Aviation insurance

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History

Aviation Insurance was first introduced in the early years of the 20th Century. The first aviation insurance policy was written by Lloyd's of London in 1911. The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies.^[1]
It is believed that the first aviation polices were underwritten by the marine insurance Underwriting community.
In 1929 the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today.
By 1933 realising that there should be a specialist industry sector the International Union of Marine Insurance [1] (IUMI) set up an aviation committee, and by 1934 eight European aviation insurance companies and pools were formally established and the International Union of Aviation Insurers [2] (IUAI) was born.
The London insurance market is still the largest single centre for aviation insurance. The market is made up of the traditional Lloyds of London syndicates and numerous other traditional insurance markets. Throughout the rest of the world there are national markets established in various countries, this is dependent on the aviation activity within each country, the US has a large percentage of the world's general aviation fleet and has a large established market.
No single insurer has the resources to retain a risk the size of a major airline, or even a substantial proportion of such a risk. The Catastrophic nature of aviation insurance can be measured in the number of losses that have cost insurers hundreds of millions of dollars (Aviation accidents and incidents).
Most airlines arrange "fleet policies" to cover all aircraft they own or operate.

The Risks

Hull "All Risks"

The hull "All Risks" policy will usually refer to something like "all risks of physical loss or damage to the aircraft from any cause except as hereinafter excluded".
Airline hull "All Risks" policies are subject to a standard level of deductible (that is an uninsured amount borne by the Insured) applicable in the event of partial (non-total) loss. Currently, this deductible can range from $50,000 in respect of a Twin Otter to $1,000,000 in respect of a wide-bodied jet aircraft, such as a Boeing 747.
Deductibles too can be reduced by means of a separate "Deductible Insurance" policy. The Deductible Insurance Policy is effected to reduce the large "All Risks" policy deductibles to a more manageable level. For example the US$1,000,000 applicable to a Boeing 747 can be reduced to say US$100,000.
The term "all risks" can be misleading. "All risks of physical loss or damage" does not include loss of use, delay, or consequential loss. "Grounding" is a good example of consequential loss. Some years ago when there had been a couple of accidents involving DC10 Aircraft, the Civil Aviation Authorities throughout the world imposed a "grounding order" on that type of aircraft.
That order in effect said until certain things had been established and checked out those aircraft could not fly. The operators of those aircraft were unable to fly them and as a consequence of that they "lost" the use of them. But the aircraft were not "lost" - it was known precisely where they were but they could not be used to carry passengers. Such an eventuality would not be covered by an "all risks" policy because in such circumstances there is no PHYSICAL loss or damage.
What the policy will cover is the reinstatement of the aircraft to its "pre-loss" condition, if repairable damage is involved, or some other form of settlement in the event that more substantial damage is sustained. Exactly what form of settlement will depend on the policy conditions.
Today, the vast majority of airline hull "all risks" policies are arranged on an "Agreed Value Basis". This provides that the Insurers agree with the Insured, for the policy period, the value of the aircraft and as such, in the event of total loss, this Agreed Value is payable in full. Under an Agreed Value policy the replacement option is deleted.

Exclusions

1. Wear, tear and gradual deterioration - in common with most non-marine policies these perils are thought to be a trading expense and not a peril to be insured.
2. Ingestion damage - caused by stones, grit, dust, sand, ice, etc., which result in progressive engine deterioration is also regarded as "wear and tear and gradual deterioration", and as such is excluded. Ingestion damage caused by a single recorded incident (such as ingestion of a flock of birds) where the engine or engines concerned have to shut down is not regarded as wear and tear and is covered subject to the applicable policy deductible.
3. Mechanical Breakdown - likewise is thought by aviation insurers to be an operating expense, but subsequent damage outside the unit concerned is usually covered. However, it is possible to obtain insurance coverage against mechanical breakdown of engines by way of a separate policy. This coverage has a high degree of exposure and as a result is relatively expensive. The majority of airlines do not purchase it probably viewing such exposure as a part of the "engineering" budget.

