“Let me be straight with you. What I'd rather have is an airplane. We just had a third kid. I don't like flying commercial. I like to take my family to Hawaii. When I go east, I'd like to have pilots I know. ”
Buying aviation insurance
Five years ago, a Falcon 900 with 15 people aboard was taking off from Santa Barbara, Calif. When the aircraft failed to climb, the pilots aborted the takeoff but the Falcon struck a berm at the end of the runway, collapsing the nose landing gear rearward. The pilots did manage to stop the jet and avoid what could have been a catastrophic loss. But the Falcon suffered $9 million in damages–and the owner’s insurer denied a claim for them because the copilot didn’t meet the policy’s requirements. Imagine the financial consequences to the aircraft owner if this jet had been completely destroyed and the passengers had been injured or killed.
“A lot of people don’t understand what’s in their insurance policy until they need it–and then it’s too late,” said Mike Nichols, the National Business Aviation Association’s vice president for operations, education and economics. “Knowing what coverage you have is key.”
Here are six steps to help you navigate the landmines present in many business aviation insurance policies:
1. Know who is an approved pilot under your policy. That may seem simple but this one issue generates the largest number of claim denials. Examining the so-called “pilot warranty” from the insurance policy on the aforementioned Falcon 900 is instructive. It states that the aircraft must be “operated by a two-pilot crew at all times that has been approved by the named insured’s chief pilot.” Also, such pilots “must have successfully completed a ground and flight recurrent/initial training course for the make and model operated within the past 18 months. Any such course must incorporate the use of a motion-based simulator specifically designed for the insured make and model [or] make and model series.”
Understand that these are requirements, not suggestions. The insurance company denied the claim for the Falcon 900 because the second-in-command pilot “never attended any formal course relative to any Falcon aircraft,” in violation of the pilot warranty.
To protect yourself against such an outcome, establish a monitoring system to ensure that your flight department understands and fully meets your policy’s pilot-training requirements. Your risk-management and flight departments should both have a copy of the most current policy pilot endorsement or wording, and should implement a diary system to stay on top of the pilot training and to create redundancy and accountability. Anytime you plan to use a backup pilot, contact your insurance broker and get its blessing before the flight.
2. Don’t skimp on liability coverage. This is one of the most important decisions you will make. How much coverage is enough? Unfortunately, there are no easy answers. The number and types of people who fly on your aircraft play a large part in determining your loss potential. If you’ll normally carry high-net-worth individuals or high-wage earners, you’d be wise to have relatively high liability limits. Similarly, if your aircraft has 13 passenger seats, you need much higher coverage than you would if it had six.
Other factors to consider include the benchmark average liability limit for similar-category aircraft and any umbrella policy you may have. Have your insurance broker obtain quotes for several liability limits (for example, $100 million, $200 million and $300 million) and buy as much as you can afford. Professionally flown corporate aircraft with excellent safety records can be covered for up to $500 million.
3. Review your approved-use clause. Does any entity reimburse you for use of your aircraft? One of the least understood–and therefore most dangerous–clauses in an aviation insurance policy is the “approved use” clause. This provision spells out exactly what use the insurer has agreed to cover.
The corresponding definition of the agreed-upon use will detail the “compensation” an owner may receive for the operation of his or her insured aircraft. Particularly with respect to policies written for noncommercial use, the allowable reimbursement can vary widely.
The most basic and restrictive clause covers “pleasure and business.” This means you may use the aircraft in your business and for pleasure, but not for hire or reward. The clause outlines permissible cost reimbursements, which include such items as fuel, crew travel, hangaring, insurance obtained for the specific flight, landing and customs fees, in-flight food and beverages, passenger ground transportation and flight-planning services.
Note that the clause excludes any operation for hire or reward. In other words, any exchange of goods or services (whether a case of your favorite wine or a week at a friend’s vacation home) can violate the terms of the policy.
