TOP TEN AVIATION INSURANCE QUESTIONS. Why are contracts relating to my aircraft important from an insurance perspective?

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1 TOP TEN AVIATION INSURANCE QUESTIONS Why are contracts relating to my aircraft important from an insurance perspective? Did you know that every aviation contract or agreement has the potential to limit or even void your insurance coverage? Most contracts you enter relating to your aircraft contain insurance and/or hold harmless-indemnification clauses. Signing these agreements contractually obligates you to comply with the provisions they contain. If the insurance-related stipulations fall outside the scope of your coverage, the assumed risk becomes yours. Not good. All agreements, including Purchase Agreements, Bank Loan Agreements, Maintenance/FBO contracts, Hangar Agreements, Charter Agreements, etc. should be reviewed by appropriate legal counsel for any legal ramifications with a copy sent to your insurance broker to review from an insurance perspective. Hold harmless agreements can be particularly troublesome. How much liability coverage is enough? Since there is no definitive method available to determine the appropriate liability coverage limit to select, your response to the following questions can help guide you in selecting a reasonable limit based on your exposures: 1. Number of passenger seats in the aircraft. An aircraft with 14 passenger seats presents a greater exposure and will require a higher liability coverage limit than one with Average passenger load per flight. If your average passenger load per flight is 5, you would need to carry a higher coverage limit than if it was Composition of passengers (Employee vs Guests). If the majority of passengers carried on the aircraft are employees, you may be able to justify a lower liability limit since a properly structured Workers Compensation program should be the sole remedy for injuries to employees. Conversely, if the majority of passengers are guests, you would need to select a higher liability limit. 4. What assets need to be protected? Don t let a holding company give you a false sense of security. Savvy plaintiff attorneys will attempt to pierce shell companies and corporate veils in an effort to get at the real money whether it be a larger corporation or an individual s net worth. 1

2 5. If you have an umbrella policy that covers the aviation exposure, you will need to make sure your aviation liability limit meets the minimum required umbrella limit. Generally speaking, since it is impossible to determine the exact coverage limit you need, it is best to buy as much as you can reasonably afford. Obtain quotes for alternate limits each year, as rating of this coverage can vary greatly from year to year. How do I determine the proper insured value for my aircraft? Unlike many other property policies, aircraft policies are usually written on an agreed-value basis. Therefore, you can over insure and under insure to your detriment. If you over insure, the insurance company will typically elect to repair the aircraft even when there is major damage leaving you to deal with significant damage history. If you under insure, the insurance company may elect to pay you for the total loss and sell the salvage you would lose your equity. The proper insured value to carry is the amount of money it would take to purchase another aircraft exactly like yours (i.e. same year, make and model, etc. not a brand new one). The aircraft dealer you purchased the aircraft from should be able to give you the best idea of its current value. In addition, your insurance broker should have resources to help give you an idea of this value. This coverage limit should be reviewed annually on renewal and adjusted accordingly. What measures can I take to improve my aviation insurance program? 1. Develop, implement and maintain a documented flight safety program. Address critical areas such as approach and landing accidents and controlled flight into terrain (ALAR/CFIT), dissimilar aircraft operations, runway incursions, ground handling safety, etc. For guidance in this area, refer to the NBAA website at web.nbaa.org/public/ops/safety. Not having accidents or incidents in the first place in order to keep premiums down is fundamental risk management! 2. Develop and adhere to an operations manual for your flight department. If you are an NBAA member, you can access an outline of a sample operations manual at: web.nbaa.org/member/ops/adm/mgmtguide/1/fig1-01.php 3. Get annual recurrent training in the make and model. Okay, so this is required anyway, but the fact is this is key to some insurance carrier's willingness to offer their broadest coverage and most competitive rates. Underwriters typically recognize the value of any given training for only a twelve month period, which equals a policy period, so that training completed two or more years ago does not impact the underwriting as 2

3 favorably as recurrent training in the make and model within the last twelve months. In short, training does affect coverage availability and premium. 4. Develop and implement a security plan. There are numerous resources with sample security plans available including the following links: NBAA Best Practices for Business Aviation Security AIG Aviation Inc. s. Security Plan 5. Develop and implement an accident response plan. Again there are valuable resources available to help you with this process. USAIG s sample Corporate Aircraft Accident Response Plan is an excellent template to use in getting started. 6. Details, details, details. Quantify all the things you do that make your operation superior. Standard Operating Procedures, training to supplement the manufacturer s programs, personal minimums, documented Safety and Security programs, etc. Complete all applications and forms timely, completely and truthfully. Even though there are few line-item credits in aviation insurance, you should provide your broker with as much ammunition as possible about your aircraft and flight operations. This will help your account stand out from the sea of submissions most underwriters have on their desks every day. 7. Review and evaluate your coverage regularly and thoroughly. Perhaps the value of the airplane has dropped in recent years but the insured value has not been properly adjusted. Operations change constantly so maybe there is coverage you didn t need last year that you should have this year. Consult with your broker regularly, that s why we re here! What s the deal with single-pilot operations? Single-pilot operations are possible however underwriters are less willing to extend high liability limits, offer preferred rates and will flat out require two-pilot operations in some circumstances. The industry is also attempting to address the upcoming proliferation of microjets that will open up high-performance, flightlevel operations to many owner-pilots. For an in-depth look at this topic, please view an article we recently penned for the National Business Aviation Association entitled "Two-Pilot Requirement for Single-Pilot Certified Aircraft." Should we carry war insurance or TRIA insurance or both? The subject of war insurance and the expanded terrorism coverage available under the Terrorism Risk Insurance Act (TRIA) of 2002 can be confusing. Please visit our web site for additional information about War coverage and read our article about the Terrorism Risk Insurance Act of

