With regard to liability insurance, answers to the question of “How much is enough?” have always been something of a mystery. But for shareholders in a fractional program, the answers are compounded by the concept of shared ownership.
According to Carol Tyrrell, an account executive with Van Nuys, Calif.-based broker NationAir Insurance, many fractional owners are unaware that the single-occurrence, primary-liability policy provided by the fractional operator is shared by the fractional owners. A $200 million liability policy, said Tyrrell, does not protect every shareholder in a particular airplane for up to $200 million. The apparent conclusion is that with regard to a fractional aircraft owned by 16 shareholders, each with a one-sixteenth share, the policy provides each individual with a maximum of only $12.5 million in liability coverage.
Not everyone agrees with this conclusion, though it may be that some share owners are not as familiar with how their liability coverage is structured. While in theory each owner is responsible for an equal share in liability coverage, reality presents a somewhat different picture.
Vic D’Avanzo, senior v-p of general aviation for the United States Aviation Underwriters Insurance Group (USAIG), admitted, “It is true that there is a dissolution of coverage.” But he added that a court is most likely going to determine blame and liability based on “who is most obviously responsible for the accident, who has the deepest pockets and the loss of the plaintiff.”
To date, said D’Avanzo, there has been no legal case to test the liability limits of a fractional owner. But it is likely that in such a case, attorneys for the plaintiff will not only name the owner who was in custody and control of the airplane at the time of the accident, but all the other owners. And certainly, the fractional operator, typically listed on the primary policy as the “first named insured,” will be included as well.
So to say that each shareholder in a fractional program is covered only in proportion to his or her share in ownership of the airplane is “something of a misrepresentation,” said one aviation attorney.
Susan McKeon, senior counsel with Cooling & Herbers, agreed with D’Avanzo. In the case of frax programs in which the aircraft provided may not be the actual shareholder’s aircraft, she added: “It’s entirely possible that none of the shareholders in a particular airplane will even be on board at the time of the accident. But they would nevertheless be liable and in all probability be named in any ensuing lawsuit.”
The real question is not so much whether the liability coverage is diluted by fractional ownership, but “how much insurance is enough?” Underwriters and attorneys alike feel that in the wake of September 11, even $200 million might not be enough–despite a $50 million cap per occurrence on accidents as a result of war or acts of terrorism, which applies only to injuries and property damage outside the aircraft.
So How Much Is Enough?
Months before September 11, D’Avanzo gave a presentation of a worst-case scenario in which a Gulfstream had a midair collision with an airliner, which subsequently, and ironically, collided with one of the World Trade Center towers.
Post-September 11, even the most conservative industry observers estimate the terrorist attacks will eventually cost insurers more than $100 billion. With regard to insurance, this loss has dramatically challenged everyone’s estimate of “how much is enough.” It is no longer difficult, said D’Avanzo, to imagine an accident in which there are not a half-dozen victims, but hundreds. In the legal proceedings following such a catastrophe, $200 million in liability insurance would quickly disappear.
Before deciding how much is enough, fractional owners should know the limits of the primary-liability coverage provided by their fractional program.
USAIG has worked with NetJets to provide three levels of coverage–$300 million, $400 million and $500 million–based on the seating capacity of the aircraft. D’Avanzo said the company is also providing similar coverage for Avolar.
Flexjet is covered by Global AAU with a $200 million single-limit per-occurrence primary-liability policy covering bodily injury and property damage, regardless of aircraft size or seating capacity. Global AAU provides similar coverage for Flight Options and Raytheon Travel Air.
If an owner believes the primary policy provided by the frax operator is insufficient, the answers are simple though the solutions are limited.
Unlike USAIG, Global AAU does offer additional liability coverage through a Max policy program. Max is available to each individual owner who participates in a frax operation covered by Global AAU. It is not a true “excess” coverage, as the Max policy limit would be reduced by the amount paid under the frax operation’s primary policy covering the owner. The purpose is to ensure that the share owner is covered at all times by the liability limit he or she acquired through the Max policy.
If a shareholder in a fractional program not covered by Global AAU believes additional liability coverage is necessary, the only other source is a Lloyds of London-licensed aviation insurance broker. “It’s available,” said one insurance source, “but it will cost more than some owners are willing to pay.”
USAIG had offered additional liability coverage beyond the primary blanket policy provided by the fractional operator “but has not for several years now.”
U.S. underwriter American International Group (AIG) had offered such coverage in addition to the primary policies but it has put a halt to the practice. The company, said a spokesman, reexamined the program after September 11 and in October began issuing letters of nonrenewal to the holders of such policies. “We could see it reaching a point where each of 16 owners of one aircraft might have a total of $100 million in additional coverage,” said AIG v-p of underwriting Kyle Sparks. Such coverage, he noted, could cost the company $1.6 billion.
Concern has also been expressed by some fractional owners that the FAR Part 91 Subpart K proposal would establish the share owner of an aircraft as its operator as well.
D’Avanzo, however, said insurance coverage is not based on FAA regs–when there’s an accident, “whether the FAA defines the fractional owner as its operator won’t affect liability coverage.”
The bottom line, offered D’Avanzo, is: “As a fractional owner, you don’t hire the pilots or manage the maintenance program. The only thing you do as the owner is assume strict liability, and the question to ask is not whether that liability protection is shared, but whether it is enough.”