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The importance of a condition

The importance of a condition

The importance of a condition
July 05
12:47 2017

Mitchell was the pilot of a Cessna 414 carrying two passengers when it crashed, killing all occupants. Potter owned the plane and permitted Mitchell to pilot the craft because, based on the information provided to Potter, he was considered a professional pilot. U.S. Specialty Insurance Company declined Potter’s claim when presented because based on the pilot’s logged hours condition, Mitchell was not qualified to pilot the craft. Potter argued that based on Mitchell’s background he was well qualified while USSIC argued that the hours-logged condition applied and continued to deny the claim.

See below how the courts decided when asked to consider whether Mitchell was a covered pilot at the time of the loss.

Melvin Potter and Potter & Son, Inc., (collectively Potter) are named insureds under a U.S. Specialty Insurance Company (USSIC) policy that covered a Cessna 414 aircraft (the aircraft) for liability and physical damage. The policy contained specific wording regarding the pilot. It provided coverage only when the aircraft was piloted by Melvin Potter or another commercially certified pilot. That other pilot was required to have a minimum of 3,000 “logged pilot hours.” Furthermore, 1,500 of those were required to be “logged in multiengine aircraft”. Lastly, 100 of those hours were required to be “logged in the same make and model” as the aircraft listed on the policy. Mitchell Schier (Schier) was the pilot of the aircraft in September 2001 when it crashed. He and two passengers perished. He was considered by Potter to be a qualified pilot, based on the following:

  • 1984 – acquired commercial license with single ratings
  • 1986 ­– acquired commercial license with multiengine ratings
  • 1986 – began piloting charter flights in both single and multiengine aircraft
  • 1986 – obtained flight instructor’s certificate
  • 2000 – became a flight instructor

USSIC investigated the Potter’s claim and ultimately denied coverage because the pilot lacked the required “logged” hours. Among Schier’s belongings, a single logbook was found which documented a mere 236 pilot hours of which all was in a single engine aircraft and all within a two-month period of 2001. While USSIC admitted that based upon Schier’s accomplishments, he likely had flown more hours than the policy requirement; those hours had not been “logged”. Potter argued that the term “logged” meant hours flown but not necessarily recorded.

Potter sued USSIC and the court entered summary judgment for USSIC. While the term “logged” is not defined in the policy, the court concluded that the intent of the term “hours logged” was “hours actually flown and reliably recorded in a flight time log.” Potter appealed and the lower court’s ruling was affirmed.

Melvin POTTER and Potter & Son, Inc., v. U.S. Specialty Insurance Company, No. 2 CA–CV, Court of Appeals of Arizona No. 2CA-CV2003–0182., Sept. 8, 2004.

What are conditions?

The condition section of a policy can often be overlooked until a loss occurs. While the named insured might not consider them particularly important, the insurance company considers them vital and will enforce them. An often-overlooked condition is vacancy and occupancy. The condition explains exactly when the insurance company considers a building vacant. If it is vacant for more than a set number of days, coverage is void for vandalism, sprinkler leakage, breakage of building glass, water damage, theft, or attempted theft. If any other perils cause the loss, the damages are reduced by 15%.

Read the PF&M explanation of the Vacancy and Unoccupancy Condition in the ISO Commercial Property Coverage Forms.

(June 2016)

INTRODUCTION

All commercial property coverage forms and policies include a condition that limits or reduces coverage when a building is vacant more than a certain number of days. Coverage does not apply at all for certain causes of loss.

DEFINITIONS

Insurance companies want to insure only successful, ongoing businesses. This is why pricing is based on an active occupancy. Pricing is subject to a significant surcharge if a property is vacant. Vacancy is often not discovered until a loss occurs. This is why conditions in the coverage form severely restrict coverage if the vacancy is not disclosed prior to a loss.

Because of the penalties imposed on the insured, the coverage form defines exactly when a property is considered vacant. The definition depends on the insured’s relationship to the structure.

  • Tenant

If the insured is a tenant and coverage applies only to its interest as a tenant of the property involved, the term “building” used in the vacancy condition is changed. “Building” means only the unit, suite, or space the insured occupies under a rental agreement or lease. This redefined building is considered vacant only when it does not contain enough business personal property for the insured to conduct its customary operations.

