PUNC –Your Checklist for Insurance Coverage
‘PUNC’ (Pilots, Use, Named Insured and Contracts) is an acronym capturing the four most important areas of aviation insurance that result in the largest percentage of claims denials. This month, we move down the checklist to examine why it’s imperative to review all contracts related to your aircraft.
The Importance of a Contract Review
Many of us routinely sign rental car agreements, bank loan documents, and internet site use clauses without even a cursory review. Why? Because we know we won’t get the car, or the loan, or access to the internet site if we don’t. That may be true but don’t make that same mistake when addressing contracts relating to your aircraft. The financial consequences are exponentially higher.
These contracts can, and should be, negotiated. By definition, a contract is a binding agreement between two or more persons or parties; especially: one legally enforceable. This means the importance of providing your insurance broker and attorney a copy of any aviation contracts prior to execution is not an option, it’s a requirement for any well-run flight department.
Common agreements an aircraft owner might encounter:
- Purchase agreements
- Hangar leases
- Bank financing documents
- Aircraft leases [dry lease, time share]
- Replacement engine or parts leases
- Maintenance agreements
Almost without exception, all of these contracts contain clauses requiring you to meet certain insurance conditions. Ignore these and you may find yourself in a breach of contract lawsuit. In addition, most of these agreements also contain an indemnity clause, which regardless of any insurance coverage you have in place, makes you responsible for any and all losses, covered or not.
For example, here’s the insurance clause in a typical time share agreement.
“At all times during the term of this Lease, Lessor shall cause to be carried and maintained, at Lessor's cost and expense, physical damage insurance with respect to the Aircraft in the amount set forth below:
Aircraft Physical Damage (No Deductible While In Motion or Not in Motion) The Greater of Current Market Value or the Minimum Amount Required by Lender.
At all times during the term of this Lease, Lessor shall also cause to be carried and maintained, at lessor's cost and expense, third party aircraft liability insurance, passenger legal liability insurance, property damage liability insurance and medical expense insurance in the amounts set forth below:
Combined Liability Coverage for Bodily Injury and Property Damage Including:
Passengers Each Occurrence -- No Less than $50,000,000.00
Medical Expense Coverage Each Person-- $5,000.00
Any policies of insurance carried in accordance with this Lease: (i) shall name lessee as an additional insured; and (ii) shall contain a waiver by the underwriter thereof of any right of subrogation against Lessee. Each liability policy shall be primary without right of contribution from any other insurance which is carried by Lessee or Lessor and shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured”
To illustrate the potential impact of not complying with the insurance requirements, here’s an example of a loss. Assume an aircraft owner has agreed to a time share arrangement with a local company but fail to forward a copy of the TSA to the insurance broker to have the policy endorsed to comply with the requirements of the agreement. An ensuing accident destroys the aircraft and causes critical injuries to some of the passengers.
Lawsuits are filed against the owner of the aircraft, and the lessee. Upon receiving the suit papers the lessee contacts you with a request to forward the lawsuit to your insurance carrier for defense under the additional insured provision. In addition, their pilot was flying the aircraft and they also wanted to make sure the waiver of subrogation clause was activated. Last, they wanted to remind the owner their policy is primary without any right of contribution from any insurance they have in place.
If the aircraft owner didn’t comply with the contractual requirements, they could be sued for breach of contract. If the agreement also contained an indemnification clause (which is common) they could be exposed to even greater liability. In short, this could be a very messy claim to settle causing the aircraft owner a great deal of pain, both financially and emotionally.
The Indemnity Clause
The indemnity clause also merits a close look as it can really work against an owner in its most onerous form. Careful review of this clause, along with the entire contract or agreement in question, with a good aviation attorney is worth every penny. They can guide the owner through the process and suggest wording based on fair benchmark language common to the industry. The money saved not taking this step is obviously never worth it after a loss.
In closing, when evaluating any contract related to your aircraft, contact your AssuredPartners Aerospace broker and your attorney during the contract review process (if not earlier). The details matter, and contract review is an integral part of a well-run flight department’s risk management strategy.