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So You Want To Insure Your Plane...

by Lydia Wiff 15. October 2016 10:00
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Imagine yourself here: you’ve finally saved enough to buy that beauty of a Cessna 172. You have got your pre-buy done, the loan paperwork finished and the delivery to your home airport all arranged.  You suddenly remember that you need insurance, but realize you have no clue if aircraft insurance works the same as car insurance.  Today’s post is designed to give readers an idea of how aviation insurance works – you’ll see that aviation insurance is similar to your car, but also very different. Before I give you the low-down on aircraft insurance works, it’s important to get a little history.

A Brief History 

After World War I, we begin to see the emergence of the civil aviation industry which goes hand in hand with the aviation insurance industry.  Post-war brought a surplus of war aircraft which were then either dumped into the market for pennies on the dollar.  An aircraft which had previously cost the government, such as $17,000 for a Curtiss Jenny, was being sold in the open market for as little as $50 – I don’t know about you but I’d buy an airplane right now if a Cessna was that cheap!

Former military pilots all over the country were buying these cheap planes up using them for a variety of civil aviation activities such as barnstorming (trick flying), crop dusting, mail delivery, passenger transport, and more.  As one can imagine, these new civil aviation activities added a whole new risk for insurance companies and often resulted in crashes for a variety of reasons.  Companies were ill-equipped to handle this new risk and many saw a significant loss as a result.

However, one company rose to the occasion, despite an almost certain loss, and Travelers Insurance Company became the first to announce a comprehensive program specifically for air risks in 1919.  Travelers wrote lines of insurance primarily for maintenance, operation, and the use of an aircraft for private and commercial operations.  Several lines were included in the program including: life insurance, accident insurance for owners and pilots, trip accident ticket insurance, Workers’ Compensation insurance, and public liability and property damage insurance.  While Travelers was the first to offer these lines of insurance, it’s important to note that they did not include lines for damage to the actual aircraft (this is referred to as hull coverage). 

Over the next few years, which Travelers anticipated to be a period of profit, the company ceased to exist in 1931 after being in business for 12 years.  Several other companies sprung up during those first years after Travelers made their foray into aviation insurance.  As the aviation insurance industry stabilized, companies that exist still today started to appear such as United Sates Aircraft Insurance Group (USAIG), the Associated Aviation underwriters (AAU), and the Aero Insurance Underwriters (AIU).  With several new companies in the U.S. market and an abundance of accidents during the early years, companies began to look for ways to spread the risk so that losses were not so significant. 

Group Approach, the Law of Large Numbers, & Reinsurance

As many new companies were entering the aviation insurance industry, it was discovered there was a more economical way to do business in addition to spreading the risk.  Individual companies were taking huge losses when a claim was filed because of the damage to aircraft and property as well as the deaths of those involved.

The “Group Approach” was created with the intent not only to spread the risk between many companies but also to spread the profit between those same companies.  The founders of the group approach did considerable research in Europe (a country with a more developed aviation insurance industry) and found that indemnification (making a party whole after a loss) could be handled safely only by employing the group approach.  This new method of the group approach also brought about the synonymous concept of the “Law of Large Numbers” – the risk and profit are spread over a large number of companies which allows for a much more stable aviation insurance industry.

Another approach used to stabilize the insurance industry was the approach of “reinsurance”.  In the early days of insurance, a devastating fire threatened to bankrupt several of the local insurers and it was quickly discovered that insurance companies themselves needed to be insured against such catastrophic losses.  What began as a way to protect insurance companies became the essential element of aviation market supporting major airlines, airports, and even space risks.  Aviation insurance can be similar to auto insurance (premiums, liability, etc.), however there are some key differences that are important to know about. 

Direct Writers, Brokers, Underwriters & Policy Term Length

Recently I bought a new car.  To add it to my insurance, all I did was call up my insurance agent at State Farm® and give the Vehicle Identification Number (VIN), make, model, year, and the accident history.  I opted for full coverage since it was a much newer car than I had owned previously and in a matter of minutes I had a binder (temporary insurance policy) ready for me at the office to pick up so that I could use my new car.

State Farm® is a great example of what is known as a Direct Writer.  A direct writer gives a you an aircraft policy option through their company, just like an auto insurance agent.  There is actually only one company that currently issues policies this way –  the Avemco Insurance Company.   This company is actually very popular with private owners of aircraft in general aviation, airports and Fixed-Base Operators (FBOs).  It can be argued that Avemco gives the best deal as they directly write their own polices, which brings me to the concept of insurance brokers.

Insurance brokers (as well as agents) are the middle men between insurance companies and people looking for insurance.  Brokers work for a commission (percentage) of the premium and work with certain companies to find the best policy for their client much like aircraft brokers look for the best buyer for their clients’ aircraft.  When they gather a list of different policies, they take them back to their client for comparison and selection.  Agents are a representative of an insurer and have delegated authority to act on behalf of their company.  Insurance agents, however, are often certified as both an agent and a broker.

