The Pilot's Lounge #85: Some Blunt Talk About Aviation Insurance (or, What You Don't Know About Sublimits Can Hurt You)
Insurance -- and talking about insurance -- can be one of the most tedious things to deal with when the sky is blue and beckoning for winged aviators. Yet even pilots who think they've got it covered can be rudely awakened after an accident, as AVweb's Rick Durden explains in this month's column.
It was a normal weekend morning in the Pilot's Lounge at the virtual airport; students were either exulting or bemoaning flights they had just completed, a few pilots were debating where they should go for their high-dollar hamburgers and a couple of airplane owners were deep in discussion over the operating costs of their steeds. As the last group worked their way through various cost issues, I heard them start to discuss insurance. When one of them said that he still didn't understand what a "smooth" policy was and asked whether it had anything to do with hull coverage, I started for the door. I suddenly remembered that I had to go sump the tanks or add air to the tires of an airplane. I didn't want to get into a discussion of insurance because a lot of folks don't like what I have to say when I point out that there isn't any free lunch.
I was almost out the door when Old Hack, who'd been watching the whole thing, grabbed my arm and said, "Now they're all looking at you, so go answer their questions. Be a man about it, you big chicken."
Old Hack has to be past 80, but he hasn't got an ounce of fat on him and I've made a practice of not arguing with him. I turned around and said I'd try to answer questions if I could. Jason, who recently became the owner of a lovely, old Cessna 210, was the one who had asked the question I'd overheard. He plunged right in and said that one of the toughest parts of the airplane purchase was figuring out insurance. I suddenly felt trapped in a tidal wave, rather than a stream-of-consciousness experience; Jason just unloaded. The exercise had been confusing ... he'd tried talking to various brokers to get competitive quotes for coverage, but after one of them did so, no other broker would talk with him, which didn't make any sense to him at all ... how come one company didn't go through brokers but dealt with you over the phone, and what the heck is the difference ... and the insurance sure seemed expensive, although it wasn't as much as his brother paid to insure his Cadillac in Chicago. Why? How come? What is going on?
I felt like the guy in the old stereo-speaker advertisement with my hair blowing straight back due to the intensity of Jason's questions. I sat down, looked him in the eye and asked, "Do you really want to know? It's going to take some background to try to give you an answer, and it can be painfully boring at times," hoping against hope he'd say "No" and I could go do something interesting like counting the number of acoustic tiles in the ceiling of the Lounge.
Jason expressed that he wanted to get a handle on this subject because his insurance seemed expensive and he wanted to be sure he was getting the best deal he could. We talked for more than a half hour; as best as I can recall, this is what we discussed.
No Free Lunch
First of all, there is no magic bullet for an owner/pilot to avoid potential liability if he fouls up and crashes, hurting or killing someone. Incorporating yourself or your airplane does not provide protection if you are the one flying when the mistake is made. Therefore, you face a risk in owning and operating an airplane. When facing a risk, either avoid the activity altogether or take actions to reduce the risk by taking recurrent training to diminish your chances of having an accident while you buy insurance for the risk you do face.
A Small Market
With that as an introduction, there are very few companies that are willing to write aviation insurance in the U.S. The market is absolutely tiny -- only some 200,000 airplanes are flying in the U.S., a fraction of the number of cars that exist in even one big city -- but those machines tend to carry some fairly well-off people when they operate. Plus, outside of corporate aviation, general aviation has a lousy accident record. Therefore, a lot of risk has to be spread over a small group of insureds and a limited number of companies who will "write" insurance for aircraft (insurance is a contract, so one "writes" an insurance policy). In the last 15-20 years, the aviation insurance market has been "hard"; the insurers have only turned a profit in something less than 1 out of 4 years, and more than one company has gone bankrupt while others have decided that the rate of return is too low so they have stopped writing aviation insurance.
There are a lot of hot arguments as to why the cost of insurance is "high," but the reality is that it's about the same as it was 40 years ago. If you apply straight inflation to the rates of the 1960s, they are about the same or slightly lower than they were in those halcyon days. The pain came about because there was a very "soft" market in much of the 70s and early 80s, when there were a lot of companies willing to write policies and the prices were extremely low. It got so "good' for us buyers that some companies were actually using aviation as a loss leader, writing policies at a loss in the hopes of getting their clients to also purchase other insurance products that would make money. Naturally, the shakeout came and the companies that stayed in the business realized they had to make a profit, and prices shot up radically in the early 90s. On top of that, many companies made the decision to stop writing the high-risk portions of general aviation such as flight schools, small FBOs, and aircraft rental operations, an action that sent shockwaves through the aviation community that are still being felt.
