Patch the holes in your aviation insurance

Two corporate aircraft runway accidents in recent years underscore the importance of understanding your aviation insurance policy and communicating key details to all pertinent parties. The 2007 accidents—in Nova Scotia, Canada, and Santa Barbara, California—resulted in no serious passenger injuries but caused millions of dollars of damage. In each case, the insurance carrier denied the claim because the pilot(s) failed to meet policy requirements.

Contrary to popular belief, insurance companies don’t like to reject claims. It’s bad PR for them and isn’t conducive to retaining their other policyholders. However, when aircraft owners fail to adhere to contract terms, insurers have little choice but to say no.

Here’s a look at the four mistakes that result in the largest percentage of claim denials. Avoid them and you’ll have the bulk of your coverage nailed down tight.

1. Using Unapproved Pilots

One of the easiest and most common ways to void your insurance is to allow someone to fly your aircraft without confirming that he or she meets your policy’s approved-pilot clause.

The policy will state exactly who is authorized to act as pilot in command or second in command. Typically, either these pilots will be listed by name or you’ll see an “open-pilot” clause, which stipulates broad credentials and experience required to operate the airplane.

Many policies also list additional mandatory requirements for pilots. For example, your insurer may stipulate that all pilots, whether named or conforming to an open-pilot clause, must annually complete a motion-based simulator training course designed for the make and model aircraft operated. (A Falcon 900 doesn’t equal a Falcon 2000.) After a loss, a claims adjuster would require documentation that the pilot flying the aircraft had, in fact, completed such training.

Insurance companies recognize the need for flexibility regarding who is allowed to fly your airplane. This is the intent of those open-pilot clauses. For example, if your regular pilot is ill or on vacation, this clause can give you the authority to ­utilize another pilot who meets the minimum standards outlined in the policy. The open-pilot clause isn’t designed to allow you to let other pilots operate the aircraft regularly, however, so be careful when relying on this provision.

Some aircraft owners mistakenly believe it’s OK for a pilot who hasn’t been approved by the insurance company to receive instruction or log time, provided that someone who’s “insurance-approved” acts as pilot in command. However, insurance carriers define pilot in command to mean “sole manipulator of the controls.” Therefore, if the pilot handling the controls at the time of a loss isn’t approved under the policy, no coverage will apply.

Keep in mind that investigators attribute most accidents and incidents to pilot error. At each renewal of your insurance, you should provide your pilots with a copy of the approved-pilots section of your policy and encourage them to keep it in the cockpit as a reminder. Make certain they complete required recurrent training within the allotted time, as no grace period applies. You should list by name on the renewal application any pilot you employ regularly. Before using new pilots, have them complete a form verifying their credentials. Ask your insurance broker to submit that form to your insurance carrier and get its blessing.

2. Misunderstanding Approved-Use Clauses

One of the least understood and therefore most dangerous clauses in an aviation insurance policy is the one about “approved use.” This provision spells out what commercial or non-commercial uses the insurer will cover and what compensation the aircraft owner may receive for the operation of its aircraft. Particularly concerning policies written for non-commercial use, allowable reimbursement can vary widely.

The most basic and restrictive clause would allow for use in the insurance holder’s business as well as personal use, but not for hire or reward. In other words, any exchange of goods or services—be it a week at a friend’s vacation home or a case of your favorite wine—could violate the policy terms.

A more liberal wording of the usage clause would state that the policy shall not apply while the aircraft is used with the insured’s knowledge “for any purpose involving a charge intended to result in financial profit to such insured unless otherwise indicated herein.”

An even broader clause would cover “all operations of the named insured.” Insurers normally reserve this language for their best corporate flight department customers. It allows maximum flexibility on reimbursement for aircraft operations. If you can get it, this is the clause you want.

Why are insurers so focused on commercial versus non-commercial use? Because in the eyes of the law, an entity engaged in a commercial operation owes a much higher standard of care to the public. The courts will hold the commercial operator—and therefore the insurance company—much more liable than a non-commercial operator.

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3. Incorrectly Listing 'Named Insured'

The “named insured” is the policy’s owner—the person or company that is entitled to cancel, add, change, and benefit from coverage and that has the right and responsibility to coordinate with the insurer on any claim, receive claim checks, return premium checks and respond to cancellation notices. An “additional insured,” on the other hand, simply shares certain parts of the liability coverage and does not have any other rights under the policy.

Many owners mistakenly list the registered owner (often a sole-asset LLC) as the only “named insured” and sometimes list the true operating company or principal owner as an additional insured. Consult with your insurance broker to determine whether it makes sense in your situation to list all owners as named insureds. If your policy doesn’t already have it, add the “broad form named insured” clause.

Properly structuring the named insured is crucial to assuring that coverage applies to the people or entities that need it. Why? Because many ancillary coverages, such as for use of non-owned aircraft, apply only to the named insured. For example, say the owner’s aircraft is on a flight and another executive of the company must therefore use charter. If the flight is chartered under the operating company’s name and that company isn’t listed as a named insured, the coverage for the use of non-owned aircraft wouldn’t apply, leaving the operating company exposed to a lawsuit in the event of an accident.

You might think you needn’t worry about that and that your company couldn’t be sued if all you did was charter an aircraft. In fact, when an accident occurs, typically everyone involved in the loop of commerce for that flight will be brought into a lawsuit. One great benefit of your liability coverage is that it provides an attorney to defend you, even against a groundless suit.

Because the wording of aviation policies varies, you must review your risk profile with your insurance broker so he or she can help you properly structure your policy’s named-insured clause. The penalty for not doing so could be financial ruin.

4. Failing to Properly Review Contracts

Many of us routinely sign rental-car agreements, bank loan documents, and website use clauses without even a cursory review. Why? Because they’re long and loaded with legalese. That’s also true of aviation contracts—including purchase, financing and maintenance agreements, hangar leases and more—but the consequences of not reading and understanding them before you sign could be much greater. Among other things, these contracts could significantly affect your insurance coverage.

It is essential that you provide a copy to your insurance broker and attorney before you sign any such agreement. Almost without exception, they contain clauses requiring you to meet certain insurance conditions. Ignore these and you may find yourself in a nasty breach-of-contract lawsuit. In addition, most of these agreements contain indemnity clauses that—regardless of any insurance coverage you have—make you responsible for any losses.

Indemnity clauses merit particularly careful review as they can work against you in their most onerous form. Your aviation attorney can guide you through the process and suggest wording based on language common to the industry. The money you might save by not taking this step would seem trivial after a loss. So if you want to avoid the cost of an attorney, do it on contracts that don’t involve as much loss exposure. It just makes sense.