READY TO FLY – OR ARE YOU? AIRCRAFT MANAGEMENT & CRITICAL INSURANCE IMPLICATIONS

The process of purchasing an aircraft involves countless decisions, few more critical than the aircraft management choice. Setting aside the obvious issues of tax benefits, fuel and FBO contracts, recruiting advantages and other considerations, the purpose of this article is to look closely at the insurance implications related to aircraft management.

The primary insurance advantage of an aircraft management arrangement is the cost savings that come with being part of a larger fleet. All else being equal, insurance companies scale rate breaks as premiums increase. There’s no uniform formula for this, and at some point, the fleet growth and premium discount lines converge, but a fleet of 10 or more aircraft is likely to get a better deal than a single ship. The “all else being equal” aspect of this deserves scrutiny. The pro-flown private jet category has long been a favored insurance sector due to low incidence of catastrophic loss and, to be frank, the glamour factor. Underwriters, like everyone else, are attracted to the bright shiny aircraft and the rich and famous that inhabit them. That said, the attritional losses from a legacy of increasingly expansive policy terms combined with inflationary repair costs and the rise in modular aircraft design have eroded insurance company profits in this class, to a point that the underwriting community’s resolve has finally stiffened, and insurance rates have begun to rise even for the latest models. While aircraft management companies, given the expectations of their customer base and stiff competition, tend to operate at a very high level of quality and safety, their attritional loss record can impact the insurance costs they pass on to customers.

It is worth asking for information about overall managed fleet losses over the previous 5 years and factoring that into your assessment.

Beyond pure cost, there are a range of other differences:

NON-OWNED AIRCRAFT COVERAGE

Under a Managed Aircraft Policy/Endorsement, Non-Owned Aircraft Coverage is afforded to the aircraft owner (usually referred to as the “Insured Owner”), but this typically only applies if the non-owned aircraft is operated or arranged by the management company. This can be problematic for a corporation that may have unrecognized non-owned exposures – sales arranges an excursion for key customers
that includes a flightseeing helicopter ride; the marketing department contracts with a drone operator to take aerial photographs; an employee heads to a conference in their private aircraft.

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LIMIT DILUTION
Regardless of how many separate entities are covered by a single insurance policy, the liability limit you purchase applies only once to any given incident. For example, let’s suppose you purchase $100,000,000 in liability coverage per occurrence, and let’s also suppose you’ve temporarily leased an engine while an owned engine is in maintenance. Under an aircraft management arrangement, the policy should cover the aircraft owner and the management company. It’s likely you are also required to name the engine lessor as additional insured, so with some exceptions they are entitled to seek coverage through your policy, as well. In a catastrophic event, the $100M limit would be shared between all covered parties – you may think that because it is your aircraft and, in fairness, should be your policy, that
you would have first rights to the limit, but this is not the case. Coverage is apportioned, broadly speaking, on a first come first served basis. It is conceivable that you could end up on the short end of your own insurance. Since the Management Company rightly expects to be included as an operational insured under any policy covering a managed aircraft, this would be true whether you procure your insurance under the Management Company’s policy or purchase your own standalone policy. Couple this with the growing social inflation, where awards for injuries related to aircraft accidents are heading into 9 figure territory, and this is more than just a theoretical problem.

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“TWO OR MORE AIRCRAFT INSURED” CLAUSE

Most insurance policies contain a “two or more aircraft insured” clause which can limit some coverage if there is a single incident involving two aircraft qualifying for insurance under the same policy. For instance, two aircraft owned by separate individuals but both insured under the same management policy that are involved in one event could end up in a limit sharing situation like the one described above, essentially halving the amount of insurance available to each.

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