Corporate Jet Insurance and Liability Issues
- The cost to insure a corporate jet is often the cheapest direct cost of owning a corporate jet, but if anything goes wrong, it is the one thing that is most heavily relied upon by the owner.
- Insurance is not a wasted cost just because it may be required only once despite years of paying for it. See it as a protective wrapper shielding your personal wealth from claims exposure.
- This Holland & Knight alert provides an overview of insurance and liability issues for corporate jet owners to consider, including elements of coverage, minimum liability limits, considerations when setting liability limits, premium cost, a case study, and the possibility of transferring operational risk and liability to an aircraft management company.
Unsurprisingly, given the differential in terms of passenger capacity and in terms of physical size, the latter of which affects the potential to cause third-party injury/damage, liability insurance for corporate jets is generally taken out in a range of only $100 million to $300 million, compared with $750 million to $2 billion for larger commercial aircraft.
Surprisingly, all of the other insurance coverages are typically the same as those applicable to larger aircraft operated by commercial airlines.
Elements of Coverage
- Hull coverage: This section of the policy covers damage/destruction to the physical structure of the aircraft, including its engines when attached or when removed and not replaced with other engines, but will exclude hull war risks (see below) among other things. The aircraft will typically be insured on an "agreed value basis," which means that it is insured for a fixed amount, which may not necessarily be the same as its replacement value or market value. However, it is worth noting that if the "Agreed Value" is substantially greater than the market value, this could have the effect of limiting the circumstances where a constructive total loss (see the definition below) is declared.
- Hull war coverage: This section of the policy covers the hull war risks that are excluded from the hull coverage above, such as damage/destruction caused by war or other listed hostilities. There are certain non-insurable exceptions, such as a nuclear war or a war between any of the United Kingdom, United States, France, Russia and China, and there are certain standard exceptions that can be reinstated with relative ease depending on the jurisdiction, such as confiscation by the government of the country of registration.
- Hull deductible coverage: The hull deductible is similar to the excess on a car policy and applies to the hull coverage. An operator can buy down the hull deductible to a more manageable level for cash flow purposes. Deductible insurance is usually provided on an aggregate basis (which is a cap on the cumulative value of claims that can be made under the policy in any one year).
- Spares coverage: This section will cover engines and other spare parts when removed from the aircraft and replaced (if an engine or part is removed but not replaced, it is still deemed to be part of the aircraft for insurance purposes and so covered under the hull coverage) up to a certain limit, and may be provided as a sub-section under the hull and the hull war coverages. There is usually a small deductible.
- Liability coverage: This section covers all loss or damage to property, other than to the aircraft/spares, and all claims arising out of death or injury to any person caused by the aircraft and/or related to the use of the aircraft, but will exclude liability war risks. The minimum liability limit will often be prescribed by law.
- Liability war coverage: This section of the policy covers the liability war risks excluded from the liability coverage. As with hull war cover, it also has certain non-insurable exceptions, such as nuclear war.
Common Insurance Terms
- Combined Single Limit: This is one combined liability limit for all of the liability insurances (e.g., passenger, cargo, third parties) and is usually stated to be in respect of any one occurrence, with certain sub-limits (see No. 3 below as an example).
- 50/50 clause: This is an agreement between the hull insurer and the hull war insurer to pay half each on any claim for which the cause of the loss, war or non-war, is unclear. This allows the insured to be paid out prior to the determination of the cause. The two insurers will then enter into discussions to agree their actual portion of liability without further reference to the insured.
- Personal Injury: This is often sub-limited to $25 million for each offense under the Combined Single Limit but, despite the wording used, does not mean physical bodily injury. Instead, it covers injuries such as those caused by libel and slander (i.e., offenses against the person).
- Constructive Total Loss: An aircraft can be declared a constructive total loss (similar to a car being written off) if the cost to recover it and/or repair it is greater than a particular percentage (usually in the region of 65 percent to 75 percent) of the noted 'Agreed Value'. When purchasing this insurance, it is important not to set the 'Agreed Value' of the insured aircraft too far in excess of the market value because it could result in a situation where an aircraft should be declared a constructive total loss but is instead repaired because doing that is cheaper than paying the "Agreed Value."
