Aircraft Liability Insurance: What is it and do you need it?

March 23, 2017 - Anyone can sue anybody anytime for anything seeking any amount of financial damages. This premise of our legal system can strike fear into the heart of anyone; yet, this premise of our legal system is intended to protect equally those who suffer injury or loss and those who might be accused of causing injury or loss. The challenge becomes how anyone manages to be financially capable of seeking recovery from those accused of causing injury or loss and at the same time ensure financial security for those accused of causing injury or loss. In the 19th century, laws were created to protect both sides of this equation and as a result we have “insurance” which allows individuals to purchase financial security (insurance) from an insurance company who then indemnifies each individual in the group for their respective legal obligations. In the end, if the insurance company has carefully underwritten each individual in the group, the collective of claims from all individuals will be paid leaving a small but reasonable profit for the stockholders who own the insurance company. This is called the law of large numbers. This article and the related webinar  will explore aircraft liability insurance — what it is and whether you need it.

What is aircraft liability insurance?

Aircraft liability is just one part of an aircraft insurance policy. The other parts insure the value of the aircraft for partial or total loss, and medical expenses incurred by occupants in the aircraft, other than medical expenses that are part of a liability insurance claim.

Aircraft liability insurance applies to the named insured’s legal obligation for bodily injury including death incurred by someone other than the named insured and property damage to property owned by someone other than the named insured arising out of the ownership, maintenance, or use of the insured aircraft. The insurance policy between the insurance company and the named insured forms a partnership whereby the named insured pays the insurance company money (premium) and the insurance company agrees to defend and indemnify the named insured (i.e., be financially responsible for the named insured’s legal obligations).

Just look in the newspaper and you will find court announcements listed as ABC Insurance Company & Thomas Jones v. XYZ Insurance Company & Mary Smith. If you were to investigate, you might find that Jones fell at a party at Smith’s house and his medical insurance company (ABC) is seeking recovery from Smith’s homeowner insurance company (XYZ). In short, XYZ is accepting financial responsibility for the legal obligation of Smith for the bodily injury incurred by Jones and subsequently paid by for by ABC. If someone is injured or someone’s property is damaged because of the use, maintenance, or ownership of your aircraft, the insurance company whose aircraft insurance policy you purchased would assume responsibility.

Is aircraft liability insurance expensive?

You might be surprised to discover that the price for aircraft liability insurance is only a fraction of what aircraft owners pay when they also buy aircraft physical damage insurance. Here are a few examples that illustrate this:

-          Cessna 172, private pilot with 200 hours in make and model, $1,000,000 per occurrence and $100,000 per Passenger is $175

-          Vans RV-6A, private pilot with 200 hours in make and model, $1,000,000 per pccurrence and $100,000 per passenger is $190

-          Pitts S2-B, private pilot with 200 hours in make and model, $1,000,000 per occurrence and $100,000 per passenger is $325

-          Evolution Revo WSC, private pilot with 200 hours in make and model, $1,000,000 per occurrence and $100,000 per passenger is $425

The cost for aircraft physical damage insurance in the examples above could be as low as $300 for $30,000 on the Cessna 172 and as high as $3,000 for $75,000 on the Revo or Pitts. Keep in mind these are generalizations and not exact quotes; the point is that aircraft liability insurance is not that expensive. Also, keep in mind the numbers above are based on the aircraft owner buying both aircraft liability insurance and aircraft physical damage insurance. Aircraft owners do have the option to purchase aircraft liability insurance only in which case the prices shown above would increase by 25-50 percent. The point still is that aircraft liability is not expensive.

Aircraft owners can reduce the cost for aircraft liability insurance by deciding to purchase less coverage. If the insured aircraft only has two seats there could be a slight reduction by purchasing $500,000 per occurrence instead of $1,000,000, but the difference is usually minimal.

What about legal defense?

