Aircraft Insurance Insights
Like nearly everything else in business aviation, aircraft insurance is both unique and complex. If coverage came in a "one size fits all" package, policies could be purchased on line or from a vending machine. However, the reality is anything but that.
How, then, do you truly make valid and actionable "apples to apples" comparisons when evaluating various options for insuring a valuable asset against loss while also providing protection in the event of an accident or incident? What is the secret to obtaining the type of coverage you need at an appropriate price? Is there a way to sleep well at night without worrying what might happen if there is an incident or accident involving your aircraft?
Three key, overarching concepts must be in the forefront of your aircraft insurance planning:
1) Monetary damages for injury or death in aviation accidents are substantially higher than in all other modes of transportation.
2) Business aircraft are expensive, and their property damage liability profile is commensurately high.
3) The limited number of aircraft in the civil fleet (compared to higher numbers of exposure units in other insurance fields such as automotive) prevents insurers from applying the law of large numbers to allocate risk over a broader fleet.
The man, the mission and the machine.
To appreciate the process, and understand how best to work with an insurance provider so you obtain the desired end product, view yourself and your aircraft from the position of the insurance company. You are now the one who is obligated to provide legal defense as well as to potentially pay out a substantial sum in the event of a claim. You, as the insurance underwriter, have to determine how to price the coverage you would provide, what all will be included, and the dollar limits of the various policy components, and still be profitable enough that you can remain in business. In other words, looking through the underwriter’s eyes, just how much of a risk are you?
As the underwriter, you now make this risk determination, in large part, on previous experience with the same or similar aircraft operated in relatively the same manner and flown by comparably experienced and trained crews for the same purpose(s). But, a major part of the equation is also determined on how much data, and how complete and accurate the data is, you receive from your prospective insured as you go about the underwriting process.
The analysis starts with the make, model and year of your aircraft. Where it will be based, where and how it will be operated, and how it is stored when not in use are the next factors considered in analyzing the risk that you pose. Finally, who will be doing the flying, are there any additional entities or underlying contracts to be covered under this policy, and the purpose of use round out key elements evaluated by the underwriter.
Risk and pricing.
The most desirable insurance risk classification is a corporate operation, as defined by Federal Air Regulations (FAR) Part 91. This is also known as Industrial Aid, which means the aircraft is flown by professional pilots, carries non-revenue passengers, is operated for the furtherance of the company’s business, and involves no direct charge of profit. Because this classification is deemed the least risky, underwriters will generally require a lower premium. Also falling under FAR Part 91 are Business and Pleasure use, which is where the aircraft is primarily individually owned, operated for the owner’s personal use, and for which no charge is made and no direct profit is derived.
Limited Commercial use refers to aircraft used for profit and employed in roles such as flight instruction. Business and Pleasure or Industrial Aid uses will also be covered under the Limited Commercial classification. A Commercial use classification entails for-profit activities such as FAR Part 135 aircraft charter held out for access to the general public. Owing to higher exposure (greater risk), this coverage costs more than for other purposes of use.
The health and proficiency of the pilot(s) undergo(es) constant scrutiny. Vehicle insurers review driving records for accidents and violations. Since the majority of pilots haven’t had accidents or violations, underwriters look at other information to help them establish a risk rating. Key items are: total flight hours, the type of flying those hours entail, FAA issued licenses and flight ratings, the amount of time in your type of aircraft, the number of hours in the make and model that you will be flying, currency, recent flight experience, and the amount and type of recurrent training conducted.
Nonprofessional pilots operating an aircraft can expect to be offered maximum limits of liability on the order of $1 million to $2 million. Contrast that to Industrial Aid aircraft which will typically carry anywhere from $10 million to $100 million in liability coverage.
Protecting the aircraft.
Coverage on the aircraft itself, known as hull insurance, is underwritten for agreed value coverage, as opposed to Actual Cash Value (ACV) since this valuation is extremely difficult to determine. Agreed value is the amount that you and your underwriter agree your plane is worth, and forms the basis of claim settlement in the event of a hull loss. The agreed value basis allows for a wide variation in values between various aircraft of the same make and model. This enables factors such as equipment, condition, flight time and age to be taken into account. It is critical to get this number right.
