AIRCRAFT INSURANCE COVERAGE ANALYSIS

(September 2020)

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This analysis is based on a review of available coverage using several policies as examples as there is no standardized policy. However, there are similar coverages provided by all carriers.

Insuring Agreements

The insuring agreement establishes the coverage provided by the policy and, naturally, is located at the beginning of the form. The remainder of the policy wording clarifies, expands, or restricts the insuring agreement. Essentially, the insuring agreement states the insurance companies overall obligation for providing coverage based on the insured’s applicable, contractual consideration (paying premium, fulfilling policy provisions, use of qualified pilots, craft maintenance, etc.).

Bodily Injury Excluding Passengers

Usually under this part of the contract, the insurance company obligates itself to pay for the bodily injury that an insured causes to third parties. Naturally, the injury has to be directly related to the ownership, maintenance or use of the insured aircraft.

Example: Samantha has completed her flight, taking clients on an aerial tour of possible sites for construction projects. As she is taxiing to her hangar, she loses her attention and strikes a person who was outside the hangar, inspecting his own plane that was awaiting maintenance work. When she is sued, her policy will respond to the claim.

Important considerations:

· How does the policy define bodily injury?

· Does BI include mental anguish?

· Does coverage include BI to aircraft passengers?

· Is the coverage conditional on how the aircraft is being used?

· Does the coverage apply when an unlisted pilot is operating the aircraft?

Property Damage Liability

This portion of the policy responds to property damage of others that an insured causes. The damage must be related to the ownership, maintenance or use of the insured aircraft.

Passenger Bodily Injury Liability

Usually under this part of the contract, the insurance company obligates itself to pay for the bodily injury that an insured causes to passengers. The injury must be directly related to the ownership, maintenance or use of the insured aircraft.

Example: Wayne, the owner and one of the pilots for “Casual Flyte” Commuter Air Taxi, is sued by a customer who is hurt when Wayne tossed a heavy suitcase to him.

Scenario 1: The customer was still on the plane and fell out when he lost his balance in an attempt to catch the bag.

Scenario 2: The customer was in the airport where Wayne caught up with him with the forgotten bag. The customer falls after losing his balance when attempting to catch the bag.

Scenario 1 is eligible for coverage while scenario B is not.

Medical Services or Medical Expense Insuring Agreement

The insurance company pays for medical expenses that are incurred due to an accident involving the covered aircraft. Typically, such expenses must be incurred within one year from the date of the accident.

Important considerations:

1. Who is covered? Passengers, crew, pilot?

2. How does the policy define medical expenses?

Note: Some policies provide an explanation of covered medical expenses while other forms respond to expenses that are ordinarily considered to be "necessary" or "reasonable."

Physical Damage to the Aircraft

The insurance company pays for tangible damage to and/or disappearance of the aircraft listed on the Declarations. Coverage is generally provided on an all-risk type basis. Coverage may be offered on a basis of the aircraft being in motion (taxiing, take-off, flight, landing) and not in motion.

Example: A tornado touches down in Middleplace’s Municipal Airport. Hopeless Airlines has one plane that has a wing ripped off and destroyed. Their policy will respond to the loss under the limit for Not In Motion Physical Damage.

Non-Owned Aircraft Liability

The insurance company pays for BI or PD that is connected to an insured's use or operation of an aircraft that the insured does not own.

Important considerations:

Who is considered to be an insured?
Does the policy cover only the named insured or does it include the spouse, family members? Does it cover related parties (such as other relatives or, when an insured is a business entity, other members of the business or corporation)?
What aircraft is covered? Any aircraft? Aircraft that is similar to the scheduled aircraft?
Are there restrictions regarding the types, use and conditions of non-owned aircraft?
Is the coverage applicable to commercial, business and pleasure use of the aircraft?

Supplementary Payments

Some insurance companies offer additional items as supplementary payments such as:

· First-aid

· Cost of foaming of aircraft

· Premiums on appeal bonds or bonds to release attachment

· Search and rescue costs

Naturally, these costs have to be associated with a claim that is eligible for loss under the policy. They are extremely valuable since their use does not reduce the policy’s available coverage limits.