The major driver of insurance rates is the stock market, because the companies invest their premiums rather than just sit on the cash. The need for premium prices to "catch up" in the early 90s outpaced the booming stock market for a while, but things leveled off by the late 90s and premiums have been remarkably stable even as the stock market slumped and then come back in the last four years. Despite the political hype, there is an absence of reliable evidence that awards in lawsuits have skyrocketed (the vast majority of shockingly big awards reported in the media get reduced in post-trial motions or appeals to a fraction of the original number). In fact the number of aviation-related lawsuits has gone down in the last 10 years as tort reform has taken hold in most states and the General Aviation Revitalization Act has made it more difficult to sue manufacturers of older airplanes.
Despite the uncertainty of the last 15 years, we do have a half-dozen or so companies that will write insurance for the objects of our desire; so how do they sell their product? Most aviation insurance is sold through brokers. You, the owner, call up an aviation insurance broker. That person becomes your representative; he or she owes a fiduciary responsibility, a duty and obligation, to you, not to the insurance companies. Your broker will go into the insurance market, usually by telephone, and talk with an underwriter at each insurance company (an underwriter is one of the people at the insurance company who evaluates the potential risk posed by the pilot/owner and decides if the company will quote insurance for that person/airplane -- and, if so, at what price). If you and the broker have done your homework, the broker will know a lot about you. By the time your broker calls the first underwriter, your broker should know:
- Your flying experience, including flying time flying under various conditions and types of airplanes you have flown. It is utterly essential that you do not not not not pad, or exaggerate your flying time; in many states, overstating your flying time on an insurance application means that the insurance company can refuse to pay if you have an accident. The reasoning of the courts that have made rulings in such cases is that the company was tricked into insuring a risk that was actually worse than they had agreed to insure.
- Flying time in the type of airplane being insured.
- Whether you take regular recurrent training (that's a big one) and how you go about it. The FAA Wings Program may help you here.
- If you've ever had an accident (just one isn't bad, more than one accident will hurt you with insurers).
- The ratings you have.
- Anything else that the broker thinks will help influence an underwriter to give you the lowest possible premium price, so ask.
You want to sell yourself to your broker so he will be able to go out and pitch you as a very good risk to the insurance companies.
The broker will then call you with the quotes he's obtained. They may be fairly close in price, or they may have a pretty big spread. The various insurance companies use different standards to set their premiums (there are those who assert that black magic is involved) and some specialize in certain types of risks that some others don't particularly want to insure. You may find that some companies will not quote you. You may have an airplane that is currently unpopular with underwriters. Like fads, the hot and cold airplanes come and go. The Bonanza had its period when it was tough to insure due to the in-flight breakup rate of the V-tail versions; Grumman-Americans were targeted for a while; and tailwheel airplanes can be tough to insure because of their high accident rate.
The Rules of Engagement
Once a broker has gone into the market for you, the market will not give any quotes for you to another broker. Aviation insurance is a small world; you will not get any benefit by attempting to play one broker off another for rates, and you risk aggravating the underwriters to the point they simply refuse to insure you at all. The broker is your agent, so if you want to go to another broker, you will probably have to notify the original one, in writing, that you are changing brokers, before the insurance underwriters will give a quote for you to a second broker. Chances are that it will be absolutely the same as the underwriter gave your original broker.
The other method of selling insurance is by becoming a "direct writer," such as Avemco, and selling straight to the public without going through brokers. You, the owner/pilot, contact the company on the phone or via Internet, give them the numbers on your experience and they spit out a quote for coverage. It's pretty cut-and-dried, using established tables for flying time and type of airplane. The person you speak to on the phone is an agent of the insurance company and owes no duty of loyalty to you. That person's loyalty and duty are with the insurance company. It is a legal technicality to keep in mind.
Jason nodded sagely, seeming to still be awake, and asked, "OK, we've got companies selling insurance. What type of insurance is needed for my airplane? What, exactly, is hull insurance and do I need it?"
There are two types of insurance that you (the aircraft owner) are going to need to consider for your airplane: hull and liability. They are generally sold as a package; and although most people buy both, it's not required unless you have a loan on the airplane because your lender will insist that you have both types of insurance.
