(August, 2008)
This analysis is based on a review of available coverage using several policies as examples. There is no standardized policy but there are similar coverages provided by all carriers. Whenever non-standard coverage forms are used, it is possible for insurance agents to inadvertently reduce an insured's coverage by changing carriers. Since this can lead to serious coverage gaps for an insured and claims against an agent’s E&O coverage, we will attempt to highlight these areas.
The insuring agreements establish the coverage provided by the policy and they, naturally, are located at the beginning of the form. The remainder of the policy wording either clarifies, expands, or restricts the insuring agreement. Essentially, the insuring agreement states the insurance companies overall obligation for providing coverage based on the insured’s applicable, contractual consideration.
A. Liability Insuring Agreement
Usually under this part of the contract, the insurance company obligates itself to pay for the bodily injury or property damage that an insured causes to third parties. Naturally, the injury or damage has to be directly related to the ownership, maintenance or use of the insured aircraft.
Important considerations:
· How does the policy define bodily injury?
· Does BI include mental anguish?
· Does coverage include BI to aircraft passengers?
· Is the coverage conditional on how the aircraft is being used?
· Does the coverage apply when an unlisted pilot is operating the aircraft?
B. Medical Services Or
Medical Expense Insuring Agreement
The insurance company pays for medical expenses that are incurred due to an accident involving the covered aircraft. Typically, such expenses must be incurred within one year from the date of the accident.
Important
considerations:
1. Who is covered? Passengers, crew, pilot?
2. How does the policy define medical expenses?
Note: Some policies provide an explanation of covered medical expenses while other forms respond to expenses that are ordinarily considered to be "necessary" or "reasonable."
C. Non-Owned Aircraft
Liability
The insurance company pays for BI or PD that is connected to an insured's use or operation of an aircraft that the insured does not own.
Important considerations:
· Who is considered to be an insured?
· Does the policy cover only the named insured or does it include the spouse, family members? Does it cover related parties (such as other relatives or, when an insured is a business entity, other members of the business or corporation)?
· What aircraft is covered? Any aircraft? Aircraft that is similar to the scheduled aircraft?
· Are there restrictions regarding the types, use and conditions of non-owned aircraft?
· Is the coverage applicable to commercial, business and pleasure use of the aircraft?
D. Physical Damage To The
Aircraft
The insurance company pays for tangible damage to the aircraft listed on the Declarations. Considerations about this coverage exist in a given policy's limits, valuations and deductibles rather than in the insuring agreement.
The insurance company has the right and the duty to defend a bodily injury or property damage suit until the limit of insurance is exhausted by payment to claimants. This means that the insurance company will incur expenses associated with the defense. Most insurance companies pay these expenses separately, without affecting the policy’s applicable limit of insurance. Therefore, they are referred to as supplementary payments.
These expenses can include the attorney’s fees, premiums of court bonds, reasonable expenses of the insured and their employees when testifying or participating in other activities that assist in the defense against a claim. Some insurance companies offer other items as Supplementary Payments such as:
· first-aid
· cost of foaming of aircraft
· search and rescue
· premiums on appeal bonds or bonds to release attachment
While such extras significantly benefit an insured, they pale in importance of having defense costs handled as a supplemental coverage. The cost to defend a lawsuit is extremely high and can quickly use a policy's liability limit. If the limits are used to pay defense costs and the case is lost, there will be little money left to pay any judgment.
Example: Prinder, a maintenance supervisor at a private airfield, was seriously injured by a piece of metal that fell from the sky. He sued Miguel after learning that Miguel's plane landed on the field a few minutes after he was struck. Miguel is adamant that he wasn't responsible for Prinder's injury. Miquel's insurer agreed to defend Miguel against Prinder's lawsuit. After going through many phases, Miguel lost the suit. His defense costs totaled $300,000 and Prinder was awarded $850,000 in damages. Miguel’s aircraft policy limit was $1,000,000.
|
Loss Feature |
Aircraft Policy A Defense costs paid under the insurance limit |
Aircraft Policy B Defense costs paid under supplemental coverage |
|
Liability Ins. Limit |
$1,000,000 |
$1,000,000 |
|
Judgment |
$850,000 |
$850,000 |
|
Defense Costs |
$300,000 |
$300,000 |
|
Total Lawsuit Costs |
$1,150,000 |
$1,150,000 |
|
Total Paid by Insurer |
$1,000,000 |
$1,150,000 |
Under the situation as handled by Policy A, Miguel would be left with the financial responsibility of paying the $150,000 of the settlement cost that was not covered by his policy.
