A Guide to Aviation Insurance

Your aircraft represents a wonderful business tool but also one of your largest potential exposures to catastrophic loss—one that could wipe out what you have spent years building. The importance of properly insuring against such loss should be obvious. Here’s a look at the most critical coverage types and clauses.

AIRCRAFT HULL INSURANCE

What it covers: Physical damage to the aircraft as a result of an accident. The insurer has the option to pay for repairs or to declare a total loss and pay the insured value stated on the policy.

What it costs: The annual premium is calculated per $100 of insured value. The higher the insured value, the lower the rate per $100. The hull premium for a midsized jet that isn’t used commercially and has an insured value of $10 million might run $13,000 (13 cents per $100 of insured value), including coverage for war-risk perils. An older version of the same jet insured for $5 million might have a premium cost of $10,500 (21 cents per $100 of insured value).

Who needs it: If you have a lien on the aircraft, the bank will require it. Otherwise, you still need it unless you could withstand an uninsured loss. 

Advice: Because this coverage is based on the aircraft’s agreed-to or stated value (not on its cash value), there’s potential for over- or under-insuring, which can be perilous. Consider the 2010 hangar collapse at Dulles International Airport, near Washington, D.C. Many of the damaged aircraft were significantly over-insured and the unintended result was that insurers were forced to repair airplanes that owners would rather have had declared total losses. 

The proper insured value to carry is the aircraft’s current market value or lien amount, whichever is greater. You should include coverage for war-risk perils, as it offers broad additional protection for a small additional premium. Be sure to review and adjust your coverage annually at renewal.

AIRCRAFT LIABILITY INSURANCE

What it covers: Liability for bodily injury or property damage arising from an accident. The coverage is written on a single-limit-per-occurrence basis (e.g., $100 million per occurrence) and includes defense costs over and above the stated liability cap.  

What it costs: The premium is normally a flat amount based on factors such as the liability limit selected, the pilots flying the aircraft (owner pilot?), and the approved use (Part 91 vs. Part 135). Assuming the midsized jet we used as an example above with insured value of $10 million, approximate annual premiums for ascending liability limits might be $8,500 for $100 million of coverage, $17,000 for $200 million of coverage, and $25,000 for $300 million of coverage. These numbers will vary based on the age of the aircraft and the extent to which an underwriter prefers to load more premium on the hull insurance and less on the liability component of coverage. Also, you could face rate surcharges of up to 25 percent, depending on how much the aircraft is used for charter flights.

Who needs it: Everyone. This is the most important coverage you will buy, as it protects against what is typically your largest ­catastrophic-lossexposure. If your aircraft is involved in an accident that results in injury or property damage, you’ll most likely be sued. Even if the suit is groundless, the coverage will provide a defense.

Advice: Purchase as high a limit as you can afford, keeping in mind that you won’t find out whether you bought enough coverage until after a loss. The liability claims you might face if your aircraft were to crash while carrying high-net-worth individuals or flying over a populated area could easily exceed $100 million. For that reason, many flight departments carry $200 million, $300 million, or $500 million liability limits. As with hull insurance, coverage for war-risk perils is recommended, because it offers broad additional protection for a small additional premium.

APPROVED-PILOT CLAUSE

What it covers: Anyone authorized under your policy to act as pilot or second in command on your aircraft.

What it costs: While no specific premium is associated with the approved-pilot clause, the overall policy premium correlates directly with the experience level of your pilots and their training protocol. Obviously, the better qualified the pilots and the more stout their recurrent training and safety initiatives, the lower the premium. 

Who needs it: You do, and all policies have an approved-pilot clause. A disproportionate number of claim denials are directly attributable to the fact that pilots flying aircraft did not meet the exact criteria of the pilot clause. 

A classic case involved a Falcon 900 that was forced to abort a takeoff, exiting the runway and causing substantial damage to the aircraft. The temporary copilot that day, although well qualified, had not completed insurance-required training for this make and model aircraft. (Apparently, the training requirement was never communicated to the individual approving the pilots for the aircraft owner.) The insurer denied the claim.

Advice: If you review only one section of your ­insurance policy annually, this should be the section. This clause varies widely among insurers and your aviation insurance broker negotiates the language, so if you aren’t represented by an experienced broker, you’re at a distinct disadvantage here. You want the broadest approved-pilot clause possible. When you receive your insurance policy annually, be sure to provide your flight department and any other pertinent parties with a copy of this section along with any evidence of required recurrent training. 

Be advised that almost without exception, the primary pilots of all turbine/jet aircraft will have to complete annual recurrent training at an insurer-approved facility, whether or not such training is stipulated in the policy. Moreover, the training is critical, since pilot error causes about 85 percent of aircraft accidents. It amazes me when I see clients not blink an eye at a $100,000 maintenance bill, but hesitate to spend $15,000 to $20,000 to train the pilots who represent their best opportunity to increase operational safety.

APPROVED-USE INSURANCE

What it covers: Allowable reimbursement by non-owners who use your aircraft. 

What it costs: As with the approved-pilot clause, no specific premium is assigned to the approved-use clause but as you’d expect, commercial operations face higher premium rates than non-commercial ones. 

Who needs it: You do, and all policies contain an approved-use clause. It’s a sleeper, though, because most owners erroneously assume they can do almost anything they want with their aircraft. 

Advice: Like the approved-pilot clause, the approved-use endorsement varies widely among insurers, each of which has several versions it can use, some much broader than others. Your insurance broker negotiates the wording so, again, if an experienced aviation broker doesn’t represent you, you’re at a disadvantage. 

When subsidiary companies, business associates or friends use your aircraft, make sure your broker knows exactly what you’re receiving as compensation—whether it’s money, a case of wine or a week at someone’s vacation home, it all converts back to the almighty dollar. If your aircraft is involved in an accident and the U.S. Federal Aviation Administration determines that due to the reimbursement you received, the flight was actually commercial and should have been operated under Part 135 charter regulations, your insurance claim could be denied.

OTHER COVERAGES AND CLAUSES YOU MIGHT WANT

Broad Form Named Insured Clause. This extends coverage to subsidiary or affiliated companies of the named insured and other companies the named insured’s controls or actively manages. 

Contractual Liability. This coverage insures to some extent, against liability you assume under contract. Be vigilant to submit any contracts or agreements related to your aircraft to your insurance broker. This includes hangar agreements, dry-lease, time-share and interchange agreements, purchase/lease agreements, and leased/loaner engine agreements.

Non-Owned Aircraft Liability: This extends coverage under your policy for your use of non-owned aircraft, including chartered and rental aircraft. Review any known or anticipated use with your insurance broker.

Diminution of Value. This reimburses the aircraft owner for depreciated value caused by damage history due to a physical-damage claim. It is rarely purchased due to the cost and complexity of the formula used to determine coverage. [For more on this coverage, see the Taxes, Laws, and Finance column in our June/July 2014 issue.—Ed.]

Garagekeepers Liability. This covers you for damage resulting from your negligence to a non-owned auto in your care, custody, or control (think cars in hangars).

Stuart Hope, co-owner of Hope Aviation Insurance, has been in the business since 1979.