Hull insurance is coverage for repair of the airplane itself, should it be damaged in an accident or if it gets pelted with hail while tied down or a 747 falls on it. The term "hull" comes from admiralty (marine) insurance. Admiralty insurance developed into a distinct and very well defined field over the centuries. When airplanes were invented and insurance was desired, rather than try to create a new world of insurance from scratch, the insurers went with something that was roughly analogous: Airplanes operate in a sea of air, boats in a sea of water. So as you get into aviation insurance you'll keep stumbling across nautical terms.
Hull insurance premiums are usually some fraction of the value of the aircraft. You agree on a value of your airplane with your insurance company, which becomes the "stated value" and that is the sum that is paid, minus deductible, if the airplane is totally destroyed. Make sure the stated value is very near the actual value. Hull insurance is pretty inexpensive, so you don't save much by declaring a lower value, and you could really get yourself into a jam by doing so. I worked on a matter where a Cessna 206 was insured at a stated value that was almost exactly 50% of what it was worth. Yes, it was because the owner was cheap. The airplane was damaged during a tornado. The cost to repair was almost exactly the stated value under the policy. The owner was faced with a quandary because of his parsimony. He could pay for the repairs himself, without making a claim, and keep the airplane or he could make a claim to his insurance. If he made a claim to his insurer, the policy language said that because the cost to repair the airplane was more than 90% of the stated value, the airplane was considered a total loss. Therefore, he would be paid the stated value, minus deductible and the airplane would then belong to the insurance company. The owner thought it over, made the insurance claim, got paid the stated value he had set and the insurance company got the airplane. The insurance company had the airplane rebuilt and sold it, thus recovering the total cost it had paid the owner and paid to rebuild the airplane.
The moral is to insure for what it's worth.
"OK," Jason muttered, "then what is liability coverage?"
Liability coverage protects you if you hurt someone or something when you are operating your airplane. It pays for the injuries to that lineboy you clobbered with the wing tip as you whipped into the tiedown area; or for your passenger's massive hospital bills after you lose it in a crosswind and put your airplane into the airport restaurant. It also pays for reconstruction of the restaurant and for the lawsuits filed against you by the folks in the restaurant who had hot soup splash in their faces as you made your grand entrance through the picture window.
The tricky thing about liability coverage is something called "sublimits." They can bite you badly and, in my opinion, you should do a lot of soul searching and evaluation of your personal assets before you buy a policy that has sublimits. Sublimits mean that there is some limitation in the amount of money available to be paid out in the event you are sued.
Look at it this way: Most aircraft owners buy a $1 million liability policy, so they figure if they have an accident for which they are partially or wholly at fault, and someone is hurt or killed, they've got a million bucks available to pay the damages for the person or persons who were hurt.
Smooth Liability Coverage
A policy such as that, with a $1 million pool of money available to pay any and all liability claims, is called a "smooth" policy; that million bucks is available no matter how many or how few people are injured and make a claim against you.
The problem is that brokers and direct writers may not push smooth limits, because some customers don't want or can't afford smooth limits.
Sublimits on Liability Coverage
Simply put, a sublimits policy means that while you have a pool of money -- $1 million in most cases -- only 10% of it is available for the injuries suffered by any one person. So if you have one passenger who has a few broken bones and hospitalization for a few weeks, and he or she sues you, you haven't got $1 million to pay off those damages, you only have $100,000. Most sublimit policies only provide coverage in the amount of $100,000 per injured person; and that, again in my experience, is not enough to protect you if there is a serious injury or death. You'd have to hurt 10 people before your insurer has a risk of paying out the million dollars of your policy. I've found that a significant number of pilots who think they have a million dollar policy are very surprised when they find out that it has $100,000 sublimits.
What is the reality? If you seriously injure or kill someone and you have a $100,000 sublimit policy, and there is no other defendant around to tap for money, your personal assets or your estate (if you're dead) are at risk. If you have the money to own an airplane, the odds are good that you have assets that can be reached.
Some years ago I worked a case involving a pilot who had a million dollar policy with $100,000 sublimits. It appeared he was doing something that might be considered less than safe while carrying one passenger. He crashed and was killed instantly. The passenger survived for a period of time, in hideous pain, before dying. The passenger's estate sued the pilot's estate. The pilot's insurance company put up the $100,000 sublimit; however, it was nowhere near enough to pay what was being demanded by the estate of the deceased passenger. Yes, the estate of the pilot got hit. The widow and children suffered financially. Now, one of the widow's memories of her husband is that he was too cheap to buy adequate insurance and it hurt her and the kids.