Spares

First of all we must identify what we mean by a "spare" or perhaps - "when is a spare not a spare" to which a simple answer is "when it is attached". Under most "Hull" policies the word "Aircraft" means Hulls, machinery, instruments and the entire equipment of the aircraft (including parts removed but not replaced). Once a part is replaced it is no longer, from an insurance viewpoint, part of the aircraft. Conversely once a spare part is attached to an aircraft as a part of that aircraft (not in the hold as cargo or on the wing as an extra pod) it is no longer a "spare".
If the equipment is insured on the hull "All Risks" policy the automatic transfer of coverage from "aircraft" to "spare" and vice versa is automatically accomplished.
Having established when a spare is a spare how is it insured as such? Usually in one of two ways. Either under a "spares" section of a hull policy or by a separate Spares Policy. In either case the scope of coverage will probably be similar. All Risks whilst on the Ground and in Transit for a limit of [so much] any one item or sending or any one location. War Risks can also be covered (in respect of transits), Strikes, Riots, Civil Commotions can be covered in accordance with standard market clauses. Spares coverage is usually subject to a small deductible except, however, in respect of ground running of spare engines when the appropriate Ingestion deductible will be applied. Spares are normally covered on an agreed value basis - usually their replacement cost (be it new or reconditioned - as is required).
Spares installed on any aircraft are not covered by the Spares Insurance. They become, from an insurance standpoint, a part of the aircraft upon which they are installed and a part of the Agreed Value for which it is insured. This becomes particularly important if the parts are loaned to another airline.

Hull War Risks

The hull "All Risks" policy will contain the exclusion of "War and Allied Perils". Generally speaking, throughout the aviation insurance world, "War and Allied Perils" have a defined meaning. In the London Aviation Insurance Market the standard exclusion is called the War, Hi-jacking and Other Perils Exclusion Clause (currently known by its reference - AVN48B for short) this lists and defines these so-called war and allied perils.

1. War Definition
   1. War - this includes civil war and war where there is no formal declaration.
   2. The detonation of a weapon of war employing nuclear fission or fusion.
   3. Strikes, riots, civil commotions and labour disturbances.
   4. Political or terrorist acts.
   5. Malicious or sabotage acts.
   6. Confiscation, nationalization, requisition and the like by any government.
   7. Hi-jacking or any unlawful seizure or exercise of control of the aircraft or crew in flight.

The exclusion also applies to any loss or damage occurring whilst the aircraft is outside the control of the operator by reason of any of these "war" perils.
The majority of the excluded "War and Allied Perils", other than the detonation of a nuclear weapon and a war between the Great Powers (the aviation insurance world identifies these as the U.S.A., the Russian Federation, China, France and the UK), can normally be covered by way of a separate "War and Allied Perils" policy. Aircraft deductibles are not normally applied in respect of losses arising out of "War and Allied Perils".
Other exclusions insurers will usually apply are, as follows:-

1. Confiscation etc. by the "state" of registration (this exclusion can often be deleted in respect of financial interests - albeit, in some instances at an additional premium charge)
2. Any debt, failure to provide bond or security or any other financial cause under court order or otherwise;
3. The repossession or attempted repossession of the Aircraft either by any title holder or arising out of any contractual agreement to which any Insured protected under the policy may be party;
4. Delay and loss of use. (Although there is often an extension to the policy for a limited amount for extra expenses necessarily incurred following confiscation or hijacking).

The aircraft hull "War and Allied Perils" policy will cover the aircraft on an "Agreed Value" basis against physical loss or damage to the aircraft occasioned by any of these perils. This statement is made carefully and deliberately in order to highlight the essential difference from a "Political Risks" Insurance.

Liability Insurance

Liability can be divided basically into two categories:

1. Liability in respect of Passengers, Baggage, Cargo and Mail carried on the aircraft. These liabilities result from the operations the airline is set up to perform and are normally the subject of a contract of carriage like a ticket or airway bill, which provides some possibility of limiting the airline's liability.
2. Aircraft Third Party Liability - the liability for damage done to property or people outside the aircraft itself.

