Aviation Insurance: Some Good News and Blunt Talk

Mother Nature hasn't been particularly kind to general aviation airplanes this year. Not every aircraft owner was able to get away from the winds and flooding of Hurricane Matthew and a lively tornado season did its share of recycling aircraft aluminum into beer cans.

The word on the street is that, in most cases, the aircraft owners who were insured had good experiences in dealing with their insurance companies when it came time for the insurers to step up and pay. All of the affected owners I spoke with said that the claims people they dealt with were pleasant to work with, did a lot to help them with the process of repairs and didn't try to nickel and dime them on the cost of repairs or what was to be paid if the airplane was a total loss.

That was good to hear—and it's in keeping with the current "soft" insurance market. Aircraft insurance rates are the lowest they've been in more than 50 years (corrected for inflation). There are so many companies writing aviation insurance and the competition between them is so strong that none can afford getting a reputation for being a jerk when it comes to paying claims.

While insurance is currently one of the few inexpensive things in general aviation right now (in May, our sister publication Aviation Consumer reported rates were down between 20 and 40 percent from 10 years ago), there are still some ways aircraft owners can shoot themselves in the foot when it comes to buying insurance for their steeds. It's important to understand the types of coverage available and especially, the risks of buying a policy that has what are known as sublimits.

First of all, there is no magic bullet for an owner/pilot to avoid potential liability if he fouls up and crashes, hurting or killing someone. Incorporating yourself or your airplane does not provide protection if you are the one flying when the mistake is made. Therefore, you face a risk in owning and operating an airplane. When facing a risk, either avoid the activity altogether or take actions to reduce the risk by taking recurrent training to diminish your chances of having an accident while you buy insurance for the risk you do face.

Most aviation insurance is sold through brokers. You, the owner, call up an aviation insurance broker. That person becomes your representative. He or she owes a fiduciary responsibility—a duty and obligation—to you, not to the insurance companies. Your broker will go into the insurance market and contact an underwriter at each insurance company (an underwriter is one of the people at the insurance company who evaluates the potential risk posed by the pilot/owner and decides if the company will quote insurance for that person/airplane—and, if so, at what price). If you and the broker have done your homework, the broker will know a lot about you. By the time your broker calls the first underwriter, your broker should know:

Your flying experience, including flying time flying under various conditions and types of airplanes you have flown. It is utterly essential that you do not not not not pad, or exaggerate your flying time; in many states, overstating your flying time on an insurance application means that the insurance company can refuse to pay if you have an accident. The reasoning of the courts that have made rulings in such cases is that the company was tricked into insuring a risk that was actually worse than they had agreed to insure.

Flying time in the type of airplane being insured.

Whether you take regular recurrent training (that's a big one) and how you go about it. The FAA Wings Program may help you here.

If you've ever had an accident (just one isn't bad, more than one accident will hurt you with insurers).

The ratings you have.

Anything else that the broker thinks will help influence an underwriter to give you the lowest possible premium price, so ask.

You want to sell yourself to your broker so he will be able to go out and pitch you as a very good risk to the insurance companies.

The broker will then contact you with the quotes he's obtained. They may be fairly close in price, or they may have a pretty big spread. The various insurance companies use different standards to set their premiums (there are those who assert that black magic is involved) and some specialize in certain types of risks that some others don't particularly want to insure. You may find that some companies will not quote you. You may have an airplane that is currently unpopular with underwriters. Like fads, the hot and cold airplanes come and go. The Bonanza had its period when it was tough to insure due to the in-flight breakup rate of the V-tail versions; Grumman-Americans were targeted for a while; and tailwheel airplanes can be tough to insure because of their high accident rate.

Once a broker has gone into the market for you, the market will not give any quotes for you to another broker. Aviation insurance is a small world; you will not get any benefit by attempting to play one broker off another for rates, and you risk aggravating the underwriters to the point they simply refuse to insure you at all. The broker is your agent, so if you want to go to another broker, you will probably have to notify the original one, in writing, that you are changing brokers, before the insurance underwriters will give a quote for you to a second broker. Chances are that it will be absolutely the same as the underwriter gave your original broker.

As an aside, it's usually a good idea to stick with a broker you like over the years, especially if you are getting to an age where it may be difficult to get coverage. A broker who has had you as a long-time customer may be able to convince an underwriter to provide coverage—at its base, aviation insurance is a person-to-person business and good relationships are important.

The other method of selling insurance is by becoming a "direct writer," such as Avemco, and selling straight to the public without going through brokers. You, the owner/pilot, contact the company on the phone or via the internet; give it the numbers on your experience and it spits out a quote for coverage. It's pretty cut-and-dried, using established tables for flying time and type of airplane. The person you speak to on the phone is an agent of the insurance company and owes no duty of loyalty to you. That person's loyalty and duty are with the insurance company. It is a legal technicality to keep in mind.