Defense Costs

The insurance company has the right and the duty to defend a bodily injury or property damage suit until the limit of insurance is exhausted by payment to claimants (via judgments or settlements). This means that the insurance company will bear the expense associated with providing a legal defense. Most insurance companies pay these expenses separately, without affecting the policy’s applicable limit of insurance. These expenses can include the attorney’s fees, premiums of court bonds, reasonable expenses of the insured and their employees when testifying or participating in other activities that assist in the defense against a claim.

The cost to defend a lawsuit is extremely high and can quickly use a policy's liability limit. If the limits are used to pay defense costs and the case is lost, there would be little money left to pay any judgment.


Example: Prinder, a maintenance supervisor at a private airfield, was seriously injured by a piece of metal that fell from the sky. He sued Miguel after learning that Miguel's plane landed on the field a few minutes after he was struck. Miguel is adamant that he wasn't responsible for Prinder's injury. Miguel's insurer agreed to defend Miguel against Prinder's lawsuit. After going through many phases, Miguel lost the suit. His defense costs totaled $300,000 and Prinder was awarded $850,000 in damages. Miguel’s aircraft policy limit was $1,000,000.
Loss Feature	Aircraft Policy A Defense costs paid under the insurance limit	Aircraft Policy B Defense costs paid under supplemental coverage
Liability Ins. Limit	$1,000,000	$1,000,000
Judgment	$850,000	$850,000
Defense Costs	$300,000	$300,000
Total Lawsuit Costs	$1,150,000	$1,150,000
Total Paid by Insurer	$1,000,000	$1,150,000
Under the situation as handled by Policy A, Miguel would be left with the financial responsibility of paying the $150,000 of the settlement cost that was not covered by his policy.

Who Is An Insured

The following are all considered insureds under the policy:

1. The named insured

2. Any person using or riding in the aircraft with permission

3. Any person or organization legally responsible for the aircraft; provided they do not fit in any of the following groups:

· An employee who injures a fellow employee

· Un-named student pilots

· Any person who has paid to use the aircraft

· Persons who are not employees of the insured but are employees of repair facilities, flying schools, airports, and similar services

Exclusions

Exclusions must be studied carefully in order to understand their impact on policy coverage. Some exclusions will apply to the entire policy while others are specific to the insuring agreement. A unique aspect of the policy is that some exclusions may apply only when the aircraft is in flight. The exclusions below are typically found in an aircraft insurance policy.

1. Criminal Acts - There is no coverage when the aircraft is used for an unlawful or criminal purpose. There is normally a requirement that the insured or someone with authority in the insured’s operation be aware of the unlawful use.

Example: Katie, an executive with Global Real Estate, was granted permission to have the company's pilot fly their Cessna 182 on a trip to Jamaica. While beginning the trip back home, the pilot lost control of the plane, ran off the runway, damaging airport maintenance equipment and injuring several airport employees.

The official reason for the trip was to pick up two clients who were looking for commercial real estate. As it turns out, Katie was also bringing back 4 kilos of cocaine and used the Global plane in order to avoid customs. In this case, the bodily injury and property damage claims arising form the crash would be covered, because the insured, Global Real Estate, was not aware of Katie's criminal act.

2. Intentional injury - If an injury or action is the result of an insured's deliberate action, the policy will not respond to any related loss. There is one exception. Coverage still applies if the intentional action was taken to prevent dangerous interference with aircraft operation.

Example: Paul has completed his final check on his T-6 and starts to enter the cockpit. Suddenly, a woman pushes him out of the way and attempts to start up the plane's engine. Paul wrestles with her and throws her out of the cockpit. The intruder loses her balance and slams onto the floor, unconscious. Paul calls the police and she is removed from his plane. Several weeks later, Paul receives a legal notice. The woman is suing Paul for the injuries she suffered during their scuffle. Paul's insurer advises him that it will defend him. His intentional acts occurred while he was protecting the aircraft.

3. Assumption of Liability - If an insured accepts responsibility for injuries or damage under a contract, coverage for those injuries or damages is excluded UNLESS the contract is with a governmental authority and for the purpose of airport operations.