The following are all considered insureds under the policy:
1. The named insured
2. Any person using or riding in the aircraft with permission
3. Any person or organization legally responsible for the aircraft; provided they do not fit in any of the following groups:
· An employee who injures a fellow employee
· Un-named student pilots
· Any person who has paid to use the aircraft
· Persons who are not employees of the insured but are employees of repair facilities, flying schools, airports, and similar services
Exclusions must be studied carefully in order to understand their impact on policy coverage. Some exclusions will apply to the entire policy while others are specific to the insuring agreement. A unique aspect of the policy is that some exclusions may apply only when the aircraft is in flight. The exclusions below are typically found in an aircraft insurance policy.
1. Criminal Acts - There is no coverage when the aircraft is used for an unlawful or criminal purpose. There is normally a requirement that the insured or someone with authority in the insured’s operation be aware of the unlawful use.
Example: Katie, an employee of Global Real Estate, was granted
permission to have the company's pilot fly their Cessna 182 on a trip to
The official reason for the trip was to pick up two clients who were looking for commercial real estate. As it turns out, Katie was also bringing back 10 kilos of cocaine and used the Global plane in order to avoid customs. In this case, the bodily injury and property damage claims arising form the crash would be covered, since the insured, Global Real Estate, was not aware of Katie's criminal act.
2. Intentional injury - If an injury or action is the result of an insured's deliberate action, the policy will not respond to any related loss. There is one exception. Coverage still applies if the intentional action was taken to prevent dangerous interference with aircraft operation.
Example: Paul has completed his final check on his T-6 and it enters the cockpit. Suddenly, a woman pushes him out of the way and attempts to start up the plane's engine. Paul wrestles with her and throws her out of the cockpit. The intruder loses her balance and slams onto the floor, unconscious. Paul calls the police and she is removed from his plane. Several weeks later, Paul receives a legal notice. The woman is suing Paul for the injuries she suffered during their scuffle. Paul's insurer advises him that it will defend him. His intentional acts occurred while he was protecting the aircraft.
3. Assumption of Liability - Responsibility for injuries or damage that an insured acquires under a contract are excluded EXCEPT for contracts with governmental authorities for airport operations.
4. Certain In-flight Activities - The policy prohibits coverage for losses that occur when the aircraft is in flight under the following circumstances:
a. Pilot is not listed on the declarations or pilot endorsement
For more information on how this situation could affect a claim, please refer to PF&M Section 330_C006 "Unauthorized Pilot Voids Aircraft Coverage" in Court Cases.
b. Pilot is listed but is not approved by current FAA regulations
c. Aircraft does not have FAA Standard Airworthiness Certificate
d. If a special permit or waiver is required by the FAA
e. A student pilot not under the supervision of a certified flight instructor
f. A student pilot with a passenger other than a certified flight instructor
5. Nuclear and radioactive activity - All related losses are excluded.
6. War and terrorism - All related losses are excluded.
7. Noise, sonic boom, pollution, electrical/electromagnet interference, interference of property use - All such causes of loss are excluded except when it is created by an actual crash, collision of the aircraft or in flight emergency.
8. Miscellaneous activities - The policy excludes damage or injury that results from using the insured aircraft for the following (this is not a comprehensive list):
|
advertising |
towing |
photography |
hunting |
|
herding |
surveillance |
flight instruction |
sky diving |
|
parachuting |
closed course racing |
off shore business |
|
Note: If an insured is involved in unusual flight activities, the application must thoroughly document the aircraft use in order for any aviation carrier to evaluate and, if applicable, price the risk.
9. Workers compensation and Employer liability situations - Aviation policies exclude losses that should be handled by WC and/or EPLI coverage. The exclusion extends to actions brought by family members of an employee.
