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Insuring a Business Aircraft for Sale?

When selling the company aircraft through a broker- two insurance options exist: maintaining coverage under the seller’s policy- or placing the ‘for sale’ aircraft on the broker’s fleet policy. Stuart Hope examines the advantages and disadvantages of both scenarios.

Stuart Hope   |   1st July 2013
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Stuart Hope Stuart Hope

Stuart Hope is a co-owner of Hope Aviation Insurance. His career as an aviation insurance broker...
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When selling business aircraft through a broker- two insurance options exist: maintaining coverage under the seller’s policy- or placing the ‘for sale’ aircraft on the broker’s fleet policy. Stuart Hope examines the advantages and disadvantages of both scenarios.

Unlike automobiles- aircraft are not required by law to be insured. Failure to do so- however- would be an abdication of a Board’s responsibility to protect shareholders from liability and loss of asset value. Thus- a prudent corporation employing the services of a resale broker will ascertain that their interests are properly protected until the aircraft’s title is transferred to the new owner.

Maintaining insurance coverage on the aircraft being sold (as opposed to removing the asset from the corporation’s policy- placing it on the broker’s fleet policy and being named as an additional insured) provides the corporation with several privileges that may seem advantageous.

• The owner controls the coverage under the policy and can make certain that shareholder interests are properly protected and that premiums have been paid to the insurance carrier.
• The owner deals direct with its own insurance company in the event of a loss.
• The owner can potentially recover consequential losses from the broker such as diminution of value (assuming the broker is responsible for the damage- carries the appropriate non-owned aircraft liability insurance coverage and has not contractually signed away its rights).

The owner’s non-commercial insurance policy often provides broader coverage than the broker’s commercial policy. Maintaining coverage on the seller’s insurance policy also offers advantages to the broker. Any physical damage claim not resulting from the broker’s negligence goes against the owner’s loss history. If there is a physical damage loss that stems from the broker’s negligence- the broker is protected for diminution of value/consequential loss (assuming the broker carries appropriate non-owned aircraft liability insurance coverage).

DISADVANTAGES FOR THE OWNER AND BROKER

Retaining a company’s existing insurance coverage on an aircraft being sold by a broker requires the owner to pay annual premiums (which must be remitted at the beginning of the coverage year) and once the aircraft is sold- may incur a short-rate cancellation penalty. Furthermore- the owner’s policy is usually much more restrictive as respects pilot approval.

The broker would be responsible for requesting and confirming that appropriate coverage is added to protect his interests under the owner’s policy. The Owner could recover diminution of value/consequential loss damages from the broker due to an accident if it’s found to be a result of the broker’s negligence- negatively impacting the broker’s loss history.

INSURING THE AIRCRAFT UNDER THE BROKER’S POLICY

From the owner’s point of view- placing the ‘for sale’ aircraft on the broker’s policy may have some advantages. The broker may have a fleet reporting policy allowing the owner to pay in smaller increments- thus conserving the seller’s cash flow. There would also be no short-rate cancellation penalty once the aircraft is sold. Broker policies typically allow the flexibility of blanket approval for pilots on the broker’s authority without hourly or recurrent training requirements. Also- any loss will go against the broker’s loss history.

The broker also may find benefits- such as controlling coverage under the policy and assuring that its interests are properly protected. The brokerage firm deals directly with their insurance company in the event of a loss and can use the clout of their larger policy as leverage.

CONS OF BROKER-PROVIDED COVERAGE

Owners must request that appropriate coverage be added to the broker’s policy- following up to be sure the provisions were included and premiums were paid to the insurance carrier. Coverage under the broker’s commercial policy form typically will be less broad than coverage under the owner’s non-commercial policy form. The owner may not want the broker’s insurance company representing its interests in a claim or possible lawsuit.

The owner loses the ability to recover damages for diminution of value/loss-of-use claims from the broker’s insurance carrier. Consequential loss claim waivers against the broker are usually required. From the broker’s perspective- care must be taken that all contractual obligations of the owner- such as complying with policy terms and payments- are fulfilled.

Also- the broker does not have insurance protection for diminution of value/loss-of-use claims resulting from its negligence- thereby requiring the broker to include a contractual waiver for consequential loss claims or be left unprotected. In the event of an accident- failure to obtain such protection can create a large reputational risk exposure.

CONCLUSION

In a perfect world- the cleanest way to insure an aircraft being sold by a broker is for the owner to continue insuring the aircraft under its own policy- endorsing any reasonably required coverage for the broker- and for the broker to rely on coverage under its policy for operation of non-owned aircraft. Each party is responsible for providing insurance for their own interests.

Unfortunately- it’s not a perfect world. Due to circumstances- it may make sense or simply be more convenient for the aircraft to be insured under the broker’s policy- which is acceptable provided both parties enter into the transaction with their eyes open to eliminate any unpleasant surprises. Obviously- each firm’s insurance provider should be consulted.

 

Read more about: Business Aviation Insurance

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