Aircraft title insurance: Do you need it–or not?

 - October 20, 2006, 11:55 AM

The time has come, your boss tells you, to buy another aircraft. So you jump to the task, do your research and find just the aircraft the boss needs. But before she signs her name on the purchase contract, she calls you and asks, “Do you think we need title insurance?”

Title insurance for an aircraft? When you bought the corporate steed eight years ago, you had a title company check the registration at the FAA Civil Aviation Registry. Everything worked out fine. But some aviation lawyers say that times have changed and the risks for buyers have increased. Cover those risks, they say, with aircraft title insurance.

“I’ve had a 180-degree transformation of my thoughts about title insurance over the last five years,” said aviation attorney Kevin Austin of the Aero Law Group in Seattle. “Deals used to be a lot cleaner. In the last six months we’ve seen reason to recommend title insurance for 40 to 50 percent of the transactions we’ve done.”

Attorney Steve Hardesty of law firm Hawley Troxell Ennis and Hawley in Boise, Idaho, said his client, a private aircraft finance company, requires title insurance for all its corporate aircraft transactions. “As a general rule, title insurance serves a good purpose for the right transactions. For airliners, it’s probably too expensive. For the light-airplane weekend pilot, the cost is probably not justified. The niche really is corporate aircraft.”

David Cheek, president of Aircraft Title Insurance Agency, said the FAA registers some 40,000 transactions a year (all aircraft types) and about 1 percent are covered by title insurance. Other aviation attorneys put the percentage of corporate aircraft covered by title insurance at about 5 percent. Although most agree there are good reasons to buy the product in some circumstances, they don’t see that need being as great as the pro-title insurance attorneys say it is.

What Title Insurance Is

“An aircraft title insurance policy,” explained Kenneth Mayfield, v-p and general counsel of Aero Records & Title, a wholly owned subsidiary of Fidelity National Title Insurance, “is a contract between the insurance company and the insured that protects the title of the insured in a specific aircraft from risk, defined in the insurance policy, from challenges to the insured’s title arising from covered events.” Unlike casualty and liability insurance, which cover events after the date of the policy, title insurance covers events that happened before the date of the policy.

If necessary, title insurance will provide, at no cost to the insured, a legal defense team to defend or assert the insured’s title in court. “If the court rules that someone else has superior title to your aircraft,” said Mayfield, “the company will pay for your loss of title.” The policy is in force for as long as you own the aircraft, or if it is a lender’s policy, for as long as the insured loan is unpaid. Mayfield and Cheek, along with John Casbon, president of First American Transportation Title Insurance, presented a session on the topic at the ninth annual Corporate Aircraft Transactions and Fractional Ownership Interests seminar in New York City in July.

One reason interest in aircraft title insurance is increasing is the product itself. Early-vintage aircraft title insurance, first available in the 1980s from David Cheek’s father, Oklahoma City attorney Bill Cheek (who had experience with real estate title insurance), covered only the accuracy of the search of the FAA records by a title company or attorney. If a problem with the title did not appear in the FAA records, there was no insurance coverage. In 1999, Frank Polk, an aviation attorney and shareholder of McAfee & Taft of Oklahoma City, helped First American redesign its aircraft title insurance more along the lines of real estate title insurance. Today, aircraft title insurance policies cover much more risk than Bill Cheek’s first policies. However, they are still relatively inexpensive–typically from 0.15 to 0.5 percent of the purchase price, according to Mayfield.

Another reason for increased interest in title insurance is that more business aircraft are owned by sole-purpose limited liability corporations (LLCs) set up just to own the aircraft. Austin explained, “LLCs became more popular in the late 1990s, in part to shield parent companies from liability and avoid shareholder scrutiny. Now an increasing number of these LLCs are selling their aircraft. Because it is sole-purpose, the LLC is frequently liquidated after the aircraft is sold. If there’s a problem with the title–a lien or unpaid taxes, for example–it’s hard to sue a liquidated company.”

One way to protect against title problems is to obtain an additional title warranty (a guarantee that the title is clear) from the parent company at the time of purchase. “But with LLCs, piercing the corporate veil to get such a guarantee can be difficult,” Austin said. Title insurance can cover most of the problems.

Lack of payment of state sales and use taxes by the previous owner is another increasing concern. Sometimes aircraft owners honestly think they are exempt from these taxes, or would have been if they had filed for an exemption. Other owners are not so honest. “Some turn over aircraft quickly, before state authorities can catch up with them,” said Austin. The buyer might be caught holding the tax bag.

A third reason Austin sees for the increasing need for title insurance is what he called “back-to-back” transactions by aircraft brokers. “Some brokers will hold title for a short time to orchestrate a bigger cut of the transaction. But now the broker’s liabilities can be attached to the title and many brokers don’t have a lot of assets.”

Polk, who is also an agent for First American, noted, “A lot of people say they’ve done deals for years without title insurance with no problems. It’s true that not many deals go bad. But when they do, large sums can be involved.” You have three options when it comes to aircraft titles, he said. “You can get a title opinion from a lawyer; you can buy title insurance; or you can ‘go naked’ and depend on the FAA title search by a title company. A lawyer’s title opinion will be worded to avoid as much liability as possible. The problem with depending on a title company is that there’s not much to sue if there’s a problem.”

Other attorneys say title insurance is unnecessary, as long as the aircraft has not gone through many owners, the buyer has full trust in the seller and previous owners and the ownership has not crossed international borders (Mexico and former CIS countries were mentioned as particularly risky). Said attorney Jeff Wieand of Boston Jet Search, “The FAA registry is meant to trump most state claims. If you have the bill of sale on file with the U.S. registry and no liens on file, for all practical purposes, you have title. No one can come after you, even if the seller gave the bill of sale to someone else before you.”

FAA Registration Not Enough

But Mayfield disagreed. He said, “The FAA’s Civil Aviation Registry examines an aircraft’s registration records, records the documents supporting an application for registration, registers the aircraft and issues a certificate of registration. But this is not the same as a certificate of title. There is no such thing, as far as the FAA is concerned.” The FAA doesn’t determine ownership of aircraft, he said, just apparent eligibility for registration.

Most attorneys say title insurance for new aircraft purchased directly from the factory is unnecessary, but Polk said he has written policies for buyers when there have been concerns about the financial viability of the manufacturer. “A manufacturer with money problems may have borrowed money using unsold aircraft as collateral,” he explained.

“For the lender who loans the aircraft buyer money, requiring title insurance just about always makes sense,” Polk said. “A lender can lose an aircraft if the borrower does not have a valid title, if the lender’s lien is invalid or if the lender’s lien is subordinated to another claimant.” He has put together a list of “Sixty-something Ways for a Lender to Lose an Aircraft,” all of which can be covered by title insurance. Other problems he mentioned included mechanics’ liens and outright forgeries of the bill of sale. These “cloud” a title and can cost a buyer or lender much time and money to clear up. Polk said his firm has encountered five or six such forgeries in the last few years.

The bottom line, say both the pro- and not-so-pro-title insurance advocates, is, how much do you trust the seller to deliver a clean title with no hidden strings attached? “What’s the ownership issue?” asked Wieand. “If the owner is Count So-and-so who has debts all over Europe, title insurance is a great idea. On the other hand, if the seller is a solid Fortune 500 company that bought the aircraft from the manufacturer, you probably don’t need it.”

“But,” countered Polk, “how do you know your Fortune 500 company is not actually the next Enron or Tyco?”