The ultimate safety net

Aircraft insurance may save the day

October 1, 2009

The weather is beautiful. The frequency is popping with airplanes coming and going. It’s a perfect day to fly—well, perfect until the engine quits. What a second ago was the droning hum of pistons and propeller is now the sputtering sound of sporadic combustion. But you’re a skilled pilot. You line up perfectly for that plowed field below. Everything goes beautifully until you hit the woodchuck hole on the rollout. A prop strike, busted wing, and sheared-off landing gear later, you’re thankful your aircraft insurance policy will cover the damage. Or will it?

Aircraft insurance is a highly complex world that runs on advanced computer modeling, risk analysis—and, until recently, backroom deals with big cigars. Like most things in life, it’s about trust, relationships, and contracts.

Unlike the world of car insurance with its huge risk pool, thousands of brokers, and hundreds of underwriters, the aircraft insurance industry consists of about 15 underwriters and a dozen major aviation-specialty brokers (with hundreds more that will write aviation policies, even though the company doesn’t specialize in it). Although the numbers between the two industries vary widely, their structures are the same. In almost every case, a pilot requests a quote from a broker, who then shops the various underwriters for the best price. The exception to this practice is Avemco, an underwriter that writes directly to customers.

The entire process begins with the quote. In the past there was a practice called market blocking, said Brenda Jennings, senior vice president of the AOPA Insurance Agency. It boiled down to a process whereby the client could only work with one broker at a time. Underwriters and brokers were protected, but the customer had difficulty shopping around. But that practice is changing, thanks to computer automation and customer demand for greater transparency, Jennings said. And that’s good news for customers.

One of the most misunderstood aspects of aircraft insurance is what determines the premium. Without a doubt, it’s the insured value of the aircraft, or what the industry calls the hull value. On average, the hull accounts for 60 percent to 75 percent of the annual premium. This should come as no surprise, given that insurance companies are paying out for many more gear-up landings than full $1 million liability settlements for negligence.

To reach the hull figure, underwriters and owners work together to come to a common, reasonable figure, unlike automobile insurance companies that list cars at the market rate. While services such as Vref go a long way toward helping to determine the insured value, most companies will allow for an increase of 40 percent from the book figure. Experts recommend that a good rule of thumb is to insure the aircraft for what it would cost you to completely replace it at the current market rate. To overinsure brings up the possibility the underwriter may pay to fix $100,000 of damages on a $120,000 airplane, a proposition bad for the aircraft’s value. To underinsure means getting a check that won’t cover a replacement.

Knowing that hull value makes up most of the premium, it makes sense that a pilot’s time in type is the single biggest factor in determining that premium. Ratings, the make and model, and other factors such as aircraft complexity and performance usually round out the quote. Other than flying your new pride and joy as much as possible, the best way to get your insurance premium down is to get your instrument rating, Jennings said. She said that although the commercial certificate and other advanced ratings may help with more complex ratings, simply flying more will have the biggest impact.

Although liability coverage costs less, it’s the lifeline most pilots are glad they have when things really go south. Previously, liability coverage of $1 million smooth, or what the industry calls a combined single limit, was common. With smooth coverage, the aircraft owner is covered up to $1 million per occurrence, whether that coverage goes to making injury payments, or protecting the owner’s liability for outside property damage or passengers. But more common today are sublimits—a separate limit for passengers and the total loss. Typical coverage is $1 million total and $100,000 per passenger.

To understand why this is an important distinction, you only have to consider your own flying habits. Chances are you usually fly with only one or two passengers. Let’s say you have an accident and your two passengers sue you for negligence. With $1 million smooth, theoretically you would be covered up to $500,000 for each passenger. But with sublimits, coverage is limited to $100,000 per passenger, leaving you exposed. Smooth limits are still available, but obviously that coverage is going to be more expensive. Even $2 million smooth is available if the owner is willing to pay for it.

