Category: Business Aviation and the Boardroom
Author: Stuart Hope
Your Checklist for Insurance Coverage
‘PUNC’ (Pilots, Use, Named Insured and Contracts) is an acronym capturing the four most important areas of aviation insurance that result in the largest percentage of claims denials, asserts Stuart Hope. This month, we consider the vitality of reviewing all Contracts related to your aircraft.
Many of us routinely sign rental car agreements, bank loan documents and internet use clauses without even a cursory review. Why? Because we know we won’t get the car, the loan or access to the internet site if we don’t. Don’t take the same approach when addressing contracts relating to your aircraft, however. The financial consequences are exponentially higher.
Contracts related to your aircraft can, and should be negotiated. By definition, a contract is a binding (i.e., legally-enforceable) agreement between two or more persons or parties. This means, like it or not, that providing your insurance broker and attorney a copy of any aviation contract prior to execution is not an option. It is a requirement for any well-run flight department.
Following are some common agreements an aircraft owner might encounter:
* Purchase agreements
* Hangar leases
* Bank financing documents
* Aircraft leases [dry lease, time share]
* Replacement engine or parts leases
* Maintenance agreements.
Almost without exception, all of these contracts contain clauses requiring you to meet certain insurance conditions. Ignore these or simply fail to take action and you may find yourself in a nasty Breach of Contract lawsuit. In addition, most of these agreements also contain an indemnity clause that, regardless of any insurance coverage you may or may not have in place, makes you responsible for any and all losses.
Let’s examine the insurance clause in a typical Time Share Agreement.
“At all times during the term of this Lease, Lessor shall cause to be carried and maintained, at Lessor's cost and expense, physical damage insurance with respect to the Aircraft in the amount set forth below:
“Aircraft Physical Damage (Not Deductible While In Motion or Not in Motion) -The Greater of Current Market Value or the Minimum Amount Required by Lender.
“At all times during the term of this Lease, Lessor shall also cause to be carried and maintained, at lessor's cost and expense, third party aircraft liability insurance, passenger legal liability insurance, property damage liability insurance and medical expense insurance in the amounts set forth below:
“Combined Liability Coverage for Bodily Injury and Property Damage Including
- Passengers Each Occurrence - No Less than $50,000,000.00
- Medical Expense Coverage Each Person - $5,000.00
“Any policies of insurance carried in accordance with this Lease: (i) shall name lessee as an additional insured; and (ii) shall contain a waiver by the underwriter thereof of any right of subrogation against Lessee. Each liability policy shall be primary without right of contribution from any other insurance which is carried by Lessee or Lessor and shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured”.
Now let’s examine a loss to illustrate the potential impact of not complying with the insurance requirements set out above: An aircraft owner has entered into a time share agreement (TSA) with a local company but fails to forward a copy of the TSA to his insurance broker to endorse the policy as required. An ensuing accident destroys the aircraft and causes critical injuries to some of the passengers.
Lawsuits are filed against you as owner of the aircraft and against the lessee. Upon receiving the suit papers the lessee contacts you with a request to forward the lawsuit to your insurance carrier for defense under the additional insured provision. In addition, their pilot was flying the aircraft and they also wanted to make sure the waiver of subrogation clause was activated. Last, they wanted to remind you that your policy is primary without any right of contribution from any insurance they have in place.
You vaguely remember reading these requirements in the TSA. If you didn’t comply with the contractual requirements, you could be sued for breach of contract. If the agreement also contained an indemnification clause (which is common) you could be exposed to even greater liability. In short, this could be a very messy claim to settle causing you or your company a great deal of pain, both financially and emotionally.
THE INDEMNITY CLAUSE
The indemnity clause also merits a close look as it can really work against you in its most onerous form. Careful review of this clause along with the entire contract or agreement in question with a good aviation attorney is worth every penny. He/she can guide you through the process and suggest wording based on fair benchmark language common to the industry.
The money you saved not taking this step is obviously never worth it after a loss. Again, if you want to avoid the cost of an attorney, do it on contracts that don’t have as much loss exposure. It just makes sense.
Your aviation insurance broker can also be a valuable resource. He/she has seen numerous insurance and indemnity clauses in contracts and can suggest more equitable language where appropriate. In closing, when evaluating any contract related to your aircraft, contact your broker and attorney during the contract review process (if not earlier). The devil IS in the detail, and contract review is an integral part of a well-run flight department’s risk management strategy.
Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com