May 4, 2016
Unlike the estimated premium originally used to calculate your workers’ compensation insurance premium, an annual premium audit determines the accurate costs for the policy period. There can be vast differences between the estimated and actual premiums, so the audit process is extremely important. To bypass audit errors that tend to inflate workers’ compensation premiums, utilize this checklist. • Set up an appointment with the auditor and obtain a name and phone number in case you need to change your appointment. If you do need to cancel and reschedule, do so promptly. • Assign an employee as the auditor’s primary contact person. • This individual should be familiar with all of the company’s departments and employees. • This individual should have knowledge of the payroll records that the auditor will be examining. • The contact person should review the prior year’s billing statements and auditor’s worksheets (if requested in the past) to understand the issues that may arise again. • Make sure that your records document the spent by each employee in different workplace exposures if employees are involved in a variety of operations. • Do not estimate payroll. Gross payroll should be provided with monthly and quarterly or year-to-date totals by employee and department. The type of work performed and the job duties by each person must be shown. This includes officers, members, sole proprietors and partners. • If your records do not break down payroll by different workplace exposures, the auditor will classify it under the most expensive classification applicable. • Consolidate the payroll verification records including 941's, 940, W-3, Unemployment Tax Reports or Schedule C. You may also want to assist the auditor by highlighting pre-tax wages that will be subject to premium. • Have workers’ compensation documentation including certificates of insurance for 1099 independent or subcontractors showing that they have their own insurance (if applicable). • If you do not have this information, get it before the auditor arrives. Otherwise, the auditor will charge your company the premium charge for this exposure. • Review payroll documents to highlight overtime pay for the auditor so he/she can discount it back to normal pay (allowed in most states’ workers’ compensation rules). • The auditor does not have the time to perform the premium portion of your overtime pay, so records should be easily readable so he/she can do their job efficiently. • Review the classification codes assigned to your job contacts. Some individual jobs may be subject to different codes. If the auditor cannot locate this information, he/she will need to review your invoices. • Give the auditor a well-lit, comfortable place to do his/her work, preferably onsite. If you must conduct the audit offsite, make sure your contact person is available for questions. • Provide payroll records (as mentioned previously), which include payroll tax records (state and federal), your cash disbursement journal/checkbook, job contacts and general ledger. • Once the audit is complete, ask for a copy of the auditor’s worksheets. • This document is not normally provided but will be upon request. • These documents provide you with information concerning how the audit was conducted, how payroll numbers were derived and what codes were used. • Designate someone from the company to receive the audit worksheets, as it contains confidential payroll information. • Review the audit billing statement carefully and compare that document to your original policy. • Balance the total audited payroll figures to the documentation provided. Check for any significant changes between the total payroll shown on the policy and the actual figures provided. • Compare the payroll by classification code on the policy to that on the audit. The payroll by classification codes shown on the audit should not contain any significant fluctuations in comparison to the policy. • Compare the experience modification factor on the original policy to the one shown on the audit. Make sure the auditor applied the factor for the audited period. • Review the rates charged for each classification code. There should be no significant changes between the rates on the audit versus the original rates on the policy. • There should be no changes to the Schedule Credit or Debit from the original policy. • Contact the auditor to discuss any questions that arise or make any necessary revisions.

May 4, 2016
At times our best source for aircraft risk management is EYES WIDE-OPEN. As pilots, one of the most difficult and frustrating situations we can find ourselves in is to have our aircraft grounded due to damage at an airport away from home. Here we sit, stuck, without transportation. The airport line service has damaged our aircraft, we don’t care for the fixed base operator and by this time, after a few choice words, the fixed base operator doesn’t care much for us. But like it or not, we may have to hire him to repair the aircraft because there is not another operator on the field. Even if he has insurance, we have still lost our airplane for the duration of the repair. Who knows how long that will take, and when we finally do get the airplane back, it now has less value due to a damage history. What is the best way to protect ourselves against this most unfortunate situation? In my opinion, it is simply, While taxiing into the ramp I search for a likely place to park, hopefully not in anybody’s way. Not having received any traffic advisory on the way in I’m not too hopeful an eager line service person will come out to meet me with a set of chocks. Finding a spot on the slightly sloped ramp I’m not surprised to find no one in sight. While shutting down the engines I take the time to glance behind me wondering if I roll backwards what am I going to hit. It’s just a King Air. I’ve never found myself very trusting of these little pull levers to set a brake. I need a solid foot pedal with a positive clicking sound as you jam it down to set the brake as in my Chevy pickup. Still no one in sight as I sit holding the brakes while putting away my headset and looking for my brief case. Trust the brake I must, as I step out on to the ramp knowing there is no way I can stop a 6,000 lb airplane if it decides to roll. As I scan the ramp for a set of chocks I can steal, another twin, a Navajo, taxis in and parks next to me. Finally, here comes Mr. Line Service. I suspect he’s hoping for a fuel sale since there are now two of us. I say, “I think” because he is not the usual type line service person I have come to expect. With an over-sized belly, OD green T-shirt one size to small, blue