There are two types of insurance that you (the aircraft owner) are going to need to consider for your airplane: hull and liability. They are generally sold as a package; and although most people buy both, it's not required unless you have a loan on the airplane—your lender will insist that you have both types of insurance.

Hull insurance is coverage for repair of the airplane itself, should it be damaged in an accident, gets pelted with hail while tied down or a 747 falls on it. The term "hull" comes from admiralty (marine) insurance. Admiralty insurance developed into a distinct and very well defined field over the centuries. When airplanes were invented and insurance was desired, rather than try to create a new world of insurance from scratch, the insurers went with something that was roughly analogous: Airplanes operate in a sea of air, boats in a sea of water. As you get into aviation insurance you'll keep stumbling across nautical terms.

Hull insurance premiums are usually some fraction of the value of the aircraft. You agree on a value of your airplane with your insurance company. That becomes the "stated value" and that is the sum that is paid (sometimes minus deductible) if the airplane is totally destroyed. Make sure the stated value is very near the actual value. Hull insurance is relatively inexpensive, so you don't save much by declaring a lower value, and you could really get yourself into a jam by doing so. I worked on a matter where a Cessna 206 was insured at a stated value that was almost exactly 50% of what it was worth. Yes, it was because the owner was cheap. The airplane was damaged during a tornado. The cost to repair was almost exactly the stated value under the policy. The owner was faced with a quandary because of his parsimony. He could pay for the repairs himself, without making a claim, and keep the airplane or he could make a claim to his insurance. If he made a claim to his insurer, the policy language said that because the cost to repair the airplane was more than 90 percent of the stated value, the airplane was considered a total loss. Therefore, he would be paid the stated value and the airplane would then belong to the insurance company. The owner thought it over, made the insurance claim, got paid the stated value he had set and the insurance company got the airplane. The insurance company had the airplane rebuilt and sold it, thus recovering the total cost it had paid the owner and paid to rebuild the airplane.

The moral is to insure for what it's worth.

Liability coverage protects you if you hurt someone or something when you are operating your airplane. It pays for the injuries to that lineboy you clobbered with the wing tip as you whipped into the tiedown area; or for your passenger's massive hospital bills after you lose it in a crosswind and put your airplane into the airport restaurant. It also pays for reconstruction of the restaurant and for the lawsuits filed against you by the folks in the restaurant who had hot soup splash in their faces as you made your grand entrance through the picture window.

The nasty thing about liability coverage is something called "sublimits." They can bite you badly and, in my opinion, you should do a lot of soul searching and evaluation of your personal assets before you buy a policy that has sublimits. Sublimits mean that there is some limitation in the amount of money available to be paid out in the event you are sued.

Look at it this way: Most aircraft owners buy a $1 million liability policy, so they figure if they have an accident for which they are partially or wholly at fault, and someone is hurt or killed, they've got a million bucks available to pay the damages for the person or persons who were hurt. If you have a sublimits policy, there isn't a million-dollar pool of money to settle the claims of each person who gets hurt. There's only the dollar amount set out in the sublimit—usually $100,000.

A policy with a $1 million pool of money available to pay any and all liability claims, is called a "smooth" policy. That million bucks is available no matter how many or how few people are injured and make a claim against you.

The problem is that brokers and direct writers may not push smooth limits, because the policies are more expensive and insurers make more money on sublimit policies.

I'll repeat it because a sublimit policy can be hazardous to your wealth. A sublimits policy means that while you have an overall pool of money in the policy, only a percentage of it—usually 10 percent—is available for the injuries suffered by any one person. So, if you have one passenger who has a few broken bones and hospitalization for a few weeks, and he or she sues you, you haven't got $1 million to pay off those damages. You only have $100,000. In my experience, that is not enough to protect you if there is a serious injury or death. You'd have to hurt 10 people before your insurer has a risk of paying out the million dollars of your policy. I've found that a significant number of pilots who think they have a million dollar policy are very surprised when they find out that it has $100,000 sublimits.

What is the reality? If you seriously injure or kill someone and you have a $100,000 sublimit policy, and there is no other defendant around to tap for money, your personal assets or your estate (if you're dead) are at risk. If you have the money to own an airplane, the odds are good that you have assets that can be reached.

Some years ago I worked a case involving a pilot who had a million dollar policy with $100,000 sublimits. It appeared he was doing something that might be considered less than safe while carrying one passenger. He crashed and was killed instantly. The passenger survived for a period of time, in hideous pain, before dying. The passenger's estate sued the pilot's estate. The pilot's insurance company put up the $100,000 sublimit; however, it was nowhere near enough to pay what was being demanded by the estate of the deceased passenger. Yes, the estate of the pilot got hit. The widow and children suffered financially. Now, one of the widow's memories of her husband is that he was too cheap to buy adequate insurance and it hurt her and the kids.

