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Do You Feel Lucky?
Even before Covid-19, the aviation insurance had become painful for aircraft operators. Aircraft owners are seeing premium increases in the 20%-30% range on all renewals. Owners with recent claims are experiencing even higher premium increases.
Why? The aviation insurance market ended an unusually long “soft” market. Competition drove down premiums, so insurers didn’t have adequate reserves to pay large losses. These are not just the large losses that make headlines like the Kobe Bryant and Boeing crashes. It is also the everyday non-headline claims that add up and drive premium increases. All segments of the aviation industry enjoyed a healthy level of activity before Covid-19. That increased level of activity meant an increase in non-catastrophic claims that add up behind the scenes. Some insurers left the market rather than compete against low premiums that could not sustain losses. Others decided to reduce or eliminate coverage to some operators, such as older pilots and/or owner-flown turbine aircraft.
Is self-insurance a viable alternative?
What is self-insurance? Self-insurance simply means that a company or individual does not pay a third-party company. Instead the self-insuring company or individual intends to pay costs out-of-pocket if an accident happens.
Historically, some cash-rich industries would take a creative approach. They purchased aircraft liability insurance, but they did not purchase “hull” coverage for their aircraft. If the aircraft was damaged or totaled, that loss was out of pocket. But, if someone was injured, insurance coverage was available to provide legal defense costs and to pay any settlements or judgments.
Who can self-insure? Most Part 91 operators have no obligation to carry insurance. There are federal insurance requirements for Part 135 and Part 121 air carriers. Some states, as part of their aircraft registration requirements, require minimum aircraft liability insurance. For instance, Virginia requires Part 91 operators to have liability coverage. For those who want to self-insure, they have the option of delivering $250,000 in cash to the Virginia Department of Aviation, or an irrevocable letter of credit for $250,000.
But is that enough?
Does it sound expensive to park $250,000 with a state agency in case of an accident? It might, but can you imagine an aviation liability claim where $250,000 would be adequate to cover the settlement or judgment? The average “slip and fall” settlement is between $15,000 and $45,000. The average settlement in the U.S. for an aviation fatality is $4.5 million. Of course, if your company has cash reserves in the millions, and a jury finds that the accident was a result of gross negligence, then the plaintiffs’ attorneys will be seeking additional “punitive damages.” Juries have often awarded punitive damages in the hundreds of millions against “deep pockets” defendants in aviation.
If your company is financing an aircraft purchase, then self-insurance is not an option. Banks typically will not loan your company money for an aircraft until you prove that your company doesn’t really need the money. Nevertheless, even though you can demonstrate to the bank that your company does not need to borrow to buy the aircraft, you won’t be able to convince the bank that you have enough cash to self-insure. Banks will insist that you carry “hull” insurance to cover the full cost of the aircraft, and a healthy amount of liability coverage as well.
A forgotten benefit of insurance
An overlooked benefit of liability insurance is the legal defense provided by the insurance carrier. Promptly after an accident, the insurer will hire counsel, at their cost, to represent your company. Your company may have in-house counsel, but at no charge to your company, your company will get the benefit of experienced aviation counsel that will advise and counsel your people through the harrowing legal process that carries on at a glacial pace for months and even years after an accident. The insurance company pays these attorneys, but they work for the insured. Their experience gives them unique insight in how to work through the aftermath of an accident. The cost of legal defense after a fatal accident can quickly reach six figures, but the insurance company does not deduct this cost from your liability limits. If the policy is for fifty million, and the insurance company pays $100,000 in legal fees, the full fifty million dollars is still available to pay settlements or judgments.
Self-insurance may seem like a reasonable risk in the face of rising premiums and an uncertain economy. However, in Safety Management System terms, this is a low probability/high severity risk. At the end of an accident free year, premiums look expensive, but premiums seem quite cheap when a plaintiff’s lawyer serves your company with a lawsuit in the wake of an accident.
This article appeared in the May/June, 2020 issue of Business & Commercial Aviation as a Point of Law article.