Insurance insight: PEAS AND CARROTS
By Greg Reba, CPCU
I know of no more expeditious way to put someone to sleep than to drone on about the importance of having adequate insurance coverage and coverage limits with respect to an aircraft. To ensure slumber is induced, add contracts to your monologue.
Insurance and contracts. To quote Forrest Gump, �…they go together likes peas and carrots.� So why has the general aviation community seemingly been so averse to these concepts since the J-3 Cub was first introduced? Most pilots would rather experience the dentist�s drill than an insurance rep�s presentation about these subjects.
One of the fundamental purposes of a written contract is to provide clarity to an agreed-upon verbal understanding of one or more subject points within the context of a structured framework. Unfortunately, too many times such well-intentioned efforts between friends and colleagues devolve into a legal quagmire with hard feelings, lawyers, and court fees with severe financial implications.
I can clearly visualize numerous voices of protest being raised from amongst the readers of this article, each confidently stating, �I have a written contract.� My first response is one of sincere congratulations (really) as, based upon my interaction with general aviation the past 25 years, such respondents have instantly surpassed at least half of their fellow aircraft owners who permit their aircraft to be used by a third party.
However, the accolades are often short-lived. A review of such purported written contracts reveals that these documents usually span no more than a couple of loosely knit ambiguous paragraphs and are usually not signed by both parties. While brevity can be a noble ambition, a written understanding needs to incorporate two critical components: indemnification and its first cousin, insurance.
A properly constructed indemnity, whereby the aircraft user agrees to pay the owner for any and all damages, injuries, and all other costs and expenses arising from the use of the aircraft, is indispensable. When properly crafted, it will serve to place liability upon the user when damage or injury results from his acts or omissions.
The last phrase of the preceding sentence cannot be overstated, especially if the owner is imposing a fee for the aircraft�s use. While it is understood that the performance of a preflight inspection is a prerequisite for any flight, it is hard to perceive how any user would be able to discern an engine seizing at cruise altitude. While it may be comforting for the owner to transfer all responsibility and liability to the user for any and all damage or injury that may result while the aircraft is in the user�s care, custody, and control, the preceding example clearly demonstrates the use of such language can constitute nothing more than a �feel-good provision� and be laden with serious shortcomings if ever put to the ultimate legal challenge following an accident.
As a result, the owner�s liability coverage needs to be adequate and in an amount equal to prevailing market conditions commensurate with the type of aircraft involved. A conversation with your insurance rep will yield the information needed to make a well-informed decision as to the level of coverage that is right for you.
What many owners do not realize is that merely having a properly crafted indemnity in place with the user is not sufficient, for without a representation of insurance from each user, its available assets with which to defend and pay a claim may quickly be exhausted, leaving the owner to settle any balance.
In addition to specifying the type and amount of coverage to be carried by the user, the written understanding needs to specify the user�s coverage to be deemed as primary, consistent with the indemnification requirements, name the owner as an additional insured, and provide for a certificate of insurance to be issued to the owner evidencing the user�s procurement of coverage and payment of premiums.
The user should not be permitted to use the aircraft until the agreement has been signed, the aforementioned certificate furnished to the owner, and the certificate�s contents verified as being consistent with the agreement�s requirements. Also, the owner needs to remember that certificates of insurance expire on an annual basis. Vigilance is needed on the part of the owner to secure a replacement certificate from the user prior to the existing one�s expiration date.
It cannot be overstated that in conjunction with the foregoing indemnity, the owner MUST ensure he requires the user to maintain independent liability insurance and include the requirement within the written understanding. Again, the amount of such coverage should be discussed with your insurance rep. While you don�t necessarily want the coverage to be so oppressive that the user cannot reasonably obtain it, it nevertheless needs to be reasonable.
As for the balance of the owners reading this article who do not have a written agreement of some type in place, the usual response is, �I have an understanding with the individuals who use my airplane. It�s worked fine for 15 years and I�ve never had a problem.� Whenever I hear that (and I hear it a lot) I am reminded of the scene in the movie Jerry Maguire where the father of the number-one football recruiting prospect tells Tom Cruise, �I don�t do contracts, but you have my word and it�s stronger than oak.� The next thing you know the father has signed with Jerry�s rival and former employer. Such is the nature of verbal understandings—no problems, until something happens.
The focal and stark realization of general aviation is that inherent risks are always present. Dealing with such matters in advance and in a responsible manner is essential for aircraft owners before the consequences of inaction deal with them.
Friendship is friendship and business is business.
My thanks to the NationAir contracts department for their input on this article.
Greg Reba is a Branch Manager with NationAir Aviation Insurance.
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