jeans with the crotch almost dragging the ramp, as he bends over to fetch some chocks, my first impression is “Mr. Plumber”, if you know what I mean. Now I have the option to buy fuel here or I can wait until my next stop. With this in mind, I chock my airplane and let him know that I’m not sure yet if I need any fuel. “Mr. Navajo” immediately thumbs up wanting fuel, so off goes “Plumber” to get his truck. Pulling up in front he jumps out, reeling out the hose and heads for the wing intent on getting this job done. “Mr. Navajo” points to the grounding cable still on the truck and proceeds to walk off toward the terminal. “Plumber” drops the gas nozzle on the ground and trudges back to the truck to grab the ground cable, a rusty wire with what appears to be a bear clamp attached to the end obviously not used too often. Now I’m thinking perhaps “Mr. Navajo” may have walked off a little too soon. “Plumber” grabs the clamp with both hands squeezing it wide open to fasten it wherever he decides might make a good grounding place. Sure enough, the most obvious place for that bear clamp is that nice shiny nose strut. Talk about my EYES WIDE OPEN! He grabs up the nozzle from the ground and jams it into the tank, being sure to put it all the way in hitting the bottom of the tank while resting the shut off valve on top the unprotected wing. I’ve seen enough. No fuel here for me today as I look around thinking maybe I should move my airplane as far away as I can to the other side of the ramp. We take the time to plan a flight and check the weather. We take the time to preflight the aircraft, looking at everything to be sure all is well and can reasonably be expected not to come apart in flight. We do our run-up checking engines, props, radios, everything, just to be sure all looks and sounds as it should. But when it comes to trusting our aircraft to a stranger we seem, at times, to have on blinders. In most cases, there are plenty of clues that our aircraft is in danger if we would just go in with our EYES WIDE OPEN. Your own eyes can be your best insurance in preventing a most difficult and frustrating occurrence. by Brent Anderson

May 4, 2016
Any person can change hats to become “the boss” as a business owner. When this happens they are required to consider aspects of the business that have never really been of concern to them before. When their business is responsible for repair and service of aircraft, liability and risk management issues should come very near the top on the list of concerns. Aviation maintenance shops differ vastly, one to another. Large, independent, and FBO shops employ many personnel. They do regular maintenance and heavy inspections on large, turbine-powered commercial and corporate aircraft. At any one time, these shops may house many aircraft, worth tens of millions of dollars, collectively. At the other end of the spectrum is the lone aviation technician, working from a small building at the local general aviation airport. These shops focus on oil changes and scheduled inspections of light singles and the occasional twin. They do minor repairs and removal and replacement of parts and components. In the middle are the countless medium-sized maintenance shops, overhaul facilities, avionics installation and repair, paint shops, non-destructive testing technicians, and others. Although these shops differ in size, scope of work performed, and revenue, they all share similar risk situations. Ask ten people what they think risk is and you will get ten different answers. It does not take a thorough search of risk resources to reveal the same problem. Definitions are many and they are all worded in slightly different ways. What is important is to understand the concepts underlying risk. Risk is the chance of injury or loss. Insight can be gained by listening to how people refer to risk in an everyday context and, particularly, in the aviation environment. The underlying concept is always the same —a chance that something is going to happen and consequences if it does. Risk management introduces the idea that the likelihood of an event happening can be reduced, or its consequences minimized. In aviation, the term is frequently used in the context of decision-making about how to handle situations. Effective risk management seeks to maximize the benefits of a risk while minimizing the risk itself. [/i] Risk management is the identification, assessment and prioritization of risks and the subsequent coordinated and economical application of resources to minimize monitor and control the probability and impact of losses. Effective risk management activities create value and should be an integral part of the decision-making process. How does risk management impact your bottom line? • Opportunity for better pricing on insurance premiums • Saves out-of-pocket costs like deductibles • Ensures a safe and stable environment for employees, volunteers and customers • Helps you understand and be prepared for risks before losses occur Strategies for addressing an identified risk typically include two of the following: Can you eliminate a service or activity considered too risky? •Eliminate activities that involve risk •Avoid creating activities that involve risk •Relatively extreme approach What steps can be taken to reduce the likelihood of losses occurring or lessen the impact of losses should they occur? •Manage liability by structuring activities and programs in ways that reduce or limit institutional risk Can we transfer either the risk or financial consequences of a loss to another party? •Insurance policies •Indemnification agreements •Releases and waivers Accept the risk as it is – some risk is inherent in the activities of operation. • Self-insurance •Deductibles •Deciding not to purchase an insurance policy for a specific exposure Since this publication is primarily a guide to assist the business owner how to manage his risk through insurance we will further discuss risk management as it is associated with the various insurance products available for this business. [/i] Every business owner should step back and ask this question. Once this is determined then you can set up the best ways to protect it. Not everything can or needs to be insured. Insurance should be your last resort once the risk management principles have been employed. It is important to determine what has value and how much. Once this is accomplished and the risk management principles are applied you will have a better idea what risk needs to be offset by insurance. For most businesses this can be viewed in three basic areas, PROPERTY, PEOPLE and INTANGIBLES SUCH AS REPUTATION. Although we can’t cover