4. Certain In-flight Activities - The policy prohibits coverage for losses that occur when the aircraft is in flight under the following circumstances:

a. Pilot is not listed on the declarations or pilot endorsement

b. Pilot is listed but is not approved by current FAA regulations

c. Aircraft does not have FAA Standard Airworthiness Certificate

d. If a special permit or waiver is required by the FAA but the waiver or permit has NOT been secured.

e. A student pilot not under the supervision of a certified flight instructor

f. A student pilot with a passenger other than a certified flight instructor

5. Nuclear and radioactive activity - All related losses are excluded.

6. War and terrorism - All related losses are excluded.

7. Noise, sonic boom, pollution, electrical/electromagnet interference, interference of property use - All such causes of loss are excluded except when it is created by an actual crash, collision of the aircraft or in flight emergency.

8. Miscellaneous activities - The policy excludes damage or injury that results from using the insured aircraft for the following (this is not a comprehensive list):

advertising	towing	photography	hunting
herding	surveillance	flight instruction	sky diving
parachuting	closed course racing	off-shore business

Note: If an insured is involved in unusual flight activities, the application must thoroughly document the aircraft use in order for any aviation carrier to evaluate and, if applicable, price the risk, and endorsement coverage.

9. Workers Compensation and Employer Liability situations - Aviation policies exclude losses that should be handled by WC and/or EPLI coverage. The exclusion extends to actions brought by family members of an employee.

10. Property damage to items owned, held by or controlled by an insured - No coverage exists for damage or loss of items that belongs to or is controlled by an insured with the exception of limited protection for loss involving either of the following:

Passenger carry-on items
Hangars that are leased or rented by an insured

11. Other Loss or Damage to the owned aircraft - Other items that damage an insured's aircraft (or create a loss in value), but which are barred from coverage include:

a. Embezzlement, repossession, or conversion of the aircraft through the use of bailment, lease or similar encumbrances whether they are lawful or unlawful

b. Wear and tear and deterioration losses. Mechanical, engine, hydraulic structural pneumatic and electrical failures are not covered if they remain confined to the failure.

c. Loss to engines and power units due to heat or temperature from operation of the engine unless caused by another covered loss

d. Depreciation

e. Governmental taking or detaining of the aircraft for any use – peace or war, lawful or unlawful

This is a representative, rather than an exhaustive, list of actual exclusions found in the reviewed policies. A given policy's actual exclusions must be carefully evaluated in order to determine the scope of coverage.

Conditions

The conditions in a policy outline the responsibilities of both the insurance company and the insured. It is an area that commonly triggers disputes between the insurer and the carrier.

Action Against the Insurance Company - No action can be brought by the insured against the insurance company until the insured has met all conditions required by the insurance policy. There are time limits and requirements that differ by policy but, overall, the insured has a fairly short time frame to sue the insurance company.

Note: State laws and court decisions frequently affect this provision and insurer actions are adjusted accordingly.

Appraisal - This provision may be invoked when the company and the insured don’t agree on the amount of the loss. Each party must select its own qualified appraiser. The two appraisers then select an umpire. The appraisers then submit their opinion of the actual cash value and the amount of the loss. If they don’t reach agreement, they submit this information to the umpire. An agreement by any two persons is binding on both parties.

The company and the insured have to pay for the expenses of their own appraiser, as well as equally share the expenses of the umpire. No other insurer rights are affected by their agreeing to an appraisal. For instance, if another party has some responsibility for the loss, the insurer, after paying the appraised amount of loss, may still subrogate the claim.

Assignment - Policies cannot be assigned by the insured due to a covered aircraft's sale. The insurance company must be consulted and provide consent before any assignment takes place EXCEPT for the death or bankruptcy of the insured. In death or bankruptcy there is 60 days coverage for the legal representative.

Assistance and Cooperation - The insured is expected to work with the insurance company during all claim proceedings. This could mean testifying, helping with witnesses and participating in examinations. The insured does not have the right to volunteer payments on behalf of the insurance company.

Note: An insured may risk making out of pocket payments without expectations of being re-paid by the insurer. However, this may not be wise if the payment is construed as an admission of liability.

Automatic Reinstatement - At the time of loss to the applicable aircraft, the amount of coverage is reduced with respect to any subsequent losses until the aircraft’s value has been restored due to completed repairs. This provision applies both to eligible and ineligible losses.

Bankruptcy or Insolvency - The insured’s bankruptcy or insolvency does not affect the insurance company’s obligations under this insurance policy.