Yes, the $100,000 sublimit policy (as well as the smooth policy) does pay for your attorney fees if you are sued. The costs of your defense do not come out of the $100,000 (or $1 million) pool of money that is available to pay a person making a claim against you. If you have few assets beyond your airplane, a $100,000 sublimit policy is likely to be enough; the injured person will probably take it and go away. However, by the time you get up to ownership of a Cessna 182 or Cirrus SR20, the chances are pretty good that you have assets beyond that airplane; otherwise you could not have afforded it in the first place. So, to protect yourself, take a hard look at buying a "smooth" policy, with $1 million completely available. The chances are that if you screw up and hurt someone, it won't be a lot of people and each one will have damages of more than $100,000. You've spent a lot on your airplane—don't go cheap in protecting yourself and your family, especially now that insurance is inexpensive.

Sadly, in my experience, a majority of pilots who buy insurance don't know what a sublimits policy is or what the ramifications are; only that they are cheaper to buy than a smooth policy.

Do not let a broker or direct writer give you a sublimit policy when you want smooth coverage (some companies will not write smooth coverage). I have twice had to fight with an employee of a broker who ignored my statement that I wanted smooth coverage and got quotes for $100,000 sublimits. In one case the person tried to get me to buy the sublimit policy because it was so much cheaper, thinking, perhaps that she was doing me a favor, without discussing the coverage with me or the nature of my insurance needs.

In my experience, $1 to 2 million is adequate to settle the vast majority of potential events you as an aircraft owner might face. It's also not so much insurance that you make yourself an attractive "target" in the event of an accident.

If you regularly carry one or two or three passengers, a $1 or 2 million smooth policy will probably protect you for the huge majority of potential liability risks you face. However, talk to your broker or your attorney before you decide. You may want to carry $5 million in liability insurance. If you are well-off (however you define the term) you may want more coverage if you can get it. The question of how much insurance is right for you is personal and should be discussed with a professional in the field.

In looking at aviation blogs and forums, I still see some insurance myths that I thought were dead and buried. I'll go over them quickly:

Reality: That has been untrue for many years. It's almost impossible to crash without violating an FAR. Those clauses proved unenforceable and are gone from most every policy I've seen in the last 20 years. (However, don't risk flying your airplane if it is out of annual; in that case it is very possible that the company may be able to avoid paying if you bend it.) Be sure and read your policy. Yeah, reading the policy is boring, but it won't take you long.

Reality: Sorry, you are not covered by the "open pilot warranty" (sometimes you hear it referred to as the "experience requirement"). The open pilot warranty sets out minimum experience for you and other users of your friend's airplane for her to be covered when you fly it. If she lets you fly her airplane and you have the requisite minimum experience set out in the open pilot warranty of her policy and, if you crash, her insurance will cover her. It will fix the airplane and defend her if she (not you) is sued. It may also turn around and sue you for what it paid out (that's called "subrogation"). To make sure you are covered on her policy, have her call her broker and add you as a "named" or "additional" insured on the policy.

Reality: Almost never. The FBO is covered, but usually you are not. If you crash, you are going to be liable for the costs of repairs, usually more than just the deductible (so don't get suckered into buying "deductible" insurance -- it's expensive for the little coverage it provides). Buy renters insurance to cover yourself for the value of the airplanes you normally rent. (Sadly, it's almost impossible to get "smooth" renters insurance; all of it that I've seen comes with $100,000 sublimits.)

To recap: Insurance is a contract and only covers what is specifically set forth in the contract. Not all aviation insurance is alike—it's not like auto insurance that is set by state law and pretty much identical no matter what company writes the insurance policy. Make sure you know what is covered and not covered in your policy.

To help keep your rates down, take regular recurrent training or stay current in the FAA Wings program.

Insure the hull of your airplane for its market value and be sure to review that amount each year when you renew your policy, because your airplane may be appreciating. It may also bump in value if you do an avionics upgrade or redo the interior or paint it. (If that happens in the middle of the insurance year, call your broker and nudge up the stated value.)

Buy a smooth policy if you have assets; don't put them at risk.

Finally, always read your policy, to make certain you got what you intended to buy.

Rick Durden is an aviation attorney, is a CFII and holds an ATP with type ratings in the Douglas DC-3 and Cessna Citation. He is the author of The Thinking Pilot's Flight Manual or, How to Survive Flying Little Airplanes and Have a Ball Doing It, Vols 1 & 2.