Aircraft Insurance 2014:

Aviation International News » June 2014
New companies are betting that a business model built on sharing will prove its value in the aviation market, as it has for cars and hotels.
June 1, 2014, 6:00 AM

As the softness of the aviation insurance market continues to drive premiums down, aviation insurance underwriters, brokers and agents are struggling to make money. In fact, when asked how much lower premiums could fall before they hit bottom, Aviation Insurance Association (AIA) president Franklin Bass told AIN, “I thought we were there last year.”

“The market is very soft,” Bass said. “Premiums have gone down in the last few years. It’s a struggle for underwriters to make a profit in this market. You can insure your four-place airplane [such as a Cessna 172] for less money than it takes to insure the family car.”

More than 500 people registered for the 2014 AIA Conference, held May 3 to 6 in Phoenix. The conference featured continuing-education sessions for insurance agents, brokers, underwriters and legal counsel. Managing risk, safety and commercial use of unmanned aerial vehicles were recurring topics among the speakers. But the conference also provided the opportunity for brokers to meet with underwriters to ask questions and share information. Some underwriters expressed the desire for their insureds to do the same.

“There are three legs to a successful insurance program: the customer, the broker and the insurer,” said Joseph Strickland, global head of aviation for Allianz Global Corporate and Specialty Americas, one of the largest aviation insurers in the world with operations in 14 countries. “The worst time to meet your insurance carrier is after a loss. You want to become familiar with what [your insurer] offers you at a more relaxed time.”

Strickland noted that aviation operators of all sizes should consider inviting their insurance brokers or underwriters to tour their operations. While this action might not result in reduced premiums, insurers can share resources and provide suggestions to improve operations.

“We think we can play an important part in making operations better in a few different ways,” Strickland said. “Approaching your insurance carrier and inviting them out to see your operation and review your coverages is certainly an indicator of a safety-minded insured. We’re always happy to visit with an insured, to view their operations large and small, and to give them the benefit of our experience.

The invitation for an insurer to visit the insured doesn’t happen as often as it should, especially with single-aircraft operations, said Strickland. Sometimes dubbed “safety engineering visits,” these onsite meetings are typically reserved for the larger operations. But one reason to invite the insurer out is when a flight department wants to implement a safety management system (SMS). Insurers often have experienced people who can walk the flight departments through the SMS process.

“A growing number of flight departments are implementing SMS,” said Strickland. “It’s becoming another key area where pilots can enhance their operations through standardization and best practices. It’s important, and it should be seen that SMS is a path toward safer operations.”

However, Carole Gates, director of risk management and insurance for the International Air Transport Association (IATA), doesn’t believe an SMS is the end-all for managing risk. “Risk management should consist of governance, risk and compliance disciplines,” said Gates during the “Managing Risk–A Panel’s Perspective” discussion. “In the quest for no accidents, [operators] have an SMS in place, but it’s only one component of enterprise risk management.” Gates noted that while most operators are focused on managing flight risks, the risks in ground operations, outsourcing and suppliers, quality systems, security and other systems are either not managed or not integrated into the SMS. “Integration is key and the [insurers] are the ones that can make the integration happen.”

Collecting and Analyzing Data for Safer Operations

Both Strickland and Gates independently indicated the need for operators to collect statistical data in the quest to increase safety.

“Our industry can do a better job of data collection and analyzing exactly where we’re going wrong,” said Gates. “To show that your risk profile is improving, you have to collect the right data and make it useful.”

Strickland noted that in the general aviation market, some corporate flight departments are already installing flight data monitoring systems such as Alerts, produced by North Dakota-based Appareo Systems. “There are two ways to look at data that comes out of aircraft, whether it’s a jetliner or a general aviation aircraft,” said Strickland. “You can review data in retrospect to see what went wrong and train to [prevent] it from happening again, or you can spot trends in areas where it didn’t lead to an accident but could in certain circumstances. Collecting that data has been more of a challenge in the general aviation world. Systems such as Appareo’s are allowing [operators] to collect data and use it to promote safety.”

Managing Risk from a Corporate Perspective

As an operation grows, managing risks can become tougher. For a large enterprise such as Honeywell, the risk profile is astronomical. According to Mark Larson, v-p and chief litigation counsel for Honeywell Aerospace in Phoenix, Honeywell maintains an aggressive stance toward avoiding litigation and avoiding setting precedents when dragged into litigation.

“There are few aircraft in the skies anywhere in the world that don’t have Honeywell content,” said Larson. “You can guess the scope of the risk related to our products and the number of litigating matters that we have at any one time. Honeywell has been aggressive about avoiding litigation. That’s the most effective type of risk management in my world. So we have an engaged product integrity department that provides litigation support. Whenever we go to trial, the product integrity engineers support our outside counsel. They also play a major role in accident investigations, and in field service reports–issues where our products in the field didn’t perform exactly the way they were designed or manufactured to perform. By handling those reports quickly, we head off litigation and improve safety overall.”

