on the actor to whom the insured had relinquished possession.

Having found coverage and no applicable exclusion, the Court reversed summary judgment for USSIC and remanded for proceedings on (a) whether USSIC acted in bad faith when it denied coverage and (b) what damages, if any, DSA can prove under the policy, including the timing and causation of any physical damage (e.g., corrosion) in relation to the policy period.

Impact and Future Implications

• Clarifies “direct physical loss” in Nebraska: Physical dispossession or loss of dominion qualifies as “direct physical loss,” even absent permanent deprivation and even if the property is later returned. This is especially salient for inland marine, aviation, and other property policies insuring movable equipment frequently entrusted to third parties.
• Meaning of “accident” when defined from the insured’s perspective: Where the policy text ties “accident” to what was not expected or intended by the insured, third‑party intentional acts can constitute an “accident.” Insurers who intend to exclude third‑party intentional acts must draft for that result expressly.
• Conversion exclusions: “relinquished possession” matters: Exclusions for conversion/embezzlement by persons to whom the insured relinquished possession are confined to that class of actors. Losses caused by different actors (e.g., a landlord, airport owner, or other third party) fall outside such exclusions unless the policy is broadened.
• Distinguishing “loss of possession” from “loss of use”: Nebraska now clearly separates core dispossession (covered “loss”) from consequential “loss of use” (often excluded). This distinction limits the reach of COVID‑era “no physical alteration” decisions, which will be weak authority against claims involving actual physical deprivation.
• Claims handling and bad faith exposure: Insurers denying all‑risk claims on the theory that dispossession is not a covered loss risk bad faith if policy language mirrors the language here. The Court highlighted the temporal disconnect that would arise if coverage depended on events occurring after denial, while bad faith is judged at the time of denial.
• Policy drafting responses: Expect insurers to review all‑risk forms for “confiscation, seizure, detention” exclusions and to consider expanding exclusions that now apply only to bailees or entrusted persons, if they intend to avoid coverage for detentions by other actors (e.g., landlords asserting liens).
• Litigation posture on partial returns: Policyholders can press for coverage even if property is later retrieved; coverage turns on the initial fortuitous event. Damages may include the loss during dispossession and any physical damage proven to have occurred during the policy period, subject to policy limits and causation proof.

Complex Concepts Simplified

• All‑perils (all‑risk) policy: A policy that covers all risks of direct physical loss or damage unless a specific exclusion applies. The insured shows a loss occurred; the insurer must prove an exclusion.
• Direct physical loss: In Nebraska, this includes physical dispossession—loss of possession or control—of insured property. It is distinct from mere “loss of use,” which typically refers to economic or consequential loss without dispossession.
• Accident (insured‑centric definition): When a policy defines an “accident” as a “sudden event” not expected or intended by the insured, the focus is on the insured’s state of mind, not the actor’s. A third party’s intentional act may still be an “accident” under such a definition.
• Conversion exclusion tied to entrustment: An exclusion for conversion/embezzlement/secretion “by anyone to whom the insured relinquished possession” applies only if the wrongdoer is an entrusted person (e.g., a bailee). A different wrongdoer falls outside the exclusion.
• Summary judgment (de novo review): An appellate court re‑examines the record without deference, drawing reasonable inferences for the nonmovant, and affirms only if no material fact disputes exist and the movant is entitled to judgment as a matter of law.
• Bad faith (Nebraska): If a lawful basis for denial exists, a bad faith claim fails. If coverage exists and no exclusion applies, the insurer’s denial can be scrutinized for whether it lacked a reasonable basis in fact or law at the time of denial.

Conclusion

U.S. Specialty Ins. Co. v. D S Avionics establishes two key principles in Nebraska insurance law. First, physical dispossession amounts to “direct physical loss” under an all‑perils policy, and subsequent recovery does not negate coverage that attached at the time of loss. Second, where the policy defines “accident” by reference to what is “neither expected nor intended by the insured,” an event caused intentionally by a third party can still be an “accident.” The Court further confirms a disciplined approach to exclusions: a conversion exclusion tied to entrusted persons does not apply to acts by non‑entrusted actors.

The decision realigns Nebraska law with the mainstream understanding of all‑risk coverage for dispossession losses and draws a clear line between “loss of possession” and “loss of use.” It also signals to insurers the importance of precise drafting when seeking to exclude detentions by non‑entrusted actors or to limit “accidents” to unintended events regardless of perspective. On remand, the district court must address bad faith and damages, but the Nebraska Supreme Court has decisively resolved the threshold coverage dispute. As a result, this opinion is poised to guide future disputes over wrongful detentions, lien‑based holds, and other dispossession scenarios across property and aviation insurance lines.