Minimizing the Risks of Selling your Aircraft or Spare Parts

Minimizing the Risks of Selling your Aircraft or Spare Parts

Minimizing the Risks of Selling your Aircraft or Spare Parts

General aviation has had a great tailwind lately. Fuel prices have been low and stable, insurance premiums continue to be at historic lows, avionics manufacturers are developing new products, and there seems to be enthusiasm to upgrade cockpits in conjunction with ADS-B installations. There also appears to be quite a bit of action for people entering, or trading up in, aircraft ownership.

Engaging in commerce does come with risk. Thankfully, the perils can be covered in your aircraft insurance policy, provided you have it customized to your needs. During aircraft ownership, there are ways to manage your current and future risks. Like most things in aviation, it is always a good idea to have a plan, be proactive and prepared. While we all hope we never have one, airplanes have claims filed every day. Thankfully what you read in the NTSB reports does not paint an accurate portrait of what the insurance industry sees on a daily basis. Most claims never make it to the highlights that appear in your social media feeds or make the news.

Do you remember what happened to golfer Payne Stewart? In 1999, the Learjet he was a passenger on crashed, and many businesses and people were initially named in lawsuits. They all had to plead their case of what they did or didn’t do to the aircraft wasn’t contributory to the accident. If your name is in the log book, if you were an owner of the aircraft at one time, or involved in the transaction of selling/purchasing the aircraft, odds are you will be brought into the action, just like many were during that high profile loss. Allegations can be as simple as, you, the aircraft owner, didn’t properly maintain it. Or, the shop you had perform the maintenance did “cheap” work and you should have known better than to take it to them.

During one of my first jobs in aviation, I was an aircraft maintenance assistant for a Fortune 500 company. I was 17 and oblivious to “the real world.” I’ll never forget the moment when the director of maintenance gave me a hammer and told me to destroy an old delaminating windshield we had taken out of the King Air. He could see the look of confusion on my face, “Why on earth do I need to beat the old windshield to a pulp?”

He wanted to ensure it would not be “recycled” on to another King Air, where it could be involved in an accident, and then be traced back to our company. That experience stayed with me, and I now fully understand the risk with aircraft ownership and used/spare parts. Our flight department was also insistent on using new parts when repairing the aircraft. There were two reasons for this, liability and resale value. We kept many spare parts in our inventory. When the flight department closed, all of the new parts were sold, and some parts were destroyed. Your aircraft policy protects you for “aircraft ownership, use, and maintenance.” However, you may not want to take the “off the shelf” policy. Consider customization; there are many ways to do this, but the following are two for consideration:

1) ave the time frame for “liability for sale of aircraft and aircraft parts” extended beyond the cancelation date of your aircraft policy, perhaps you can get one additional year, or more. This is a complex request and isn’t as simple as it seems on the surface, but it is possible. The wording and situation needs to be right for your exposure and situation.

2) urchase a tail policy for a set amount of time, maybe three years, or longer.

Another consideration should be the maintenance shops you use for your aircraft maintenance. As discussed, YOU have coverage if you are sued as it relates to the “ownership, use, or maintenance” of your aircraft. When working with service providers, it is prudent to make sure they not only do good work, but that they have the necessary insurance coverage in place. Plaintiffs go where the money is, and if it isn’t there, they will come back to you. The time to find out your shop doesn’t have insurance isn’t during the discovery process in court.

As owners and operators of cars, most states require we show proof of insurance in order to register it. Not so with general aviation; only commercial operators (Part 121 and Part 135) are required by the Department of Transportation to carry insurance. Also, FBOs and repair stations are not required to carry insurance. In some cases, the airport authority, as their landlord, may require the businesses on their airport to carry insurance.

OEMs really like the General Aviation Revitalization Act, as it limits their risk to 18 years. The aircraft owner and maintenance shops then become the source for the settlement. There are even some maintenance shops that refuse to work on aircraft older than 18 years of age because of this. Some insurance companies also shy away from insuring older aircraft and shops that agree to work on older aircraft.

