330.1

OVERVIEW OF AIRCRAFT AND AVIATION INSURANCE

(May, 2006)

Aviation insurance is a coverage that requires both specialized underwriting and production facilities. It is written by a relatively small number of insurance organizations, most of which are specialists in the field. Insurance agents rarely receive requests to write an aviation insurance policy. Therefore, most agents rely on representatives of the major aviation insurance markets for technical assistance in arranging coverage. Our discussion in this section will focus on the need; the market; and the available coverage for aircraft insurance risks.

GENERAL AVIATION DEFINED

General aviation is the largest segment of the aviation industry. It is also the primary segment from which a request for coverage arises. The general aviation segment is diverse, including all types of flight activity except that done by the commercial airlines and the military.

The various categories of general aviation - business flying include:

• public
• corporations
• business
• personal
• instructional
• aerial application
• aerial observation, and
• air taxi

These categories are identified by the Office of Airline Information in the FAA Statistical Handbook.

In 2003, personal aviation accounted for roughly 40% of all hours flown and 70% in primary use. The next highest primary use category was business with nearly 12%. In the same year, there were almost 600,000 active pilots in the United States. Of that total, there were 249,000 private pilots who owned, rented or leased small aircraft for business and pleasure use. Today, there are more than 209,000 aircraft in the United States. About 70% of these are single engine models; 11% multi-engine; and about 7% are turbo props or turbo jets.

Types Of Aircraft Owners/Operators

There are four major classes of aircraft owners/operators:

1. industrial aid

2. business and pleasure

3. flying clubs, and

4. fixed base operators

Industrial Aid operators - refers typically to corporations which own aircraft and employ full time, highly-skilled professional pilots to fly them.

Business and Pleasure operators - this category consists of individuals, businesses or corporations that own and operate aircraft for both business and pleasure. However, they usually do not employ professional, full-time pilots. In many cases, the president or a chief executive officer is the principal pilot.

Flying Clubs - these are non- profit organizations composed of at least three individuals who jointly own and operate all aircraft, but strictly for pleasure use.

Fixed Base Operators - commonly called FBOs, these are airport-based businesses which own, operate, buy, sell, rent and lease aircraft. They also provide a variety of aviation-related services including fueling, repairs, flight instruction, etc.

Prospects

Each classification of aircraft owner/operator requires varying types and levels of insurance coverage, including:

• aircraft hull and liability
• medical payments
• voluntary settlements
• airport liability
• hangarkeepers liability
• product liability and
• workers compensation.

An alert agent or broker can be successful arranging a proper insurance program if he or she becomes familiar with the exposure and the requirements of the applicable aviation insurer and coverage form.

Coverage Limits

Aviation loss exposures demand a great deal of personal attention from an insurance professional. Although the frequency of aircraft-related accidents doesn’t compare with the level that occurs with automobiles, death and serious injury are more often the result. This fact emphasizes the need for high liability limits. Besides a primary level of aircraft coverage, additional (umbrella or excess) liability might be sought from an aviation underwriter.

Passenger Injury Exposure

The aviation exposure to liability for injuries to passengers is created by statutes in some states. It also exists internationally. Originally, such liability was controlled by the Warsaw Convention. The Warsaw Convention, adhered to by most nations since it took effect in 1929, was superceded by the Montreal Convention. In 2003, The United States was the thirtieth country to sign the convention. It substantially liberalized the limitations of the Warsaw Convention which was criticized as being too restrictive to respond to modern losses. The Montreal Convention established two tiers of coverage. The first operates under strict liability and is capped according to the value of the special (monetary) drawing rights specified in the agreement. The second tier depends upon the circumstances of a given loss, specifically regarding an allegation that negligence may be involved. Air carriers may be obligated to pay damages injured passengers may seek in excess of a particular agreement's initial tier, unless the carrier can prove that it was not negligible for a given accident. The changes created by the Montreal Convention increases the per passenger liability and lifts many of the restrictions on lawsuits that may be brought against aircraft owners.

Non-Owned Liability

Insurance producers have another opportunity to service aviation clients that is often overlooked. In many instances, insureds need renter's policies or non-owner coverage. Pilots who operate aircraft that they rent or borrow have a serious liability exposure that is excluded by the typical aviation policy. A non-owned aircraft policy covers liability for bodily injury or damage to property caused by the insured pilot. However, the policy does not cover damage to the aircraft being operated by the insured since that coverage should be handled by the owner's policy.

Other Aviation Exposures

Airport operations or fixed base operators need airport liability and hangarkeepers legal liability coverage. Contractual and products liability coverage can be included in such a policy. If the airport operator owns and rents planes to pilots (including student pilots), an aircraft hull and liability policy is needed. In most instances, financial institutions finance the sales of aircraft. Banks and other lenders need physical damage coverage in order to protect their insurable interest in aircrafts covered by their loans. There are many other types of coverages available to respond to different aviation needs. The agent or broker should carefully survey all of a prospect’s exposures before submitting an application.

Risk Evaluation

Generally, a risk is evaluated by such factors as pilot qualifications, aircraft used, the type and value of the aircraft, and any other extensions of standard coverages. For more information, please refer to PF&M Section 330.5-1, Aircraft and Aviation Insurance Underwriting Considerations.

Types Of Insurers

Over the years, a number of insurance companies have entered the aviation field only to leave, voluntarily or in receivership. Today there are only eight markets for all aviation coverages. These markets are often pools of companies. The two largest writers are United States Aircraft Insurance Group (USAIG) and Global Aerospace. The name Global Aerospace (GA) is a new name for an old company. GA was formed when long-time insurer, The British Aviation Group purchased Associated Aviation Underwriters from Chubb and CNA in 2000. The markets that write aviation exposures in the United States are:

• AIG Aviation, Inc.
• ACE USA Aviation
• Global Aerospace, Inc.
• HCC Insurance Holdings, Inc (Avemco and U.S. Specialty Insurance Companies)
• Phoenix Aviation Managers
• United States Aircraft Insurance Group (USAIG)
• Underwriters at Lloyds, London and other London Companies
• XL Specialty/Aerospace

Most of the above insurance companies work with wholesalers to place their coverage. The wholesalers operate within their underwriting authority and place business in accordance with their level of experience, book of business and expertise.

Type Of Coverages

• physical damage to the aircraft,
• bodily injury (to passengers and others)
• property damage (to property of passengers and others)
• medical payments (for the insured and passengers).