A broader and more liberal usage clause reads: “The policy shall not apply to any insured while the aircraft is being used with the knowledge and consent of such insured for any purpose involving a charge intended to result in financial profit to such insured unless otherwise indicated herein.” This allows for full reimbursement of operating expenses provided the charge isn’t intended to result in profit.
The broadest usage clause simply covers “all operations of the named insured” and is normally reserved for an insurer’s best non-commercial corporate flight-department operations. It allows maximum flexibility on reimbursement. If you can get it, this is the clause you want.
I urge you to review your approved-use clause with your aviation insurance broker. Be sure to communicate to your flight department precisely what your policy allows.
4. Review insured value annually. Many aircraft owners insure their jets for the purchase price and then fail to adjust the coverage when they renew their policies. Best practice is to insure for current market value or the bank lien amount, whichever is greater. Review this at least annually, as over- or under-insuring can create a serious problem if you have a claim. Typically your best source to determine current market value will be the salesperson who sold you the aircraft or one who specializes in selling your category of aircraft.
5. Make certain the “named insured” is structured properly. Many owners make the mistake of listing the registered owner (often a sole-asset LLC) as the only named insured. It’s imperative to structure the named insured properly because failure to do so can leave the entities or persons who really need the coverage unprotected. For example, coverage for use of a non-owned aircraft normally applies only to the named insured. If the true operating company subsequently charters an aircraft that is involved in an accident, it may have no protection if it wasn’t listed as a named insured.
6. Give careful consideration before switching insurance companies. The aviation insurance business remains extremely soft. It’s a buyer’s market. Seven years ago, eight companies were competing for your business. Today, there are more than 20 and the pie is simply not big enough for all of them. To gain market share, each has been willing to cut its rates below what is profitable.
A word to the wise: be careful. In these hard economic times, it’s easy to be lured by lower rates. Keep in mind, though, that while auto, homeowner and business owner policies are written almost exclusively on boilerplate forms, aviation insurance policies vary widely. Some are much broader than others. If you’re contemplating a switch in insurers, be certain to have your aviation insurance broker thoroughly review the differences between policies to be sure that you won’t find out after a disastrous loss that you made a bad decision.
Hull and Liability Insurance Brokers
Ormond, Beach, Fla.
Thomas K. Coughlin, (386) 672-6210
AirSure Ltd. LLC
Bill Behan, (303) 526-5300
AON Risk Services, Inc.
New York, N.Y.
Tracy Toro, (212) 479-3233
Brad Meinhardt, (702) 647-2333
Chartis Aerospace Insurance Services, Inc.
Linda Parent, (404) 249-1800
Falcon Insurance Agency Inc.
John Allen, (830) 257-1000
Frank Crystal & Co., Inc.
Louis M. Timpanaro, Jr., (212) 504-5850
Hope Aviation Insurance, Inc.
Stuart Hope, (803) 771-7766
John F. Throne & Co.
Brint Smith, (206) 622-3636
Insurance Office of America
Aerospace Division Atlanta
John C. Averill, (770) 308-2398
L.L. Johns & Assoc., Inc.
Stephen Johns, (248) 666-4400
Marsh USA Inc.
Nancy P. Gratzer, (404) 995-2480
NationAir Insurance Agencies Inc.
W. Chicago, Ill.
Jeff Bauer, (630) 584-7552
PIM Aviation Insurance
Timothy K. Bonnell, Sr.,
Travers Aviation Insurance
Glen Travers, (800) 888-9859
Wells Fargo Insurance
Services USA, Inc.
Charles R. Tooley, (513) 333-2121
Willis Global Aviation
New York, N.Y.
Melissa Harder, (212) 915-8213
Wings Insurance Agency, Inc.
Eden Prairie, Minn.
Steve Bruss, (952) 942-8800
Title Insurance Agent
Global Aviation Title Insurance Agency, LLC
(agent for First American Transportation Title Insurance Company)
Frank L. Polk, (405) 552-2201