Example: Begley Office Building has ten tenants. Nine of them move out but Links, Inc. (which occupies 10% of the building) remains. Links’ insurance policy considers the “building” occupied.
  • Building Owner or General Lessee

If the insured owns the building or is a general lessee, building is defined as the entire building. The building is considered vacant unless at least 31% of the total square foot area is occupied. This occupancy can be through the property being rented by a lessee or sub-lessee that uses the building for it operations. The building owner can also occupy it for its own operations. The combined square foot area of the occupancies must be at least 31% of the building’s total square foot area. The operations conducted must be those customary to the lessee, sub-lessee, and/or building owner.

Example: Begley’s insurance policy considers Begley Office Building to be vacant because only 10% of its total square foot area is occupied.
  • Buildings under construction

Buildings under construction or renovation are not considered vacant.

Example: Begley decides to totally renovate the building. As a result, it is considered occupied but under renovation and therefore not subject to the vacancy provisions.

VACANCY PROVISIONS

Now that vacancy is defined, the vacancy condition can be stated. If the building, as defined above, where the loss or damage occurs is vacant more than 60 consecutive days before the loss:

  • The insurance company does not pay anything if the loss is caused by or results from vandalism, sprinkler leakage, breakage of building glass, water damage, theft, or attempted theft. There is one exception. If the insured protects the sprinkler system against freezing, the sprinkler leakage claim is covered subject to a 15% loss reduction.
  • The insurance company reduces the loss amount by 15% if the claim is due to any other covered cause of loss or peril not listed above.

VACANCY EXAMPLES

Examples: A strip mall signs rental agreements with various tenants for approximately 40% of its space. However, only 10% of the mall is actually occupied at the time of loss. The building owner does not believe the mall is vacant because the rental agreements are in place. However, the insurance company disagrees because the tenants are not using the rented space to conduct their customary operations.

  • Real Building, Inc. lost its major tenant. Pleasant Ridge Consulting had occupied the second through the sixth floors of the building. Real Building occupies the basement, three retail stores occupy the main floor and Tip Top Productions occupies the seventh floor. Because the space still rented and occupied is more than 31% of the total area, the building is not considered vacant under Real Building’s policy.

However, the Pleasant Ridge Consulting policy treats the space it previously occupied as vacant once it is unoccupied and vacant more than 60 days.

  • Colonial Shopping Mall has one anchor store that occupies 50% of the mall’s square foot area. The anchor store merges with another entity and Colonial is notified that the anchor store will close and vacate the space on May 1. However, the notice also states that it will honor its lease until it expires the following January. The other mall tenants become aware of the anchor store’s departure and notify Colonial that they will also leave on May 1. As a result, only 20% of the mall is leased and occupied on May 1. In this case, the mall is considered vacant even though the anchor store still has inventory in the store.
  • Pelican Processing’s building is both huge and expensive to heat. Through intelligent re-engineering of its operations, the Pelican now operates profitably in only 25% of the total square foot area. The rest of the building is not yet remodeled because the business does not know if it will be rented to others or used for expansion if the business continues to be successful.

Is Pelican’s building truly vacant? It is, according to the policy. However, if the insured begins renovating the remaining 75% of the building, it is not vacant. If a loss occurs, questions such as the definition of renovation, the extent of the renovations and the conditions that apply will certainly arise. Pelican may be adamant in thinking the building is fully occupied but the insurance company may be equally adamant that it is vacant, based on the vacancy condition. Situations like this should be discussed with underwriting and an agreement reached as to how any loss will be settled before a loss occurs. CP 04 60–Vacancy Changes described below, may provide a perfect solution.

  • Pete purchases a parcel of land and builds an apartment building, anticipating the arrival of a new commercial enterprise nearby. Just as construction of the building is complete, the commercial enterprise declares bankruptcy. Pete manages to rent out only one of the 12 units. The building is considered vacant 60 days after construction ends if it does not have any additional tenants. Pete may encourage the builders to slow down and not rush to complete the job. He should also check the terms of the builders risk policy because coverage may end as soon as any occupancy is established.

 VACANCY OPTIONS

CP 04 60–Vacancy Changes

This endorsement is helpful in the unusual situation where both the insured and the insurance company acknowledge that the definition of a vacancy in the coverage form or policy does not apply to the situation or is inappropriate. The two parties can agree in advance to a different occupancy percentage. The affected building is listed and a percentage between 10% and 30% entered on the endorsement schedule. This percentage replaces the 31% figure stated in the conditions. This endorsement is not usually subject to a premium charge.

