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The Importance of Contract Review

Article published in World Aircraft Sales Magazine

We have all become dangerously accustomed to signing contracts in everyday business dealings without even a cursory reading.  Don’t make this mistake with contracts related to your aircraft.

The stakes are exponentially higher! Con’-tract (noun): a binding agreement between two or more persons or parties; especially: one legally enforceable. 

Given this definition, the importance of providing your insurance broker and attorney a copy of any aviation contracts prior to execution cannot be overstated.  These include:

  • Purchase agreements
  • Hangar leases
  • Bank financing documents
  • Aircraft leases
  • Replacement engine or parts leases
  • Maintenance agreements.

Generally all of the above contracts contain clauses that require you to meet certain insurance conditions. If you don’t comply with these requirements, you may find yourself in a nasty ‘breach of contract’ lawsuit simply because you didn’t dot your “i’s” and cross your “t’s”.

So what types of insurance requirements are found in these agreements? In a typical bank loan, you will be required to name the bank as loss payee with breach of warranty coverage. Breach of warranty coverage provides almost exclusion-less coverage with respect to the bank’s interest. In addition you would be required to provide 30 days’ notice of • cancellation, and add the bank as an additional insured as respects liability arising out of your operations.

Let’s examine a loss to illustrate:

You have financed your aircraft with the above insurance requirements stipulated in the contract. You fail to forward a copy of the contract to your insurance broker to endorse the policy as required. Unfortunately, the aircraft is involved in a major accident. Lawsuits are filed against you as owner/operator of the aircraft, but the plaintiff’s attorney also names the bank as a defendant since they are in the loop of commerce (this is a tactic many attorneys employ).

Upon receiving the suit papers the bank contacts you with a request to forward the lawsuit to your insurance carrier for defense under the additional insured provision. Can you remember where you agreed to add them as additional insured?

If you didn’t comply with that contractual requirement, you could be sued for breach of contract. If the agreement also contained an indemnification clause (which is common) you could be exposed to even greater liability.

Navigating an Indemnity Clause

An indemnity clause merits close scrutiny as it can really stack the deck against you in its most onerous form. This is where a good aviation attorney is worth every penny. He/she can guide you through the process and suggest wording based on fair benchmark language common to the industry. Your aviation insurance broker can also be a valuable resource. They have seen numerous indemnity clauses in contracts and can suggest more equitable language where appropriate.

Once armed with a copy of the contract, your aviation insurance broker can suggest wording changes that are more in line with industry standards, and amend the policy to comply with the insurance clauses of the agreement. There may be requirements in the contract the insurer can not or will not approve, in which case the agreement will need to be amended to reflect what you are able to provide.

It has been my experience as an aviation insurance broker that more often than not an aircraft is purchased, finance documents are signed and a hangar lease is executed without the insurance broker ever seeing a copy of any of these contracts.

You are strongly advised to show these documents to your insurance broker and attorney now, even if they have already been signed.
In the future, when evaluating any contract related to your aircraft, contact your broker and attorney during the contract review process (if not earlier).

The devil really is in the detail, and contract review is an integral part of a well-run flight department’s risk management strategy.

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