Last August, I had lunch at a restaurant overlooking Centennial Airport (KAPA) with the chief underwriting officer of a major aviation insurance carrier. The view was mesmerizing. The blue sky and Rocky Mountains in the background, a variety of aircraft below us – some just landing, some preparing for takeoff and others parked in perfect rows. Over lunch we discussed the challenges the aviation insurance industry is facing with the rising cost of claims and the premium squeeze owners are feeling. The underwriter began telling me about their portfolio of active claims. He said the most stressful claim they have is the one when a “reservation of rights letter” must be issued, and then, ultimately, followed with a claim denial letter.
A reservation of rights letter is a document that an insurance company provides to an insured client indicating that a claim may not be covered under the policy. The letter is not denying the claim; it simply states that the insurance company is looking at all the facts and policy language and reserves the right to deny the claim if they feel it is not covered under the policy.
As we looked out the window, we watched aircraft crews, and what appeared to be individual owner/pilots preparing for flight or deplaning. He commented, “You’d be surprised how many of those pilots do not meet their pilot warranty.”
This statement shocked me. It was startling to hear that he believes there are that many pilots operating aircraft in violation of a policy condition. However, as I considered his comment, I also know that over the last 20 years of my aviation insurance carrier, the most frequent reason I have seen for claim denial is the pilot warranty or the aircraft being out of inspection, i.e., not airworthy. Perhaps he is correct, I just hadn’t thought of it in such blatant terms.
Aircraft insurance is complex and laced with details. “Hangar talk” attempts to simplify what it is, but ultimately the aircraft insurance policy is a legal contract that states what you have coverage for, and what you must do and must not do so the coverage is there when you need it. There are specific “rules” within the policy that must be adhered to, and each section has its own importance in outlining your coverage. While policyholders typically review the “Exclusions” section, the “Conditions” or “General Provisions” is often overlooked, while the “Endorsements” can also take away, extend or amend coverages and conditions.
Along with nearly every aspect of the policy, the “Pilot Warranty” or “Open Pilot Warranty” is often amended in your “Endorsements.” Sometimes a pilot meets the license and flight time requirements, but have let the insurance required training lapse, or their medical inadvertently expire. Both are cause for the insurance company to deny a claim, even if the accident occurred because of mechanical issue, not because of pilot error. The incompliance is the loophole for coverage. You should never assume that because you meet the FAA’s requirements to fly that you also meet the requirements of the insurance policy on that specific aircraft.
In addition to the pilot warranty, there are many others you should pay particularly close attention to. They are typically scattered throughout the policy and endorsements. The aircraft policy is broken down into sections:
- Declarations
- Liability Coverages & Exclusions
- Medical Coverages & Exclusions
- Physical Damage Coverage & Exclusions
- Conditions, Exclusions & Endorsements
The “Declarations” page at the beginning of your policy lays out a basic overview of coverage. Who the policy is intended to cover, “Named Insured.” The address, policy effective date, maybe the pilot warranty, policy territory, purpose of use, the annual premium, schedule of attached endorsement forms and limits of liability. Each of these items are important, as they may directly impact coverage that is described throughout the policy. For example, the purpose of use may be stated as “Pleasure and Business.” If you are leasing or renting the aircraft out to a third-party, you don’t have coverage unless an endorsement has been added stating otherwise.
The next section is the “Liability Coverages.” Here you can review the list of many ancillary coverages. This is a good overview of specific limits associated with each ancillary coverage; however, you will need to read further into the policy to see what conditions must be met so you do not inadvertently breach the policy. You may have a coverage known as “Host Liquor Liability.” This can be useful if you allow passengers to enjoy alcohol onboard the aircraft, or if you are having a hangar party where alcohol is served. However, if your business is alcohol based, such as beer distribution, you may not have Host Liquor Liability coverage. Some, but not all, policies have an exclusion for host liquor for those in the business of manufacturing, distributing or selling alcohol. It is important to know your policy specifics, so you stay in compliance with the policy terms.