CP 04 50–Vacancy Permit

This endorsement can be added for an additional premium charge if a building is vacant but the insured still wants full coverage on it. The building must be identified and the period of time that vacancy is permitted entered on the endorsement schedule. The time period cannot extend past the anniversary or expiration date but it can be included on the inception date for the entire policy term.

Note: Because of concerns with vandalism and sprinkler leakage issues in vacant buildings, these causes of loss or perils can be excluded from the extended coverage the vacancy permit provides.

Aircraft coverage is unique

Aircraft coverage was modeled after ocean marine coverage but it has developed into a product unlike any other. The emphasis is on the specific aircraft being covered and the pilot’s ability to handle that specific craft. There is no assumption that because a pilot can handle one craft that he or she will be able to handle another. There is no general “permissive user” coverage for non-owners who are operating the craft even if being done with full knowledge and approval of the owner.

See below to review PF&M’s analysis of aircraft coverage forms.

(September, 2014)

This analysis is based on a review of available coverage using several policies as examples. There is no standardized policy but there are similar coverages provided by all carriers

Insuring Agreement

The insuring agreement establishes the coverage provided by the policy and, naturally, is located at the beginning of the form. The remainder of the policy wording clarifies, expands, or restricts the insuring agreement. Essentially, the insuring agreement states the insurance companies overall obligation for providing coverage based on the insured’s applicable, contractual consideration (paying premium, fulfilling policy provisions, use of qualified pilots, craft maintenance, etc.).

  1. Liability Insuring Agreement

Usually under this part of the contract, the insurance company obligates itself to pay for the bodily injury or property damage that an insured causes to third parties. Naturally, the injury or damage has to be directly related to the ownership, maintenance or use of the insured aircraft.

Example: Wayne, the owner and one of the pilots for “Casual Flyte” Commuter Air Taxi, is sued by a customer who is hurt when Wayne tossed a heavy suitcase to him.

Scenario 1: The customer was still on the plane and fell out when he lost his balance in an attempt to catch the bag.

Scenario 2: The customer was in the airport where Wayne caught up with him with the forgotten bag. The customer falls after losing his balance when attempting to catch the forgotten bag.

Scenario 1 is eligible for coverage while scenario B is not.
Important considerations:

  • How does the policy define bodily injury?
  • Does BI include mental anguish?
  • Does coverage include BI to aircraft passengers?
  • Is the coverage conditional on how the aircraft is being used?
  • Does the coverage apply when an unlisted pilot is operating the aircraft?

Note: Some policies express such coverage separately for bodily injury (excluding passengers) and passenger bodily injury.

  1. Medical Services or Medical Expense Insuring Agreement

The insurance company pays for medical expenses that are incurred due to an accident involving the covered aircraft. Typically, such expenses must be incurred within one year from the date of the accident.

Important considerations:

  1. Who is covered? Passengers, crew, pilot?
  2. How does the policy define medical expenses?

Note: Some policies provide an explanation of covered medical expenses while other forms respond to expenses that are ordinarily considered to be “necessary” or “reasonable.”

  1. Physical Damage to the Aircraft

The insurance company pays for tangible damage to and/or disappearance of the aircraft listed on the Declarations. Coverage is generally provided on an all-risk type basis. Coverage may be offered on a basis of the aircraft being in motion (taxiing, take-off, flight, landing) and not in motion.

Example: A tornado touches down in Middleplace’s Municipal Airport. Hopeless Airlines has one plane that had a wing ripped off and destroyed. Their policy will respond to the loss under the limit for Not In Motion Physical Damage.

  1. Non-Owned Aircraft Liability

The insurance company pays for BI or PD that is connected to an insured’s use or operation of an aircraft that the insured does not own.

Important considerations:

  • Who is considered to be an insured?
  • Does the policy cover only the named insured or does it include the spouse, family members? Does it cover related parties (such as other relatives or, when an insured is a business entity, other members of the business or corporation)?
  • What aircraft is covered? Any aircraft? Aircraft that is similar to the scheduled aircraft?
  • Are there restrictions regarding the types, use and conditions of non-owned aircraft?
  • Is the coverage applicable to commercial, business and pleasure use of the aircraft?