He noted a potential precedent-setting case that Honeywell vigorously defended regarding cabin air quality. “We’re always concerned with precedent-setting litigation,” said Larson. “A few years ago, a group of flight attendants sued Honeywell and Boeing alleging exposure to toxic cabin air and resulting neurological deficits. We were equally concerned about defending the case and about the precedent. If we lost to that group of flight attendants, there are a lot of other flight attendants, pilots and frequent fliers who might also believe they were damaged by toxic cabin air.”

For Julie Duffy, v-p and deputy general counsel of litigation at Textron, one of the big issues in litigation is a dearth of aviation experts available for testimony. “Expert development is a hot topic for us right now,” said Duffy. “The panel of experts in the aviation world from the defense standpoint is thinning as experts are retiring. We haven’t planned for succession so we need to share.”

Duffy said that Textron is also trying to manage litigation costs by looking at ways to streamline discovery processes and educating outside counsel about aviation matters. “We are looking to our broker and lead insurer to use their knowledge to help us think outside our own box and develop ways to select counsel with strong subject-matter expertise so we might not have to spend time educating them,” said Duffy. “For example, is there one firm that does great GARA [General Aviation Recovery Act] motions, so we don’t need to re-create the wheel with every local counsel?”

One way Textron is reducing litigation costs is to use electronic discovery tools to archive old paper documents. “We can answer a request for production in 30 days instead of 120 days,” said Duffy. “Textron has invested in in-house e-discovery tools, including an electronic legal hold tool that has helped us manage who’s on legal hold and the documents related to that case. We have IT resources dedicated to our legal team to immediately image and clean out hard drives. We see savings of $6 to $8 million based on the reduction of the amount of data that we send to outside counsel.”

Criminalization of Pilots and Mechanics

Laws in the U.S. do not criminalize the conduct of pilots who make mistakes and crash airplanes, but this assort of retribution is common outside the U.S. Unfortunately, while most aviation insurance policies cover hull and liability losses they provide no coverage for a pilot or operator entangled in criminal proceedings stemming from an aircraft accident. Gates asked the insurance underwriters in the audience to consider new policies covering criminalization. “I’ve been trying to get an explanation of all countries’ laws on criminalization for underwriters so you can know what you need to underwrite,” said Gates. “If you don’t have that knowledge, then the coverage that you already have in your aviation policy, up to $25 million, will not go to [the operators]. If I don’t get [the operators] to give you the information you need, you’re not going to accept the claim.”

Strickland said some policies might cover these circumstances, especially for companies that already have facilities in the foreign countries where their aircraft are operating. “Depending on the wording in various policies around the world, some defense costs can be covered, but criminal proceedings that might go along with civil proceedings are typically a separate area. While it’s a continuing and perhaps a growing concern for operators who have typically operated just in the U.S., the large manufacturers that have a presence outside the U.S. are more familiar with jurisprudence that criminalizes certain actions.”

Strickland said that communication between the operator and its insurer is extremely important when flying multinational routes. “The key for business aircraft pilots and owner/operators who are not part of a multinational organization but must fly into countries that routinely criminalize pilot error is to work with the insurance broker and insurer to understand the local regulations. We’re seeing more brokers dealing with large multinational insurers that have operations in those countries. For example, we have an operation in Brazil, and we’re familiar with the local insurance regulations. We can work with brokers and customers to make sure that if they are flying in those areas they have the proper coverage in place to make sure they are compliant.”

How much of the underwriting concerns might be predicated on how much international flying an operator is doing and where? Strickland said that it’s all part of the underwriting process. “When we look at a risk, we look at the equipment, pilot qualifications, the mission and the geography. It’s the combination of those things that gives us a risk profile. An operator flying in and out of Phoenix every day with terrific equipment has a risk profile different from that of someone flying to an unimproved runway in an area with terrain and weather issues. We spend a lot of time looking at where you fly, what you fly and how you fly.”

 

Fallout from the Dulles Jet Center Hangar Collapse

In a sidebar of interest to any aircraft owner, Jonathan Stern of Schnader Harrison Segal & Lewis discussed the insurance ramifications of the Feb. 6, 2010, incident when three of Dulles Jet Center’s (DJC) four 40,000-sq-ft hangars structurally failed after a record-breaking snowstorm deposited more than 30 inches of snow on their roofs. Fourteen of the 19 aircraft housed in the DJC facility, including four Globals and more than a half dozen Gulfstreams, were damaged from the collapse and stabilization efforts. Although the five aircraft in Hangar D escaped damage, they were trapped inside until March 13, blocked by shoring towers installed immediately after the snowstorm to prevent Hangar D’s roof from collapsing.

