Insurance tips for fractional and charter customers

If you’re a charter customer or fractional owner, your net worth may well exceed that of your flight provider. That would make you the deep pocket with the most to lose in an accident, yet you have no role in selecting the provider’s insurer or drafting its coverage terms. So how can you protect yourself? By performing the most dreaded task in all of aviation—reading the insurance policy—and by keeping these tips in mind: 

1. Focus on usage clauses, not on whether you’re a “Named Insured.” Many people wrongly believe that being a “Named Insured” eliminates the need to examine the usage clause. The reality is that if the policy’s use is noncommercial, being a “Named Insured” is not a talisman that enables coverage for commercial activities. The “Named Insured” method also ignores the complication that the use clause may be based upon the activities of the “First Named Insured” (the person or entity listed first on the policy’s declarations page). 

There is no shortcut for an analysis of whether your use of the aircraft falls within the scope of the insurance policy. For example, if you’re a fractional owner acting as the aircraft operator under FAR 91 Subpart K, is your use within the scope of “all uses by the First Named Insured”? Does your use fall under the umbrella of use by the fractional program manager?

2. Don't accept discounted rides from friends with fractional shares. Unless your friend has his own charter certificate, your payments to him for flights would likely violate the FARs and the use provision of his insurance policy. In this scenario, there is no coverage, hull, or liability, for either of you.

3. Make sure the provider’s policy includes non-owned coverage. Charter companies and fractional programs may rely on charter vendors to cover your trips on peak-demand days and when their own aircraft have mechanical issues. Do you need to scramble to vet another insurance policy if you’re outsourced? No, not if your charter or fractional provider’s insurance includes non-owned coverage. Such coverage should give you the same level of protection whether or not your flight is outsourced.

You do, however, need to ensure that the non-owned coverage encompasses flights arranged by the company for its customers and that it includes non-owned hull insurance. If you drive your car into the aircraft or your child carelessly swings her golf club as she boards, you may be liable for the resulting damage—as well as for the diminution in value created by the damage history. Non-owned hull coverage protects you in such cases. 

4. Get a recovery waiver. When an insurer pays a hull claim, it has the right to subrogate: it may step into the shoes of the aircraft owner and recover from the person who damaged the aircraft. As a charter customer or fractional shareowner, you have exposure for negligently damaging the company’s aircraft. 

Don’t be lulled into complacency by a waiver of subrogation—it’s likely invalid if the aircraft owner hasn’t already granted you a recovery waiver. To avoid claims for damage and diminution of value, you need the aircraft owner to waive his rights of recovery against you. Once the owner has done this, the insurer has no legal basis to proceed against you via subrogation. The recovery waiver protects you from the owner and the insurer.

5. Request a breach-of-warranty endorsement. Insurance policies have conditions that specify aircraft use, pilot qualifications, and territory. If an accident involves an unapproved use, unapproved pilots or flight into unapproved territory, the insurer may deny coverage. For a charter customer, it’s impractical to verify that the aircraft provider is complying with all of the policy conditions. The fractional owner faces a similar problem, exacerbated by the fact that hundreds of other share-owners may operate “his” airplane.

The solution is to request a breach of warranty from the insurer. If you have that, the insurer will cover you despite the policy being otherwise invalidated by some unapproved activity. If an insurer denies your request for a breach of warranty, that’s an indication that the insurer perceives a risk that its insured will violate a policy condition. This should lead you to reconsider whether you want to have a flying relationship with the operator.

6. Ask for a cancellation notice. Make sure that the insurer will mail the notification directly to you, not to the charter or fractional company. Also, bear in mind that you’ll receive this notice only if the insurer cancels the policy—not if it’s canceled at the request of the “Named Insured” or if it has simply expired or been materially changed. These are all real risks.

7. Beware of indemnifications. Several seemingly reputable operators have adopted indemnifications that make their customers responsible for losses that exceed insurance limits—as well as losses that aren’t even insured. These murky indemnifications make you the backstop insurer. You should avoid doing business with operators that offload risk to you rather than purchasing adequate insurance. 

8. Consider buying an excess policy. Excess policies have many wonderful attributes. The coverage can be yours—not split among the operator, aircraft owners, crew, and passengers. You get to select the limits to match your assessment of the exposure. Further, excess policies can provide a level of primary coverage in the event that the underlying policy doesn’t respond—whether due to cancellation by the charter company or to your failure to get a breach of warranty.

Avoid excess policies that have a stacking clause. This clause reduces your liability limit by the amount of any underlying coverage or excess coverage written by the same insurer.

Beware of excess policies that require a scheduled underlying policy. The excess policy will be void if the underlying one disappears. Also, the excess policy may not respond if the underlying one fails to respond or if there is an endorsement to the underlying policy.

9. Review any fractional excess coverage. Fractional excess policies need to cover you for your use of “your” aircraft, others’ use of your aircraft, your use of other fractional aircraft, your use of charter aircraft provided by the fractional program, and your use of charter aircraft that you arrange yourself. Though premiums have fallen dramatically for fractional excess policies, you need to find an insurer that can cover all of the exposures. If you have a fractional excess policy, it behooves you to study it carefully.

Daniel Herr is an attorney who specializes in providing economic and legal advice to owners of fractional shares.