Almost Everything You Need to Know About Aviation Insurance 
By: NationAir

Let's start with what I call The Four Questions. When I meet with a new client I don't always receive these questions in the same order and there may be an occasional curveball. But, at some point in a first meeting, all four of the questions will invariably hit the table. "How much coverage do we need?" "Are we covered for everything we do?" "Which insurance company is the best?" "How can we get a better (i.e. cheaper) deal?"

These are good questions. Here are the answers.

Question Number One: "How much coverage do we need?"

If you operate an aircraft, you have two primary risk exposures. First, you are exposed to the risk of potential damage to your aircraft and equipment. To counter that risk, you can purchase an insurance policy that includes Aircraft Physical Damage (Hull) Coverage. Second, you are exposed to lawsuits brought by people who contend that your aircraft or aviation operation hurt them or damaged their property. Coverage for the impact of lawsuits brought by these "third parties" is provided by an Aircraft Liability insurance policy. Coverage for both of these exposures is typically combined into a single form: the Aircraft Hull and Liability policy. You can purchase a policy that provides only liability coverage but you cannot purchase a stand-alone hull policy. 

Unlike your auto coverage, aircraft hull coverage is provided on an "Agreed Value" basis. You and your insurance company agree (before a loss) on the insured value of your aircraft. There is no such thing as "replacement value" coverage in an aircraft policy. For that reason, when you negotiate the terms of your policy (or your renewal) you should insist on a hull value limit that will allow you to replace the aircraft in TODAY'S market. That number may have little in common with what you paid for the aircraft, what it was worth last year or what you owe to the bank. Review the value annually. Your friends at J. Mesinger can assist you in that regard. By the way, if you are tempted to undervalue your aircraft to obtain a lower overall premium … there are real downsides to that approach. Deductibles are generally negotiable and you should begin by demanding nil (zero) physical damage deductibles.

Liability coverage limits for corporate aircraft are provided in increments of $5,000,000. If you operate a corporate jet, the typical limits considered to be prudent are in the neighborhood of $5,000,000 per passenger seat. Remember, these limits are considered to be minimums. It is not unusual for a corporate operator of an eight- seat jet to carry between $100,000,000 and $200,000,000 in liability coverage. Ask your broker to provide you with alternative limits and then buy as much as you can afford. The price for each incremental increase in liability limit - say, from $25,000,000 to $50,000,000 - should not be linear. The cost for each succeeding increment should be slightly lower than the cost of the previous increment. 

Question Number Two: "Are we covered for everything we do?"

Well, you knew the answer to that one before you asked it. Obviously, the answer is, "No." But, you might be pleasantly surprised to learn that a good policy covers you for almost everything. Hull Physical Damage coverage provided by a quality underwriter will pay for damage caused by almost anything except intentional damage or nuclear war. Wear and tear (tire wear or compressor blade erosion are examples) is not covered. These exceptions are collectively called "Exclusions." If you run into a ditch, get hail damage, smack into a duck, suck up a rock, tangle with a fuel truck … your friendly underwriter should write a check. To gain a clear understanding of the exclusions, ask your insurance broker to review all the policy provisions with you.

Your Liability coverage should protect you from most suits relating to your aviation operations. The policy typically won't respond to suits brought by employees. Workers compensation coverage is supposed to respond to those claims. Many pollution claims won't be covered. Claims brought against you for harm you intentionally inflict on others might not be covered. A notable exception to this exclusion - you are usually covered if you hurt someone while preventing them from harming your passengers or aircraft. The legal bills accrued during your defense are paid in addition to the payouts to the plaintiffs. 

It is probable that your underwriter (insurance company) will defend you from most suits, frivolous or not. Once again, make sure you have a clear understanding of the few exclusions to your coverage. READ YOUR POLICY.

Question Number Three: "Which Insurance Company is the best?"

There are currently about six primary underwriters (insurance companies) that provide aviation insurance policies. The secret is to know which underwriter does the best job for each class of aircraft and use. One underwriter may do a great job of providing coverage for a G-IV but want nothing to do with a Lear-24 flown by the owner. Another underwriter may provide coverage for the Lear but be uncompetitive on a Bell 407. All of the companies (USAIG, Global-Aerospace, AIG Aviation, W.Brown and Assoc., Phoenix Aviation Managers and USSIC) are solid and well financed. Global, USAIG and AIG are the biggest. The kind of operations/aircraft an underwriter wants to insure and the operations/aircraft they stay away from are referred to collectively as their "appetites." A good broker knows and understands these (changeable) appetites. Ask your broker, "Which underwriter has an appetite for our class of business?" The broker should be able to answer without too much head scratching. If you operate a high-value jet under Part 91 or Part 135 and you operate it with a professional crew, you should be able to get a competitive quote from at least three of the six companies.

Question Number Four: "How can we get a better (i.e. cheaper) deal?"

First, hire the right broker. When you want to purchase car insurance or homeowners insurance you can thumb through the Yellow Pages and pick several brokers and ask them to independently scour the markets and obtain several quotes. It doesn't work that way in the world of aviation insurance. There are only six primary aviation underwriters. Of the six, it is likely that only two or three have an appetite for your class of business. The cost savings are accomplished through a negotiation process with those two or three underwriters. If two or more brokers are working on your account simultaneously your negotiating position could be weakened and that could be detrimental to your bottom line. 

Only in rare cases will a multiple broker approach work to your advantage. Instead hire one aggressive advocate (broker). Hire a knowledgeable broker. Hire a broker that talks your language (aviation) and understands your issues. Don't necessarily hire the biggest or smallest broker. And don't hire a broker to handle your aviation exposure simply because they do a good job insuring your factory or autos. If you need aviation insurance, you need a broker who specializes in aviation insurance. 

Second, become a pro-active part of the process. Be informed; be creative; benchmark; be safe; learn how to be your own advocate. The insurance price goes down dramatically when an underwriter is favorably impressed with a flight department. And, conversely, your insurance price will go up if you don't train, don't perform needed maintenance or hire under-qualified co-pilots. You'll still get insurance. It will just be more expensive.

OK. There are the answers to the first four questions. It's your turn to challenge me. Throw me some tough ones. I'll pick a few to answer in the next newsletter. If you provide your name and email address, I'll send you a personal response. Remember: stay safe. We're all in this together.

Copyright © 2004 Jackson & Wade, L.L.C., Shawnee, KS