Aircraft dealers should take the time to understand and address insurance issues before adding a client’s aircraft to their fleet coverage. Owners seeking to sell their aircraft also should pay heed as it’s not as simple as it may seem, advises Stuart Hope in the February 2016 issue of AvBuyer Magazine.
Consider the following scenario: An aircraft dealer has an exclusive sales agreement with an aircraft owner to market and sell their aircraft. Upon learning the aircraft will be sold, the owner’s pilots take positions flying for another company. Since the owner’s current insurance policy is due to expire soon, the client asks the dealer to insure the aircraft under its fleet policy, which seems like a reasonable request.
Firstly, the dealer’s insurance program was written on a monthly basis, so the aircraft owner would pay a monthly premium to the dealer rather than the full annual premium in advance if the owner renewed their own policy.
Second, the owner’s insurance policy required all pilots who flew the aircraft to complete simulator-based recurrent training for the make/model aircraft within the preceding 12 months of flight. The dealer’s fleet insurance policy, however, allows them to approve any pilot at their discretion without the training requirement.
Last, once the aircraft is sold, the aircraft can simply be deleted from the dealer’s reporting-form insurance. This arrangement allows the aircraft owner to avoid incurring a short-rate cancellation penalty that they would have paid had they renewed their own insurance policy.
From the dealer’s perspective, this scenario can sound very reasonable. It helps to “sign the prospect” by apparently solving their insurance problem. At the same time, it solves the age-old problem of finding pilots who have completed simulator-based training in the seller’s make and model aircraft within the preceding 12 months of flight (often a tough task made more difficult if the seller happens to reside in a small rural town).
The dealer’s insurance allows them the flexibility (and responsibility) to approve any pilot they choose whether training is current or not. On the surface, the arrangement seems straightforward and beneficial for both the client and the dealer. But what happens if a loss occurs?
Read the Fine Print!
When dealers add a consigned/For Sale aircraft to their fleet insurance policies, those vehicles are treated no differently than an aircraft the dealer owns and insures. Let’s say the dealer arranges a “demo flight” for a prospective buyer and the pilot approved by the dealer to fly the aircraft has an accident (e.g., a gear up landing).
The dealer’s insurance policy will pay for the resulting direct physical damage to the aircraft but will NOT pay for any diminution of value or loss of use. Furthermore, since the aircraft dealer is a commercial operator, they may carry substantially lower liability limits than the seller had carried with their own insurance policy, thereby increasing the exposure for the owner.
Unless issues such as the one described have been previously addressed by the client and the dealer (generally via the sales agreement), subsequent actions most certainly will result in more than hurt feelings for both parties. The dealer probably will have a very dissatisfied client (or ex-client), and the owner will have a substantially devalued aircraft.
What Should Be Done?
As a general rule, it is normally best that each party be responsible for their own insurance.
In our example, if the aircraft owner had continued carrying their own insurance protection (rather than go under the dealer’s insurance policy) and the aircraft dealer carried liability coverage for their use of non-owned aircraft, the claims process would have proceeded much more smoothly for both client and dealer. The aircraft owner would have turned in the insurance claim to their insurer, who in turn would pay for the direct physical damage.
If the owner’s insurer felt the damage had been caused by the negligence of the dealer’s pilot, they would subrogate against the dealer’s insurer to be reimbursed for the dollar amount of the damages paid. The owner could also seek payment from the dealer’s insurer for diminution in value and loss of use since the damage was caused by a third party (i.e., the dealer).
Occasionally there are circumstances when it makes sense to insure a seller’s aircraft under the dealer’s insurance policy. If the aircraft owner and the dealer are going to take that route, both parties must understand the insurance ramifications clearly to avoid an unpleasant conversation after a loss.