10. Property damage to items owned, held by or controlled by an insured - No coverage exists for damage or loss of items that belongs to or is controlled by an insured with the exception of limited protection for loss involving:
11. Other Loss or Damage to the owned aircraft - Other items that damage an insured's aircraft (or create a loss in value), but which are barred from coverage include:
a. Embezzlement, repossession or conversion of the aircraft through the use of bailment, lease or similar encumbrances whether they are lawful or unlawful
b. Wear and tear and deterioration losses. Mechanical, engine, hydraulic structural pneumatic and electrical failures are not covered if they remain confined to the failure.
c. Loss to engines and power units due to heat or temperature from operation of the engine unless caused by another covered loss
d. Depreciation
e. Governmental taking or detaining of the aircraft for any use – peace or war, lawful or unlawful
This is a representative, rather than an exhaustive, list of actual exclusions found in the reviewed policies. A given policy's actual exclusions must be carefully evaluated in order to determine the scope of coverage.
The conditions in a policy outline the responsibilities of both the insurance company and the insured. It is an area that commonly triggers disputes between the insurer and the carrier.
1. Other Insurance - If there is more than one policy on the aircraft then all policies are expected to participate in a loss. The participation is based on the relationship of the limit to the policy to the aggregate limit available. Policies purchased as excess policies are not considered in the aggregate limit. Also coverage for non-owned aircraft is excess over any other available insurance.
2. More than one insured - If there is more than one insured, each is covered as though they are the only insured except that any payment is subject to the policy's insurance limits. This means that each insured is treated by the carrier uniquely in defense and discovery with no preference. However, at the time of settlement, the only limits available are the single set of limits in the policy.
3. Rights of Recovery - The insured must agree to give the insurance company full rights of recovery and do nothing to hurt the insurance company’s ability to exercise those rights and will help the insurance company exercise those rights.
Example: Mabel and her Cessna 150 were insured by Acme Airsurers
when she had her plane serviced by Tempe Air Garage. A
4. Valuation - If the aircraft loss is total, the insurance company pays the limit shown on the declaration or summary page. However, if the loss is partial, the loss is settled based on who repairs the plane. If the insured repairs it – cost of like kind or quality material plus the straight time rate wages plus an amount for supervisory and overhead is paid. If someone other than the insured makes the repairs, the net cost to the insured is paid.
Note: Where is the plane repaired? Normally it must be repaired at the loss site or at the aircraft's home airport. The insurance company pays the cost of transportation for the aircraft and the parts. The insurer has the discretion of finding the most economical method to handle the move. The insured has the right to choose another place for repair or another mode of transportation, but then will have to pay the additional cost.
When parts are replaced or the entire plane is replaced, the insurance company has the right to all salvage. However, retaining salvage is the carrier's choice. An insurer is not obligated to accept salvage.
5. Notice of occurrence, claim or suit - The insured must notify the insurance company of an occurrence that could lead to a claim. The notice must be given as soon as practicable. If a claim or suit is brought, the insured must immediately send the information to the insurance company.
6. Action Against the Insurance Company - No action can be brought by the insured against the insurance company until the insured has met all conditions required by the insurance policy. There are time limits and requirements that differ by policy but, overall, the insured has a fairly short time frame to sue the insurance company.
Note: State laws and court decisions frequently affect this provision and insurer actions are adjusted accordingly.
7. Changes - The policy can only be changed by written endorsements. In other words, a policy can only be modified in writing, meaning that any change has to occur with the carrier's permission.
8. Fraud and Misrepresentation - The policy is void if the insured misrepresents significant information. This is a vital condition since aircraft applications are very detailed and most of the information is important in evaluating a submission. While no standard application exists, an insured must is still obligated to carefully read each question and to respond truthfully and accurately.
9. Assignment - Policies cannot be assigned by the insured due to a covered aircraft's sale. The insurance company must be consulted and provide consent before any assignment takes place EXCEPT for the death or bankruptcy of the insured. In death or bankruptcy there is 60 days coverage for the legal representative.
10. Cancellation - The insured can cancel at any time. When the insurer wishes to cancel coverage, it must provide notice at least 30 days in advance except for non-payment when only 10 days is required.
11. Return premium - If the insured cancels, the return is based on a short rate table but if the insurance company cancels the return premium is based on prorate tables. If a plane is a total loss, the insurance company is not required to refund any remaining premium.
12. Assistance and Cooperation - The insured is expected to work with the insurance company during all claim proceedings. This could mean testifying, helping with witnesses and participating in examinations. The insured does not have the right to volunteer payments on behalf of the insurance company.
Note: An insured may risk making out of pocket payments without expectations of being re-paid by the insurer. However, this may not be wise if the payment is construed as an admission of liability. .