Supplementary Payments

Some insurance companies offer additional items as supplementary payments such as:

  • First-aid
  • Cost of foaming of aircraft
  • Premiums on appeal bonds or bonds to release attachment
  • Search and rescue costs

Naturally these costs would have to be associated with a claim that is eligible for loss under the policy. They are extremely valuable since their use does not reduce the policy’s available coverage limits.

Defense Costs

The insurance company has the right and the duty to defend a bodily injury or property damage suit until the limit of insurance is exhausted by payment to claimants (via judgments or settlements). This means that the insurance company will bear the expenses associated with the defense. Most insurance companies pay these expenses separately, without affecting the policy’s applicable limit of insurance. These expenses can include the attorney’s fees, premiums of court bonds, reasonable expenses of the insured and their employees when testifying or participating in other activities that assist in the defense against a claim.

The cost to defend a lawsuit is extremely high and can quickly use a policy’s liability limit. If the limits are used to pay defense costs and the case is lost, there would be little money left to pay any judgment.

Example: Prinder, a maintenance supervisor at a private airfield, was seriously injured by a piece of metal that fell from the sky. He sued Miguel after learning that Miguel’s plane landed on the field a few minutes after he was struck. Miguel is adamant that he wasn’t responsible for Prinder’s injury. Miguel’s insurer agreed to defend Miguel against Prinder’s lawsuit. After going through many phases, Miguel lost the suit. His defense costs totaled $300,000 and Prinder was awarded $850,000 in damages. Miguel’s aircraft policy limit was $1,000,000.
Loss Feature Aircraft Policy A

Defense costs paid under the insurance limit

Aircraft Policy B

Defense costs paid under supplemental coverage

Liability Ins. Limit $1,000,000 $1,000,000
Judgment $850,000 $850,000
Defense Costs $300,000 $300,000
Total Lawsuit Costs $1,150,000 $1,150,000
Total Paid by Insurer $1,000,000 $1,150,000
Under the situation as handled by Policy A, Miguel would be left with the financial responsibility of paying the $150,000 of the settlement cost that was not covered by his policy.

Who Is An Insured

The following are all considered insureds under the policy:

  1. The named insured
  2. Any person using or riding in the aircraft with permission
  3. Any person or organization legally responsible for the aircraft; provided they do not fit in any of the following groups:
  • An employee who injures a fellow employee
  • Un-named student pilots
  • Any person who has paid to use the aircraft
  • Persons who are not employees of the insured but are employees of repair facilities, flying schools, airports, and similar services

Exclusions

Exclusions must be studied carefully in order to understand their impact on policy coverage. Some exclusions will apply to the entire policy while others are specific to the insuring agreement. A unique aspect of the policy is that some exclusions may apply only when the aircraft is in flight. The exclusions below are typically found in an aircraft insurance policy.

  1. Criminal Acts – There is no coverage when the aircraft is used for an unlawful or criminal purpose. There is normally a requirement that the insured or someone with authority in the insured’s operation be aware of the unlawful use.

Example: Katie, an employee of Global Real Estate, was granted permission to have the company’s pilot fly their Cessna 182 on a trip to Jamaica. While taking off for the trip back home, the pilot lost control of the plane and ran off the runway, damaging several buildings and injuring the buildings’ occupants.

The official reason for the trip was to pick up two clients who were looking for commercial real estate. As it turns out, Katie was also bringing back 10 kilos of cocaine and used the Global plane in order to avoid customs. In this case, the bodily injury and property damage claims arising form the crash would be covered, since the insured, Global Real Estate, was not aware of Katie’s criminal act.

  1. Intentional injury – If an injury or action is the result of an insured’s deliberate action, the policy will not respond to any related loss. There is one exception. Coverage still applies if the intentional action was taken to prevent dangerous interference with aircraft operation.

Example: Paul has completed his final check on his T-6 and starts to enter the cockpit. Suddenly, a woman pushes him out of the way and attempts to start up the plane’s engine. Paul wrestles with her and throws her out of the cockpit. The intruder loses her balance and slams onto the floor, unconscious. Paul calls the police and she is removed from his plane. Several weeks later, Paul receives a legal notice. The woman is suing Paul for the injuries she suffered during their scuffle. Paul’s insurer advises him that it will defend him. His intentional acts occurred while he was protecting the aircraft.

