All Pilots Are Created Equal… Except When They’re Not!
As published in World Aircraft Sales Magazine, November 2013
One of the most common questions Stuart Hope receives from pilots is “Am I covered to fly the aircraft?” The answer, he opines, lies somewhere in between ‘yes’ and ‘no’.
Confusion over insurance protection stems from what is meant by the terms “approved” and “covered”. A pilot can be either approved OR covered (or both). There is a big difference between these situations, however, and the implications for the pilot who misunderstands these terms can be financially catastrophic.
Let me give you a hypothetical example. The full-time pilot for an insured company has terminated his employment and taken a position with another flight department. Before his replacement can be located, the insured has a trip to make and wishes to use an independent contract pilot while seeking a permanent hire. The insured’s carrier is informed of the situation, verifies that the contract pilot’s credentials are satisfactory regarding experience and recent training, and approves the pilot for flights under the insured’s policy.
It’s an early morning departure and things proceed uneventfully until landing at the destination airport, which has a rather short runway. Furthermore, rain is falling. The aircraft runs off the end of the wet runway resulting in substantial damage to the aircraft and minor injuries to three passengers. A claim is filed, and the insurance company’s adjuster begins the process of collecting the loss information, such as whether the pilot at the time of accident was approved under the provisions of the insurance policy to operate the aircraft. We have previously established that he was approved—at least as far as the insured’s coverage is concerned. Not so fast for the pilot himself, however!
KNOW WHAT IS COVERED
Aviation insurance policies only provide coverage on behalf of certain entities and exclude coverage for others. Why? Because some entities are considered to be “in the business of commercial aviation”, and as such are responsible for providing their own business insurance.
The definition of insured as stated within the specific aviation policy highlights the distinction. One insurance company’s policy states: “Insured: Any person or organization while using such aircraft with the permission of the Named Insured provided the actual use is within the scope of such permission and any other person or organization, but only as respects that person’s or organization’s liability because of acts or omissions of the Named Insured.
“Insurance under this policy does not apply to any person or organization, or agent or employee thereof (other than employees of the Named Insured) engaged in the manufacture, maintenance, repair, or sale of aircraft, aircraft engines, components or accessories, or in the operation of any airport, hangar, flying school, flight service, or aircraft or piloting service.”
LEGAL, SO BEWARE
The coverage described makes sense when you are using the services of an FBO or professional pilot staffing company, but caution is needed when you are using independent contract pilots. As you can see, the contract pilot in this example may be left out in the cold. In a perfect world, the contract pilot would have his own coverage through carrying Non-Owned Aircraft Liability coverage, like FBOs carry. In practice, however, such policies are prohibitively expensive for individual pilots, if available at all.
What’s the cure? You can add the contract pilot as an additional insured under the liability coverage (only with respect to pilot services). A downside of including an independent as an additional insured is that you dilute your liability limit. Therefore, limit the coverage amount you provide to some smaller multiple of your overall liability limit.
For example, if you carry a $50m liability limit, you might limit the coverage amount you share under the additional insured status to $5m, which is fair and reasonable. Also, have your insurer agree to waive right of subrogation against the contract pilot with respect to any physical damage or hull damage.
This proviso basically acts to restrict the insurer’s right to subrogate or go back against the contract pilot for the damage to the aircraft if the insurer felt it was pilot negligence that caused the damage. As you can appreciate, there is a reason the difference between ‘approved’ and ‘covered’ continues to be misunderstood. There are also other provisions and strategies to consider that are beyond the scope of this article. Your best move forward? Be certain to consult with your aviation insurance broker when using a contract pilot.
The True Costs of An Accident
Have you covered all the bases?
Risk mitigation does not guarantee cost mitigation, cautions Stuart Hope. The cost of an accident can be far more than meets the eye – so what will be your insurance strategy?
You are completing the third leg of what has been a successful business trip. As the airplane touches down, there is a loud “thunk”. The pilot successfully maintains control of the aircraft and brings it safely to a stop. Fortunately no one is hurt, but the deer and the airplane suffer a different fate. A quick check by the local mechanic confirms the aircraft sustained heavy damage and is no longer airworthy.
Even though you have a good insurance program in place, you will now learn the many costs of an accident that are not covered by your policy.
As you collect your thoughts, you realize you will need to get your business associates to their next destination (including yourself) and will need supplemental lift for the next 60 days while your aircraft is being repaired. You recall the time you were in an auto accident; the insurance company paid for a rental car while your car was being repaired. You assume your aviation insurance policy might respond in a similar fashion.
THE GOOD NEWS
The insurance company will pay for the direct losses as a result of the accident, including the damage to the aircraft and any property damage or bodily injury claims. In addition, if you operate a turbine or jet powered aircraft (not for hire), your policy should contain certain ancillary coverages including: ‘Extra Expense for Replacement Aircraft’ and ‘Extra Expense for Trip Interruption’.
The limits and wording of these coverages vary widely and are negotiable, but for the purpose of our example we will assume you had the following coverage limits:
• Extra Expense for Replacement Aircraft: $5,000 each day/$300,000 each loss-(normally the ‘each day limit’ x the ‘benefit period in days’).
