Insurance and Aircraft Charter / Management
Risk Management of a Complex Enterprise by Stuart Hope, as published in AvBuyer Magazine
When you purchase an aircraft for the first time, you discover that you have literally created a start-up business. You have employees in the form of pilots, mechanics, and flight schedulers. You have a budget for your flight department that includes maintenance [both planned and unplanned], pilot salaries, reserve for engine overhaul, insurance, hangar, aviation fuel, and weather/navigation services just to name a few.
In addition, you have to ensure compliance with the FAA Regulations, obtain the services of an accountant familiar with the FAA requirements related to monetary charges, and retain an aviation attorney to help you establish the ownership structure.
Enter the Aircraft Management Company (AMC). To many aircraft owners, this model of managing their aircraft is a godsend. Typically for a monthly fee, the AMC’s manager handles all headaches of aircraft operational and cost control that typically fall on the owner. If a pilot quits to take a position with the airlines, the AMC supplies a replacement. The management company knows the territory and speaks the language.
But hold on – this hand-off approach doesn’t mean you drop your guard and fail to pay attention to the details.
For example, consider insurance. While one might think insurance would be easy to navigate, there are several issues to consider when placing insurance coverage under the fleet policy of the Aviation Management Company. One of the benefits management companies bring to the table is cost savings on routine expenses such as insurance, fuel, maintenance, etc., through economies of scale created by combining a large number of aircraft under one roof. But there are several important points to consider…
PREMIUM PAYMENT & OTHER DETAILS
Be sure the management company pays the carrier for the annual premium on your aircraft. Just because you paid the AMC’s bill does not guarantee that the insurance carrier has been paid.
Several management companies over the years have gone “belly up” owing insurance premiums they collected from aircraft owners. The AMC may have used your funds to cover other business expenses – until the house of cards collapsed. Although rare, this situation may be something that can be addressed contractually and certainly must be part of your due diligence.
Another critical area in need of due diligence concerns how the management company uses your aircraft. Will it be flown exclusively for FAR Part 91 [non-commercial] operations, or will the aircraft also be utilized for FAR Part 135 [for hire] charter operations by AMC? The degree of care the operator owes the passengers on each type of flight varies.
With flights flown in accordance with FAR Part 135 (e.g., charter), the commercial component changes your risk exposure. In the event of an accident where there is bodily injury to a “paying passenger”, the question is not if you will be asked to pay but how much you will be asked to pay.
For this reason, it is imperative that you carry a significant limit of liability. Considering how inexpensive increasing limits of liability are, I highly recommend buying as high a limit as you can afford. When you consider the amount of money you will spend on maintaining the aircraft, buying a high liability limit will appear to be the biggest bargain in aviation.
What if the aircraft is involved in an accident when the management company is operating the aircraft but not on an owner flight? The AMC’s insurance company will adjust the claim and will work with the AMC’s representative as their claims contact. But keep in mind, especially in the US, if a lawsuit arises, the owner can and will be brought into the suit even though the flight was not made on his/her behalf. Therefore, you need a Mutual Invalidation clause.
In layman’s terms Mutual Invalidation states that if one party breaches the warranty of the policy, thereby voiding insurance coverage, that action will not void the coverage of the other party not involved. For example, if the claim investigation reveals there was a violation of a policy warranty or exclusion, the insurance company can deny coverage to the Aviation Management Company but is still obligated to defend the aircraft owner.
Most management companies run a professional ship and most of them accomplish mutually-agreed goals negotiated with their clients. Nevertheless, you have a large investment exposed and should not blindly relinquish control of your asset; you must consider the multiple exposures that you have.
You would be smart to involve your own aviation insurance broker to help you navigate the complex wording of an aviation insurance contract and help verify that all the insurance bases have been covered. Remember, you don’t know what you don’t know.
Insurance Coverage for War & Other Allied Perils
Observing increased volatility around the globe, Stuart Hope recommends that aircraft owners consider purchasing optional coverage available through War Risk insurance and provisions of the Terrorism Risk Insurance Act (TRIA).
Liability coverage under an aircraft insurance policy has two separate components: primary liability coverage and war risk liability, each with its own associated premium. Unlike the primary liability coverage, which applies to all covered losses under the policy, the War Risk liability coverage only applies to losses resulting from the specific war-related perils (war, hijacking, terrorist acts, confiscation, riots, civil commotion, etc.).
The primary liability coverage limit is written on a per-occurrence basis, which means the full liability coverage limit applies to each and every occurrence that takes place during the policy period. The War Risk liability coverage, however, is written on an occurrence/aggregate basis, which means the limit of liability does not reset with each occurrence. Once cumulative liability claims payments during a policy term total the policy’s liability limit, coverage is exhausted.
To further complicate matters, for any aircraft owner that carries a liability coverage limit in excess of $50M, their coverage for any loss caused by one of the war risk perils has a sub-limit.
That is, coverage for bodily injury liability to persons outside the aircraft and any property damage liability is limited to $50M. The higher overall liability limit they purchase is only applicable to passenger bodily injury liability.
Assume an aircraft owner carries a $200M liability limit, including War Risk coverage. On a trip, a disgruntled copilot who sympathizes with a terrorist cause takes control of the flight from the Captain and flies the aircraft into a skyscraper. There are numerous fatalities in the building, millions of dollars in damage to the structure itself, and all five passengers on board the aircraft are lost.
In the lawsuits that follow, the aircraft owner will have full access to the $200M liability coverage for bodily injury lawsuits brought on behalf of the passengers. Coverage for claims related to persons injured or killed in or around the building as well as for physical damage to the building, however, will be restricted to $50M.
Keep in mind, as we discussed earlier, the War Risks coverage is written on an aggregate basis. Not only could you be caught with an inadequate overall limit for this loss, but you may also have to immediately buy more coverage since the liability limit does not reset for a possible future loss as an occurrence limit would.
This example gets us to my “buy” recommendation. For a reasonable additional premium, you can purchase per-occurrence War Risk insurance that includes the provisions of TRIA. I include TRIA because if you buy the per occurrence war coverage you would be foolish not to go ahead and pick up the TRIA coverage for a very small delta in premium.
By purchasing the per-occurrence War and TRIA, your $200M limit now applies to all covered losses; no longer contains any sub-limit for bodily injury claims to persons outside the aircraft or any property damage claims; and removes the aggregate limit so the full $200M limit is available for all accidents during a given policy term.
In addition, you pick up the benefits of TRIA coverage we have discussed in previous articles [e.g., cannot be cancelled except by government, occurrence-based coverage trigger dictated by three US officials and not insurance contract language, etc.]
When you consider how much money you spend on aircraft maintenance alone, the additional premium here will seem inconsequential for the peace of mind you should have now that you understand what you are getting. In the past, most war-related events predominately seemed to occur away from our soil. The world is changing, and we must adapt to meet the new proximity of these threats.
For more information on these important coverages and to discover how you can make them watertight, click here!