  1. Assumption of Liability – If an insured accepts responsibility for injuries or damage under a contract; coverage for those injuries or damages is excluded UNLESS the contract is with a governmental authority and for the purpose of airport operations.
  2. Certain In-flight Activities – The policy prohibits coverage for losses that occur when the aircraft is in flight under the following circumstances:
  3. Pilot is not listed on the declarations or pilot endorsement

Related Court Case: Unauthorized Pilot Voids Aircraft Coverage

  1. Pilot is listed but is not approved by current FAA regulations
  2. Aircraft does not have FAA Standard Airworthiness Certificate

Related Court Case: Airworthiness Certificate Exclusion Applied Despite Insured’s Lack of Knowledge

  1. If a special permit or waiver is required by the FAA but the waiver or permit has NOT been secured.
  2. A student pilot not under the supervision of a certified flight instructor
  3. A student pilot with a passenger other than a certified flight instructor

Related Court Case: Student Pilot Endorsement Violation Negated Coverage

  1. Nuclear and radioactive activity – All related losses are excluded.
  2. War and terrorism – All related losses are excluded.
  3. Noise, sonic boom, pollution, electrical/electromagnet interference, interference of property use – All such causes of loss are excluded except when it is created by an actual crash, collision of the aircraft or in flight emergency.
  4. Miscellaneous activities – The policy excludes damage or injury that results from using the insured aircraft for the following (this is not a comprehensive list):
advertising towing photography hunting
herding surveillance flight instruction sky diving
parachuting closed course racing off shore business

Note: If an insured is involved in unusual flight activities, the application must thoroughly document the aircraft use in order for any aviation carrier to evaluate and, if applicable, price the risk.

  1. Workers compensation and Employer liability situations – Aviation policies exclude losses that should be handled by WC and/or EPLI coverage. The exclusion extends to actions brought by family members of an employee.
  2. Property damage to items owned, held by or controlled by an insured – No coverage exists for damage or loss of items that belongs to or is controlled by an insured with the exception of limited protection for loss involving either of the following:
  • Passenger carry-on items
  • Hangars that are leased or rented by an insured
  1. Other Loss or Damage to the owned aircraft – Other items that damage an insured’s aircraft (or create a loss in value), but which are barred from coverage include:
  2. Embezzlement, repossession or conversion of the aircraft through the use of bailment, lease or similar encumbrances whether they are lawful or unlawful
  3. Wear and tear and deterioration losses. Mechanical, engine, hydraulic structural pneumatic and electrical failures are not covered if they remain confined to the failure.
  4. Loss to engines and power units due to heat or temperature from operation of the engine unless caused by another covered loss
  5. Depreciation
  6. Governmental taking or detaining of the aircraft for any use – peace or war, lawful or unlawful

This is a representative, rather than an exhaustive, list of actual exclusions found in the reviewed policies. A given policy’s actual exclusions must be carefully evaluated in order to determine the scope of coverage.

Conditions

The conditions in a policy outline the responsibilities of both the insurance company and the insured. It is an area that commonly triggers disputes between the insurer and the carrier.

Action Against the Insurance Company – No action can be brought by the insured against the insurance company until the insured has met all conditions required by the insurance policy. There are time limits and requirements that differ by policy but, overall, the insured has a fairly short time frame to sue the insurance company.

Note: State laws and court decisions frequently affect this provision and insurer actions are adjusted accordingly.

Appraisal – This provision may be invoked when the company and the insured don’t agree on the amount of the loss. Each party must select its own qualified appraiser. The two appraisers then select an umpire. The appraisers then submit their opinion of the actual cash value and the amount of the loss. If they don’t reach agreement, they submit this information to the umpire. An agreement by any two persons is binding on both parties.

The company and the insured have to pay for the expenses of their own appraiser, as well as equally share the expenses of the umpire. No other insurer rights are affected by their agreeing to an appraisal. For instance, if another party has some responsibility for the loss, the insurer, after paying the appraised amount of loss, may still subrogate the claim.

Assignment – Policies cannot be assigned by the insured due to a covered aircraft’s sale. The insurance company must be consulted and provide consent before any assignment takes place EXCEPT for the death or bankruptcy of the insured. In death or bankruptcy there is 60 days coverage for the legal representative.

Assistance and Cooperation – The insured is expected to work with the insurance company during all claim proceedings. This could mean testifying, helping with witnesses and participating in examinations. The insured does not have the right to volunteer payments on behalf of the insurance company.

