Aviation Insurance

Noble Insurance can provide cover to smaller aircraft and helicopters including privately owned aircraft, commercial activities and fleets, clubs and flying schools, business jets and ground service providers against the loss or damage, legal liability to third party and to passengers arising out of the operation of the aircraft.

General aviation insurance

Hull and liability cover for smaller aircraft and helicopters including privately owned aircraft, commercial activities and fleets, clubs and flying schools, business jets and ground service providers.

Types of aviation insurance 1. Aircraft Hull and Liability

There are several standard aircraft liability policies in the London market, but for the purposes of keeping it simple, I will focus primarily on AVN1C, which is the London Aircraft Insurance Policy. This policy is mainly used for general aviation business, as opposed to major airlines, which obviously require wider coverage than is provided by this standard form. It covers both the hull risks and the insured’s liability to third parties and passengers. There are four main sections to AVN1C:

            Section I: Loss of or damage to aircraft
            Section II: Legal liability to third parties (other than passengers) 
            Section III: Legal liability to passengers 
            Section IV:
                        General exclusions applicable to all sections
                        Conditions precedent applicable to all sections
                        General conditions applicable to all sections
                        Definitions
Section I - Loss of or damage to aircraft:

Insurers will pay for, replace or repair accidental loss of or damage to the aircraft described in the schedule under the policy for the risks covered (generally being flight, taxiing and ground risks). It would be common for aircraft policies to have a separate premium rate for flight risks and a reduced premium rate for ground risks. Operators should be aware of such differentials when seeking insurance, particularly if they have a fleet of business jets, which may have long periods of grounding for commercial reasons or economic downturn. Operators may be able to negotiate the inclusion of a 'lay-up' clause (AVN26A) which would provide premium returns for aircraft 'laid-up' for a defined period of time, thus keeping insurance costs to a minimum, subject to various conditions being met, i.e. not for maintenance/overhaul or repair purposes and a minimum of 30 days laid up.

The policy is underwritten on a 'insured value' basis whereby, although a value is attributed to the aircraft at inception, the reduced (depreciated) value of the aircraft at the time of any loss is the value that would be used for claim settlement in the event of a total loss. This can however be amended to an 'agreed value' basis, thus the amount to be paid in the event of a total loss is set at inception under the schedule of aircraft. Any partial losses will be subject to the applicable deductible. Operators should seek insurance on the best terms available regarding lower deductibles. Insurers are flexible in providing alternative premium structures to accommodate various deductible options and the current market for business jets appears to be softening, insofar that very low deductibles can be achieved.

Turbojet aircraft are susceptible to foreign object damage despite recent improvements in design efforts. Operators should note that foreign object damage is only covered if it is attributable to a 'single recorded incident' (being recorded in the aircraft technical log). However, consequent damage sustained to other parts of the aircraft is covered.

Spares coverage is often included within Section I at an additional premium, rated against 'values at risk'. Operators should ensure that their spares inventory is kept up to date and declared to their broker.

Section II - Legal Liability to third parties (other than passengers):

Insurers will indemnify the insured for all sums that the insured becomes legally liable to pay as damages (including costs) in respect of accidental bodily injury or property damage caused by the aircraft or by any person or object falling therefrom.

The policy excludes injury to employees, namely directors/employees acting in the course of their employment, operational crew (can be written back in), passengers (insured under Section III), property belonging to, or in the care, custody and control of the insured, noise and pollution as defined under aviation clause AVN46B.

Operators should consider the limit of indemnity being purchased and seek advice from their insurance broker to ensure that the limit provides adequate protection given their fleet size, aircraft type and area of operation. In Europe, the EU will also have to be adhered to with regards to minimum insurance liability limits for both passengers and third parties, which is determined by aircraft type, take-off weights and seating capacity.

Section III: Legal Liability to passengers:

Insurers will indemnify the insured for all sums the insured becomes legally liable to pay as damages (including costs) in respect of accidental bodily injury to passengers whilst entering, on board or alighting from the aircraft and for loss of or damage to baggage/personal effects arising out of an accident to the aircraft. Again, employees and operational crew are excluded. Operators may wish to consider purchasing an independent Personal Accident policy to cover pilots, crew and other passengers.