Exclusions, warranties, and clauses

If quotes and coverage are the intro class, the open pilot warranty and subrogation are the master’s curriculum. In an effort to allow an owner greater utility of his aircraft, and to decrease workload on the insurance companies, the underwriters developed a concept called the open pilot warranty. Most policies contain the warranty, each with different flight experience requirements. As an example, any pilot approved by the owner may operate the owner’s Cessna 172 if he or she has 300 hours total time, a private pilot certificate, and 10 hours in make and model. A multiengine, complex, or other high-performance airplane will likely have much higher minimums.

If a pilot meets the open pilot warranty, has the owner’s permission to use the airplane, and operates within the parameters of the policy, he or she will be covered just as much as the owner. But there are exceptions.

Jennings said if the owner is charging you to use the airplane, some underwriters might consider that a commercial operation, that standard owner’s insurance doesn’t cover. “Each policy is different and it depends on the definition of approved use of the policy,” Jennings said. “Charging for fuel and some portion of maintenance is usually fine, but charging even $50 may be considered a commercial use.” It pays to clear this up with your broker if there’s any question.

Saying an operation is an approved use can also get sticky. Let’s say your friend allows you to take his Cessna 172 to Cleveland to watch a football game. If you instead take the airplane to Boston to see a friend and have an accident on landing in Boston, coverage may be in jeopardy. Under that scenario the owner is covered under the terms of the policy. But because the pilot wasn’t operating the aircraft under the express permission of the owner, the insurance company could theoretically come back and subrogate (substitute one creditor for another) against the pilot. Whether the company does that is up to state law (some prohibit doing so against a covered party) and the offense, Jennings said.

Subrogation is more likely against an uninsured party. For example, if an FBO damages your wing while moving the airplane, you can make a claim to your insurance, which will pay. But there’s no doubt the insurance company will then go to the FBO to cover the loss.

A better solution to all this, Jennings said, is to name the pilot on the policy if he or she is more than an occasional user of the airplane. Although this may increase the premiums, coverage is guaranteed to be better for the pilot using the airplane. Besides, Jennings said, it’s important to be honest with your insurance company. One important note about other pilots using your airplane: Insurance coverage is per occurrence and does not expand with a named insured or a pilot operating under the open pilot warranty. So if someone is hurt on the ground and both the pilot and owner are sued, and a judgment is awarded, the coverage will be split between the two.

The exclusions portion of the insurance contract must be fully understood and respected. Although insurance companies want to follow the contract and cover the pilot, most also look for reasons not to pay. So make sure you fully understand the exclusions so you don’t give them a good reason. Things are always changing. You may even be surprised to know that breaking an FAR is not always an exclusion, Jennings said. “Policies are changing and the underwriters are broadening policies.”

Although most of the exclusions are straightforward, some are more difficult to grasp. Take the opening scenario, for example, where the engine failure led to a forced landing and some damage. Under most policies, hull insurance will cover the damage to the airplane, but not the engine. While the engine may have been damaged during the landing, its failure to continue running happened before the accident, and would thus not be covered. In an extreme example, if a tire blows on takeoff and you roll the airplane into a ditch next to the runway, everything is covered except for the tire.

70 is the new 50

One of the biggest issues facing the industry right now is the age of the pilot population. Warranted or not, the insurance underwriters consider pilots of a certain age to be a higher risk, and will therefore either not cover them, or only offer coverage at a higher premium or with stipulations such as no solo flight. Jennings’ advice is to pick an underwriter when you are in your 60s and stay with them. “Companies may decline a new piece of business if you’re older,” she said. “Your best bet is to pick a company in your 60s and stay with them.” Jennings went on to say that although coverage is probably available beyond age 70, it will be harder to get if you don’t fly often, or try to upgrade to a twin or other high-performance airplane.

Read the policy carefully, follow the rules, and make sure you have enough coverage, and your aircraft insurance could be the best money ever spent.

E-mail the author at ian.twombly@aopa.org.