4 Who may use our airplane? This question is often addressed in the context of cost reimbursement. That is, how much can be charged for the use of the airplane before running afoul of the insurance policy and/or the FARs. The short answer is, you can t charge anything for the use of the airplane and charge doesn t just mean cash payments. Aircraft insurance policies are designed for your use. The your is the Named Insured. Therefore the Named Insured can use the airplane for its pleasure and business. For example, ABC Company owns the airplane and utilizes it to transport ABC employees to conventions, move parts between plants, send ABC executives to meetings or bring ABC clients to visit company headquarters. Problems arise when XYZ Company, whose jet is down for maintenance, wants to be able to use the ABC Company plane for supplemental lift. Or when ABC Company s CEO has a buddy who wants to use the plane for a trip to the Bahamas. Or ABC Company makes widgets and the CEO is John Smith. John Smith owns an airplane under John Smith, LLC and he utilizes the airplane both for his family travel and also allows ABC Company personnel to utilize it, as needed. These alternative uses should be orchestrated with the help of an aviation attorney, your tax advisor and your broker so the insurance company can properly address any cost reimbursement that may fall outside the policy parameters. What is a Broker of Record Letter (or Agent of Record Letter) and what does it do? Insurance companies rely on insurance brokers to bring account submissions to them for evaluation. There are only a few aviation insurance companies, each with limited staff, and they do not want to tie up their underwriters by quoting the same risk to several different brokers. Therefore, each will recognize only one broker on any given risk on a first-come, first-serve basis. The first broker who presents a submission to an aviation insurance underwriter is the official "broker (or agent) of record." The insurance carrier assumes this person was your first choice since they contacted them first. The choice of broker belongs entirely to the customer, so the broker can be later changed if that is the wish of the customer. Enter the Broker of Record Letter. It is a serious document that accomplishes the following: A. Terminates the relationship between you and the current broker and suspends the current broker's ability to negotiate on your behalf with the insurance company. B. Affirms the appointment of a new broker, giving that broker the sole ability to negotiate with the insurance company for you, and grants access to any underwriting information or proposals that are currently "on the table." (Without a significant change in the basic underwriting information, if the insurance company has already made a firm commitment to the first broker to either decline or provide a quote, the new broker usually "inherits" that decision whether it be a declination or a specific premium proposal.) 4

5 C. Provides a relief mechanism, expressed in terms of a specified number of days "waiting period," to allow full disclosure of the letter to all parties involved, thereby granting the former broker the opportunity to review the implications of the letter with you and to confirm your desire to change brokers. Be certain you understand the ramifications of this document. Have your broker explain its intent to you before you sign it! You are best served by selecting, up front, one competent aviation insurance broker who has access to all the markets and will consult with you on the resulting proposals. Can pilots be sued? Absolutely. For example, in the aftermath of an accident, the policyholder is sued for negligence as the owner of the aircraft. Meanwhile, a lawsuit naming the pilot personally for negligence is also filed. The insurance carrier s obligation is to defend and take care of the policyholder. If the pilot is an employee of the policyholder or has been specifically added as an additional insured, the insurance carrier will defend the additional lawsuit for the pilot. (Remember the liability limit is shared by all parties; it is not a per person or per lawsuit occurrence limit!) If the pilot is an independent contractor and has not been added to the policy as an insured, the pilot will have to defend that lawsuit solo. Remember, it is possible to be an approved pilot but not necessarily a covered pilot. The fact that you are an approved pilot, whether by name in the policy or by meeting the policy s open pilot warranty, simply means that if there is a loss while you are at the controls, coverage will still be in place for the policyholder. How is a pilot who is injured (or worse) compensated after an accident? It depends. If the pilot is an employee of the policyholder, workers compensation coverage should apply. Independent contractor pilots should still have their own workers compensation coverage, in theory. Absent of workers compensation, perhaps there is major medical or life insurance to fall back on. Workers compensation laws usually bar employees from suing their employers. If however the pilot is not an employee, he or she could potentially sue the policyholder just like any other passenger! This is a big reason why underwriters prefer the regular use of employee pilots. Bonus Question: Can you give me a quick explanation of common aviation insurance terms? Yes. Visit our web site ( for a list of terms and what they mean. 5

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