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Insurance Coverage Audits: It pays to know what’s included in your policy

By Stuart Hope, as published in World Aircraft Sales Magazine (May 2013)

Boards consider insurance coverage audits as part of their due diligence in overseeing risk mitigation. Stuart Hope provides a checklist of items to examine for companies utilizing Business Aviation.

head in sand guyYou’ve proceeded for years assuming your aviation insurance program is solid. Your policy comes up for renewal, you provide updated information to your broker, and you renew your policy without any thoughtful consideration as to whether your insurance program is as airtight as it could be. Should such an approach be condoned by a corporate Board? 

Clearly, the answer is ‘No’. Without a thorough examination of your company’s aviation coverage—in essence an insurance audit—Directors are failing to meet their responsibilities to shareholders. An insurance audit in response to Board oversight serves at least two purposes. Primarily, the corporation reviews its protection in the event there is ever an uninsured loss. What should a company policy cover regarding any form of transportation, ranging from something as simple as a taxi ride to something as sophisticated as travel on the company aircraft – and everything in between? Secondarily, the Board demonstrates due diligence in fulfilling its  fiduciary responsibilities to shareholders. 

Don’t bury your head in the sand.  An insurance audit is crucial.  The scrutiny and liability that a Board might face in the event of a serious mishap would certainly be alleviated to some degree by the fact they went the extra mile by having an audit performed. Specifically, a comprehensive coverage audit will help answer many questions. 

Are you buying too much or too little coverage limit?

By comparing and benchmarking your coverage with similar flight departments, an audit can quickly determine if your firm is under- or over-insured, at least by comparison with your peers. As safe as Business Aviation is, if your company is unfortunate enough to experience a “high profile” aircraft accident, having significantly less coverage than the industry standard can affect your company in a court of law, with some nasty repercussions. 

Are there any unidentified gaps in your coverage?

A comprehensive analysis of your policy coverage wording can serve to identify any potential known or unknown gaps in coverage. An audit isn’t about trying to make your current broker look bad. A good broker will welcome a “second pair of eyes” looking over the coverage language. Aviation insurance policies are uniquely constructed and very complex. 

Uncovering gaps or limitations do not necessarily mean that your broker isn’t doing an adequate job. There is no perfect insurance policy. Crafting the ‘perfect’ protection often is a creative process for your broker as he or she attempts to provide your company with the best program of coverage and cost. Unknown gaps, per se, aren’t a bad thing provided you are aware of them and can make an informed decision to self-insure and/or mitigate with other risk management techniques. 

Are your premium rates comparable to industry standards?

Again, benchmarking your rates with others in your industry will provide a reasonable gauge of the competitiveness of your premium. Because of the volatility of the insurance market and the rating process, there will always be flight departments paying less and flight departments paying more for what appears at first glance to be comparable coverage. 

The question to resolve is whether your premium is significantly out of line with current market pricing structure. 

Are aircraft insurance requirements addressed in your company’s policy?

It pays to review all contracts/agreements you have entered (loan documents, hangar leases, dry leases, etc.) to verify compliance with the insurance language in each. You signed the agreements stating that you would comply with all requirements, correct? Therefore, to avoid being sued for inadvertent breach of contract, pay attention to the details. WAS mag

Other considerations

Beware of a consultant who uses the opportunity to audit your insurance program as his/her chance to get their foot in the door and write your account. Some brokers will use the concept of “market standard” without an adequate explanation of what is being compared. Furthermore, there may not be agreement that all enhancements proposed are indeed available. 

If the consultant is also an insurance broker who could write your coverage, consider both a non-disclosure agreement and a clause that prohibits the broker from competing for your account for a minimum of three years. If the insurance auditor is good, such provisions (which also puts your current broker at a lower threat level) will probably be in the audit contract. 

Getting a second opinion in the medical field is routinely considered good practice. In a perfect world, it should be no different regarding other major decisions where the consequences of error are catastrophic. 

I may be biased but I would argue the consequences of having a high profile aviation accident, even though the likelihood of such a tragedy is very low, merit a second look at your insurance program. I would humbly recommend that you put an insurance audit on the calendar as a high priority task, sooner rather than later. 

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