13. Inspections and Audit - The insurance company has the right to inspect the aircraft and records that pertain to the aircraft during the policy period and up to a year afterwards.
When an insured regularly travels
outside
15. More than one Aircraft - If there is more than one aircraft on a policy, the policy applies to each one separately.
The liability limits are per occurrence. There is no aggregate limit. This means that policy's limit is available to each separate eligible occurrence. The Declarations states the occurrence limit is the maximum liability payment for any single occurrence. The definition of occurrence includes any series of related events. For instance, if a single accident started a chain reaction, all injuries and damages would be considered a single occurrence and subject to the occurrence limit.
The policy can have a per person or a per passenger limit. This is a restriction of coverage. It means that the maximum coverage available for a single person or passenger is limited to the per person or passenger limit. The per person limit is more restrictive than the per passenger limit since it includes the passengers and any other person who might bring suit.
The Medical Expense Limit is a separate coverage and limit that operates independently of the policy's occurrence and the per person limit.
Example: While Clint was landing his ultralight, he slightly tilted the wings and crashed into a small office/hangar. His passenger was thrown around the cockpit and a maintenance person who had been working in the building was seriously injured. The property damage loss was $50,000 for the building and its contents. The passenger suffered back injuries and lacerations and filed suit for $200,000. The groundskeeper broke a leg and arm and lost 60 days of work. He sued Clint for $300,000. Clint had a policy with $1,000,000 per occurrence limit. The policy included a per person limit of $100,000. This means that his policy will cover the property damage ($50,000), and a maximum of $100,000 for the passenger's and maintenance person's claims. The total payment is $250,000. Clint is responsible for the remaining $300,000. If Clint’s policy had the per passenger limit instead of the person limit, insurance company would have paid $50,000 plus $100,000 plus $300,000 or $450,000 and Clint would have only been responsible for the passenger's remaining $100,000 claim.
Any aircraft physical damage is subject to deductibles that differ according to circumstances surrounding a given loss. The applicable amounts are:
1. Not-In-Motion Deductible - This amount applies whenever the aircraft is not moving.
2. In-Motion Deductible - This applies when the aircraft is intentionally moving either on the ground or in flight.
3. In-Flight Deductible - This applies when the aircraft is intentionally in flight.
Typically the required in-flight deductible is the greatest amount, while the not-in-motion deductible is the least.
The deductibles apply independently based on the actual loss.
If the insured uses a substitute aircraft for an insured craft that is out of commission, the policy provides protection. The insured has liability and medical expense coverage while using the substitute, but the maximum payout for any occurrence can not exceed what would have been paid if the primary aircraft was in operation. This is a critical consideration if the substitute craft has a significantly higher value than the insured craft.
If the insured purchases a new aircraft to replace a scheduled aircraft, there is automatic coverage provided the insurance company is notified within 30 days of the purchase and premium payment is made. The coverage is the same as on the scheduled aircraft.
If the insured purchases an additional aircraft, there is automatic coverage provided the insurance company currently insures all of the insured’s owned aircraft. The insured must notify the insurance company within 30 days of the acquisition. The coverage is the same as another aircraft with similar passenger capacity. The physical damage limit is the actual amount the insured paid for the aircraft.
For an illustration of a legal ramification involving an unlisted aircraft, please refer to PF&M Section 330_C007,
"Reporting Form Dispute Decided In Insured’s Favor" (Classic) in Court Cases.
Typically, a policy will have a number of terms with a special meaning. Actual defined terms can vary by insurer, but the following are items that are likely to appear:
· Aircraft
· Bodily Injury
· Charter
· Commercial
· In Flight
· In Motion
· Instruction and Rental
· Insured
· Medical Expense
· Occurrence
· Partial Loss
· Passenger
· Physical Damage
· Pleasure and Business
· Premises
· Property Damage
· Total Loss
This is a brief listing of common endorsements that may be attached to a policy.
Exclusions:
· Terrorism
· Hijacking
· Noise and other types of pollution
· Asbestos
· Inability to recognize years (Y2K)
Explanatory:
· Pilot requirements
·
· Mechanical breakdown
Amendatory:
· Company-specific version of a broadening endorsement that extends coverage.
· Cancellation changes by state.
For more information, please refer to PF&M Section 330.4-3, Aircraft And Aviation Insurance Available Endorsements.