© 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.

Obtaining Policy

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.

Reading Policy

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.

© 2004 Reigel & Associates, Ltd./Aero Legal Services. All rights reserved.

Why Use An Aircraft Purchase Agreement?

It always surprises me when a potential aircraft buyer is unsure of whether he or she should use a purchase agreement when buying an aircraft. Most of these individuals have purchased homes and no doubt used a purchase agreement in such transactions. Yet, many of these same individuals would spend same amount of money to purchase an aircraft, and often times a great deal more money, without protection of a written aircraft purchase agreement.

Aircraft purchase agreements should be used in almost every aircraft sale transaction. First, law in most states requires that a contract for an amount greater than $500.00 be in writing in order for it to be enforceable. This is called statute of frauds. Although exceptions to this legal doctrine exist, complying with law is usually safer than hoping you will be able to take advantage of an exception.

Further, using an aircraft purchase agreement can also help avoid confusion and misunderstandings. If agreement clearly explains how transaction will happen, when it will happen and what is included in deal, greater likelihood that buyer and seller will each know other party’s expectations and less chance for surprises or misunderstandings.

What Terms Should Be Included?

The number and complexity of terms that should be included in an aircraft purchase agreement will often times be dictated by type and value of aircraft being purchased/sold. Although by no means inclusive, following terms provide a good place to start.

Identify Parties. The agreement should identify who is selling aircraft and who is buying aircraft. Although this sounds simple to do, it isn’t always clear who is seller and who is buyer. It is very common for aircraft to be registered in name of a corporation or limited liability company. In that case, individual with whom you are negotiating is not owner of aircraft and should not be listed as seller. The registered owner of aircraft should be identified as seller.

The buyer on other hand, can be an individual or a corporation or limited liability company. If an individual is buyer, that person will be listed and upon registration will be record owner of aircraft. To fully take advantage of release and indemnity language discussed in greater detail below, seller may also want to consider having an individual buyer’s spouse execute purchase agreement.

If a corporation or limited liability company will be registering aircraft, purchase agreement should identify that entity as buyer. Alternatively, an individual can sign an agreement as buyer and, as long as agreement allows buyer to assign his or her rights under agreement, that individual may still assign agreement to a corporation or limited liability company prior to closing. The corporation or limited liability company then becomes buyer and can close on transaction without individual ever entering chain of title. From a liability perspective, this can be important.

Identify Aircraft. The aircraft purchase agreement should identify aircraft with as much detail as possible. At a minimum, it should include make, model, N-number and serial number for aircraft. Ideally, a list of all avionics, logbooks, handbooks, additional equipment and any accessories should be included. Also, if seller intends to retain certain items, those items should be specifically identified and excluded from transaction. By taking time to detail exactly what is and isn’t being sold, you will prevent misunderstandings at delivery.

Purchase/Sale Price. The agreement should specify how much is being paid for aircraft. If buyer will be giving seller a deposit or earnest money, that fact should be included. Also, what happens to deposit when it is given to seller? Will money be placed in escrow or simply held by seller? If an escrow agent is not involved, buyer will need to obtain some assurance that his or her deposit will not simply disappear into seller’s pocket making buyer’s recovery from seller difficult or impossible if transaction does not close. The agreement should also state under what conditions seller must refund deposit to buyer.

The buyer’s method of payment should also be stated. Is it a cash transaction or will financing be involved? If financing is involved, buyer may want to include language that makes transaction contingent upon buyer obtaining financing on terms acceptable to buyer. That way, if buyer isn’t able to obtain satisfactory financing, buyer will not be forced to complete purchase on financially unacceptable terms.