• Extra Expense for Trip Interruption: $15,000 per person (make sure this also includes the crew). Now, let’s take a look at how the coverages apply to our accident. First on the list is getting you and your business associates to their destination. Enter ‘Trip Interruption Coverage’. This provision will reimburse you for reasonable expenses incurred to transport each employee/person from the place your aircraft was damaged to the intended final destination or to the place where they originally boarded your aircraft.
This transportation is normally accomplished using commercial Airlines, using another company aircraft, or chartering another aircraft. The insurer will also pay for lodging and food during that time period.
Next, let’s address your previously scheduled travel plans for the 60 days your aircraft will be out of service. The applicable coverage for this is ‘Extra Expense for Replacement Aircraft’. You can lease another aircraft and provide your own crew, or charter an aircraft. Unlike your auto coverage, this only pays the extra expense of these operations over and above what it would have cost you to operate your own aircraft for the same trip.
If in doubt, clear all trips with the adjuster who is handling the claim to verify what is covered and what might fall outside of the coverage parameters.
THE BAD NEWS
Even with the best insurance program, there are multiple areas of “loss” that are simply not covered. Consider a worst case aviation accident. The aircraft is destroyed and there are multiple fatalities. Issues to be resolved include:
• Reputational risk – damage to your company’s reputation and goodwill. Many risk managers feel reputation/goodwill is their company’s most significant asset.
• The loss of productivity while key personnel are required to deal with the FAA, NTSB, the local law enforcement, media, family counselling, depositions and court attendance. The amount of time it will take to simply “deal with” the details of the claims process/paperwork is staggering.
• Possible damage to your future insurance program in terms of rating and insurability.
• The chance the loss amount will exceed the limits of insurance purchased.
• If the aircraft is repairable, the diminution of value caused by the loss history to the aircraft.
• Loss of key personnel and staff. Often the most important players in a company are the ones utilizing the aircraft.
It should be apparent that the cost of an accident is far more than meets the eye. This is a huge consideration! Now that you are aware, it should be crystal clear that your strategy is to go on the offensive and control what is in your power to prevent.
Loss prevention is paramount. Safety initiatives, recurrent training programs for your pilots and mechanics and emergency response plans (for example) all are far less expensive than the potential damage of a covered claim.
As good as insurance is, it simply cannot and does not cover everything. There is no substitute for a well-conceived and executed Safety Management System that is effective in reducing the likelihood of an accident.
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John Mason, Valcolm, Inc.
2014 Aviation Insurance Outlook
Three years ago it appeared as if aviation insurance rates might soon begin trending upwards. Despite a steady increase in claim payments, however, additional capacity (new markets) tempered rates for a few more years. As 2014 begins, several – but not all – carriers are indicating modest rises in rates across most lines of aviation insurance. While we do not foresee massive premium hikes, it may be best to budget for potential single-digit rises in aviation insurance premiums this year. As always, we aggressively market and benchmark clients’ programs to assure the most competitive combination of coverage and rates.
It Takes a Team – Staffing Update
We are pleased to announce a few staff updates and milestones for 2014 as we aim for continuous improvement while also growing our business.
After being named Senior Account Executive last year, Kelli Feathers will begin solely handling a broad cross-section of our client renewals this year. She has been with the firm since 2005 and is an experienced property and casualty agent with a wide range of aviation insurance expertise. Kelli can be reached at email@example.com.
Tami Davis has rejoined the team as Account Executive and will continue to build on her ten-year career at Hope Aviation. She has a Bachelor’s degree from the University of South Carolina and, like all our Account Executives, is a licensed property and casualty agent. You can welcome Tami back at firstname.lastname@example.org.
Later this year, broker Shannon Hope will celebrate ten years with Hope Aviation. Since joining us in 2004, Shannon has continued building on the HOPE reputation for excellence.
To close out the 50th Anniversary year of Hope Aviation Insurance, we swapped our annual Christmas party for an afternoon of volunteering at Harvest Hope Food Bank. Together, we packed 500 boxes of food for low-income elderly in our home town.
NTSB’s 2014 ‘Most Wanted’ List Includes Items That Apply to Business Aviation
The National Transportation Safety Board (NTSB) has released its “Most Wanted” list of transportation improvements for 2014, with three of the ten focus areas having application to business aviation.
Two of the priorities on the 2014 list — eliminating distractions caused by personal electronic devices (PEDs) and identifying and communicating hazardous weather to general aviation pilots — are areas addressed by NBAA’s Safety Committee in its Top 10 safety focus areas, noted committee Chairman Eric Barfield.
Barfield, a Hope broker, goes on to explain that, “When it comes to eliminating distractions, we totally support what the NTSB calls ‘PED-Free transportation operations’…We advance that agenda tactically through two dedicated areas in NBAA’s Top 10 -No. 1: The impact of technology and No. 2: Task Saturation: whether you’re flying or fixing an airplane, focus on the task at hand.”
In 2014, the NTSB will focus its general aviation advocacy in the area of hazardous weather, noting that in 2011 weather was a factor in 1,466 accidents that resulted in 444 deaths.
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