Note: An insured may risk making out of pocket payments without expectations of being re-paid by the insurer. However, this may not be wise if the payment is construed as an admission of liability.

Automatic Reinstatement – At the time of loss to the applicable aircraft, the amount of coverage is reduced with respect to any subsequent losses until the aircraft’s value has been restored due to completed repairs. This provision applies both to eligible and ineligible losses.

Bankruptcy or Insolvency – The insured’s bankruptcy or insolvency does not affect the insurance company’s obligations under this insurance policy.

Cancellation – The insured can cancel at any time. When the insurer wishes to cancel coverage, it must provide notice at least 30 days in advance except for non-payment when only 10 days is required.

Changes – The policy can only be changed by written endorsements. In other words, a policy can only be modified in writing, meaning that any change has to occur with the carrier’s permission.

Declaration – Acceptance of the policy by the insured means that the information that appears in the policy’s declarations is true and the insurance company may rely on that information’s accuracy. Further, that information is deemed to be a part of this insurance contract.

Fraud and Misrepresentation – The policy is void if the insured misrepresents significant information. This is a vital condition since aircraft applications are very detailed and most of the information is important in evaluating a submission. While no standard application exists, an insured must is still obligated to carefully read each question and to respond truthfully and accurately.

Inspections and Audit – The insurance company has the right to inspect the aircraft and records that pertain to the aircraft during the policy period and up to a year afterwards.

More than one Aircraft – If there is more than one aircraft on a policy, the policy applies to each one separately.

More than one insured – If there is more than one insured, each is covered as though they are the only insured except that any payment is subject to the policy’s insurance limits. This means that each insured is treated by the carrier uniquely in defense and discovery with no preference. However, at the time of settlement, the only limits available are the single set of limits in the policy.

Notice of occurrence, claim or suit – The insured must notify the insurance company of an occurrence that could lead to a claim. The notice must be given as soon as practicable. If a claim or suit is brought, the insured must immediately send the information to the insurance company.

Other Insurance – If there is more than one policy on the aircraft then all policies are expected to participate in a loss. The participation is based on the relationship of the limit to the policy to the aggregate limit available. Policies purchased as excess policies are not considered in the aggregate limit. Also coverage for non-owned aircraft is excess over any other available insurance.

Return premium – If the insured cancels, the return is based on a short rate table but if the insurance company cancels the return premium is based on prorate tables. If a plane is a total loss, the insurance company is not required to refund any remaining premium.

Rights of Recovery – The insured must agree to give the insurance company full rights of recovery and do nothing to hurt (prejudice) the insurance company’s ability to exercise those rights and will help the insurance company exercise those rights.

Example: Mabel and her Cessna 150 were insured by Acme Airsurers when she had her plane serviced by Tempe Air Garage. A Tempe employee accidentally nicked a hydraulic line on Mabel’s Cessna 150, causing a leak that went unnoticed when the plane was returned. A few days later, when she tried to take off, the plane lifted slightly off the ground, stuttered and then crashed. The plane seriously damaged the main building of an FBO and the plane was demolished. Acme paid the losses to the FBO. After an investigation determined Tempe’s error, Acme assumed Mabel’s recovery rights and sued Tempe Air Garage. She cooperated with the insurer and the company received reimbursement from the garage and repair firm.

Territory – The territory is the United States, Canada and Mexico and the airspace while en route between the mentioned countries. Some policies include the US territories and possessions, the Bahamas and West Indies. The policy’s territory definition should be carefully reviewed in order to understand the areas within which aviation losses are eligible for coverage.

When an insured regularly travels outside Canada, Mexico or the United States, consideration should be made to purchasing a policy just for that country using a representative in that country.

Valuation – If the aircraft loss is total, the insurance company pays the limit shown on the declaration or summary page. However, if the loss is partial, the loss is settled based on who repairs the plane. If the insured repairs it – cost of like kind or quality material plus the straight time rate wages plus an amount for supervisory and overhead is paid. If someone other than the insured makes the repairs, the net cost to the insured is paid.

Note: Where is the plane repaired? Normally it must be repaired at the loss site or at the aircraft’s home airport. The insurance company pays the cost of transportation for the aircraft and the parts. The insurer has the discretion of finding the most economical method to handle the move. The insured has the right to choose another place for repair or another mode of transportation, but then will have to pay the additional cost.

