Rather, insurance company will pay a maximum of $1,000,000 per occurrence, but will only pay each passenger up to a maximum of $200,000. Thus, for an accident in which only one passenger is injured, insurance company’s maximum exposure is $200,000, exclusive of any amounts it spends on your defense.

On other hand, smooth limit coverage of $1,000,000 per occurrence will provide up to $1,000,000 of coverage regardless of number of passengers. This coverage presents a greater risk to insurance company since it could have to pay full policy limits even if only one person is injured. As a result, greater risk means that premium for this coverage is going to be more expensive than premium for a policy containing sub-limits.

Policy Definitions

When you read an aircraft insurance policy, you need to pay special attention to definitions section. Many of terms used in policy have specific definitions that are different from a dictionary definition or common usage for that word.

Examples include definition of “accident” which is often defined as a “sudden and unexpected event resulting in bodily injury, death or property damage”. This is different than definition of accident contained in NTSB Rule 830 and is also more specific than a dictionary or common usage definition of word.

Another example is definition of “commercial operations” or “commercial purpose.” An insurance policy’s definition of this term is usually different from, and in some cases may be broader than, FAA’s or IRS’s definition or a dictionary definition.

These are just two examples. However, remember that aircraft insurance policy is a contract between you and insurance company. Both you and insurance company agreed to policy definitions when you paid premium and insurance company issued policy. As a result, both you and insurance company will be bound by those definitions.

Coverage Exclusions

Your aircraft policy will also contain exclusions. Exclusions define circumstances in which insurance company will not provide you with coverage for operation of your aircraft. An aircraft insurance policy usually includes both specific and general exclusions.

Specific exclusions arise when you assume additional liability (e.g. you sign a contract that indemnifies or holds someone else harmless for damage they cause), damage occurs to your own property or injury occurs to members of your family. The policy may also specifically exclude coverage for your own medical expenses or for your operation of an aircraft that you do not own.

Depending upon state in which aircraft is based, general exclusions can result in denial of coverage regardless of whether they directly caused a particular claim. These exclusions will preclude coverage for operation of your aircraft in commercial operations (as defined by policy, not necessarily FAA or IRS), using your aircraft to commit unlawful acts, damage caused by war or terrorism or if your aircraft is operated by a pilot that is not named as an insured on policy and does not meet open pilot qualifications.

Who Is Covered

Assuming no exclusions are applicable, policy will provide coverage to each person named as an insured under policy and to pilots who meet “open pilot” requirements. As a threshold matter, each pilot operating aircraft, whether named insured or qualifying under open pilot provision, will need to possess appropriate pilot and medical certificates and meet all currency requirements for operation of your aircraft.

The open pilot provision extends coverage of your aircraft insurance policy to a pilot operating your aircraft who is not a named insured on your policy. The provision sets out total time, time in type and training requirements that unnamed pilot must meet in order for pilot to be covered under policy. Generally, if those requirements are met and pilot is operating your aircraft with your consent, your insurance coverage should extend to that pilot.

What You Can Do

The complexities of aircraft insurance can seem daunting. But, what can you do to protect yourself? The first, and one of most important things you can do, is to read your insurance policy. If you have questions regarding terms or coverage talk to your insurance agent or contact an aviation attorney who is familiar with aviation insurance matters.

Once you understand policy, make sure you abide by policy and comply with its terms and requirements. It makes little sense to spend substantial amounts of money on insurance premiums and then place your coverage in jeopardy by doing or allowing something your policy prohibits.

Next, document your operations. What do I mean by that? Simple: Keep good records. Make sure your pilot logbook is up-to-date and current. If you take your pilot logbook with you when you fly, make copies of pages containing your satisfaction of FAR currency requirements and keep copies in a safe place.

This way, if something happens to your pilot logbook and your insurance company or FAA later question your currency, you will have back-up proof that you were current for your flight. Although not as critical, you may also want to keep a photocopy of your pilot certificate(s) along with your logbook records.

Finally, you should use this same procedure for your aircraft and engine logbooks. If you must take them with you in airplane, make copies and keep them in a safe place. In this instance, you may want to make a full set of copies of logbook entries, rather than just pages showing aircraft’s current airworthiness. An aircraft that contains logbook entries for all of work ever performed on aircraft is worth more to a potential purchaser than if those records are incomplete or missing.