everything in this article we can attempt to offer some suggestions to start with when placing value on your business. to protect can include hangars, autos, inventory and property of others. you will want to protect include yourself, employees and customers. may include protecting reputation, name recognition, brand name and other intangible assets. It is reputation that brings customers back. It is reputation that continues business growth. Would a serious aircraft accident caused by your business hurt your reputation? Would on line theft of customer data hurt your reputation? (Ask Sony Corporation) Other intangible assets that have value are and the list goes on. You can see there is much that has value and the risk of loss becomes greater the longer a business is in operation. There are good business practices to protect these intangible assets. Without much thought you are probably doing some of this now but for most business it is often given little consideration. We often fail to see the value until something happens but then it is too late. This is an area of business where you must be proactive. There are many means available for loss prevention and restoration but most need to be in place before the loss occurs. Discuss with your agent, get advice, know what others are doing to employ best practices in their business. There is insurance available for litigation and assistance in reconstructing intangible assets. (See Extra Expense and Cyber Liability) Placing value on intangible assets is often where the difficulty lies with insurance but there are great insurance products available today which are designed to help offset the expense incurred, preserve your integrity and get you back in business as quickly as possible. But remember, loss measures established first can also reduce the insurance premium required. Generally the longer a business is in operation the more it has to lose in physical assets, people including customers, and intangible assets such as your reputation which creates a greater need for proper risk management including insurance products.

May 4, 2016
Many agencies offer the client an option to finance their insurance premium through an outside premium finance company or bank. This is usually a low cost convenient way to make your premium payments. Most premium finance com¬panies require a deposit premium of 20% to 25%. The balance can be financed over nine or ten months. The company by law is required to quote the annualized rate of interest. This can appear to be a bit high due to the short term nature of the loan. The actual amount of interest charged is usually quite reasonable. The interest charges are computed only on the unpaid portion of the premium and only for the actual time the money is in use. Overall, the dollars charged are quite reasonable and the convenience of having such a management tool is worth it.

May 4, 2016
Many hangar contracts now required by fixed base operators around the country are asking the tenant to carry liability insurance for the tenant's own negligence arising out of the occupancy of the hangar or tie-down area. Some of these agreements refer to general liability, some to public liability, and others to premises liability. Although there are some coverage differences between these basic forms of coverage, the FBO is basically asking for the same thing using different terminology. Coverage for your leased premises is not a bad idea. Most FBO's, however, carry their requirements a step further. Many of these fixed base operators want you to enter into a lease agreement. Leases help to outline the responsibilities of both parties. Whether you are leasing a building, an apartment, or a hangar space, a written agreement is a good idea. Most of these FBO leases include a hold harmless agreement for your negligent acts arising out of the operation, use, or occupancy of your hangar or tie-down area. It is certainly a reasonable requirement to expect you to be responsible for your own negligent actions. We see many contracts go past the point of fairness, however. Many require a blanket hold harmless and indemnification clause that passes responsibility to you regardless of negligence. In these cases, we recommend you take extreme caution before signing such a lease contract. Send a copy to your attorney for advice and assistance in negotiating a more reasonable contract. Send a copy to your insurance agent for the approval of your aviation insurance underwriter. This will assure that you don't violate your insurance policy. Most aircraft insurance policies must be specifically endorsed to provide premises liability coverage. Regardless of the terms of your hangar contract, this is not a bad coverage for you to carry. If your lease contract is reasonable and only requires you to be responsible for your negligent acts as occupant of the hangar, coverage can be quite affordable. Ask your agent to purchase a separate general liability policy only as a last resort. Although available, you will find premiums ranging from $750 to $3,000. Is this ridiculous for such a small exposure? You bet it is. The solution may be as simple as a phone call to your aviation insurance agent requesting that your underwriter endorse your aircraft hull and liability policy to include premises liability and add the FBO as an additional insured as respects your aircraft operation. In most cases, this can be done for little or no additional premium especially if the request is made at renewal. Although some underwriters will not include premises liability under the aircraft policy, most will gladly make the coverage available. Some broader policy forms automatically include premises liability in the policy wording but may not extend coverage to apply to the lessor. We receive many calls asking if this coverage is included under a business commercial general liability policy or the aircraft owner's personal umbrella policy. The answer? Usually these types of policies specifically exclude aviation related exposures. There is no reason to try to cram a square peg into a round hole if your aviation underwriter will add the coverage at a reasonable price. What if your hangar agreement makes no indemnification or insurance requirement or you have no hangar lease agreement at all? Quite honestly, you have a premises liability exposure. The possibility of loss is inherent to your occupancy of your hangar. Give yourself a break and contact your agent. This is good coverage to have whether your FBO requires it or not. Remember, you have to ask your agent for the premises coverage extension. This is not normally a coverage that will be added automatically.