Another area within the “Liability” section that is frequently overlooked is “Contractual Liability.” Many King Air owners sign hangar leases, FBO contracts, pilot service agreements or third-party dry leases. If your policy includes Contractual Liability coverage, you need to read through and understand the conditions of that coverage. Many policies require you to notify your insurance carrier, in writing, within a specific time period of a signed contract. It is good practice to send the contracts to your broker and have them reviewed by the insurance carrier before signing. One of the conditions in Contractual Liability states you cannot assume liability that the carrier would have otherwise not had without approval. You also cannot waive rights of recovery by the insurance company without written approval by the carrier. Two frequent places we see this overlooked is in FBO contracts and those letting friends and family dry lease the aircraft. We have seen numerous claims denied due to failure to report these signed contracts.
If you employ pilots to fly your aircraft, pay particular attention to the “Medical Coverages” section. Your policy may state you have medical coverage, “including crew,” but there are several conditions that must be met to have this coverage active. A major factor to be considered is worker’s compensation laws. If you hire a pilot and are obligated to have them covered under worker’s compensation, then the medical payments may not pay out under the aircraft policy. Also noteworthy, some policies state that all medical claims must be submitted within a specified time frame or they may be denied.
Conditions in the “Physical Damage” section can also be buried. For example, if fuel leaks out of the wings and goes down a sewer drain, do you have coverage? At first glance, you may think so. However, the claims adjuster will need to determine what caused the fuel leak. If the leak was caused by an old, dry rotted O-ring, the claim will be denied under the “wear and tear and mechanical breakdown” exclusion. If the leak was caused by a tug running into the wing, then yes, it is most likely covered. There are many conditions to review within the physical damage section to ensure you have the coverage you want.
Towards the end of the policy, you will find the “Exclusions” section. At first glance, aircraft hull and liability policies are very broad and inclusive. However, I frequently tell clients, “it’s covered … unless it isn’t,” and in the Exclusions portion of the policy you will find there are many things that aren’t covered. The policy I’m referencing for this article has 91 pages, eight which are the exclusions. Some are duplicates of what is already stated in the policy. For example the “Contractual Liability” exclusion of this policy reads as: “This policy does not apply: A) to liability assumed by the insured in any type of agreement except as provided by Coverage J Contractual Liability;” or “B) to any obligation which the insured or their insurance carrier may be held liable under any workers’ compensation, unemployment compensation, disability benefits law or under any similar law.” It is imperative you read through, and understand, your policy exclusions.
Like the Exclusions portion, the “Endorsement” section of the policy can undo the first 50 pages of coverages, depending upon the conditions of each item. The “Mexico Warning Endorsement” is an excellent example. In the Declarations section the coverage territory states “world-wide.” Most would assume that indicates your policy is effective anywhere you go. However, the “Mexico Endorsement” states that “Unless you have aircraft insurance written by a Mexican insurance company you may spend many hours or days in jail if you have an accident in Mexico.” While I would enjoy an all-inclusive at a resort in Mexico, I am not interested if that all-inclusive is a Mexican prison.
Many pilot warranties are also found in the Endorsement section, so be sure to check for amendments. You can also find exclusions that have been written back into the policy, like the “War Hull” or “Terrorism” exclusions. The Endorsement section can change the policy in many ways. Don’t be fooled by just reading the “guts” of the policy without combing through the endorsements or you may find yourself in a situation without the coverage you had assumed.
These are just a few of the numerous conditions in your insurance policy. While each section of the policy is important, it is imperative you understand the Pilot Warranty and Contractual Liability portions and how the Exclusions and Endorsements may alter them. A good broker will explain each item in your policy, so you can be well informed and understand your coverages and exclusions. Your knowledge of your insurance policy and exposures should be as high on the priority list as a safe flight.