An important item for novice plane owners to know is that the policy term is much different than that of auto insurance.  For instance, if you have auto insurance, you are probably set up for auto-renewal.  You pay your bill every month, every 6 months, etc., and your coverage continues along.  However, when it comes to aircraft insurance, a policy must be reviewed every year – this means that Avemco, your agent, or broker will be giving you a call to re-write your policy contract.  While this may be slightly annoying to you, it is actually in your best interest as it allows the company to revisit you and the aircraft and see what has changed in the last year.  The assumption is that risk has changed at some point whether that relate to you as the pilot or the aircraft itself.

Closing Thoughts

Prior to a few months ago, I actually could not have told you the differences between auto and aviation insurance.  Since then I have been taking a class about aviation insurance and learning that it is a lot more complex that I originally thought.  I’m not sure when I’ll be able to insure an aircraft at this point, but just learning about it will only help me to become a more informed consumer.  Hopefully that is the case for my readers as well!

Works Cited

Brandon Wild, Assistant Professor, University of North Dakota, Aviation Insurance, Lecture, Fall 2016.

Wells, A., & Chadbourne, B. (2007). Introduction to aviation insurance and risk management. Malabar, Fla: Krieger.

Images courtesy of Google Images.

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GlobalAir.com | Aircraft For Sale | Lydia Wiff | UND

Are You Insured When You Rent an Aircraft?

by Greg Reigel 29. November 2012 11:47
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When you rent an aircraft from an FBO or some other aircraft owner, you know that as pilot-in-command you have responsibility for operating that aircraft in compliance with the FARs. But other than having to face the wrath of the FAA, what is your responsibility if something bad happens during a flight (e.g. an accident)?  Ideally, you hope you have insurance to cover you.  Unfortunately, when you rent an aircraft, that may not always be the case. The estate of a renter pilot found that out the hard way in a recent case.

In Knezovich v. Hallmark Insurance Co., a student pilot rented an aircraft from an FBO. While he was operating the aircraft solo, he was involved in a midair collision that took his life, as well as the life of the pilot and passenger in the other aircraft. A number of wrongful death lawsuits ensued.  Additionally, the estate of the deceased student pilot sued the insurance company that insured the aircraft seeking a judgment declaring that the insurer owed the estate a duty to defend and indemnify the estate in the wrongful death lawsuits.

Ultimately, the Court determined that the insurer was not required to defend or indemnify the estate of the deceased student pilot because the policy language specifically excluded coverage for a pilot, student or otherwise, who rented an aircraft.  Since the student pilot rented the aircraft for a solo flight, rather than a flight in which he received instruction from one of the FBO's flight instructors, the Court held that the insurance policy did not provide coverage.

Although this is an unfortunate situation for the deceased pilot's estate, this case serves as a reminder to anyone who rents aircraft to confirm that insurance coverage is in place that will protect the renter.  It isn't enough to simply ask the FBO or aircraft owner whether they have insurance. You need to be sure that coverage is in place to protect you, the person renting the aircraft.  If the aircraft owner's or FBO's insurance doesn't provide coverage, you need to know that so you can understand your risk and either obtain coverage elsewhere or go without.

For more information regarding aircraft insurance, please read my articles Aircraft Insurance Coverage: Will You Have It When You Need It? and My Policy Says What?!: Understanding An Aircraft Insurance Policy.

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Greg Reigel | Fixed Based Operators (FBO) | Leasing

Can An Aviation Insurer Deny Coverage If You Breach The Terms Of Your Insurance Policy?

by Greg Reigel 30. June 2011 09:27
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If you are in an aircraft accident or you suffer a loss will your aviation insurance policy provide coverage when you need it? That depends.

Aircraft insurance policies have requirements, conditions and provisions with which the insured must comply in order for the policy to provide coverage. These requirements often mandate the condition of the aircraft, qualifications and currency of the pilot and accuracy of the information provided by the insured to the insurance company.

If an accident or loss occurs, and a policy's provision has been breached by the insured, the insurer may have the right to deny coverage. In that situation, the insured could find that he or she is without coverage. But, you may ask, what if the breach of a policy provision is unrelated to or had nothing to do with the accident or loss, will coverage still be denied?

The answer to that question will depend upon the state law applicable to the case. In some states (Florida, Hawaii, Illinois, Iowa, Mississippi, Montana, South Carolina, Texas and Washington) an insurer cannot deny coverage unless the breach was causally related to the accident or loss. In other states (Alaska, Arizona, California, Colorado, Georgia, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Dakota, Tennessee and Virginia) a causal connection between the policy breach and the accident or loss is not required for the insurer to deny coverage. The remaining states have not decided the issue one-way or the other.

If you live in a state that does not require a causal connection between a policy breach and the accident or loss, you need to make sure you comply with all of the provisions and requirements contained in your policy. Failure to comply could very well result in a denial of coverage if you are ever involved in an accident or loss.

If you live in a state in which a causal connection is required between a policy breach and an accident or loss, the insurer will have the burden of proving the existence of a causal connection. That may or may not be easy, depending upon the circumstances.

In either case, you would be fighting for coverage. In the aftermath of an accident or loss, a fight over coverage is the last thing an insured should have to worry about. To avoid these situations and to ensure that you will have coverage when you need it, you need to be aware of and comply with the requirements and conditions of your aviation insurance policy. If you need help understanding your policy, talk with an experienced aviation attorney who can review and explain the terms of your policy. Then you can enjoy the security of the aviation insurance policy for which you are paying your premiums.

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Greg Reigel



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