May 4, 2016
What may not be covered in your aircraft hull and liability policy? [/i] The typical “all risk” aircraft hull and liability policy does not really mean “all risk”. In fact, all aircraft insurance policies, no matter how broad, contain numerous terms, conditions, and exclusions which limit coverage. Although there is no standardized wording in the aviation insurance industry, there are several common threads. One is that no aircraft physical damage policy (hull policy) will pay for loss of value to the aircraft due to damage caused by an accident. Loss of hull value that is the result of damage history is referred to as diminution of value. In short, diminution of value is not covered by an aircraft hull insurance policy. Can such coverage be purchased? Some years ago, one of the insurance companies offered a diminution of value endorsement, but only for high valued aircraft. The coverage was expensive and few endorsements were sold. As a result, I have not seen this coverage offered in quite some time. If your aircraft is damaged by someone else, they would be responsible for the consequential loss. It would be expected that such a loss would be covered by the appropriate liability policy of the negligent party. The trick is to prove exactly what the reduction in value actually is. [/i] Sound familiar? I have written about this short topic several times in the past. Yet, when I mention the subject of conversion, I continue to get blank looks. Let’s touch on the subject again. If you loan, rent, lease, or consign your aircraft, you could be setting yourself up for an uncovered loss. The fact is, if anyone is allowed to operate your aircraft with your permission and never returns your plane, your insurance carrier may not consider this to be a theft. It may be conversion by a permissive user and, depending upon the specific wording in your aircraft hull policy, may be excluded. The following wording was taken from the USAIG All-Clear 360 policy. “Embezzlement. We won’t cover loss or damage to your aircraft caused when someone with a legal right to possess the aircraft embezzles or converts it under a lease, rental agreement, conditional sale, mortgage or other legal agreement governing the use, sale or lease of property.” The U.S. Specialty Insurance Company (USSIC) policy uses slightly more restrictive wording that tends to be more traditional. “We will not pay for physical loss of or damage to your aircraft if anyone to whom you relinquish possession of the aircraft embezzles, converts, or secretes the aircraft.” The underwriter expects that you will use good judgment when allowing others to use your aircraft. I guess there is no substitute for good management practices. How can such a loss be covered? Only in the case of an employee pilot can such insurance be purchased. This is referred to as “Employee Dishonesty” coverage. In most cases, such coverage is readily available from your insurance agent (not from an aviation underwriter) and is not very expensive. There is a catch. You knew there had to be one, right? Most companies require that coverage be purchased on all your employees not just one select employee or position. If you own a company that has a large number of employees, employee dishonesty coverage may already be a part of your insurance package. You may just need to increase the coverage limit to accommodate the value of the aircraft. What about covering permissive users that are not employees? Can coverage be purchased? I know of no way to cover fraud or embezzlement. Good management may be the only recourse. The next time you throw someone the keys to your plane, be sure they are trustworthy. [/i] So you are just an aircraft owner. You are not a dealer. You just hire a pilot or fly the plane yourself. You have all your maintenance done professionally by the most respected shops. Your whole purpose in owning an aircraft is to go from point A to point B. You are a good citizen, pay your bills and taxes (lots of taxes) and ride in or fly your aircraft. But you want a newer, bigger, faster, airplane. Well you know the picture. So, you sell your aircraft and buy a new one. The unthinkable occurs. Your old aircraft crashes and the lawsuits start to fly. Everyone is named in the suit. The aircraft manufacturer (if the aircraft is less than 18 years old), the maintenance facilities that maintained your old aircraft, the aircraft dealer that sold your old aircraft, and you, all get the opportunity to defend yourselves in court. Why? The claimant’s attorneys are looking for deep pockets. The more “pockets” the attorneys can draw into the fray, the better their chances of upping the legal awards. It is all about the money, not who is right and who is wrong. You could be involved simply because you owned the aircraft. You do not have to be negligent to be accused. This exposure is referred to as “products liability incidental to the sale of aircraft”. Can this exposure be insured? Yes it can with many companies, but only if you qualify for the best policies. Policies such as Global Aerospace’s “Broad Horizon” policy, AIG’s “Gold Medallion”, Starr’s “Elite”, and others provide incidental products liability. Some companies don’t automatically include incidental products liability in their basic policy form but will endorse it to their policy upon request. (Note, not all underwriter’s offer this coverage to every insured and most agents do not offer it unless asked by the client.) Feel better? Not so fast. Most policies written today in the general aviation insurance industry are written on an occurrence policy form. If an