Definition of aviation insurance
Aviation Insurance:Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the risks involved in aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.
1. Aircraft Hull and Liability
There are several standard aircraft liability policies in the London market, but for the purposes of keeping it simple, I will focus primarily on AVN1C, which is the London Aircraft Insurance Policy.
Insurers will pay for, replace or repair accidental loss of or damage to the aircraft described in the schedule under the policy for the risks covered (generally being flight, taxiing and ground risks). It would be common for aircraft policies to have a separate premium rate for flight risks and a reduced premium rate for ground risks. Operators should be aware of such differentials when seeking insurance, particularly if they have a fleet of business jets, which may have long periods of grounding for commercial reasons or economic downturn.
The policy is underwritten on a ‘insured value’ basis whereby, although a value is attributed to the aircraft at inception, the reduced (depreciated) value of the aircraft at the time of any loss is the value that would be used for claim settlement in the event of a total loss. This can however be amended to an ‘agreed value’ basis, thus the amount to be paid in the event of a total loss is set at inception under the schedule of aircraft. Any partial losses will be subject to the applicable deductible.
Spares coverage is often included within Section I at an additional premium, rated against ‘values at risk’. Operators should ensure that their spares inventory is kept up to date and declared to their broker.
Insurers will indemnify the insured for all sums that the insured becomes legally liable to pay as damages (including costs) in respect of accidental bodily injury or property damage caused by the aircraft or by any person or object falling therefrom.
Insurers will indemnify the insured for all sums the insured becomes legally liable to pay as damages (including costs) in respect of accidental bodily injury to passengers whilst entering, on board or alighting from the aircraft and for loss of or damage to baggage/personal effects arising out of an accident to the aircraft. Again, employees and operational crew are excluded
2. War, Hijacking and Other Perils Exclusion Clause (Aviation) – AVN48B
It is standard for AVN48B to be included within the wording of a policy. This clause ‘expands’ the exclusion beyond those pure ‘war’ perils and operators should pay close attention to what perils are excluded. It is common practice for operators to ‘buy-back’ the majority of these exclusions in respect of both hull and liability coverage.
The insurance company is obliged to indemnify its policyholder for the loss under the insurance policy whether or not the reinsurer reimburses the insurer.
For the owner or operator it is not unreasonable to ask who the reinsures are and what percentage of the policy has been reinsured
Fleet policies are essentially policies covering more than one aircraft. It has become market practice for some aircraft operators and management companies to offer access to their fleet policy to their customers. Single aircraft policies are single standalone policies covering only one aircraft or a number of aircraft owned by one owner.
A practice has grown over the past number of years whereby financiers now insist as part of the security over an aircraft on “Assignments of Insurance”. The practice in fact developed in the commercial airline world and does not translate particularly well into the world of business and private aviation.
The theory behind the assignments of insurance is that the bank should be entitled to receive the insurance proceeds under an insurance policy. In most cases, this goes well beyond what the bank should be entitled to receive the insurance policy as an insured. This gives them greater status than just being named as a “loss payee” and, in the event of a total loss, the insurance proceeds will be paid either to, or to the order of the contract parties.
In most jurisdictions, an aircraft is not permitted to fly for the purpose of public transport otherwise than under and in accordance with the terms of an air operator’s certificate (AOC). The AOC is granted by the local CAA and certifies that the operator is competent to ensure that the aircraft he operates for public transport are operated safely.
The underlying theme of this note is that an owner of an aircraft should pay as much attention to the insurance cover as it does to all other aspects of the acquisition transaction.
In addition to buying aviation insurance, a buyer should use all available resources to protect against claims – for example the aircraft should never be owned by the individual personally but rather should be held through a special purpose vehicle with only that aircraft as its asset – this will serve to ring-fence any claim within the company and protect other assets from claims.
Ensure insurance policy documentation is available and clearly specifies the identity of the insured.