Recent losses have highlighted commonly misunderstood aspects of aviation insurance and how Insurers interpret policy terms and conditions.

Any reader who owns or operates an aircraft would be well-advised to make a careful note.

Here, in no particular order of importance, are the Top Ten misconceptions when it comes to aspects of aviation insurance. I refer to the owner, or policyholder, as the “Insured” throughout for the sake of consistency.

1 - “Advanced training” includes “conversion-to-type”. Wrong.

Insurers recognise 3 categories of training in terms of policy coverage:

a. ab-initio – training towards an initial licence (i.e. a PPL)

b. conversion-to-type – training undertaken by an already-licensed pilot for the purpose of adding additional aircraft types to his license

c. advanced – training undertaken by a licensed and type-rated pilot for the development of skills i.e. continuation training or practising under the hood with a safety pilot, the acquisition of night, safety, instrument or instructor ratings, periodic license renewal test flights, etc.

The reinstatement of a lapsed license would, technically, be “ab-initio”, but will often be described as “PPL reinstatement training”.

If an aircraft, which is covered for “advanced training” is used for “conversion-to-type”, there will be no insurance.

2 - If a policy calls for a pilot to be “commercially licensed”, that could mean a CPL issued by any country. Wrong.

When Insurers require pilots to be “commercially licensed”, they mean that the pilot must hold a commercial license in terms of which he would be entitled to fly the aircraft being insured. It does not matter whether the flying itself will be commercial or not.

If the aircraft is ZS-registered, this would generally (with exceptions) mean that the pilot must hold a South African commercial license. Whether he is a Commercial, Senior Commercial or Airline Transport Pilot is not relevant.

However, the mere fact that a pilot holds a South African PPL but a Botswana CPL would not entitle him to fly a ZS-registered aircraft where the insurance policy requires “commercially licensed pilots”.

3 - During instruction, the pilot undergoing instruction (the PUI) does not need to comply with the Pilot provisions of the policy, so long as the instructor does, because the instructor is the pilot in command of the aircraft. Wrong.

Whilst it is certainly true that the instructor is usually the designated pilot in command, the PUI must also comply with the Pilot provisions of the policy. In fact, both the instructor AND the PUI must comply, in order to avoid any possible doubt or misunderstanding.

4 - Where a policy requires pilots to have a minimum level of flying experience, that can include hours flown but not logged. Wrong.

When an Insurer calls, for example, for pilots to have 1000 hours total flying experience”, this refers to experience that is logged and can be proved. Believe it or not, there have been occasions when a pilot, who fell well below the required threshold, argued that he had many more hours of experience but hadn’t bothered to log them and that he therefore complied with the policy requirement!

Sometimes the policy will require a minimum number of rotorwing experience, or hours logged as pilot-in-command, or “multi-engine”, “turbine”, “jet”, “make and model”, turbine rotorwing”, etc., etc. Each policy is different, so particular care should be taken to ensure compliance at all times.

5 - The Insured can decide whether the aircraft should be repaired or can elect to take cash instead. Wrong.

Under aircraft insurance, the Insurer has three options in the event of an agreed Hull claim: to repair the aircraft, to pay for the aircraft or to replace the aircraft. However, the options belong exclusively to the Insurer.

Quite often, the “replace the aircraft” option will be removed by prior agreement, converting the policy to an “Agreed Value” basis. This then means that the Insurer has two options: to repair the aircraft or to pay for it i.e. to pay the Agreed Value specified in the policy.

If the Insurer decides to repair the aircraft, it will be liable for all the costs involved, subject to the deduction of any amounts which are not accident-related or which are payable by the Insured in terms of the policy conditions.

In special circumstances, some Insurers will agree to pay the assessed cost of repairs, in cash, to the Insured or any other person named as a loss payee under the policy (usually a bank), in lieu of effecting repairs. However, there can be dangers in this approach. Quite often, the actual cost of repairs will escalated owing to spares price increases, additional damage only discovered during repairs, etc. By accepting a fixed amount of cash, the Insured will waive any entitlement to further payments in the event of an escalation in the actual cost of repairs. Once the Insurers have paid, the claim is closed forever.

6 - Insurers are liable for the full cost of repairs, regardless of the extent. Wrong.

