Pilot Counsel

Smooth limits

December 1, 1996

A month or two ago, I moderated a seminar on aircraft insurance at AOPA Expo in San Jose, California. The seminar was a unique opportunity to learn what questions AOPA members have about their aircraft insurance. It was even more interesting to have these questions answered by representatives of the leading insurers of general aviation aircraft. The format was ideal, and what developed was very educational. I'd like to distill some of the more important information and share it with you.

An important point is the difference between smooth limits of liability insurance coverage and sublimits. These are terms used by insurance people as a sort of shorthand. They are commonly understood among insurance professionals, but they are not so commonly understood among aircraft owners who buy aircraft insurance.

Maybe it seems a little elementary, but a good place to start is by explaining that probably the most important coverage that we are looking for when buying an aircraft insurance policy is protection against any liability we may have arising from the ownership or use of an aircraft. That's the so-called liability coverage — as distinguished from the hull coverage, medical payments, and other coverages available in insurance policies.

To introduce a few more insurance terms, what we are talking about is a typical insurance policy on a light general aviation aircraft used for "pleasure and business." This is an insurance term that distinguishes private aircraft from aircraft used for commercial purposes and those used for industrial aid.

The participants on this most interesting panel were, in alphabetical order: Chuck Hubbard, executive vice president, Avemco Insurance Co.; Greg Sterling, executive vice president and general manager, AOPA Insurance Agency; Gray Toulin, senior vice president, AIG Aviation Inc.; Michael Vanard, vice president, United States Aviation Underwriters, managers for USAIG; and Nick Walton, president, American Eagle Insurance Company's aviation division.

According to our panelists, there are three basic sources of liability for aircraft owners to worry about: liability for the injury or death of passengers on board the aircraft, liability for injury or death of persons outside the aircraft, and liability for property damage (other than to the aircraft itself, which is a subject for another column).

If you have ever struggled through an aircraft insurance policy, you are well-aware that this liability coverage is subject to a lot of difficult-to-read conditions, exclusions, and limitations (more subjects for future columns). Among the most important is the limit on the amount that the insurance company will pay under the liability coverage. As you would expect, the higher the limits of liability, the more expensive the coverage.

This is where the meat of the discussion began. Among the top 10 questions asked of the panel was "what do smooth and sublimits mean?"

One of the panelists explained it this way: A smooth limit of liability means that the limit of liability is a single number. It is a per-occurrence limit. It doesn't matter whether an occurrence caused bodily injury to a person on the ground, or property damage, or injury to a passenger, or any number or combination of these losses; the whole limit of liability is available to cover these losses as long as they arise out of the same occurrence. This kind of limit of liability coverage is more properly called combined single limit.

In contrast, many policies contain sublimits. The most common form in which they are found is colloquially referred to as "a million sub one hundred." Sound familiar? What this means is that a portion of the liability coverage has been sublimited to a number smaller than that $1- million overall limit. In other words, the most that the insurance company will pay per occurrence is $1 million. However, the most the insurance company will pay in liability for any single person or passenger is a smaller limit, typically $100,000. The higher the sublimit, the more expensive the coverage.

Some insurance companies word their sublimits "per person," whether the person is outside the aircraft or on board the aircraft. Other companies provide a broader form of coverage by putting the limit on a per-passenger basis. That means that the sublimit applies only to passengers on board the aircraft. The coverage available for an injury claim by a person on the ground or in another aircraft is not subject to the sublimit.

What is the effect on the premium cost of smooth limits versus sublimits? Naturally, smooth limits are more expensive. According to some of the panelists, selecting sublimits could result in as much as a 25- to 30-percent reduction in the liability premium. That's a pretty significant savings.

It is not surprising, then, that many aircraft owners elect to insure with sublimits. What is surprising is how high the percentage is. About 75 percent to 95 percent of private aircraft owners, depending on the experience of the particular insurer, elect to insure with sublimits.

Does that mean that most aircraft owners are underinsured for liability? That's a provocative question that was discussed extensively. One insurer, perhaps tongue in cheek, said that the only adequate limit of liability is "unlimited." None of the insurers contradicted him, but none could answer where this liability limit is available.

While all admitted that, in theory, the sublimits that are typically selected would be inadequate to fully compensate for a death or serious injury, their collective experience is that virtually all cases settle within the policy sublimits available. However, they did note an ominous trend toward going after the aircraft owner or pilot personally for recoveries in excess of the policy limits. It could be financially disastrous to continue to rely on this experience.

So, what should an aircraft owner do? The recommendation of the panel was that an aircraft owner should buy the highest limits of liability that he or she can comfortably afford and for which he or she can meet the underwriting criteria.