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Not Enough Money In The World?

When insurance types speak about the risk management principle of Maximum Possible Loss- they are referring to the largest loss believed to be possible for a certain type of business or activity- outlines Stuart Hope. When it comes to aviation- the Maximum Possible Loss one could conceive is only limited by your imagination - yet so- too- is the Insurance available.

Once known- the Insurance Broker can address what tools they have at their disposal to protect a corporation from Maximum Possible Loss (MPL). One such tool is Risk Avoidance. Simply put- you choose not to engage in the activity that might expose the company to that loss. This solution is best deployed when the company is engaged in an activity infrequently- and the return to the business for that activity is small.

A corporate aircraft operator might think a mid-air collision between their aircraft and an Airbus A380 over a densely populated area would create potentially catastrophic bodily injury and property damage claims that could financially destroy even a well-funded corporation. Are these reasons enough for a company to employ the Risk Avoidance strategy and elect not to own/operate a corporate aircraft? The answer is an unequivocal “no!” Aircraft have become tremendouly competitive tools according companies that own them- offering those companies a step up on their competition. By any measure they have proven to be an exceedingly safe form of transportation.

While the MPL presented by an aviation risk can be intimidating- it is by no means a financial exposure the corporate owner cannot be protected from. Engaging aviation expertise in the Legal- Tax- Regulatory- and Insurance disciplines is paramount when purchasing or owning/operating an aircraft. Often protection from a MPL event begins with the aviation attorney setting up ownership of the aircraft in a corporate entity. This can be a good first layer of defense but is by no means bulletproof. Depending on the circumstances of the loss and the state it occurs in- piercing of the corporate veil may be allowed. Therefore a well-built insurance program designed by an aviation insurance broker is crucial.

It turns out there IS enough money in the world to cover a worst-case MPL in the aviation arena and it is provided by insurance companies. Liability coverage- which provides the aircraft owner lawsuit protection for bodily injury or property damage claims- is readily available in limits of coverage up to $500 million per occurrence. Higher limits can be negotiated. Most of the major airlines carry a minimum liability limit of $1 billion per occurrence.

The design of the insurance mechanism is such that no one insurance company will be on the hook for an entire $500m or $1bn dollar loss. Aviation insurance companies in the US are either pool companies or large monolithic insurers.

A pool company is generally comprised of several large insurance companies that each take a percentage share of the risk and/or profit; their combined share equaling 100 percent. Both pool companies and the large stand-alone insurers then purchase reinsurance- ceding a percentage of the exposure to a re-insurance company. By spreading the risk in this fashion- no one insurance carrier will take an epic- possibly fatal financial blow.

As stated in my previous article on Liability Insurance in January’s Business Aviation and the Boardroom- because we don’t know if we have purchased enough liability insurance until AFTER a loss occurs- a smart aircraft owner will buy as much liability protection as they can reasonably afford. Email feedback to editorial@avbuyer.com

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