By Craig Williams, NationAir Insurance Agencies
Fractional aircraft ownership is one of the most significant developments in the world of aviation over the last twenty years. Fractionals have been responsible for introducing a new group of individuals and companies to general aviation. Fractional ownership now represents the "bridge" between aircraft charter and aircraft ownership.
The advent of fractionals posed a unique challenge to the aviation insurance industry. Prior to the mid 1980's, aviation insurers offered coverage to two different groups: 1) individual or corporate aircraft owners or 2) corporations who did not own aircraft but utilized aircraft charter companies. Policies offered to aircraft owners generally were very specific in terms of identifying the aircraft insured, the pilots allowed to operate the aircraft, and the permissible uses of the aircraft. On the other hand, coverage provided to corporations who did not own aircraft (non-owned coverage) by necessity was quite broad in that there was usually no defined aircraft, pilots, or aircraft use. The broad nature of non-owned coverage recognized the fact that a corporation that chartered aircraft from a third party usually had no control over the aircraft or pilots utilized by the charter company.
From an insurance standpoint, a fractional aircraft organization combines elements of aircraft ownership and non-ownership. While the fractional member usually has an actual ownership interest in an aircraft, they rarely exercise any real control over the operation and maintenance of the aircraft, as would a typical aircraft owner. This article addresses how aviation insurers have responded to this situation, and also discusses insurance concerns important to anyone considering fractional aircraft ownership.
Aircraft Operators vs. Aircraft Owners - Common and Conflicting Interests
Organizations such as Executive Jet or Flight Options are generally defined by aviation insurers as "aircraft operators"; an acknowledgement that, as a practical matter, these organizations have control over the day to day operation of a fractionally owned aircraft. Fractional owners generally enter into written agreements with the aircraft operator whereby the operator is responsible for the hiring and training of crew members and scheduled aircraft maintenance and repair. Another area of responsibility usually ceded to the operator is the procurement of liability and aircraft (hull) insurance.
From a liability standpoint, operators and owners share a common interest in obtaining sufficient liability coverage to protect them from claims brought by third parties. This is due to vicarious liability laws in most states that make the aircraft owner legally responsible for the fault of anyone operating the aircraft with their permission. Therefore, if a claim were brought on behalf of a passenger who is neither an employee of the aircraft owner or operator, likely defendants would be the operator (as employer of the pilot) and the aircraft owner, based upon their vicariously liability for the fault of the pilot. In such a situation, the aircraft owner and operator would have a common interest to establish that the pilot was not at fault in a particular accident.
However, there are many real life scenarios that would place the interests of the aircraft owner and operator in direct conflict. For example, if a loss occurred due to improper maintenance, the aircraft owner would usually seek recovery from the party responsible for maintaining the aircraft, which in the case of a fractional situation, would be the aircraft operator. Moreover, if an employee of a fractional owner were killed, the employee's heirs would typically bring suit against the pilot (or the pilot's employer) which, in the case of the fractional, is again the aircraft operator. Since most fractional aircraft operators assume the responsibility to procure liability and hull insurance, the fractional owner is placed in somewhat of a difficult position as they attempt to protect their own interests versus those of the aircraft operator.
A more practical example of the conflicting interests of the owner and operator is the level of liability protection that is obtained from the insurer. While the fractional operator certainly has an interest to obtain adequate liability protection, they cannot be expected to be aware of whatever unique liability protection each fractional owner might require. Moreover, the fractional owner has an interest in keeping the costs of aircraft operation as low as possible. Since the price of liability insurance is primarily based upon the liability limit, a potential conflict might exist between the aircraft owner, whose business interests might require a high liability limit, and the fractional operator, who would not wish to incur the cost of high limits that are only needed for one or two fractional owners.
Another area of potential conflict relates to the potential that the aircraft operator could invalidate the terms of the insurance policy through their conduct or neglect. The failure of the operator's pilots to attend annual training, or to maintain an aircraft Standard Airworthiness Certificate, may negate coverage. While this scenario is unlikely when dealing with reputable operators, it is also unlikely that the owner of the aircraft would be aware of this situation before an uninsured loss occurred.
Resolving the conflict-Insurance/Risk management solutions
If the fractional operator and owner are aware of these potential conflicts, they can generally be avoided. The following suggestions will aid the parties to resolve potential conflicts:
- Full disclosure of Insurance Terms and Coverages
Being educated as to the specifics of the insurance program is the best starting point to resolving any conflicts down the road. Since the fractional operator is the party "in the business", it is reasonable to expect them to have the expertise to obtain proper insurance coverage through a qualified aviation broker and insurer. Aviation insurance is a very specialized field and at it is therefore unreasonable to expect aircraft owners to seek out this coverage, especially when most of the underwriting information is in the possession of the fractional operator.