accident occurs, the policy in force at the time of the loss is the one that pays. (Not the policy in force at the time your aircraft is sold.) This means, as long as your old aircraft is operational, you have an exposure and may want to maintain coverage for incidental products liability. If at some point you no longer own an aircraft and no longer purchase aircraft insurance, you will have no products liability coverage. When premiums become fully earned If your policy is canceled prior to normal policy expiration, should you expect a return of your unearned premium? It depends upon the situation. If the policy is canceled at the insurance company’s request you will expect to receive the unearned premium on a prorated basis. This means the company will return 1/365th of the premium for each day remaining on the policy. If the policy is canceled at the insured’s request, the insurance company could impose a short rate penalty returning only a portion of the unearned premium. This penalty is not a flat percentage. A standard short rate table is used to calculate premium returns. The cancellation penalty decreases as the policy nears maturity. For the purpose of “dirty math” you can use a rule of thumb of a 10% premium penalty. This is not the end of the cancellation story. Most aircraft hull policies stipulate that in the event of a total or constructive total loss, the hull portion of the premium becomes fully earned. You will receive a prorated return of the unearned liability premium, but not the hull premium. Obviously, if the loss occurs early in the policy period, the actual amount of the hull premium that would be forfeited would be greater. The cost of hull insurance can be quite expensive on high valued aircraft or those used for more hazardous missions such as aerial applications. In these situations, some (not all) underwriters will offer the insured the opportunity to purchase “premium insurance”. This is an endorsement that removes the fully earned hull premium requirement. There are no absolutes in the insurance industry. A true Lloyd’s policy form may require that both the hull and liability premium is fully earned in the event a loss exceeds the amount of the premium earned at the time of the loss. This makes the value of premium insurance greater. Also note, not all underwriters will offer the opportunity to purchase premium insurance. This varies by company and can be quite expensive depending upon the individual insurance company’s philosophy. [/i] The age old debate of the employment status of your pilot(s) may be decided in court after a bodily injury claim occurs. Is the pilot an independent contractor (contract pilot) or an employee? It has long been a standard in the general aviation industry that many pilots who “moonlight” hold themselves out to be independent contractors. The aircraft owners are not expected to withhold taxes or to provide employee benefits or workers compensation. This situation is bothersome, however. Just agreeing that a pilot is an independent contractor does not make it so. What if a loss occurs and the pilot is injured or killed. Will he or his family expect to receive compensation for his injuries? Will he remember after the loss that he was a contract pilot and no benefits were offered? This is certainly a gray area at best. The Internal Revenue Service and the individual states publish a list of tests that will determine whether the worker is an employee or an independent contractor. The state workers compensation laws are very specific as to who is an employee and who is an independent contractor. I would strongly encourage anyone who owns an aircraft to research this topic. You can then plan for the worst case scenario. One surefire way to solve the problem is to declare the pilot to be an employee. Agree in the compensation negotiations that the aircraft owner will withhold taxes and Social Security (just reduce the daily pilots salary a bit) and provide workers compensation insurance. Usually, aircraft are owned by a shell LLC or corporation with no other employees. This eliminates any discrimination of benefits that might occur with larger employee groups. Won’t this be expensive? Workers compensation is calculated as a rate on each $100 of payroll. Each state establishes their rate structure. A general aviation pilot rate is usually 5% to 6% of the pilot payroll. Full-time or part-time, it is all the same. So, we have a solution? Yes, on the insurance side we do. What about the FAA? If our shell corporation provides both the aircraft and the pilot to the parent company who ultimately pays the expenses, isn’t this considered part 135 charter use? Some of my more astute clients have set up a separate LLC as an aircraft management firm. The aircraft is owned in a shell LLC and the crew is employed by a separate LLC that provides aircraft management and pilot services exclusively to the owner. The two check rule may be applicable and could avoid a conflict with the FAA. Oh, don’t forget to name the pilot services LLC as a second named insured or as an additional insured with a waiver of subrogation on your aircraft insurance policy. Now, we don’t have to speculate on what would happen if a contract pilot is injured or how a court would rule. We have spent a bit of extra money and taken ourselves out of harms way and helped the pilot in the process. Workers compensation is the sole remedy for employee injuries in most jurisdictions. And the pilot, as an employee, will be protected for liability losses under the aircraft hull and liability policy. See it does pay to read the “fine print”.

