Risk Management of a Complex Enterprise
Contracting with an Aviation Management Company to handle the complexities of aircraft operations is a wise decision for many owners, but such arrangements still require adequate insurance, cautions Stuart Hope in the September issue of AvBuyer Magazine.
When you purchase an aircraft for the first time, you discover that you have literally created a start-up business. You have employees in the form of pilots, mechanics, and flight schedulers. You have a budget for your flight department that includes maintenance [both planned and unplanned], pilot salaries, reserve for engine overhaul, insurance, hangar, aviation fuel, and weather/navigation services just to name a few.
In addition, you have to ensure compliance with the FAA Regulations, obtain the services of an accountant familiar with the FAA requirements related to monetary charges, and retain an aviation attorney to help you establish the ownership structure.
Enter the Aircraft Management Company (AMC). To many aircraft owners, this model of managing their aircraft is a godsend. Typically for a monthly fee, the AMC’s manager handles all headaches of aircraft operational and cost control that typically fall on the owner. If a pilot quits to take a position with the airlines, the AMC supplies a replacement. The management company knows the territory and speaks the language.
But hold on – this hand-off approach doesn’t mean you drop your guard and fail to pay attention to the details.
For example, consider insurance. While one might think insurance would be easy to navigate, there are several issues to consider when placing insurance coverage under the fleet policy of the Aviation Management Company. One of the benefits management companies bring to the table is cost savings on routine expenses such as insurance, fuel, maintenance, etc., through economies of scale created by combining a large number of aircraft under one roof. But there are several important points to consider…
PREMIUM PAYMENT & OTHER DETAILS
Be sure the management company pays the carrier for the annual premium on your aircraft. Just because you paid the AMC’s bill does not guarantee that the insurance carrier has been paid.
Several management companies over the years have gone “belly up” owing insurance premiums they collected from aircraft owners. The AMC may have used your funds to cover other business expenses – until the house of cards collapsed. Although rare, this situation may be something that can be addressed contractually and certainly must be part of your due diligence.
Another critical area in need of due diligence concerns how the management company uses your aircraft. Will it be flown exclusively for FAR Part 91 [non-commercial] operations, or will the aircraft also be utilized for FAR Part 135 [for hire] charter operations by AMC? The degree of care the operator owes the passengers on each type of flight varies.
With flights flown in accordance with FAR Part 135 (e.g., charter), the commercial component changes your risk exposure. In the event of an accident where there is bodily injury to a “paying passenger”, the question is not if you will be asked to pay but how much you will be asked to pay.
For this reason, it is imperative that you carry a significant limit of liability. Considering how inexpensive increasing limits of liability are, I highly recommend buying as high a limit as you can afford. When you consider the amount of money you will spend on maintaining the aircraft, buying a high liability limit will appear to be the biggest bargain in aviation.
What if the aircraft is involved in an accident when the management company is operating the aircraft but not on an owner flight? The AMC’s insurance company will adjust the claim and will work with the AMC’s representative as their claims contact. But keep in mind, especially in the US, if a lawsuit arises, the owner can and will be brought into the suit even though the flight was not made on his/her behalf. Therefore, you need a Mutual Invalidation clause.
In layman’s terms Mutual Invalidation states that if one party breaches the warranty of the policy, thereby voiding insurance coverage, that action will not void the coverage of the other party not involved. For example, if the claim investigation reveals there was a violation of a policy warranty or exclusion, the insurance company can deny coverage to the Aviation Management Company but is still obligated to defend the aircraft owner.
Most management companies run a professional ship and most of them accomplish mutually-agreed goals negotiated with their clients. Nevertheless, you have a large investment exposed and should not blindly relinquish control of your asset; you must consider the multiple exposures that you have.
You would be smart to involve your own aviation insurance broker to help you navigate the complex wording of an aviation insurance contract and help verify that all the insurance bases have been covered. Remember, you don’t know what you don’t know.