Your maintenance provider should be carrying a couple of different coverages under their General Liability policy. If their shop rates are “cheap,” this might raise a red flag that they may not be buying the appropriate coverage, or have any coverage at all. For example, there was a mid-size business jet operator that patronized a specific FBO because they had “cheap fuel.” Later it was discovered that the FBO used homemade tow bars, which unfortunately broke during use. When the tow bar broke, the jet kept rolling … right into the tractor they were using as a tug, causing about $1,000,000 in damage. The “cheap fuel” FBO only had $250,000 in coverage. The FBO on the other side of the runway had $50,000,000. It is time well spent to read any contract the FBO wants you to sign waiving your rights to compensation when it is negligent. Additionally, ask for a “To Whom It May Concern” certificate of insurance that verifies the hangar keeper’s limit, and their product and completed operations limit.

If you want to get additional reassurance, you can ask to review any endorsements that broadens/enhances what is covered under the FBO’s policy. Then, don’t be afraid to ask your insurance broker to review it and offer their input.

An example: An aircraft owner was having a maintenance shop work on his/her aircraft. The mechanic thought the work was done, so he started up the aircraft and then realized there was no oil pressure. The engine was immediately shut down and upon inspection it was determined that there was no oil pressure because a safety wire had been left inside the engine. Once the oil screen was pulled, they found that the engine was trashed. Not good. The policy for the maintenance shop was an “off the shelf” policy, meaning it had not been customized to their needs. The claim was denied because the aircraft had not been “returned to service,” therefore the “product/completed operation” was not “completed.”

What if you’ve owned the aircraft, you’ve maintained the aircraft, and you outsourced some of your maintenance to a professional shop. It is equally important you understand how to exit aircraft ownership in a prudent fashion: Intelligent aircraft brokers will have you sign a contract pushing the liability of the sale back to you should they get brought into the suit under the premise the aircraft was unintentionally misrepresented to the buyer. The intelligent and professional aircraft brokerage company will have you sign a contract AND they will have purchased professional liability coverage, which may or may not be needed for your agreement with them.

Your aircraft policy applies and responds to an “occurrence” as defined by your aircraft hull and liability policy. Most likely, “occurrence” is defined as a situation that involves “bodily injury or property damage” as a result of “aircraft ownership, maintenance, or use.” So, if the aircraft is sold, you cash the check, and the new owner discovers the air conditioning system only cools the aircraft to 70° F on a 90° F day, but the broker assured the buyer it would easily cool the aircraft to 65° F. What happens? Most likely, the new owner will sue you and the aircraft broker. Be sure your broker has the assets and/or the appropriate insurance coverage to respond to an allegation such as this.

The final strategy for minimizing your risk is through the purchase agreement between the seller and the buyer. Everyone has a different comfort level and desire for what they want this to look like, so I’ll just give you one example: A King Air owner entered into an agreement to sell his aircraft and decided to exit aircraft ownership. In doing so, he wanted to minimize his litigation risk as much as possible. He had the aircraft buyer sign a contract that was recognized by the aircraft buyer’s insurance company through a certificate of insurance evidencing so. The aircraft buyer agreed to indemnify and hold harmless the aircraft seller, as well as waive rights to subrogate against the seller for liability claims arising from the new owner’s operation, ownership, and maintenance of the aircraft. The buyer recognized, per the contract, that the aircraft was being purchased “as is, where is” and that no condition of the aircraft was being guaranteed (the buyer did do a very thorough pre-buy though). The contract also stated that if the buyer sold the aircraft within three years, the new buyer will also recognize this contract and provide the same guarantees and certificate of insurance to the original owner.

There are many ways to manage and/or transfer your risk. Contracts, insurance, attorneys and a knowledgeable insurance broker can guide you through this process. Be aware, you still have exposure once you sell your aircraft and/or your aircraft spare parts … and many times it’s the new owner that could do something beyond your control that brings you into the courtroom.

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