What You May Not Have Heard About Lay-Up Insurance
A little known and little used coverage under a corporate aircraft insurance policy is the lay-up credit. It doesn’t often come into play but in certain circumstances can return premiums to you that otherwise would have been money wasted.
The Lay-Up Credit is coverage that is either already included in the provisions of your policy or can be added by endorsement. If your policy does not already incorporate the clause, your broker must ask for it so it can be added/endorsed.
Each insurance company has a slightly different definition; generally speaking if your aircraft is laid up and out of service (maintenance, inspections, service or alterations, repair, etc.) and the aircraft will not be in flight at any time during the lay-up period, the insurance company will return a percentage of your total premium pro-rata for the number of days the aircraft is down.
COVERAGE TRIGGER & REQUIREMENTS
The rules of the game are as follows: The aircraft has to be down for the minimum number of days stipulated in the policy (normally at least 30) which must be consecutive. Depending on the policy language, you must notify the insurer once you put the aircraft out of service. The insurer will then note the file that there is no flight coverage on the aircraft beginning on that date. When you are ready to place the aircraft back on flight status, you notify the insurer of the date.
At the end of the policy period, the insurance company will return a pro-rata percentage of the applicable premium (more on that later) that corresponds to the number of days the aircraft was out of service and not flying. The coverage does not apply if the aircraft is laid up because of a loss or damage covered under the policy. Certain insurance companies require you to have received prior written approval from them to put the aircraft on lay-up.
HOW MUCH WILL YOU GET BACK?
Each insurance company returns a slightly different amount. One company returns 65% of the in-flight premium. With this company, however, the math gets a little tricky. Since we have insured the aircraft for both Not-In-Flight and In-Flight coverage (paying one premium for both) in order to calculate the return premium in this case, we need to know what the In-Flight component of the overall premium as since we are still insuring the aircraft when Not-In-Flight.
For example, if the total premium was $14,600 for full coverage, we need to know how much the annual premium would be if the flight portion of the coverage id deleted in order to perform our calculations. If we assume the total annual premium was $8,600 (deleting In-Flight coverage), then the Lay-Up credit will be based on the difference in the two [$14,600 – $8,600 = $6,000]. We then have to know the number of days the aircraft was out of service to complete our number crunching.
Let’s say the aircraft was down 47 days. Stay with me here: 47 days/365 days = 0.1288. Our return premium would therefore be $6,000 x 0.1288 = $772. Some insurers return a blend, giving 50% of the liability premium and 75% of the hull premium.
The lay-up credit is a fairly standard coverage on business aircraft insurance policies. While not a coverage that is used often, it can and should be reviewed by your broker for your particular risk and category aircraft. The percentage that is returned and the number of days the aircraft must be out of service for the lay-up to trigger can be successfully negotiated depending on the size aircraft and account.
Beware of marketing efforts from less than ethical insurance brokers harping on the promises of lay-up credits and other type return premiums that when examined turn out to be half-truths. Keep your eye on the ball.
Remember we aren’t talking about auto insurance. The aviation risk presents one of the largest catastrophic risks your company faces. A good aviation insurance broker will be focused on improving your coverage by removing certain exclusionary wording, broadening policy wording and clauses, and in general asking a lot of questions probing for possible uninsured exposures.
If your aircraft has recently been down for an extended period and you think your lay-up clause may have applied, call your broker. I have seen insurers grant the lay-up credit to their better insureds after the fact, even though they failed to notify the insurer as required. Stay smart.