The “Hard Market” of Aviation Insurance

The “Hard Market” of Aviation Insurance

The aviation insurance industry has officially entered the “hard market.” King Air owners and operators are seeing sharp increases in premiums with reduced ancillary coverages. Unfortunately, you can expect this trend to continue throughout 2021.

In addition to the hard market affecting price, it can also impact how strictly insurance carriers adhere to exclusions within your policy. In a hard market, they are looking to increase their revenue and limit their expense, or how much they pay out on claims. On the surface, you are seeing this through higher deductibles and less coverage. It is imperative that you are prepared and informed about what is specifically excluded within your policy so you do not find yourself in a precarious situation should you need to file a claim. Understanding the exclusions will help you identify the weak links in your insurance program. Then you can address them by buying them back, purchasing additional coverage through another type of policy, or simply being aware of potential pitfalls so you can make an extra effort to avoid them.

As a quick review, your King Air policy is structured into multiple sections:

Insuring Agreements: Who IS covered, for what, where and when

Exclusions: Who is NOT covered, for what, where and when

Definitions: Explains intent or definition behind bold-faced words within the policy

Conditions: What you must and must not do in order to not jeopardize coverage

Endorsements: Changes to any of the above

It is important to remember that an occurrence is what triggers the policy. (You will notice in your policy, “occurrence” is written in bold-face, meaning your policy defines it. All bold-face terms in your policy can be found in the definitions section of the policy.)  The definition of occurrence, while specific to each carrier, generally states there must be “bodily injury” or “property damage” to be considered an occurrence, prompting your policy to respond. While the specifics of each policy vary, we will cover some generalities of what is excluded within a typical King Air policy. Please review your specific policy and familiarize yourself with the specific wording of your coverage.

Exclusions: Here you will find the words “This policy does not apply,” followed by a list of exclusions. Each exclusion will go into detailed subparagraphs, laid out in legal terms. The policy is a legal document, but the legal terminology frequently leaves the policy holder a little unsure about the actual exclusion. The King Air policy used for this article has eight specific exclusions. Here is a list of what they intend to exclude, or not cover:

If the King Air is being used for an unlawful purpose or a purpose not stated in the approved use section of the policy (typically found on the first few pages of your policy) there is no coverage. The simplest way for you to not violate this exclusion is to have the approved uses state, “all operations of the named insured.” Obviously, you can’t be violating the law by running drugs with the aircraft, but all legal uses of the aircraft would then be approved. Currently a hot button issue with the Federal Aviation Administration (FAA) are third-party dry leases versus putting the
King Air on an FAA Part 135 certificate. Be sure you have in writing with your broker and underwriter what you are using the aircraft for and that it is an approved use.

If your pilots do not meet the pilot warranty, or if the Airworthiness Certificate is not in full force and effect. The pilot warranty is an area where we frequently see coverage issues. The most inclusive wording available is “pilots as approved by the named insured.” This is as simple as it sounds; anyone you approve can fly the aircraft. If you have a complex pilot warranty, you are more likely to inadvertently breach your coverage. Equally important, make sure you pay close attention to the required recurrent training. Without the required training, your claim will be denied.

Losses because of radioactive or nuclear subjectivity. Designed around nuclear war, fortunately, this isn’t something we’ve had to contend with in recent memory.

Claims caused by war, including rebellion, revolution, martial law, attempts at usurpation of power. Strikes, riots, civil commotions or labor disturbances are also excluded. Government confiscation or seizure is also not covered. “War” has many meanings in the aircraft policy. For example, flying your King Air to Central America could create a large exposure. If the local general decided to seize the aircraft because he thinks it could be useful for him, you would not have coverage, unless you buy back this exclusion. Many finance companies recognize this and require their borrowers to buy the war hull coverage which removes many of the perils listed in this exclusion. Throughout 2020 we have seen “strikes, riots and civil commotions” in the headlines. Purchasing war hull coverage would provide you the necessary coverage should a riot spill over to your airport or damage your King Air.

To any liability that is assumed by the policy holder in a contract or agreement unless there would have been coverage otherwise stated in the policy. Furthermore, there is no coverage for claims happening as a consequence of; noise, pollution, electrical interference, UNLESS it results from a crash or collision. Assumed liability or “contractual liability” was fairly easy to overcome during the soft market. Nearly any contract you entered was accepted by the insurance carrier. The hard market is changing that. To be proactive, put all signed contracts on file with your insurance company for approval. That means you should put dry leases on file with your insurance carrier for approval, as well as your local FSDO.
Hangar leases are also becoming a point of contention. Your local FBO may ask you to sign a contract stating they aren’t responsible for damage they cause to your King Air. They may even require an official certificate of insurance stating they are an “additional insured” under your policy and that your policy will “waive the rights to subrogate” against the FBO. This means your policy would pay for the FBO’s negligence. However, the FBO should have their own coverage, called specifically “hangarkeepers legal liability.” You may find that your insurance company charges you more money in 2021 should you require them to pick up the negligence of the FBO. Do not sign the lease agreement without disclosing it to your insurance company. If you do, you will find yourself without the insurance you thought you had. Within this exclusion you will also find pollution may not be covered. For example, pollution would be covered if it is the result of an aircraft crash and fuel leaks out causing damage to the environment. However, it would not be covered should a deteriorated sump started leaking fuel on the hangar floor overnight and entered the local sewer system. This is a peril that needs to be covered by a separate pollution policy.

If workers’ compensation is applicable or bodily injury or death of the named insured. The workers’ compensation exclusion should be paid attention to if you have pilots flying your aircraft as W-2 employees. Make sure you are carrying workers’ compensation on them, as that is the first line of defense should the pilot hurt their back while loading bags or shutting the heavy airstair door.

Property damage to property owned, occupied, rented or used by the insured for any purpose exercising physical control. While this is a notable exclusion, it deals with a wide variety of exposures, such as “hangarkeepers.” If you have an aircraft in your control, in your hangar, and you were to damage it, you may not have coverage for your negligence.

Wear, tear, deterioration, freezing, any electrical malfunction or mechanical failure. Foreign object debris or damage (FOD) is excluded unless it is a result of an “ingestion.” Also, heat or hotstarts are excluded. This final exclusion comes up occasionally for hotstarts, freezing or mechanical breakdown. At least one carrier will allow you to buy back the hotstart exclusion.

A recent freezing exclusion claim happened when the pilot landed at a remote airport during liquid precipitation. While on the ground the temperature dropped below freezing, but the precipitation also quit. When the passengers arrived, the pilot walked around the aircraft, got in, and went to start the engines. He noticed the engine wasn’t operating normally during the start phase and aborted the flight. Upon investigation, it was discovered the fan blades had frozen in place, prohibiting the air flow for a normal or cool start. With this exclusion the situation would not be covered and cost you many thousands of dollars.

Aircraft insurance policies can be complicated to follow. The best preflight is a comprehensive review of your policy leading up to your renewal. Your broker should walk you through the policy, clarifying what is covered, not covered, or is a coverage that can be purchased either through the current policy, or on another type of policy such as workers’ compensation or a pollution policy.

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