Operators again need to consider the limits of indemnity purchased for passenger liability. Most limits are purchased on a 'combined' basis in conjunction with Section II above. It would not be uncommon for insurers to impose 'passenger caps' on certain areas of operation to limit their liability on a 'per passenger' basis, so this should be considered and negotiated should the need arise, with particular reference to their lease/finance agreements, to ensure there are no coverage shortfalls. A 'passenger cap', for example, might be included if operators were regularly flying to the USA, given the litigious nature of this country, i.e. 'passenger liability in respect of operations within the USA would be limited to US$500,000 each and every passenger'.

Section III would be subject to general exclusions such as 'illegal uses', those uses not stated in the policy at inception. Geographical limitations are also imposed where cover is excluded outside the areas stated in the policy. Operators should therefore be actively keeping their broker up to date with regards to the areas of operation, although it would not be uncommon for many business jet policies to have 'worldwide' coverage as standard. Nuclear risks and war, hijacking and other perils are also excluded by virtue of standard market clauses.

2. War, Hijacking and Other Perils Exclusion Clause (Aviation) – AVN48B

It is standard for AVN48B to be included within the wording of a policy. This clause 'expands' the exclusion beyond those pure 'war' perils and operators should pay close attention to what perils are excluded. In essence, the clause excludes above and beyond the basic 'war, invasion and acts of foreign enemies' and goes further to exclude (inter alia) any hostile detonation of a weapon, strikes, riots, civil commotions, malicious acts or acts of sabotage, confiscation, nationalisation, seizure by any government or local authority and hijacking without the consent of the insured.

It is common practice for operators to 'buy-back' the majority of these exclusions in respect of both hull and liability coverage. Operators can purchase a liability 'writeback' which provides liability coverage for the majority of the excluded perils contained in AVN48B. This clause is known as AVN52 and is regularly amended and updated. The majority of insurers now offer this coverage up to the 'Combined Single Liability Limit' within their policy and operators should ensure that such coverage is in line with their lease/finance agreements in order to avoid any shortfalls. If, on occasions the incumbent insurer is unable to offer AVN52 coverage up to the limit of liability, then it can be purchased as an excess layer independently through alternative insurers with such capacity.

Hull war can also be purchased independently, known as LSW555D (also regularly updated and revised). The coverage provided mirrors that excluded by AVN48B in respect of hull coverage, with one exception, namely in essence, nuclear detonation. War policies often pay up to 90 per cent of extortion, confiscation and hijack expenses. Operators should note that 'confiscation by the Government of Registry' of the aircraft is excluded, although this could be added back into the policy at an additional premium. Repossession by any title holder is also excluded, alongside the market wide 'five major powers' exclusion, which is mandatory.

Market practices

Insurance and reinsurance

Many owners and operators of aircraft have an understanding of the insurance market, mainly in terms of what their legal requirements are and how to go about complying with them. Less is universally understood about insurance practices, particularly relating to reinsurance. Reinsurance is insurance the insurer purchases from another insurance company (reinsurer, e.g. Swiss Re, Munich Re) as a means of risk management and effectively spread out liability under the insurance cover. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, all of which is worked into the price to the end customer.

The net effect of passing off some of the risk is that the insurance company is able to take on more policies - for example it can issue policies with higher limits than it would be allowed.

Most reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. For example a $30,000,000 excess of $20,000,000 layer may be shared by 30 or more reinsurers. The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers.

To further complicate matters, reinsurance companies themselves may also purchase reinsurance from other reinsurance companies. This process can sometimes continue until the original reinsurance company unknowingly gets some of its own business (and therefore its own liabilities) back. This is known as a "spiral" and was common in some specialty lines of business such as marina and aviation. Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it.

The insurance company is obliged to indemnify its policyholder for the loss under the insurance policy whether or not the reinsurer reimburses the insurer.