Safety concerns often prevented aircraft owners, pilots, mechanics, insurance representatives and counsel from entering the unstable structures, and a work stoppage caused by a bank’s refusal to release insurance proceeds delayed the stabilization and aircraft extraction efforts until mid-May. The first aircraft extracted from a collapsed hangar was a Global Express on June 25; the last was a G450 on August 11, more than six months after the roof collapse.

Stern served as lead counsel for DJC owner Landow Aviation Limited Partnership during the litigation that followed the incident, which with total damages estimated at $300 to $400 million could be the largest general aviation loss in history. According to Stern, one of the issues brought up during litigation was a provision in the waiver of subrogation signed by all DJC hangar tenants that omitted hull insurance as a requirement for use of the space. He recommends that business aircraft owners and operators who lease or rent hangar space speak with their insurer before signing agreements involving waivers of subrogation.

“A properly drafted agreement for housing aircraft is probably going to have a waiver of subrogation, so that’s not really of any concern to the aircraft owner except that they need to make sure their insurer has agreed to it,” said Stern. “When making any representations about insurance coverage they will carry, [aircraft owners] must ensure that they actually have those insurance coverages in place. And if they’ve agreed that their insurance company is going to waive its subrogation rights, they need to ensure that their insurance company has actually agreed to waive its subrogation rights. Because if that hasn’t happened, they’re at risk of losing their coverage. In this case it’s their hull coverage, but [in other cases] it could be liability coverage.”

Stern also remarked that several aircraft were insured at stated values higher than the actual market value of the aircraft. While this provided windfalls in the millions of dollars to some owners whose aircraft were totaled in the hangar collapse–and caused at least one other owner to sue his insurer when the insurer refused to total the aircraft–this practice could have insurers looking more closely at bringing stated values closer to market values.

“The stated value is intended to be an estimate of the aircraft’s fair market value in used condition,” said Stern. “[Stated values] tend to be overstated, creating a moral hazard because the aircraft owner actually stands to gain by a total loss of his or her airplane…This was a lesson learned for the insurance companies, which might pay out $45 million on a given airplane because of the stated value, but only have a potential right of recovery of $32 million against the responsible parties because they’re entitled only to fair market value in a tort suit.”

Reopened in October 2011, Dulles Jet Center has been, according to Stern, restored to the grandeur that it had maintained from its initial opening in 2006 until the 2010 hangar collapse, “except that it is now one of the most sturdily built aircraft hangar facilities in the world.” Several of the damaged aircraft that were repaired to airworthy condition have returned to the newly reconstructed DJC facility, and one owner returned to DJC with a new aircraft.

Cleveland-based Constant Aviation was one company called to provide initial consultations on a few of the large and midsize aircraft damaged. According to marketing manager Aimee Dalton, Constant Aviation works with several aviation insurers to assess and repair major structural damage to corporate and regional aircraft.

“Our team is well versed in assessing what a major structural repair will entail,” said Dalton. “The analysis of cost effectiveness is then provided to the insurance provider and aircraft owner for determination on whether the repair will be done.” With locations in Cleveland, Las Vegas and Alabama, Constant Aviation performs major repairs such as nose, wing and tail changes, and the company says it uses its contacts at OEMs and parts suppliers to reduce the cost of major repairs.

“We have several different avenues available to supply items for repairs at a lower cost than others,” said Dalton. “We have a relationship with an OEM where we can get a wing off the line at a lower cost than building a new wing. Or we can pull from partnership in an attempt to locate a wing from another damaged aircraft.”

Awards and Recognitions

Typically the AIA presents its annual Pinnacle Award to one individual whose career achievements “exemplify the standards and goals of the association and have gone above and beyond the call of duty.” This year the AIA took the unusual step of awarding the Pinnacle Award to a married couple, Michael and Mary Gayle Charlesworth, who were already individually vested in aviation insurance careers before they met in 1980. Both still involved in Seattle-based London Aviation Underwriters, a brokerage Michael founded that year to handle aviation risks in the Pacific Northwest. At age 86, Michael did not make the journey to Phoenix to accept the award, so Gayle accepted on behalf of the couple.

This year the AIA also instituted a new class of award called the AIA Eagle Society. Unlike the Pinnacle Award, which is traditionally awarded to only one person annually, there is no set limit to the number of awardees in any given year. In this, the inaugural year, the AIA inducted 58 insurance industry representatives into the Eagle Society.

Several insurance representatives who earned the Certified Aviation Insurance Professional (CAIP) or CAIP Gold designation in 2014 were also recognized at the conference. The CAIP designation is open to AIA members who have worked in the aviation insurance industry for at least five years and completed a set of five continuing-education courses. Lisa DeMichael, Jason Hendrix and Robert Wilson earned the CAIP designation this year.

The CAIP Gold designation signifies participation in the AIA and other industry organizations, enhanced continuing-education efforts and leadership in the aviation insurance industry. Awarded to previous CAIP designees, the CAIP Gold must be re-certified every two years. Teresa Pechloff earned the CAIP Gold designation this year.

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