Cancellation - The insured can cancel at any time. When the insurer wishes to cancel coverage, it must provide notice at least 30 days in advance except for non-payment when only 10 days is required.

Changes - The policy can only be changed by written endorsements. In other words, a policy can only be modified in writing, meaning that any change has to occur with the carrier's permission.

Declaration - Acceptance of the policy by the insured means that the information that appears in the policy’s declarations is true and the insurance company may rely on that information’s accuracy. Further, that information is deemed to be a part of this insurance contract.

Fraud and Misrepresentation - The policy is void if the insured misrepresents significant information. This is a vital condition since aircraft applications are detailed and most of the information is important in evaluating a submission. While no standard application exists, an insured is still obligated to carefully read each question and to respond truthfully and accurately.

Inspections and Audit - The insurance company has the right to inspect the aircraft and records that pertain to the aircraft during the policy period and up to a year afterwards.

More than one aircraft - If there is more than one aircraft on a policy, the policy applies to each one separately.

More than one insured - If there is more than one insured, each is covered as though they are the only insured except that any payment is subject to the policy's insurance limits. This means that each insured is treated by the carrier uniquely in defense and discovery with no preference. However, at the time of settlement, the only limits available are the single set of limits in the policy.

Notice of occurrence, claim or suit - The insured must notify the insurance company of an occurrence that could lead to a claim. The notice must be given as soon as practicable. If a claim or suit is brought, the insured must immediately send the information to the insurance company.

Other Insurance - If there is more than one policy on the aircraft then all policies are expected to participate in a loss. The participation is based on the relationship of the limit to the policy to the aggregate limit available. Policies purchased as excess policies are not considered in the aggregate limit. Also, coverage for non-owned aircraft is excess over any other available insurance.

Return premium - If the insured cancels, the return is based on a short rate table but if the insurance company cancels the return premium is based on prorate tables. If a plane is a total loss, the insurance company is not required to refund any remaining premium.

Rights of Recovery - The insured must agree to give the insurance company full rights of recovery and do nothing to hurt (prejudice) the insurance company’s ability to exercise those rights and will help the insurance company exercise those rights.

Example: Mabel and her Cessna 150 were insured by Acme Airsurers when she had her plane serviced by Tempe Air Garage. A Tempe employee accidentally nicked a hydraulic line on Mabel’s Cessna 150, causing a leak that went unnoticed when the plane was returned. A few days later, when she tried to take off, the plane lifted slightly off the ground, stuttered and then crashed. The plane seriously damaged the main building of an FBO and the plane was demolished. Acme paid the losses to the FBO. After an investigation determined Tempe's error, Acme assumed Mabel's recovery rights and sued Tempe Air Garage. She cooperated with the insurer and the company received reimbursement from the garage and repair firm.

Territory - The territory is the United States, Canada and Mexico and the airspace while en route between the mentioned countries. Some policies include the U.S. territories and possessions, the Bahamas and West Indies. The policy's territory definition should be carefully reviewed in order to understand the areas within which aviation losses are eligible for coverage.

When an insured regularly travels outside Canada, Mexico or the United States, consideration should be made to purchasing a policy just for that country through a representative licensed to operate in that country.

United States Navy and Air Force Insurance Requirements - If the insurer providing aviation coverage is required to issue a certificate of insurance per the U.S. Navy or the U.S. Air Force, this policy is changed. Specifically, the relevant provisions of this policy are automatically replaced by those required under either OPNAV Form 3770 (Navy) or Regulation 55-20 (Air Force). This results in the complete incorporation of those provisions, rendering this policy to be in applicable Navy or Air Force compliance.

Note: Essentially, these regulations contain unique stipulations with regard to defining aircraft, aircraft use and use of military aircraft facilities by non-military personnel.

Valuation - If the aircraft loss is total, the insurance company pays the limit shown on the declaration or summary page. However, if the loss is partial, the loss is settled based on who repairs the plane. If the insured repairs it – cost of like kind or quality material plus the straight time rate wages plus an amount for supervisory and overhead is paid. If someone other than the insured makes the repairs, the net cost to the insured is paid.