This is another great reason to buy aircraft liability insurance! Aircraft insurance policies have a section in the “insuring agreements” called “defense, settlement, and supplementary payments.” In this section, the insurance company states that they will pay certain expenses beyond the limits of the aircraft liability insurance. These expenses include legal defense. This is huge. Without aircraft liability insurance, an aircraft owner would be responsible for all such defense costs — not to mention any judgement handed down by a jury and/or judge. Even the most minor incident could run up a substantial legal expense — enough said!

What is the difference between “per person” and “per passenger” sub-limits?

When you are shopping for coverage, be aware of the distinction between per person and per passenger sub-limits on the limit of insurance for aircraft liability insurance. The per passenger sub-limit applies only to passengers and there is not a sub-limit on non-passengers. A per person sub-limit means passengers and non-passengers are both subject to the sub-limit. Here are two examples that show the impact of the per person sub-limit:

Frank takes John for a ride in his aircraft. During the flight the engine quits and Frank makes an emergency landing on a road. During the landing John is injured and the driver of a car on the road is also injured. Frank’s aircraft liability insurance is $1,000,000 per occurrence with a sub-limit of $100,000 per passenger. The aircraft insurance company pays $100,000 for John’s claim and $700,000 to the driver of the car for injuries. The insurance company also pays $25,000 for damage to the car.

Alice takes Mary for a ride in her aircraft. Alice didn’t realize the lineman at the FBO did not properly secure the fuel caps and the engine quit when all of the fuel drained out during the flight. Alice did a great job making an emergency landing on a golf course but unfortunately Mary and one of the groundskeepers working at the golf course are injured. Alice’s aircraft insurance policy has a $100,000 per person sub-limit on the aircraft liability insurance. The insurance company pays Mary $100,000 and $100,000 to the groundskeeper; however, the groundskeeper has over $700,000 in medical expenses and is not expected to be able to work for an extended period. All told, the attorney representing the groundskeeper is seeking $900,000 from Alice but her aircraft liability insurance is exhausted because of the $100,000 per person sub-limit.

The message is do not buy aircraft liability insurance with a per person sub-limit! Even if the cost of the aircraft liability insurance is slightly less, going cheap with a per person sub-limit is not the way to go — ever!

Can I buy aircraft liability insurance without sub-limits?

Sometimes the insurance company may offer aircraft liability insurance without a sub-limit. This is commonly referred to in the aviation insurance community as a “smooth” limit. The smooth limit means the insurance company is providing a single amount, or limit, for each occurrence. The smooth limit is used, as necessary, to address all of the liability claims that arise out of an occurrence. The following example uses a smooth limit of $1,000,000 per occurrence for bodily injury and property damage:

Steve invited his friend Susan to take a short flight to a nearby airport for lunch on Saturday. During the landing at the destination airport Steve over-shoots the turn to final and stalls and the aircraft crashes into a park just outside the airport. Steve and Susan are both seriously injured and a group of people in the park are also injured. The aviation insurance company who insured Steve will apply the full limit of $1,000,000 as necessary to settle all of the claims that may arise for the accident.

Smooth limits of insurance cost more and aviation insurance companies generally only offer smooth limits for pilots with higher levels of experience and aircraft the aviation insurance company determines are better risks.

Aircraft liability insurance is not complicated but in order to make sure you get the right aircraft liability insurance at the best price you need to work with a knowledgeable aviation insurance professional who can search the aviation insurance marketplace to match you up with the right aviation insurance company. EAA members have a great resource with EAA Insurance Solutions administered by Falcon Insurance Agency, Inc. If you would like to learn more about how EAA Insurance Solutions administered by Falcon Insurance Agency, Inc. can help you get the right insurance at the best price, give us a call at 866-647-4EAA (4322) or go online at www.EAA.org/insurance. One of the aviation insurance experts will be happy to help you with your aviation insurance needs.

Bob Mackey is senior vice president with Falcon Insurance Agency, Inc. the official administrators of EAA Insurance Solutions. Bob has been involved in the aviation insurance industry for over 35 years and he is a commercial pilot with instrument ratings. If you have any comments about this article or if would like to see a specific aviation insurance topic addressed in a future article you may email Bob at bmackey@falconinsurance.com.