May 4, 2016
The best and most frequently asked question posed to me as an insurance advisor is “How much liability insurance should I carry?” In past articles, I have given the answer that if you can tell me how much you are going to be sued for, I can tell you how much will be enough. Obviously, no one can predict the future. The next best thing would be to purchase as much liability as you can afford or as much as you can get. At least with this answer, you have done the best you can do. During soft markets such as the one we are currently experiencing, premiums are cheap and underwriting capacity is plentiful. Less-experienced pilots may qualify for more liability than they would during tight underwriting markets. Although the aviation underwriting community hates to hear me say it, aviation insurance underwriting is more of a gamble than traditional underwriting in market sectors such as Life Insurance, Property Insurance, or Workers’ Compensation. In other sectors of insurance, underwriters have the advantage of actuarial tables, which if followed, remove the gamble from the underwriting decision. The Life Insurance underwriter, for example, knows exactly how many 30-year-old, white, male, non-smokers will die this year. It is easy then to calculate how much premium each must pay in order for the company to have adequate policyholder’s surplus to pay the known losses and make a reasonable profit. Why do aviation underwriters not follow their actuarial statistics when pricing their products or when deciding whether or not to accept a risk? Actuarial tables are predicated upon the law of large numbers. The law says that the larger the group, the more accurate the actuarial tables and the less the underwriter’s gamble. In aviation, we do not have enough aircraft to develop accurate statistics. With only an estimated 357,000 aircraft and 617,000 pilots in the United States (2010 statistics), we have too few numbers for the law to apply. In addition, we have no homogeneous underwriter grouping. We have a U.S. fleet ranging from Lear Jets to B-747s and from G-550s to Piper Warriors. Our stable of pilots’ qualifications is equally as diverse with skills varying from the highly trained ATPs down to student pilots. And, with our aircraft usage ranging from pleasure aircraft to commercial airliners, we simply do not have the benefit of the law of large numbers, no homogeneous underwrit-ing grouping and no real actuarial advantage. As a result, the aviation underwriter follows the competitive market. During times of high capacity, the “rule of the day” is to cut prices and buy or retain as much market share as you can. Cheap brings business in the door. It also causes poor loss ratios. High liability limits for bargain prices also get the attention of many insurance buyers. During soft markets, aviation underwriters will accept high liability exposures in the primary liability layer that can only be dreamed of during times of hard markets. So if high limits are available for bargain prices, buy all you can get. It is when the capacity dries up (it eventually will) and the price goes up that you must become a more astute buyer. So how much liability insurance should I buy? Often a client will say that they need $2 million liability limits because they have a net worth of $2 million. Ask any attorney, and I believe they will agree with my next statement: “There is no correlation between your net worth and the amount someone is likely to sue you for.” In our example, if you buy a $2 million liability policy, there is absolutely no guarantee that the courts would stop at your policy limit. What you hope for is a good defense and an adequate limit to pay the negotiated claim without having to tap your personal assets. If net worth is no guide, what is? Maybe we should ask a few questions. Are you a high profile individual? Many aircraft owners are. Do you own a business? Is your name often in the society section of the newspapers? Is your wealth common knowledge throughout your community? If the answer to these questions is “yes,” you may be a lawsuit target. This should be encouragement to buy higher limits of liability. What is your Average Passenger Load? Do you fly primarily on business and alone? If so, you may need less passenger liability. Although the insurance buzz word “smooth limit” of liability has become the fad, it may not be exactly what you need. A smooth limit of liability means there are no passenger seat limitations. A $2 million smooth limit of liability is more properly referred to as $2 million combined single limit (CSL) including passengers. But if you always fly alone, would you not be equally protected by buying $2 million CSL restricted to $100,000 per passenger seat? Who cares how much passenger liability you have if you don’t carry passengers? The premium savings can be enormous. Underwriters think of aircraft liability exposures in two separate parts: Third-party Bodily Injury and Property Damage Liability (BI & PD) and Passenger Liability. Since the majority of aviation liability claims dollars are paid as a result of passenger claims, this is the sector that is most expensive when pricing the insurance product. Here is an idea. Use some of the savings and raise the limit of liability to $5 million CSL restricted to $100,000 per passenger seat. It is not that much more premium. OK, so you carry passengers on an occasional basis or regularly. It doesn’t matter; the exposure is there. It only takes one time to have a loss. This begs another question: Who is your typical passenger? Do you often invite high-profile guests? If so, your passenger exposure is greater than if you carried your gardener. This would call for higher limits of passenger liability. What is the capacity of your aircraft? What is your average passenger load? Your exposure is greater in a corporate jet than in a Cessna 152 because of the potential passenger density. The difference is reflected in the underwriter’s premiums. If your aircraft is in the name of your business and your passenger is an employee of the company, your aircraft liability insurance policy will not answer if the employee is injured in the course of his work. Why? Workers’ Compensation insurance is “sole remedy” in most jurisdictions. Statutory benefits apply and casualty policies, including aviation liability, are designed not to overlap Work Comp coverages. Remember, I said if the aircraft is operated in the name of your business. All too often, the aircraft is owned in an LLC that in turn is owned by the primary stockholder of the corporation. In many cases, the corporate owner performs duties as corporate pilot in the LLC’s aircraft believing his company’s Work Comp coverage is the answer to all his resulting exposure. Wrong. The employees are not employees of the LLC. They become guests of the owner on his LLC’s aircraft. This opens the door to a lawsuit not just against the LLC but against the owner personally. If they are flying with the owner on the owner’s (LLC’s) aircraft on business, the corporate Workers’ Compensation policy will come into play but only as sole remedy for the true employer. High passenger limits or liability just became very important. I have just described an expensive mess. It is very important to get all these items and ownership