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Why Business Aviation Insurers Say ‘No’

Many savvy aircraft owners/risk managers ask if higher deductibles or amending insurance to ground-only coverage when their aircraft is down for an extended maintenance will result in a decrease in premium. Stuart Hope explains why the answer is usually “No”.

Stuart Hope   |   1st March 2014
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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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The Reasons Behind the Decision...

Many savvy aircraft owners/risk managers ask if higher deductibles or amending insurance to ground-only coverage when their aircraft is down for an extended maintenance will result in a decrease in premium. Stuart Hope explains why the answer is usually “No”.

To minimize premium costs- most of us consider increasing deductibles on our various insurance policies. After all- insurance is really meant to protect us from catastrophic loss- not to pay small attritional claims. Therefore we are comfortable with higher deductibles- and we expect significant premium savings by doing so- which may be the case with certain types of insurance.

Aviation coverage- however- is different. The irony is almost all policies on turbine business aircraft have deductibles of zero (i.e.- no deductible). The exceptions are rotor-wing aircraft (helicopters) and aerial applicators. Increasing deductibles save the insurance companies money only in areas that have a high loss frequency- like auto insurance- workers’ compensation insurance for construction companies- etc.

In aviation- we don’t have an issue with loss frequency. In fact we have very few claims. Our issue is one of loss severity. When we have claims they are typically very expensive. For this reason- insurers realize that giving a significant premium decrease to an aircraft owner for taking a higher deductible doesn’t make much sense- since the odds that the insurance company will actually apply the deductible to a loss is very low. Rotor-wing operators and Aerial Applicators have a much higher frequency of claims- and insurers assign a higher deductible to these operations.

Ground Coverage

Another common request that- on the surface- seems reasonable but often results in a “No” decision involves aircraft inactivity – in which an owner’s aircraft is going into an extended maintenance event or will not be flown for a lengthy period of time for other reasons. The owner might request putting the aircraft on “ground-only coverage” and expect a return premium for removing flight coverage. Some aircraft owners might actually want to remove all coverage- stating the aircraft will be in the repair shop and the shop owners have confirmed that they had insurance on the aircraft when it was in their hangar.

The reason for an insurance carrier saying “No” in the first scenario typically relates to a lien on the aircraft. Banks typically require that a coverage called breach of warranty be placed on the insurance policy in their favor when an aircraft is purchased. This coverage in essence provides an exclusion-less policy (with a couple of exceptions) for the lienholder (e.g.- the bank) concerning their interests.

If the aircraft owner has an accident and the claim is denied because the owner breached the terms of the policy- the bank will still be paid the outstanding lien amount owed them. For this reason- insurance companies will not allow an aircraft owner to amend the hull coverage to ground-only if they have breach of warranty coverage on the policy in favor of a lienholder.

It would be too easy to void coverage with any in-motion claim. Imagine- for example- that an owner forgets to alert his mechanic he purchased ground-only coverage. The mechanic then starts the aircraft to exercise the engines and has a loss while taxiing. (If there is no lien on the aircraft- however- the owner can certainly select ground-only coverage or even no coverage on the aircraft if so desired.)

The reason for the insurance company saying “No” to the second scenario is the shop owner’s insurance does not provide first-party coverage on the owner’s aircraft. The shop owner’s insurance is limited to liability protection for the shop owner. If the shop owners’ negligence causes your aircraft to be damaged while in their care- custody or control- their liability policy would respond. However- if your aircraft is damaged due to a cause other than their negligence (e.g.- snowstorm causes hangar to collapse)- their policy would not respond.

For this reason- an aircraft owner would never want to rely on a shop owner’s insurance for protection. You would think this is obvious- but you would be surprised how often I get the request. Certainly it is smart to seek ways to reduce the cost of your insurance program. Higher deductibles or reduced coverage when appropriate are two strategies. The fact you might receive a negative response from your insurance carrier doesn’t mean you shouldn’t ask the questions.

Read more about: Business Aviation Insurance

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