When parts are replaced or the entire plane is replaced, the insurance company has the right to all salvage. However, retaining salvage is the carrier’s choice. An insurer is not obligated to accept salvage.

Limits Of Liability

The liability limits are per occurrence. There is no aggregate limit. This means that the policy’s limit is available to each separate eligible occurrence. The Declarations states the occurrence limit is the maximum liability payment for any single occurrence. The definition of occurrence includes any series of related events. For instance, if a single accident started a chain reaction, all injuries and damages would be considered a single occurrence and subject to the occurrence limit.

The policy can have a per person or a per passenger limit. This is a restriction of coverage. It means that the maximum coverage available for a single person or passenger is limited to the per person or passenger limit. The per person limit is more restrictive than the per passenger limit since it includes the passengers and any other person who might bring suit.

The Medical Expense Limit is a separate coverage and limit that operates independently of the policy’s occurrence and the per person limit.

Example: While Clint was landing his plane, he slightly tilted the wings and crashed into a small office/hangar. His passenger was thrown around the cockpit and a maintenance person who had been working in the building was seriously injured. The property damage loss was $50,000 for the building and its contents. The passenger suffered back injuries and lacerations and filed suit for $200,000. The groundskeeper broke a leg and arm and lost 60 days of work. He sued Clint for $300,000. Clint had a policy with $1,000,000 per occurrence limit. The policy included a per person limit of $100,000. This means that his policy pays no more than $100,000 for the passenger’s claim and no more than $100,000 for the maintenance person’s claim. The maximum payment is therefore $250,000 (two injuries plus the property damage). Clint is responsible for the remaining $300,000 injury amounts. If Clint’s policy had the per passenger limit instead of the person limit, insurance company would have paid $50,000 plus $100,000 plus $300,000 or a total $450,000. In the later instance, Clint would be responsible for the passenger’s remaining $100,000.

Deductibles

Any aircraft physical damage is subject to deductibles that differ according to circumstances surrounding a given loss. The applicable amounts are:

  1. Not-In-Motion Deductible – This amount applies whenever the aircraft is not moving.
  2. In-Motion Deductible – This applies when the aircraft is intentionally moving either on the ground or in flight.
  3. In-Flight Deductible – This applies when the aircraft is intentionally in flight.

Typically the required in-flight deductible is the greatest amount, while the not-in-motion deductible is the least.

The deductibles apply independently based on the actual loss.

Substitute, Replacement and Newly Acquired Aircraft

If the insured uses a substitute aircraft for an insured craft that is out of commission, the policy provides protection. The insured has liability and medical expense coverage while using the substitute, but the maximum payout for any occurrence can not exceed what would have been paid if the primary aircraft was in operation. This is a critical consideration if the substitute craft has a significantly higher value than the insured craft.

If the insured purchases a new aircraft to replace a scheduled aircraft, there is automatic coverage provided the insurance company is notified within 30 days of the purchase and premium payment is made. The coverage is the same as on the scheduled aircraft.

If the insured purchases an additional aircraft, there is automatic coverage provided the insurance company currently insures all of the insured’s owned aircraft. The insured must notify the insurance company within 30 days of the acquisition. The coverage is the same as another aircraft with similar passenger capacity. The physical damage limit is the actual amount the insured paid for the aircraft.

Related Court Case: “Reporting Form Dispute Decided In Insured’s Favor”

Definitions

Typically, a policy will have a number of terms with a special meaning. Actual defined terms can vary by insurer, but the following are items that are likely to appear:

  • Aircraft
  • Bodily Injury
  • Charter
  • Commercial
  • Disappearance.
  • Federal Aviation Administration
  • In Flight
  • In Motion
  • Instruction and Rental
  • Insured
  • Medical Expense
  • Occurrence
  • Partial Loss
  • Passenger
  • Physical Damage
  • Premises
  • Pleasure and Business
  • Premises
  • Property Damage
  • Total Loss

Related Article: Glossary of Aviation Terms – helpful in better understanding underwriting or claims information involving aircraft

Endorsements

Common endorsements that are used to modify aviation coverage are in the categories of additional exclusions (such as for terrorism, pollution), clarifications (such as pilot requirements) and amendatory (such as cancellation information).

Related Article: Aircraft And Aviation Insurance Available Endorsements.

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