The Importance of Contract Review

07/17/2019 Written by: Bill Kingsley

The premiums for aviation insurance are going up. Certain segments of the business are seeing rate increases of 25% or more this year. When faced with substantially higher premiums many companies consider other ways to manage their risk. One commonly used method to manage risk is to contractually transfer that risk to another party. For most companies this means having a contract that transfers their risk to their suppliers or even their customers. From a risk management prospective, having someone else agree to take your risk is like getting free insurance and they know a great many people will sign a contract without even reading the fine print, let alone, fully understanding the implications.
As an example, a well-known avionics manufacturer has an extended warranty program for their product. Within this agreement the first paragraph of the Extended Warranty Service Terms and Conditions states, that in exchange for the reduced pricing, aircraft owners must sign the attached Waiver Release and Indemnification. Sounds simple enough. As an aircraft owner, who wouldn’t want to save money on their maintenance costs? But it may not be as simple as just signing on the proverbial dotted line.
One of the provisions within the Waiver, Release and Indemnification states (paraphrasing), if the NTSB determines the pilot was the probable cause of an accident or incident, and this accident or incident occurred while you were the owner of the aircraft, then you agree to indemnify and hold the avionics company harmless if anyone sues them because of the accident or incident. In addition, you agree to pay all the avionics company’s costs associated with defending this suit, including their attorney’s fees. 
There are no provisions within this Waiver, Release and Indemnification that limits what you might have to pay under the above terms. In addition, there is nothing in the agreement that allows you to limit or try to control the company’s legal defense costs. By signing this Waiver, Release and Indemnification you have, in essence, given them a blank checkbook with you being the bank! It is not uncommon for legal fees to run in excess of $500,000 to take a suit like this to trial. If there is an appeal of the verdict it is not uncommon to see legal fees top $1,000,000.
You might think, “I purchased insurance for my aircraft, won’t that protect me?” Maybe not. While each aviation insurance company’s policy form is slightly different, all of them exclude liability arising out of, or assumed in, a contract or agreement. As an owner you may have been asked to sign many contracts and agreements related to your aircraft. Agreements such as hangar leases, maintenance agreements, pilot services agreements, perhaps even an aircraft management agreement. While none of these agreements may be as onerous as the avionics manufacturer’s extended warranty program mentioned above, nearly every contract or agreement contains some provision to shift risk(s) between the parties.
As an aircraft owner, what should you do when it comes to aircraft related contracts and agreements? The first thing we tell our clients is to send us a copy before you sign! Let us look it over. We have seen hundreds of aviation-related contracts and agreements. We can discuss how your aircraft policy will respond to the agreement. In addition, we are often able to suggest modifications to the contract or agreement which may reduce the risk the other party is trying to transfer your way. If nothing else, it will allow you to make an informed decision as to whether you want to accept the risk or not.  We also suggest having an attorney review the contract. 
Risk management is more than just buying insurance. As the price of insurance continues to rise, we have little doubt the use of contracts to transfer risks to an often-unsuspecting party will continue to increase.  Reach out to the AP Aerospace specialists to make sure you’re protected.

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