Unprecedented times are upon us. In the past, King Air magazine has published dozens of articles on a variety of insurance topics. The content has revolved around experiences your fellow King Air operators have endured and we all have been able to learn from. Currently, the world is grappling to navigate COVID-19, which has sent the entire aviation community scrambling to protect our health, as well as our business. This virus is challenging each of us and providing no answers about how long this battle will last or what our “new normal” may look like. As we consider life “post COVID-19,” we should also prepare ourselves for possible legal issues that may arise from this pandemic. While the aviation insurance industry may not have anticipated such a global challenge, there are hints of what may or may not be covered within your aircraft policy.
Third-party Liability
It doesn’t hurt to look into potential third-party liability, how to manage it and ultimately, if your policy provides coverage.
You will find the term “sickness” used within your aircraft policy, so for the purpose of this article we will refer to COVID-19 as a “sickness.” Like all risks, you should first focus on managing the exposure, in this case the risk of “sickness.” As we have learned, social distancing is the backbone of the strategy to limit the spread of the “sickness.” Staying 6 feet apart in any aircraft is difficult, particularly in business aircraft such as the King Air. Currently, some operators, particularly those who fly Part 135, are not flying because their clients or owners are staying close to home. However, many operators also want to be ready for a trip, should the need arise. Part of being prepared for a trip is making sure the necessary precautions are in place to protect both crew and passenger health. To ensure they are healthy and ready to fly, some crews are self-isolating. Other operators have explored operating single pilot to protect themselves, as well as their second pilot, to avoid inadvertently spreading the “sickness.” For operators flying fellow employee passengers, many have implemented a self-imposed restriction of only carrying a 50% passenger load to maintain proper social distancing. Each of these options are good risk management strategies, but when our management of risk fails us, we turn to the insurance policy. What coverage do we have?
Insurance policies for King Airs are typically very broad. Below is specific wording from an actual King Air policy and the endorsements that clarify coverage. Remember, endorsements modify the policy to add or remove coverage to the policy. Near the beginning of every aircraft policy there is a statement: “When and where you are covered.”
In the particular policy we reviewed, it reads:
“You are covered for occurrences that take place during your policy period while your aircraft described on the Coverage Summary Page is anywhere in the world. By an occurrence we mean any accident or continuous or repeated exposure to conditions which you don’t expect to happen resulting in bodily injury, property damage or loss of or damage to your aircraft. All injuries or damage resulting from generally the same conditions will be considered one occurrence.”
The policy starts with a very broad attitude toward expansive coverage. That coverage becomes more restrictive when the term “bodily injury,” is further expanded and defined: “bodily injury caused by your aircraft, including sickness, disease, mental anguish, personal injury or death.”
“Sickness” is the key word in the definition and would lead one to believe there is coverage in the event a third-party contracts a “sickness” onboard your aircraft. The difficulty will be the burden this places on the legal interpretation of the policy. The insurance policy is a legal contract and coverage is triggered upon determining an “occurrence” has happened. It is also worth noting, aircraft insurance policies are not designed to cover King Air owners and operators from perils covered under workers’ compensation. The policy specifically addresses this with the following:
“EXCLUSIONS, unless otherwise provided in the policy of insurance, the liability insurance afforded under this policy shall not apply to: Bodily injury, sickness, disease, mental anguish or death of any employee of the Named Insured while engaged in the duties of employment, or any obligation for which the Named Insured or any company as Insurer may be held liable under any workmen’s compensation or occupational disease law.”
Upon reviewing the policy wording as outlined above, an insured is certainly entitled to file a claim should they feel a third-party passenger was harmed due to a “sickness.” If a claim like this does arise, it is possible the standard exclusion that is in all aircraft policies: “Noise and Pollution and Other Perils Exclusion” could come up for debate, specifically with focus on “other perils.” While the exclusion is a lengthy and wordy endorsement, I encourage you to review it in your policy. Before the COVID-19 pandemic, my personal interpretation of the need for this exclusion was to avoid covering claims for things such as an angry homeowner next to the airport accusing an aircraft operator of being too loud. Or a King Air with an aging and cracked fuel bladder that seeped fuel onto the hangar floor that then flows to the drain leading to the sewer system. Now, reading the exclusion with the thought of “sickness” in mind, you have to wonder how the legal system may or may not apply “… and Other Perils Exclusion.” The following are a few excerpts from the policy that includes “sickness”:
“This insurance does not apply to any liability … including bodily injury, fear of bodily injury, damage or fear of damage, personal injury, advertising injury, sickness, disease … directly or indirectly arising out of, resulting from, caused or occasioned by, happening through, in consequence of, or in any way involving: Pollution or Contamination.”
How the policy defines “contamination” could be worrisome as it specifically uses the words “…‘Waste’ of any kind whatsoever, including solid waste, waste water, waste oil, infectious medical waste, and human.”
This is a new peril for all of us to consider and should be reviewed with your broker, underwriter and legal counsel to see how your policy may or may not respond to a claim involving COVID-19.
Possible Credit Endorsement
Despite aviation coming to a screeching halt amid this pandemic, we continue to see the insurance market hand out substantial increases. One way to reduce your outlay for the aircraft insurance policy is to look for the “lay-up” credit endorsement. The intention of a lay-up credit is to return premium dollars to the insured during periods of reduced exposure. Typically, this reduced exposure resulted from the aircraft being out of service for extended maintenance. There are many variations of the formula used in calculating the lay-up credit. A typical endorsement could look something like this:
“In the event an aircraft described on the Coverage Summary Page is laid-up and out of service for any reason other than loss or damage covered by ‘Your Aircraft Physical Damage Coverage,’ and you have received prior written approval from the Aviation Managers, we will suspend the in-flight portions of your Coverage and refund premiums for the period the aircraft is out of service, computed at fifty percent (50%) of the pro-rata premium which applied to the aircraft. You also agree to advise the Aviation Managers, in writing, as soon as the aircraft is returned to service. However, no refund will be made for any lay-up period of less than thirty (30) consecutive days.”
The lay-up credit is causing the insurance underwriters a great deal of pain, both financially and administratively. The actuaries most likely did not anticipate their entire portfolio of clients would be seeking a portion of their premium back, due to the effects of a global shutdown of travel. These refunds could further exacerbate the need for the insurance underwriters to seek even higher premiums at your renewal and pushing to eliminate the lay-up credit endorsement in the future. Talk to your broker about what you may be entitled to if you currently have this endorsement. If you don’t, it may be something to inquire about in the future. Especially if you have a lengthy phase inspection on the horizon or other time-consuming maintenance scheduled.
Again, these are unprecedented times. There has been both social and political pressure on the insurance companies to cover COVID-19 related claims and provide premium relief. While this sounds enticing initially, if these payouts become precedence, we will continue to see eyebrow raising rates continue into 2021, with potentially fewer carriers competing for your business.