Aerlex Law Group

Minimizing Aircraft Ownership Liability

Minimizing Aircraft Ownership LIABILITY — Originally published in BusinessAir Magazine, September 2013, Volume 23, No. 9.

Aircraft owners and prospective buyers often seek advice on how to reduce the liability risks that are inherent in air¬craft ownership. Prospective buyers often consider setting up a sole purpose limited liability company to own and oper¬ate the aircraft in order to minimize exposure to potential liability. However, under the Federal Aviation Regulations, it is extremely difficult to have a sole purpose entity operat¬ing an aircraft if money is changing hands, even when the exchange is between related parties. Therefore, creating a sole purpose company generally is not recommended unless a more complicated ownership and operational structure is established. The sole purpose LLC may enter into a dry lease exchange agreement with the ultimate user whose primary reason for existence is something other than owning the air¬craft. But even with this type of ownership structure, there is still potential liability. If an incident occurs involving the aircraft, both the owner and operator will likely be named as defendants in any lawsuits which arise out of the incident. Therefore, regardless of ownership structure, aircraft insur¬ance is always important and strongly recommended.

Not all insurance providers and policies are the same. It is important for owners to identify a good aviation insurance broker who can help his clients understand the different types of coverage available and the exclusions that may limit that coverage. It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s finan¬cial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract. Some exclusions to be aware of include conversion, embezzlement, violation of usage clauses, and diminution of value.

As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership, maintenance or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, and any umbrella policy.

Aircraft liability limits are usually written on a single limit per occurrence basis for bodily injury and property damage liability. This means a fixed dollar amount is established for each occurrence and is applicable for all bodily injury and property damage claims arising out of one occurrence.

Please contact Amanda Applegate at 877-237-5398 or