Minimum Liability Limits
For liability insurance, a minimum level of cover will often be prescribed by law and is usually based on the passenger capacity and maximum take-off weight (MTOW) of the insured aircraft. In the case of a European Union (EU) operator, the relevant legislation is EC Regulation 785/2004. For example, the minimum liability insurance prescribed by EU law for a Gulfstream G650, based on 14 passenger seats and a MTOW of 46,992 kilograms (approximately 51.8 tons), would be $225 million.
The UK's Civil Aviation Authority (CAA) has produced a useful spreadsheet to enable the minimum EU insurance requirements for an aircraft to be calculated (see EC Regulation 785/2004 Insurance Estimator). All that is required is the aircraft's MTOW, passenger capacity and cargo capacity, and the spreadsheet will do the rest.
In addition, many financiers will set minimum liability limits as a condition to financing. It is in the best interests of financiers to have a higher liability limit because of the possibility that claimants will seek to join every party with an interest in the aircraft into the litigation, including the financiers. Financiers will want to ensure that the chances of the insurances being exhausted are minimal.
Otherwise, the operator is free to choose the liability limit as long as it is above the minimum required by law.
When deciding on the appropriate level of cover, consider the potential extent of liability if the aircraft injures or kills a high-net-worth individual, its wing tears the underside of a passenger jet cockpit, or it crashes into expensive housing stock or a shopping mall. It is easy to imagine how the minimum liability limit prescribed by law could quickly disappear.
In addition, consider that there will almost certainly be exposure to uninsured and/or non-insured risks. So, even if the maximum level of liability insurance that is affordable is purchased, there are still likely going to be restrictions and exceptions under the insurance policies that will have to be self-funded.
Many specialist insurance insurers/brokers will provide advice on what levels to purchase, and it will often be cheaper to insure the aircraft with or through one of these parties, rather than include it as an add-on to an existing non-aviation policy.
Considerations When Setting Liability Limits
- Projected Usage: How many flight hours is it anticipated that the aircraft will be flown each year? Will it perform mostly short-haul or long-haul flights?
- Pilot Experience: How many hours of experience does the pilot(s) have on the aircraft type? How long has the pilot held his or her license? Are the pilots employed pilots or agency pilots?
All of this information will be requested by and analyzed by the insurer when determining price, and insurers will often set minimum flight hour experience levels for the pilots in order for the cover to be effective. So, for example, if an agency pilot is used, somebody should be given responsibility for checking the license of the pilot before the flight in order to ensure that the insurance is not invalidated.
- Destinations: Is the aircraft likely to be flying over densely populated areas and/or landing at busy airports? Is the aircraft likely to travel to countries with poor infrastructure? Is it likely that the aircraft will travel mostly to the same destinations and on the same routes?
Corporate jets, of course, have the ability to land at more airports than commercial jets. For example, it is estimated that there are approximately 500 airports in the U.S. into which commercial jets can fly and about 5,000 U.S. airports into which corporate jets can fly. This means that there is greater potential for corporate jets to fly into smaller airports with fewer safety features, which increases the risk of an incident. But conversely, if the aircraft is typically flown into major airports and on busy flight routes, it will be sharing space with larger and more expensive aircraft, thus increasing the exposure to higher third-party damage claims.
- Passenger Profile: Will the passengers be mainly employees? Will high-net-worth individuals be carried?
If the passengers will mainly be employees, workers' compensation or employers' liability insurance may be available in tandem, which would result in less dependence on the aviation policy, a factor which may help to reduce premium cost. But if high-net-worth individuals are carried, consider the potential for a large loss of future earnings claim. The possibility of being sued by the estate of a close friend or associate cannot be ruled out. It will be of no concern to the estate that the relationship goes "way back."
- Habitual Base: Will the aircraft be stored in a secure hangar when not in use? Is there 24-hour security at the airfield? Is there risk of damage to other aircraft when maneuvering the aircraft around the hangar or airfield, or risk of damage to the aircraft from other aircraft?
A dedicated hangar with airfield security is much less of a risk than an airfield parking space with no security. When considering where to park the aircraft, ask if the same spot would be a suitable parking space for a sports car or supercar. Of course, the tornado that swept through an airport in Eufaula, Alabama, in March 2019 demonstrates that even a jet in a hangar on a secure airfield is not always safe from damage/destruction.
The typical or projected flight hours and flight-to-cycle ratio will naturally have an effect on the cost, not least because takeoffs and landings are seen as the most risky activities. If the flight-to-cycle ratio is more cycles than hours, consider purchasing a higher liability limit.