Note: Where is the plane repaired? Normally it must be repaired at the loss site or at the aircraft's home airport. The insurance company pays the cost of transportation for the aircraft and the parts. The insurer has the discretion of finding the most economical method to handle the move. The insured has the right to choose another place for repair or another mode of transportation, but then will have to pay the additional cost.

When parts are replaced or the entire plane is replaced, the insurance company has the right to all salvage. However, retaining salvage is the carrier's choice. An insurer is not obligated to accept salvage.

Limits Of Liability

The liability limits are per occurrence. There is no aggregate limit. This means that the policy's limit is available to each separate eligible occurrence. The Declarations states the occurrence limit is the maximum liability payment for any single occurrence. The definition of occurrence includes any series of related events. For instance, if a single accident started a chain reaction, all injuries and damages would be considered a single occurrence and subject to the occurrence limit.

The policy can have a per person or a per passenger limit. This is a restriction of coverage. It means that the maximum coverage available for a single person or passenger is limited to the per person or passenger limit. The per person limit is more restrictive than the per passenger limit since it includes the passengers and any other person who might bring suit.

The Medical Expense Limit is a separate coverage and limit that operates independently of the policy's occurrence and the per person limit.

Example: While Clint was landing his plane, he slightly tilted the wings and crashed into a small office/hangar. His passenger was thrown around the cockpit and a maintenance person who had been working in the building was seriously injured. The property damage loss was $50,000 for the building and its contents. The passenger suffered back injuries and lacerations and filed suit for $200,000. The groundskeeper broke a leg and arm and lost 60 days of work. He sued Clint for $300,000. Clint had a policy with $1,000,000 per occurrence limit. The policy included a per person limit of $100,000. This means that his policy pays no more than $100,000 for the passenger's claim and no more than $100,000 for the maintenance person's claim. The maximum payment is therefore $250,000 (two injuries plus the property damage). Clint is responsible for the remaining $300,000 injury amounts. If Clint’s policy had the per passenger limit instead of the person limit, insurance company would have paid $50,000 plus $100,000 plus $300,000 or a total $450,000. In the later instance, Clint would continue to be responsible for the passenger’s remaining $100,000.

Deductibles

Any aircraft physical damage is subject to deductibles that differ according to circumstances surrounding a given loss. The applicable amounts are:

1. Not-In-Motion Deductible - This amount applies whenever the aircraft is not moving.

2. In-Motion Deductible - This applies when the aircraft is intentionally moving either on the ground or in flight.

3. In-Flight Deductible - This applies when the aircraft is intentionally in flight.

Typically, the required in-flight deductible is the greatest amount, while the not-in-motion deductible is the least.

The deductibles apply independently based on the actual loss.

Substitute, Replacement and Newly Acquired Aircraft

If the insured uses a substitute aircraft for an insured craft that is out of commission, the policy provides protection. The insured has liability and medical expense coverage while using the substitute, but the maximum payout for any occurrence can not exceed what would have been paid if the primary aircraft was in operation. This is a critical consideration if the substitute craft has a significantly higher value than the insured craft.

If the insured purchases a new aircraft to replace a scheduled aircraft, there is automatic coverage provided the insurance company is notified within 30 days of the purchase and premium payment is made. The coverage is the same as on the scheduled aircraft.

If the insured purchases an additional aircraft, there is automatic coverage provided the insurance company currently insures all of the insured’s owned aircraft. The insured must notify the insurance company within 30 days of the acquisition. The coverage is the same as another aircraft with similar passenger capacity. The physical damage limit is the actual amount the insured paid for the aircraft.

Definitions

Typically, a policy will have a number of terms with a special meaning. Actual defined terms can vary by insurer, but the following are items that are likely to appear:

· Aircraft

· Bodily Injury

· Charter

· Commercial

· Disappearance

· Federal Aviation Administration

· In Flight

· In Motion

· Instruction and Rental

· Insured

· Medical Expense

· Occurrence

· Partial Loss

· Passenger

· Physical Damage

· Premises

· Pleasure and Business

· Premises

· Property Damage

· Total Loss

Note: This glossary may be helpful in better understanding underwriting or claims information involving aircraft.

Endorsements

Common endorsements that are used to modify aviation coverage are in the categories of additional exclusions (such as for terrorism, pollution), clarifications (such as pilot requirements) and amendatory (such as cancellation information).