Where the required repairs will include the replacement of “wear and tear”, that amount will be deducted from the settlement. Similarly, Insurers are not liable for the full cost of Lifed items that are overhauled or replaced. If an engine is overhauled at half-life, the Insurers will deduct 50% of the standard overhaul cost. Items which are “on condition”, such as propeller blades, for example, will be assessed in terms of the amount of life that they were good for prior to replacement. In addition, the Insurers will deduct the agreed Excess from any settlement.

Where the Insured is unable to carry the uninsured costs, the option of a “cash in lieu of repairs” settlement may have to be considered. However, that would leave the Insured in the same position, being unable to effect repairs and the only option may be to sell the aircraft in an unrepaired condition. It is therefore very important that the Insured makes ongoing provision for, in particular, the overhaul or replacement of Lifed items so that, in the event of a loss, the funds are readily available.

7 - If repairs cannot be carried out within a short space of time, the Insurers have no option but to “write off” the aircraft. Wrong.

Aircraft insurance policies are mute on the question of the time taken to effect repairs. Depending upon the nature of the damage, the type of aircraft, the availability of spares and components, etc., a repair may take weeks or months to complete. In extreme cases, certain parts may have to be manufactured.

Insurers are not responsible for the time taken to effect repairs, although it is equally true to say that the lengthier the repair, the more expensive it is likely to be and, therefore, the more likely it is that the Insurers would, in any event, elect to “write off” the aircraft. But there are no guarantees and the Insured should ensure he is able to withstand the loss of the aircraft during a lengthy repair period. One option is to purchase “Loss of Use” insurance, which will pay an agreed amount for each day that the aircraft is unserviceable due to an accident.

8 - It’s the broker’s responsibility to ensure that the Insurer pays all claims. Wrong.

A broker has a number of duties towards the Insured. These include a duty to take reasonable care, a duty to carry out his mandate timeously, a duty to explain policy conditions to the Insured, a duty to act in the best interests of the Insured at all times, and so on.

However, a broker cannot ensure that the Insured remains within the terms of the policy – all the broker can do is to point out what those terms and conditions are: the rest is up to the Insured.

9 - The broker is responsible if the Insurer is financially weak. Usually wrong, but sometimes right.

The duty of care includes the important aspect of the selection and recommendation of the Insurer(s) with whom coverage is to be placed.

In making such a recommendation, a broker must be sure to disclose to the Insured any information within his knowledge (or which ought to be) regarding the Insurer and which might affect the Insured’s judgement. For example, if an Insurer has a poor claims-paying record, this would be material to the Insured, notwithstanding the cheaper insurance premium quoted by that Insurer.

Another factor is the general financial condition of the Insurer concerned. This is particularly relevant where the Insurer is situated overseas. Agencies such as Standard & Poor’s (S&P) provide financial strength ratings for most Insurers in the world and major brokers will often require a minimum rating before they will even consider placing their client’s insurance coverage with any particular Insurer. A generally-accepted minimum S&P rating would be “A-”.

A broker who offers coverage from an Insurer which is S&P-rated below “A-”, or which is not rated at all for any reason, may attract a liability for any unpaid claims that subsequently arise, unless the facts have been placed before the Insured, who has elected to insure with that Insurer notwithstanding.

10 - The Insured can be paid for the operation of an aircraft insured for “private use only”, provided he doesn’t make a profit. Wrong.

An aircraft insured for “private business and pleasure” may NOT be used for any form of reward. In this context, a “reward” is anything received by the Insured in return for the use of the aircraft. It might be cash or any other consideration, but it does not even need to be commensurate with the actual cost of the operation. So, the Insured who allows his friend, Fred, to fly his aircraft in return for the use of Fred’s holiday cottage in Ramsgate is receiving a reward for the use of the aircraft.

The solution is merely to ensure that the insurance permits rental of the aircraft to Fred. There would not normally be any increased premium, particularly where the pilot who is renting the aircraft is specifically named under the policy.

A PPL may not receive any form of reward for flying an aircraft. In doing so, he would be breaching the terms of his license and the insurance coverage may be invalidated.

If 4 friends are going to Durban on holiday, they may jointly hire an aircraft from a flying club and may contribute equally to a “pool” for the purpose of buying fuel, etc. However, if one of the 4 is a PPL who will be doing the flying, he may not receive any direct reward or benefit for having done so. Not even a beer at the end of the flight. Not even the more comfortable bed at the B&B!!

If this article has raised additional questions in your mind, you are welcome to contact DJA and we will endeavour to answer them immediately.