correct. And yes, buy higher limits of passenger liability. In today’s underwriting world with the current soft market higher liability limit is often very inexpensive. Of course, your “purpose of use” may have a huge influence on the need for liability. If your aircraft is used for charter, your passenger exposure is much greater than private use. Usually, the passenger density is greater. Charter services are not cheap. Therefore, you would expect high-profile passengers. Charter companies usually operate in a wider range of conditions and go to busier airports than those frequented by owner-operators. So the exposure is greater. And the accountability of a commercial operator is held to a higher standard. Then there is the charter or managed aircraft contract. It seems it always comes down to a contract. Often the party asking for the contract is trying to pass off his responsibility to someone else, anyone else, and that could be you. In these contracts, you will see a variety of hold harmless and indemnification agreements as well as insurance requirements that you may not be prepared to assume. Some may actually have nothing to do with your exposure and may require that you purchase coverage that you may not need just to meet the contract requirements. Solution? Have your insurance advisor and attorney review the contract before you sign it. There is very little they can do to repair a situation once the paper is inked. I guess this is where the old saying that “you can’t un-ring a bell” comes in. If caught in time, however, you might have an opportunity to negotiate to remove those insurance requirements that do not apply and soften the indemnification wording that makes you responsible for acts in which you should share no responsibility. Hey, negotiation is cheaper than buying insurance. By Thomas H. Chappell

May 4, 2016
In the aviation insurance business we see many companies and individuals consider the purchase of “corporate” aircraft. For purposes of this discussion, I am referring to seven to fifteen seat, cabin class piston twins or large singles, turboprops, and jet aircraft like Piper Navajos, Twin Cessnas, King Airs, Citationjets, Hawkers, Gulfstreams and similar models. These aircraft are typically flown by professional pilots for the purpose of transporting the owner and/or the owner’s employees and guests on personal and business trips. There are many issues associated with the purchase and ownership of these large, complex aircraft. Full or part time pilots must be recruited, screened, hired, trained, and retained. A maintenance shop or mechanic has to be set up to keep up with the myriad of maintenance issues and the associated complex and important maintenance record keeping requirements. Arrangements have to be made for the storage of the aircraft in a hangar. Office space must be provided for the personnel who work with the aircraft. Fuel prices must be negotiated. Navigational charts and subscriptions must be maintained. These are daunting tasks for a new owner who may or may not even have previous experience with airplanes of any kind. Almost certainly, time and resources spent “managing” a corporate aircraft are time and resources that are not available for the aircraft owner’s core business ventures. In recent years many “Aircraft Management Companies” have formed to provide pilot services, maintenance, hangar storage, aircraft scheduling, logbook management, and other services to aircraft owners. Management companies act like outsourced flight departments. Typically, they employ the pilots, arrange the maintenance or perform it themselves with in house mechanics. In many cases, management companies and owners enter into leaseback arrangements where the manager operates the owner’s aircraft to provide commercial on-demand charter services, allowing increased equipment utilization and some possible tax benefits. The aircraft owner takes a percentage of the charter revenue from each trip, which helps to offset the cost of ownership. Aircraft management companies market themselves as aircraft experts. From an owner’s perspective, their contacts and experience in the aviation world are indeed valuable commodities. In some cases this includes a direct relationship with an insurance agent and/or underwriting company and a level of experience with administration of aviation insurance policies. [/i] As an insurance agent specializing in the placement of aviation risks, I am often asked by aircraft management companies to help place a “fleet policy” to include the aircraft the manager handles – or frequently, aircraft the manager WANTS to handle. Just what is a fleet policy? Like many things, this concept has many definitions. Here’s mine: With a true fleet policy, the aircraft management company holds an insurance policy under which all of its customers’ airplanes are insured. The named insured on the policy is the aircraft management company, affording them the rights and duties of policy administration, payment of premium, reporting of losses, etc. Each aircraft owner is recognized as such and is also protected as an insured for liability and as a loss payee with respect to payment for physical loss to his or her particular aircraft. The advantages to this arrangement can be many. Most importantly, all of the aircraft are handled by a single insurance agent and insured by one underwriting company with a single set of policy terms and conditions. Placing all of the aircraft that a manager operates on a single policy can lead to advantages other than lower premiums. Some of the advantages are described below: [/i] Insurance contracts require that the aircraft be operated in accordance with certain terms and under certain conditions. In cases where an aircraft owner contracts with a professional aircraft management company to operate, maintain, and store the airplane, underwriters generally prefer to draw their contract with the entity that actually operates the airplane on a day to day basis rather than the owner. [/i] While there is certainly some “economy of scale” benefit to a large policy with multiple aircraft, the real key to obtaining the very best premium rating is to make the risk attractive to the various insurance companies, creating competition for the business. [/i] - Broader policies / better coverage – most companies have “broad form” policies that often are available only to policy holders who meet certain criteria. While a single aircraft may not qualify the risk for the best terms, a fleet often will. - Pilot cross-utilization – Once the agent helps the underwriter understand the “big picture,” accommodations can often be made for pilot training that may save all the aircraft owners in pilot training costs. - A single insurer handling all of the management company’s business means that an underwriter can get to know the individuals and the operation. These relationships minimize the need to re-educate insurance companies about the operation many times each year and lead to more favorable treatment. [/i] Many companies apply a penalty for canceling a policy early. With a fleet policy, the policy actually remains in force even when an individual aircraft is deleted. The removal of one aircraft is usually given a pro-rata deletion and the entire unused premium is returned to the policy holder.

