My Policy Says What?!: Understanding An Aircraft Insurance Policy
© 2004 Reigel & Associates, Ltd./Aero Legal Services. All rights reserved.
Many states require that owners and/or operators of aircraft have insurance covering their aircraft and operations. At a minimum, states usually require third-party liability coverage. This applies to injuries to third-persons that result from operation of your aircraft. Additionally, if your aircraft is pledged as collateral for financing, lender will require that you have hull coverage and/or replacement value insurance to insure value of aircraft collateral.
So, how do you obtain aircraft insurance? Typically, you apply for aircraft insurance through an insurance agent or broker who represents an insurance company or companies that provide aircraft insurance policies. The insurance company then reviews application and does any additional investigation necessary for it to assess its risk in providing you with insurance for your aircraft or operations. Its risk is likelihood that it may have to pay out on a claim against your policy.
In exchange for its acceptance of risk, insurance company charges you a premium. The amount of that premium is a direct product of amount of risk that insurance company is assuming by extending coverage to your aircraft or operation. The greater risk, more expensive insurance coverage will be. In some cases, insurance company may not be willing to accept a particular risk for any price.
Factors that affect underwriting decision include type of aircraft, pilot qualifications (e.g. total time, time in type, pilot certificates/ratings), nature of operation (e.g. pleasure, business, Part 91 or Part 135) and base of operations. General aviation policies can include non-commercial pleasure and business use under FAR Part 91 or commercial use under FAR Part 135.
When an aviation insurance policy is issued, it represents a contract between you and your insurance company. As long as you comply with all of terms and requirements of policy, your insurance company will provide you with coverage. If you fail to comply and a claim arises, you may find yourself without coverage.
But, what does aircraft insurance policy actually say? Well, as a practical matter, it is quite common that pilots and operators do not read their policies. Sure, they may review declaration page to confirm that correct parties are named and that appropriate coverage limits are in place, but often times that is as far as it goes. Sometimes an owner or operator may even ask his or her agent to explain some of policy’s terms.
Unfortunately, policy contains quite a bit more information of which pilot or operator needs to be aware of to ensure that he or she complies with terms of policy. A thorough review of policy is both prudent and recommended.
This review should begin with Data Page or Declaration Page. First, confirm that aircraft is correctly identified and that appropriate owner and any additional insured parties are included. Also read coverage limits to make sure that you have limits for which you are paying.
Aircraft Damage Coverage
The typical aircraft insurance policy will include both aircraft damage coverage, as well as aircraft liability coverage. The aircraft damage coverage applies when your aircraft sustains damage (e.g. bent metal, broken windows etc.). This coverage comes in two flavors: In-flight/In-motion and Not-in-flight/Not-in-motion.
As you may have guessed, in first instance your aircraft will be insured for damages it sustains while it is in use: moving under power of its own engine, whether taxiing or flying. In latter instance, you aircraft will only be insured while it is parked on ramp or in hangar. This coverage is less expensive because it presents far less exposure to insurance company. It will only have to pay a claim if something happens to your aircraft while it is standing still and not in use. An aircraft owner may want this limited coverage when aircraft is going to be stored and unused for a period of time.
It is also possible to purchase “all risk ground and flight” coverage. This coverage protects you whether aircraft is moving or not. However, a policy with this coverage will likely be more expensive than a policy that is either In-flight/In-motion or Not-in-flight/Not-in-motion.
The aircraft damage coverage provides for transportation of aircraft to and from location at which repairs are made, any related storage charges and actual repair of aircraft. However, most policies will also exclude coverage for damage sustained by your aircraft as a result of governmental seizure, resulting from repossession or enforcement of a lien against your aircraft or damage that is due to ordinary wear and tear, deterioration or age.
Assuming damage to your aircraft is covered, you should read your policy language to determine whether it contains any specific restrictions or requirements relating to processing of your claim, who performs repairs, where they are performed and even how they are to be performed. Simply because you have insurance coverage, this does not mean that you have carte blanche for having your aircraft repaired.
Aircraft Liability Coverage
Aircraft liability coverage protects you from liability or responsibility to third-persons for damages they may suffer resulting from operation of your aircraft. The coverage requires that insurance company both indemnify and defend you against such claims. Indemnification means that if you are responsible for damage to a third-person, insurance company will pay third-person directly, up to policy limits, amount for which you are responsible.
The duty to defend means that insurance company will pay for your defense costs if you are sued by a third-person alleging that your operation of your aircraft caused damage. The insurance company will hire an attorney, usually experience in aviation law, to represent you and defend against claims. Given complexity and cost of aviation litigation, this benefit alone can be worth a substantial amount of money and may even exceed amount of money actually paid by insurance company to indemnify you.
Your policy will always have a maximum limit for liability coverage that can be either “sub-limit” or “smooth” coverage. An example of sub-limit coverage is a policy that provides for $1,000,000 per occurrence and $200,000 per passenger. This does not mean that you have $1,000,000 to pay all claims.