Have you ever allowed someone else to use your King Air or have you used an airplane you don’t own? If you are like many individuals or companies, you have “non-owned exposure.” If you are a larger company, you likely have non-owned exposures you don’t even know about.
Every time you let someone use your King Air through a dry lease or interchange agreement, it is imperative to review your insurance policy for coverage. Additionally, if you are using an airplane you don’t own, whether it is a chartered plane, dry lease or interchange agreement, you need to inform your broker so they can ensure you have the right coverage in place. Consider company employees who are private pilots – are you confident they aren’t traveling on business in another aircraft?
About 10 years ago, the risk manager for one of our clients called to report a claim. The company owned two Citations, so I was anticipating one of those aircraft to be involved in the claim he was reporting. However, I was actually informed the employee had been in a Bonanza that crashed on final approach to a small rural airport.
The risk manager was as surprised as I was when he got the initial call. He had no idea employees were using alternate aircraft for business purposes. The employee involved in the claim had been asked to survey a large area of land. To save time, he went to the local airport to see if there was a pilot around who would take him up in their airplane so he could do an aerial survey instead. There was a group of pilots hanging around that day, and one of them said he’d be happy to take him up in his Bonanza. Sadly, neither the pilot nor employee survived the flight – stall/spin on final. Additionally, after the fact, it was discovered the pilot had an expired medical and the Bonanza was out of annual. How would your policy respond to this type of claim? Would you still have coverage with an unairworthy airplane and pilot? What if the aircraft was experimental or a piston-powered helicopter? Not all policies have the proper coverage in place to cover these circumstances.
This scenario might be covered under your policy, but it is important to manage your unknown exposures such as this. If you are a business with employees, most likely you have an employee handbook. This is an excellent place to add a section as it relates to business travel. You may make it as limiting or liberal as you want. You could be extremely limiting by stating, “Employees may only travel on FAA-approved Part 121 airline carriers, company owned and operated aircraft, or fixed wing, multi-engine, turbine-powered aircraft operated by two qualified commercially licensed pilots.” It doesn’t have to be that restrictive, but that is an example of just how limiting you can be in your corporate travel policy. Any exceptions would then have to be approved, by the company, in writing. You can amend your handbook to whatever risk tolerances you are willing to accept. Once guidelines are in place, you can provide them to your insurance company so they are aware you are attempting to manage your non-owned exposure; resulting in better pricing for your King Air policy.
A common non-owned exposure companies frequently encounter is using another aircraft while theirs is down for maintenance. If you elect to charter an aircraft that is not of similar size and/or type as your King Air, you could be exposing yourself to an uninsured situation, or in a state that leaves two aircraft policies disputing which should be considered the primary. This can get extremely confusing and frustrating for everyone involved. Managing the exposure, and then obtaining approval from the insurance company prior to signing the contract, can eliminate this enormous headache. A contract is absolutely necessary. Everyone is a friend, until there is bodily injury, death, and/or property damage with millions of dollars at stake. A contract will have everything that is agreed upon, in writing. Additionally, you could jeopardize your insurance policy if you assume liability or waive your insurance company’s rights. Hire an aviation attorney to create a contract that states precisely who is responsible for damage to the airplane while it is in your care, custody, and control. Most commonly, the contract will state the aircraft owner’s policy is primary and will extend to protect the aircraft against physical damage while being operated by the lessee. Additionally, the liability portion of the policy will extend to protect the lessee, and the lessor’s policy should waive its rights to subrogate against the lessee.
There are many ways to be in mutual agreement as to who is responsible for what. A benefit to having the lessor’s policy being the primary, and the lessee’s policy being excess, is that when damage is found at a later date during a phase inspection (FOD) you, the lessee, won’t get a phone call stating you damaged the aircraft and need to get your checkbook out.
Here are two claims to consider: Company One had their aircraft down for maintenance, so they borrowed a King Air 200 from Company Two, located on the field. Company One provided their own pilot. On takeoff, the door came open right after rotation. The cost to repair the aircraft came to $200,000. That doesn’t include loss of use, extra expense, and diminution of value! There was no written contract between the two parties, so who is left paying for this claim?
The following is a similar story, but with a different crew situation. Company A had their aircraft down for maintenance and needed to take a trip, so they borrowed the same make and model jet from Company B on the field. One pilot was employed by Company A; the other pilot was an employee of Company B. They took off, ingested a bird and came back around and landed. Now, we have a FOD problem. Whose insurance should pay? Again, there is no written agreement.
I cannot stress enough how important it is to create a contract and have it approved by the insurance company before signing it. When the contract has been signed by both parties, have certificates of insurance and endorsements processed to acknowledge and accept the contract. Spending a couple thousand dollars now on a contract could save you hundreds of thousands of dollars later.
From a policy language standpoint for your known and unknown non-owned liability exposures, review your policy, and most importantly, review the conditions and exclusions. The policy could grant you very liberal coverage, only to take away some of the coverage via an endorsement. Looking at actual policy verbiage will allow you to see where coverage is given for use of a non-owned aircraft, but then limit the coverage later in the policy:
We will: a) provide the coverage shown in Paragraph 3 “Use of Another Aircraft” if you fly another aircraft; b) under Paragraph 3 “Use of Another Aircraft,” pay for physical loss of or damage to other aircraft for which you are legally responsible. The most we will pay is the cost to repair or replace the other aircraft, not to exceed its fair market value or 125% of the highest aircraft agreed value shown on Item 5 of the Coverage Identification Page, whichever is less. You must first pay or bear the highest in motion deductible for an aircraft shown in Item 5 of the Coverage Identification Page.
Great, you have coverage for using a non-owned aircraft, put the policy away and go fly, right? Not so fast! That was page 12 of 32 of the policy, you should probably keep reading:
Page 25 of 32 states:
If there is an accident or occurrence covered by your policy involving Temporary Use of Substitute Aircraft or Use of Another Aircraft, your policy will be excess over any other coverage protecting you.
This means you shouldn’t have agreed to have your policy be primary when using somebody else’s King Air unless you have approval from your insurance company. This isn’t the end of the policy though, keep reading.
Page 30 of 32 says:
What is Not Covered: In addition to what is Not Covered in your policy, we will not cover Temporary Use of Substitute Aircraft, Use of Another Aircraft or Newly Acquired Aircraft:
a. Unless the requirements of the Coverage Identification Page regarding Pilots and Use are met;
b. Unless it is licensed under a standard airworthiness certificate issued by the FAA;
c. If it is a multi-engine aircraft in Item 5 on the Coverage Identification Page is a multi-engine aircraft;
d. If it is a turbine-powered aircraft unless an aircraft in Item 5 on the Coverage Identification Page is a turbine-powered aircraft;
e. If it is a rotorcraft unless an aircraft in Item 5 on the Coverage Identification Page is a rotorcraft;
f. If it is a seaplane or amphibian unless an aircraft in Item 5 on the Coverage Identification Page is a seaplane or amphibian.
As you can see, insurance policies are complex contracts and need to be read and understood. Not all insurance policies are worded the same. Review your policy to ensure you have the coverage you think you do. If you are using a non-owned aircraft, letting someone else use your King Air, or if you are a business with employees, you should first manage your risk. You can do this with a contract between the lessor and lessee of the aircraft to be used. Then have the insurance companies acknowledge and accept the contract via an endorsement and certificate of insurance. For the unknowns, have a corporate travel policy in your employee handbook so employees know what they can and can’t travel on for company business.