May 4, 2016
During bad economic times, the used aircraft marketplace is flooded with aircraft of all kinds. Single-engine, piston-powered aircraft to corporate jets are listed for sale at bargain-basement prices. Cash-strapped owners seek immediate relief by listing their aircraft for sale with aircraft dealers and brokers. During times like these, there seems to be far more aircraft for sale than there are buyers to take advantage of the bargains. As you might imagine, many issues can arise during the sales process from bankers to owners to aircraft brokers to aircraft buyers. The word of caution that I might extend in this scenario is that someone follow the insurance trail to assure that one has all parties and all interests covered under an aircraft Hull and Liability policy. Insurable interest must be maintained by the party providing insurance. All too often the aircraft moves from owner to broker without a clear-cut agreement as to who should provide the insurance. The owner cancels his policy or allows it to expire believing that the broker is providing the insurance and the broker takes possession of the aircraft believing that the owner is providing coverage. And, who is responsible to notify the lien holder or banker? No one if the coverage is allowed to expire. If such coverage is ordered canceled or allowed to expire, the bank may receive no notification. This simple scenario could happen to you or anyone trying to sell their aircraft. Of course, it is easy to fix. First of all, a simple written agreement between the aircraft owner and the aircraft broker will outline the details of the sales process. An understanding of who is responsible for insuring the aircraft should be built into the agreement. Such a contract will specify that the owner retains insurable interest in the aircraft and will provide the insurance for sales demonstration (the purpose of use), naming the broker as an additional insured under the liability section of the policy and offering a waiver of subrogation under the hull coverage. The converse of this is necessary when the broker provides the insurance. Insurable interest must pass to the broker by a consignment sales contract allowing the broker’s insurance to cover the aircraft. In this case, the owner should be picked up under the broker’s policy as an additional insured and, in the event that the owner should cause his airplane to be flown, a waiver of subrogation in favor of the owner should be included in the broker’s policy. Oh yes, don’t forget to specify that any hull damage claim check should include the owner’s name. In either situation, a bank or lien holder should be named as loss payee. In most cases, the bank or lien holder will require that he be given a 30-day notice of cancellation on the policy. In addition, the lien holder will require a breach of warranty and hull insurance in an amount equal to or greater than the amount of the lien on the aircraft. It all sounds so simple. The execution of a consignment sales contract need not be lengthy to help outline each party’s responsibilities for the sale of an aircraft. It should go without saying that such an agreement is necessary and that insurance certificates should be issued as evidence that the insurance requirements of the contract, in fact, have been complied with. You would be amazed how frequently these simple steps are ignored. As an insurance agent, I have seen situations where insurance was duplicated, being purchased by both the aircraft owner as well as the aircraft broker. Once discovered, this scenario only causes a bit of paperwork to rectify the confusion. It is when neither party insures the aircraft that irreversible difficulties arise. When making your plans to sell your aircraft, be sure to include your insurance agent. He could be quite helpful when detailing the transaction. By Thomas H. Chappell

May 4, 2016
Fact or Myth: Nobody can sue me because my aircraft is owned in a shell corporation. This is a Myth if you are the pilot. It is true that in many states and jurisdictions owning property in a corporation or LLC can help to contain liabilities. As¬suming that you have maintained an arm’s length relationship with your shell corporation or LLC, only the assets of the corporation will be at risk. If you are the pilot of the aircraft, however, you are operating the air¬craft under your own authority and pilot certificate. Should a person be injured or property be damaged be¬cause of your negligence, the liabilities will fall squarely on your shoulders (and your personal assets). You can’t out run your personal responsibilities. In addition, the aircraft owner, your corporation, will also be caught up in the suit.