It is true to say that the higher the level of cover required under liability insurance, then the higher the premium cost. However, this is even more relevant to corporate jets. The lower liability limits for corporate jets typically means that they can be insured 100 percent by one insurer, but as the level of cover is increased, it may be necessary for the broker to spread that risk among a number of insurers, and that can increase the cost exponentially.
In addition, an insurer's capacity to take 100 percent of the risk is not just dependent on its size, it is also dependent on the percentage of its capacity that is already taken, so it may be that a smaller insurer can offer the best price.
Again, a specialist aviation insurance broker is best placed to advise on the availability of capacity in the market.
According to a recent article by JLT, a London-based insurance broker, several insurers left the business aviation insurance market in 2018 and high losses already in 2019 mean that the remaining insurers are starting to look again at the risks in this market sector, all of which means that premium cost is likely to rise in the near future. In fact, Willis Towers Watson, another London-based insurance broker, predicts premium increases of between 5 percent and 15 percent, with the most significant increases being applied to those operators with any level of loss activity.
The following case study, prepared by Holland & Knight Partner Gary Halbert, illustrates why it would be unwise to react to rising premium costs by reducing the level of cover purchased:
The example involves a corporate jet accident and subsequent litigation in the United States in which Holland & Knight defended the aircraft manufacturer. Litigation arising out of the accident eventually involved claims by the two pilots, a flight attendant, a number of guests as passengers, and the estate of one of the aircraft owners who died in the accident.
Although the claims against the manufacturer were relatively straightforward, Holland & Knight had the opportunity to observe the legal challenges and potentially large liability exposure against the aircraft owners' policy created by an ownership structure that was not that unusual for the U.S., but was still relatively complicated. Numerous entities, including a co-owners' business, were sued in the various proceedings requiring a defense of multiple entities under the owners' policy. Those defense obligations alone burdened the policy. In addition, the litigation ultimately produced potential exposure under the owners' policy from passengers' claims (as would be expected), an employee's claims despite a potential defense under workers' compensation laws in the U.S., and claims related to the fatally injured co-owner as well.
Perhaps one of the most significant lessons from being involved in the litigation, though, was the size of the claims arising out of the multimillionaire co-owner's death. The size of the claims offered a lesson to those owners who typically transport multiple guests or other high-net-worth individuals on their aircraft. Such liability exposure for wrongful death or even permanent disability could potentially exceed typical corporate jet coverage amounts. Therefore, the structure of the operating entity or entities, the aircraft usage practices put in place by owners and operators, as well as the insurance policy limits are all important considerations in protecting owners from personal liability for accidents involving their aircraft.
Aircraft Management Companies
Some corporate jet owners choose to place their aircraft with specialist aircraft management companies as a means of passing on operational responsibility and, to a degree (subject to contract terms), operational risks and liabilities. Such a company usually adds the aircraft to its Air Operator Certificate (AOC) and then looks after every aspect of the operation, maintenance, handling and storage of the aircraft, and, as part of this, the owner may be able to benefit from group discounts on fuel and other services. The larger service providers will even have fleet insurance policies that can cover the aircraft, often for relatively low premium costs (when compared to stand-alone policies).
Once covered under an AOC, all operations are "public," requiring compliance with a greater number of rules and regulations when compared to "private" operations. Consequently, it is also possible for these aircraft management companies to market the aircraft to third parties on charter, thus generating revenue from the asset when not required by the owner. This is very much a personal choice, however, and it does not suit every corporate jet owner.
In some cases, it may be possible to transfer all operational risk and liability to these management companies. In others, it may be possible to transfer only a portion of it, and in a few it may not be possible to transfer any at all. Much depends on the management company's practices and size, and on the bargaining power of each party when negotiating the management agreement.
The cost to park, fuel, staff and maintain a corporate jet usually runs to six figures per year for each item. But the cost to insure a corporate jet usually runs to only five figures per year. It is often the cheapest direct cost of owning a corporate jet, but if anything goes wrong, it is the one thing that is most heavily relied upon by the owner. Insurance is not a wasted cost just because it may be required only once despite years of paying for it. See it as a protective wrapper shielding your personal wealth from claims exposure, and buy the biggest and strongest wrapper you can.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.