However, it should also be expected that the aircraft operator should fully disclose these terms, including a copy of the policy, to the aircraft owner upon request.
- The policy should recognize the legitimate interests of the aircraft owner
The aircraft owner should be diligent in reviewing the policy, focusing on several areas. The insurer chosen by the operator should be financially stable. Aircraft owners can address this issue in the management agreement by requiring that the insurer providing coverage have at least an "A" rating from A.M. Best Co. Rating information can be obtained by checking various web sites of the insurance rating agencies.
The aircraft owner should confirm that the policy provides coverage for the aircraft owner. This is accomplished by making certain specific requests of the fractional operator.
First, the aircraft owner should be provided with notice of cancellation, (typically thirty days) and any material change in coverages. Second, since the aircraft owner has an ownership interest in the aircraft, they certainly want to make sure that their interest is recognized with respect any physical damage claim made under the terms of the policy. This can be accomplished by requiring that the policy specially provide that any physical damage (hull) claim be adjusted with the aircraft owner (s). This request will insure that any physical damage payment made by the insurer will be issued to the aircraft owner (s) (in addition to any financing institution). Third, in order to assure that the insurer will provide liability coverage to the aircraft owner, they should request that aircraft owner is named as an additional insured in the policy. This will extend the full liability protections under the policy to the owner-additional insured.
Finally, the policy should respond to a potential claim asserted by an aircraft owner against the operator of the aircraft. Since both parties are insureds (by virtue of the above request), it is necessary to remove a standard exclusion that prohibits coverage for a claim asserted by one insured versus another. This specific coverage is referred to as a "cross liability" endorsement, and can be added to the policy to provide coverage for such claims.
- All requests should be confirmed in a certificate of insurance
Upon request, aviation insurers will confirm all of the above requests in writing by issuance of a certificate of insurance. An insurer's certificate of insurance is a binding agreement between the insurer and the certificate holder to provide the coverages listed in the certificate. Without such a certificate, the only recourse the owner would have for any damages resulting from uninsured losses would be against the aircraft operator. Therefore, it is imperative to not only request that the above issues be addressed to protect the owner's interests, but that they receive a certificate of insurance evidencing that the requested changes have actually been processed.
The ultimate solution: fractional ownership insurance policy
Even if the fractional owner is diligent in making all of the above requests of the fractional owner, there are still several issues that can still potentially lead to an uninsured loss.
First, if a fractional owner determines that the limit of liability in the policy obtained by the operator is insufficient, they can request that the policy limit be increased. However, if the fractional owner refuses for economic reasons or is otherwise unable to obtain the requested level of liability coverage, there is now an option that can be obtained directly by the fractional owner.
Within the last twelve months, the aviation insurance industry has created a fractional ownership insurance policy to specifically protect the interests of the aircraft owner. These specialized products are designed to provide certain tailored coverages for the fractional owner.
The first type of coverage provided under these policies is excess liability coverage. As the name indicates, this coverage is excess over the underlying limit of liability in the primary policy purchased by the fractional operator. It offers the fractional owner the flexibility to purchase that level of coverage deemed to be necessary for the unique needs of that fractional owner.
The other major coverage offered under these policies is that of contingent liability. Contingent liability responds to the situation whereby the underlying coverage is negated due to some exclusion in the primary policy. For an additional premium, the fractional ownership policy can respond to this scenario via contingent liability and hull converage, which becomes the primary coverage in the event that no other coverage exists due to the effect of exclusionary language in the policy purchased by the fractional operator.
In addition to the coverages listed above, the fractional ownership policy also offers several optional coverages such as non ownership liability (designed to provide coverage for individuals or entities that use non owned aircraft in addition to fractionally owned aircraft), and diminution of value coverage (designed to offer limited coverage in the event the aircraft's value is decreased due to a loss).
The fractional ownership policy addresses many of the unique concerns of the fractional owner and it is anticipated that it will gain wide acceptance over the next several years.
Fractional ownership is an excellent method to provide lower cost private air travel. While fractional ownership poses unique insurance concerns, these issues can be largely addressed through careful review of the existing insurance program and fractional operator's insurance policies to address the unique needs of the fractional operator.
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(818) 989-6211 or (800) 951-6201