Every airline will arrange liability insurance for these two categories, normally in a single liability policy. In many countries there are requirements laid down imposing minimum limits of liability that are a prerequisite to obtaining an operator's licence. Elsewhere limits are specified for an aircraft to be allowed to land. The size of limit required is often related to the size of the aircraft concerned (and its potential for causing damage). A small aircraft operating only in remote regions and using small airstrips incurs considerably less potential exposure than an aircraft flying into and out of major airports.

General Liabilities

The other category of liability covers premises, hangarkeepers and products liability and is called "Airline General Third Party" - being the liability for damage done to property or people arising from other than the use of aircraft. Many airlines cover their "Airline General Third Party Liability" within their main liability program.
It is called "Airline General Third Party Liability" these days since the insurers took steps specifically to exclude all non aviation activities (for example hotel ownership or management) from "Aviation" Policies a few years ago. Basically for a risk to be considered as "Airline General Third Party Liability" it must arise from what are described as "aviation occurrences" being those involving aircraft or parts relating thereto, or arising at airport locations or arising at other locations in connection with the airline's business or transporting passengers/cargo or arising out of the sale of goods or services to others involved in the air transport industry.
This means that there is a definitive language detailing what is considered as "aviation exposure" such that any other (non-aviation) exposure is excluded.
Most policies are placed on a Combined Single Limit Basis. This means Bodily Injury and Property Damage combined. In the past, personal injury was included but now this has been separated. It should be mentioned, however, that these days the term "bodily injury", in addition to bodily injury, sickness and death resulting at any time, will include shock and mental anguish. "Personal Injury" on the other hand is defined as "offences against the person", such as false arrest, malicious prosecution, invasion, libel or slander and the like.
In respect of Personal Injury the full policy limit, whatever that may be, is not available and is usually limited to US$25,000,000 any one offence and in the annual aggregate.
What is excluded from a liability insurance are such things as:-

1. Damage to the Insured's own property. (It is after all a third party liability policy).
2. War and Allied Risks although these are "written back" by a device called "The Extended Coverage Endorsement - AVN 52".
3. Radioactive Contamination.
4. Noise and Pollution - unless caused by or resulting in a crash, fire, explosion or recorded "in flight" emergency

Both the Aircraft and General Liability policies usually includes the "war and allied perils" exposure by way of a "write back" and will probably provide for such things as search and rescue expenses, first aid and other humanitarian expenses and also defence costs.

Hull Total Loss Only Cover

This is similar to Hull All Risks cover given above but will respond only to total losses of aircraft, whether actual, constructive or arranged. This is particularly given for old aircraft since the old aircraft are heavily depreciated and insured for low sums and premium on such low sums would result in low premium, which would be inadequate for the partial losses. The ratio of partial losses to total losses in such old aircraft is distorted.

Individual or Personal Non-owned coverage otherwise known as renters insurance

For individuals who fly rented aircraft whether it is piston or turbine they should obtain a non-owned policy to provide personal protection.
If you rent piston aircraft from a flying club or FBO at your local field their insurance coverage is designed to protect the FBO and not the renter.
Depending on the flying club or FBO they may have purchased a limited amount of student/renter liability coverage but that won't protect you from having to reimburse the flying club or FBO for damage to the aircraft or loss of use for that aircraft.

CFI's have their own exposure when they are teaching in their students aircraft or if they are an independant contractor with a local flight school. They can purchase non-owned coverage for their exposure to non-owned aircraft.
If you are like most CFI's having trouble trying to justify the purchase of a non-owned policy the insurance companies are offering a 10% renewal discount on all non-owned policies that have not had any claims in the previous year. This brings down the cost of coverage for CFI's that have proven to be good instructors.

Click the following link for the personal & CFI nonowed application and rates in PDF format. This form is only for single engine piston aircraft if you need multi-engine non-owned please call us. The coverage is available but not on a standardized rate base.

References

1. ^ Wells, A. T. and Chadbourne, B. D. Introduction to Aviation Insurance and Risk Management (3rd). pp4. (2007).