For the owner or operator it is not unreasonable to ask who are the reinsures and what percentage of the policy has been reinsured - if for example only five per cent is being held by the insurance company you are dealing with, this means 95 per cent of your policy has been passed on to other markets. If taking undertakings from the insurer, consider asking for them from the lead reinsurer at least also - they are after all the company taking on most of the risk in this example. The strength of the policy depends on the credit rating of the reinsurers - in recessionary times, owners and operators will want assurances that if they need to call on their policy in the event of a loss, that those supporting the policy whether through insurance or reinsurance can meet the obligations.

Fleet policies and single policies

Fleet policies are essentially policies covering more than one aircraft. It has become market practice for some aircraft operators and management companies to offer access to their fleet policy to their customers. Single aircraft policies are single stand alone policies covering only one aircraft or a number of aircraft owned by one owner.

The commercial difference between the two tends to be that insurance cover under a fleet policy due to economies of scale can be cheaper for higher liability limits. The more aircraft that join the policy, in theory the cheaper and more extensive the cover should be. This doesn’t always happen in practice - those joining the policy from the outset don’t always have the savings in cost passed down to them by later joiners. In addition, the more aircraft there are on a policy, the higher the risk that there may be a claim on the policy.

If adding your aircraft to a fleet policy, you should take great care to ensure you understand the levels of cover and also the level of protection open to you as an insured under the policy. Ensure that a claim from another aircraft owner does not affect your position under the policy. Likewise ensure that you are not being prejudiced by limitations and restrictions designed for other owners (e.g. restrictions on geographical locations, war risk where you have no need for it). Ask for the certificate of insurance to be reviewed against the actual policy - the certificate of insurance is merely evidence of a policy, it is not the actual policy. The certificates of insurance tend to be drawn up by brokers with substantial disclaimers at the end absolving themselves from all liability if it turns out that the certificate does not correctly reflect the policy or omits to include important terms of the policy.

An aircraft owner should make it their business to have the policy explained to them by a qualified professional.

Insurance as security - assignments of insurance

A practice has grown over the past number of years whereby financiers now insist as part of the security over an aircraft on "Assignments of Insurance". The practice in fact developed in the commercial airline world and does not translate particularly well into the world of business and private aviation.

The theory behind the assignments of insurance is that the bank should be entitled to receive the insurance proceeds under an insurance policy. In most cases, this goes well beyond what the bank should be entitled to receive.

Banks will usually protect their position by requiring that the air operator notes the banks’ interest on the insurance policy. If that interest is noted in the form of the London market Lease/Finance Contract AVN 67B or 67C the bank will be named as "contract parties" for AVN 67B or C purposes and the insurers therefore acknowledge that the bank has interests in the aircraft under certain "contracts" which are listed in the clause. The key point under AVN 67B/C is that the "contract parties" are elevated to the status of an additional insured under the policy and therefore have an interest in the proceeds of the insurance policy as an insured. This gives them greater status than just being named as a "loss payee" and, in the event of a total loss, the insurance proceeds will be paid either to, or to the order of the contract parties.

If a borrower agrees to an assignment of insurance on top of the protection given by AVN67B, they are assigning to the bank the borrower’s residual rights in a policy after the bank has been paid out on a loss. AVN67B means that the bank will be paid by the insurer usually up to an agreed value. Banks usually set this agreed value at a figure higher than the amount of the loan to cover off any costs or charges associated with a loss. The bank is therefore adequately covered and arguably should not be entitled to take what is left (and should be given to the borrower). This is particularly relevant where a bank is for example lending on a 60:40 loan to value ratio. The loan amount is 60 per cent of the value of the aircraft at the outset of the loan. As the loan is repaid, this amount reduces yet the agreed value under the policy does not change. So in theory the bank is more than adequately covered. Why the need for the assignment of what is left?

The reason given is usually that there is some concern AVN67B may not work if tested - industry practices and experience on losses show this to be unfounded.