These simple steps can prevent potentially costly disputes down road. It’s been said that best insurance is insurance you never have to use. That may be, but if you take these steps, you should have greater peace of mind that your insurance will be there if you need it.

Documents. The agreement should include a statement about which documents seller will sign and deliver to buyer at closing. Usually this includes a Bill of Sale (FAA Form 8050-2) and a signed current Registration Form (FAA Form 8050-3).

Pre-purchase inspection. In most transactions, buyer will want to have a pre-purchase inspection performed on aircraft. The purchase agreement can specify who will perform inspection, what qualifications that individual must possess and where inspection will take place. Also, buyer should make agreement contingent upon buyer’s satisfaction with results of inspection. Although buyer is usually responsible for expenses associated with a pre-purchase inspection, agreement should address which party is responsible for what expenses related to inspection.

Warranties. It is possible to include a variety of warranties in purchase agreement representing certain conditions of aircraft (e.g. warranties of airworthiness, merchantability, fitness for a particular purpose etc.). However, due to space limitations most of these warranties will not be discussed here.

From a buyer’s perspective, warranty of title is probably most important. This warranty ensures that buyer receives title to aircraft free and clear of any liens or mortgages. Although buyer will still want to obtain a title search of FAA Registry’s records for airplane, having warranty of title included in purchase agreement will help to minimize risk of any unrecorded liens or interests in aircraft.

Most sellers will want to include a disclaimer in purchase agreement stating that buyer is purchasing aircraft "As-is". This language is intended to limit seller’s responsibility for any defects or unknown conditions in aircraft. If buyer is having a thorough pre-purchase inspection performed by a qualified mechanic familiar with specific aircraft, inclusion of this disclaimer in purchase agreement is probably not a great concern for buyer.

Choice of Law/Venue. If transaction involves a buyer and seller from different states, it may be prudent to include language in purchase agreement that governs what law applies to transaction and where any disputes would have to be resolved.

Waiver and Release of Liability. The seller will want waiver and release of liability language in purchase agreement to limit potential liability for injury or damage sustained by buyer arising out of buyer’s use of aircraft. The language should be in bold, all caps letters to make sure it is obvious and not buried in fine print of purchase agreement.

Waiver and release of liability language will not release a seller from responsibility for seller’s intentional acts or gross negligence. Nor will it prevent possible claims from third-parties who are injured or damaged by buyer’s use of aircraft or from buyer’s minor children. However, it will prevent buyer, and buyer’s spouse if spouse has signed purchase agreement, from suing seller if a defect in aircraft causes an accident that results in injury or damages.

What Remedy Does An Aircraft Purchase Agreement Give You?

First, an aircraft purchase agreement is not a 100% guarantee that a buyer or seller will not be sued. In this litigious world, I don’t know that such a guarantee is possible. Further, purchase agreement alone does not make anyone do anything. If a buyer or seller does not want to comply with his or her obligations, purchase agreement will not change that. However, purchase agreement will give you ability to go to court and have a judge make non-performing or “breaching” party comply with his or her obligations.

If purchase agreement is drafted clearly and with sufficient detail, it may be possible to have court specifically enforce agreement (e.g. make breaching party do what purchase agreement says he or she is supposed to do). An example would be where a buyer refused to complete a transaction even though seller and aircraft complied with all of terms of purchase agreement. In this case, a court could force buyer to purchase aircraft.

Alternatively, court may award money damages for losses incurred by non-breaching party. An example of this is when a seller refuses to return a deposit even though buyer has complied with all of terms of purchase agreement and has a right to return of money. In this situation, a court could enter a judgment against seller in amount of unreturned security deposit.

Conclusion

An aircraft purchase agreement is a valuable tool to ensure that each party to an aircraft purchase transaction receives what is expected. It prevents confusion and misunderstanding and provides security that a party will have recourse if other party to transaction fails to perform as required. With minimal up-front time and expense, both buyers and sellers can protect their interests and maximize likelihood of an uneventful closing and purchase.