Insuring your charter income

A new insurance policy offers owners and operators of charter aircraft protection from loss of income should mechanical issues cancel or terminate flights. Typically the charter customer gets all the sympathy when these events occur, as the broker and/or operator scramble to find a replacement aircraft. But if you’re the owner or operator of the grounded airplane, the canceled flight could cost you thousands of dollars.
“It takes only one mechanical event and someone to lose $20,000 in revenue for this product to find a home in their annual insurance budget,” says Carl Shephard of SterlingRisk Insurance, in Boca Raton, Florida, the brokerage that created the “aviation business income” policy.

The policy, which is underwritten by Great American Insurance of Cincinnati, pays for the loss of net charter income sustained due to the necessary suspension of operations while repairs are performed. Basically, direct operating costs are subtracted from the total charter invoice to determine revenue loss. This is an area that aircraft hull and liability insurance doesn’t address, and the coverage has been requested “for a long time,” says Stuart Hope of Hope Aviation Insurance, a brokerage in Columbia, South Carolina, that’s not involved in creating or selling the coverage.

A sampling of operators and consultants bolsters Hope’s contention. Julian Tonsmeire, vice president for business development at charter operator Mountain Aviation, says he has heard about the insurance and plans to “closely review” it. Greg Petersen, COO of Solairus Aviation, calls the policy an “interesting concept,” while Kevin O’Leary, president of consultancy JetAdvisors labels the coverage “intriguing and innovative,” though he is unfamiliar with prices.

The insurance pays both the operator’s and owner’s shares of net revenue loss to the policyholder. It costs $1,800 to $22,500 per aircraft per year, with the rates varying based on airplane type and age, utilization, maintenance history, fleet size, and coverage limits, which max out at $25,000 per day and $500,000 per occurrence. No inspection of logbooks or aircraft is required to receive coverage. Shephard declines to disclose the number of policies bought thus far, but says purchases have been about evenly split between owners and operators.

On the surface the coverage is straightforward: if your airplane can’t make a scheduled trip due to mechanical difficulty, the insurance pays the anticipated profit. But “the devil is in the details,” says aviation attorney Paul Lange. “Any insurance that can help smooth out the bumps is a good thing, but you need to be sure you understand what you’re buying, so the only surprise is the mechanical type, not the claim type.”

Think of the range of your aircraft’s missions, the ways mechanicals could impact them, and how they’d be treated under the policy. A breakdown that cancels a one-day charter is relatively simple. But what if a mechanical prevents the aircraft from embarking on a four-day trip, the aircraft is repaired in 48 hours and you pick up a charter for what would have been the last two days of the original trip? In this case, the insurance would cover lost income only for the days the aircraft was out of service.

If mechanical issues rarely ground your aircraft on short notice, or you have sufficient lift to backstop a charter aircraft, the policy will likely be less appealing than if you’re one breakdown from missing your monthly nut. But with the squeeze on charter rates of the past few years, “nobody’s making a huge amount in charter,” says aviation attorney Daniel Herr of FractionalLaw, “so once you take the operating costs out, there won’t be a whole lot left.”

Policy and payout details aside, the coverage also reflects the insurance industry’s effort to make up for revenue loss in today’s highly competitive market, where premium costs for business jets have plunged. Shephard notes that in the mid-1990s, hull and liability insurance for a GIV cost about $225,000 annually, whereas today, due to improved safety records and greater competition, “that same client is paying less than $40,000.”

By that measure, aviation business income insurance is expensive. That’s not surprising, given that it’s a new type of policy written without the benefit of historical data. In the absence of actuarial tables regarding the risk of a mechanical breakdown for Part 135 aircraft, Shephard developed SterlingRisk’s policy using his experience to set premium rates and coverage limits.

Says Hope about new policy types, “The first [insurer] is putting his head in a guillotine,” potentially overlooking prudent exclusions or other limitations, “and could get walloped on a big claim.” To avoid that, insurers typically price new coverage conservatively. If the product makes sense and demand is strong, additional underwriters will step in to offer me-too products, and competition often leads to lower prices.

“I’m sure over the next few years, others will dabble in the market,” Shephard says. “That’s just the nature of the business.” Meanwhile, he adds, SterlingRisk is in discussions with underwriters to “make the product available for use with their own comprehensive aircraft protection policies.” Such bundling would likely lower coverage costs, as well.

James Wynbrandt, a private pilot, is a regular BJT contributor who has also written for The New York Times, Forbes and Barron’s.