If a borrower does agree to an assignment, it should bear the following in mind:
  1. It is not possible to agree to an assignment of a fleet policy. In fact the wording should never refer to an assignment of a policy, but merely the right to proceeds under a policy. This is particularly important in the context of aviation insurance regulation - assignment of a policy would mean assigning the benefit of a policy to the bank which is illegal in the context of some insurance eg passenger insurance.
  2. The borrower should agree with the bank a waterfall of payments so that when the banks position has been adequately covered, any remaining amounts should be returned to the borrower.
  3. The assignment should only be effective on a default by the borrower - there is usually no need for the security to become effective until the borrower has defaulted. This will allow the borrower to continue to deal with its insurers without having to involve the bank at every turn.
  4. A carve out should be given under any assignment for repairs (presumably up to an agreed limit). If the owner or operator conducts repairs on the aircraft then it must only be right that the owner or operator should be entitled to receive the benefits of any insurance cover for the repair work.
  5. Some countries impose a stamp duty on assignments of insurance with high penalties if the tax is not paid.
Public and private use - Illegal Public Charter

In most jurisdictions, an aircraft is not permitted to fly for the purpose of public transport otherwise than under and in accordance with the terms of an air operator’s certificate (AOC). The AOC is granted by the local CAA and certifies that the operator is competent to ensure that the aircraft he operates for public transport are operated safely.

The UAE has established and developed its registry in line with the United Kingdom Civil Aviation Authority. Similar rules and regulations regarding registration and licensing of aircraft and operators are in operation. Also the GCAA is particularly safety conscious and ensures that only those aircraft that have been certified by the FAA and EASA/JAR are allowed on to the UAE Registry.

A practice has grown however whereby owners of aircraft who are not holders of an AOC do carry passengers for some form of reward. This practice is known as illegal public transport. Aside from the legal consequences, conducting an illegal flight may have serious consequences for the certification of the aircraft itself and may invalidate any otherwise applicable insurance cover, including the passengers’ own life insurance.

It will be an inherent requirement of finance documents and any insurance policy governing the aircraft that the aircraft be properly operated in accordance with the requirements of the relevant regulator. This has repercussions for all parties if an accident occurs - the owner of the aircraft will find itself named on a claim which may not be covered by his insurance policy. Owning the aircraft through a limited liability company will not ring fence the owner of the aircraft against claims for negligence or criminal liability (see further below). Moreover his financier will typically be entitled to call for repossession of the aircraft for default under the finance documents so any residual scrap value in the aircraft will fall immediately to the bank. The bank will seek to enforce any other security against the owner to make good any balance owed to the bank, calling in all guarantees and supporting collateral. The operator will find itself under investigation for operating an aircraft illegally and the hapless customer may find themselves trying to bring a claim against an empty shell company with no insurance cover.

Liability does not stop there - there is a new and growing trend worldwide for criminal proceedings to be brought following aircraft accidents and for plaintiffs to seek to break the corporate veil of limited liability and seek to attach responsibility and liability to owners and financiers.

Summary

The underlying theme of this note is that an owner of an aircraft should pay as much attention to the insurance cover as it does to all other aspects of the acquisition transaction.

In addition to buying aviation insurance, a buyer should use all available resources to protect against claims - for example the aircraft should never be owned by the individual personally but rather should be held through a special purpose vehicle with only that aircraft as its asset - this will serve to ring-fence any claim within the company and protect other assets from claims. Where possible, insist on contractual protections such as warranties and indemnities - if a third party is assuming operational control and risk for your asset, this should be reflected clearly in the contract.

Ensure insurance policy documentation is available and clearly specifies the identity of the insured. If there have been changes of corporate name keep the documents to establish the chain of title with the insurance documents. Also ensure that full copies of any contracts referred to as AVN 67B Contracts are available. Much time is often spent from the insurers’ side in tracking down a full set of documents. Keeping a "bible" of documents scanned after each insurance placement would be useful. When placing insurance work with your legal advisers and insurance brokers to ensure that only necessary parties are included as contract parties to streamline the claims process.