If the hull is underinsured, an insurance company may be compelled to write a check for a total loss, even when it could have been reasonably repaired. Who then do you think keeps what’s left of your airplane? If you said the insurance company, you guessed correctly. They’ll sell it to salvage buyers or other operators for parts to recoup as much of their loss as possible.
Were the hull value to be over insured, things can go just as badly. This can force an insurer to restore a damaged aircraft to service when everyone would prefer to scrap it. Instead of getting a claim check for the value, which would be relatively quick and allow you to replace the aircraft in an expeditious manner, you now have to wait through a lengthy repair. The end result is an aircraft with significant damage history that will be much harder to sell and / or which will assuredly command a much lower price in the marketplace.
The next question becomes who makes the determination that an aircraft should be declared a total loss or be repaired. Most of the time that decision is made by insurance companies. Is it totally arbitrary? No, it’s all in the policy, right there in the fine print.
Especially when it comes to insurance, little things can cause big problems. There is an important interplay between insurance policies and their underlying contracts in that they must be consistent with each other. In many cases, the scope of insurance coverage can be restricted by an underlying contract. Your policy language should incorporate limitations from any underlying contracts such as leases or aircraft management agreements.
Aircraft and pilot log books, maintenance history and all manner of supporting documentation are incorporated into your decision as an underwriter to assess the level of risk and determine the price to be charged for the coverage. Therefore, from your prospective insured, receiving orderly, complete and comprehensive information is key. "I have about 10,000 hours" or "I think actual flight time in IMC is probably 15 percent of the total" will not provide much motivation to view this application for coverage as a low, or lower than others, risk. The corollary is that cost increases, often dramatically, as risk increases.
Do your homework.
A proven approach to purchasing aircraft insurance is identical to approaching an aircraft purchase — research the subject thoroughly. However, since purchasing an aircraft is something that most professional aviation managers and business executives only do occasionally, procuring aircraft insurance is likewise an infrequent event. Few people want to become insurance or aircraft purchasing experts, but everyone wants to make an expert decision.
Just as a prudent prospective aircraft buyer would enlist the aid of an experienced and professional aircraft broker and acquisition specialist, likewise enlisting an aviation insurance advisor with the requisite expertise is the best first step in the process. Bringing this knowledge on board early in the aircraft identification and selection process can pay additional dividends. When your final choice includes the insurer’s perspective on the aircraft being considered, you have already gone a long way to obtaining the most coverage and the lowest possible cost.
Regardless of the policy language, one of the things that separate good aircraft insurers from excellent ones is the willingness of claims adjusters to go beyond the strict confines of the policy language and take care of the client’s problem. In that regard, an aviation insurance broker’s role in the claims process can be very beneficial. More importantly, share all possible information with your broker early on, trust her or him, and then listen to her or his recommendations during the quotation process. Their experienced counsel will help you select the best insurance partner.
Your airplane is probably one of the most valuable assets you will ever own, both financially, productively and even emotionally. Protecting it is therefore paramount. Thus, the selection of insurance coverage and the provider deserve the same level of effort as does the acquisition and operation of your aircraft itself. To that end, partner with an experienced insurance broker who: specializes in aviation, makes every effort to thoroughly understand your situation, takes the time to identify your unique insurance needs, and assists you to provide exactly what aviation insurance underwriters require.
An alternative method of obtaining business aircraft insurance is to go through a wholesaler. However, you need to be aware that this adds a level of administration, cost and complication. It is in this scenario that the equation can become skewed when your needs and situation are not clearly communicated to the insurance carrier, often called the "whisper down the lane" syndrome.
Take the time and make the effort to work with a qualified, experienced and client-focused broker, and to provide the most accurate and comprehensive underwriting information possible. When your aircraft, your operation, and your insurance needs are completely and thoroughly understood, the best possible result will be ensured should you ever have to put your policy to use. It is at that point that you don’t want to learn the cheapest policy was not the best, or right, policy for you.