Yes, the $100,000 sublimit policy (as well as the smooth policy) does pay for your attorney fees if you are sued. The costs of your defense do not come out of the $100,000 (or $1 million) pool of money that is available to pay a person making a claim against you. If you have few assets beyond your airplane, a $100,000 sublimit policy is likely to be enough; the injured person will probably take it and go away. However, by the time you get up to ownership of a Cessna 182 or Cherokee Dakota, the chances are pretty good that you have assets beyond that airplane; otherwise you could not have afforded it in the first place. So, to protect yourself, take a hard look at buying a "smooth" policy, with $1 million completely available, because the chances are that if you screw up and hurt someone, it won't be a lot of people and each one will have damages of more than $100,000. You've spent a lot on your airplane -- don't go cheap in protecting yourself and your family.
Sadly, in my experience, a majority of pilots who buy insurance don't know what a sublimits policy is or what the ramifications are; only that they are cheaper to buy than a smooth policy.
As I heard recently, cheap is never good and good is never cheap.
Do not let a broker or direct writer give you a sublimit policy when you want smooth coverage (some companies will not write smooth coverage). I have twice had to fight with an employee of a broker who ignored my statement that I wanted smooth coverage and got quotes for $100,000 sublimits. In one case the person tried to get me to buy the sublimit policy because it was so much cheaper, thinking, perhaps that she was doing me a favor, without discussing the coverage with me or the nature of my insurance needs.
I have been told by two very successful aviation plaintiff attorneys that they, and others, are looking for the right case to sue a broker for not selling a well-heeled client smooth coverage, so I'm frankly very surprised the brokers still don't push smooth policies.
How Much Liability Insurance?
In my experience, $1 million is adequate to settle the vast majority of potential events you as an aircraft owner might face. It's also not so much insurance that you make yourself an attractive "target" in the event of an accident; that takes a lot more, and in today's insurance market, about the most coverage you can buy is $2 million, which is also not enough to make yourself a target.
If you regularly carry one or two or three passengers, a $1 million smooth policy will probably protect you for the huge majority of potential liability risks you face. However, talk to your broker or your attorney before you decide. You may want to carry $2 million in liability insurance. If you are well-off (however you define the term) you may want more coverage if you can get it. I have a couple of clients who do not carry passengers when they fly and one who has stopped flying because they need more than $2 million in coverage to protect themselves and they simply cannot get it in today's market. The question of how much insurance is right for you is very personal and should be discussed with a professional in the field.
As Jason and I talked, he brought up some insurance myths that I thought were dead and buried. For the sake of brevity, I'll go over them quickly:
- Myth If you violate an FAR when you crash, your insurance won't pay.
Reality: That has been untrue for many years. It's almost impossible to crash without violating an FAR. Those clauses proved unenforceable and are gone from most every policy I've seen in the last decade. (However, don't risk flying your airplane if it is out of annual; in that case it is very possible that the company may be able to avoid paying if you bend it.) However, be sure and read your policy. Yeah, reading the policy is boring, but it won't take you long -- just do it.
- Myth If you meet the "open pilot" warranty on a friend's policy when you fly her airplane, you're covered.
Reality: Sorry, you are not covered by the "open pilot warranty" (sometimes you hear it referred to as the "experience requirement"). The open pilot warranty sets out minimum experience for you and other users of your friend's airplane for her to be covered when you fly it. If she lets you fly her airplane and you have the requisite minimum experience set out in the open pilot warranty of her policy, then if you crash, her insurance will cover her, it will fix the airplane and defend her if she (not you) is sued. It may also turn around and sue you for what it paid out (that's called "subrogation"). To make sure you are covered on her policy, have her call her broker and add you as a "named" or "additional" insured on the policy. It shouldn't cost anything unless you have very little experience compared to hers.
- Myth You are covered by the FBO's insurance when you rent.
Reality: Almost never. The FBO is covered, but usually you are not. If you crash, you are going to be liable for the costs of repairs, usually more than just the deductible (so don't get suckered into buying "deductible" insurance -- it's expensive for the little coverage it provides). So, buy renters insurance to cover yourself for the value of the airplanes you normally rent. (Sadly, it's almost impossible to get "smooth" renters insurance; all of it that I've seen comes with $100,000 sublimits.)
To wrap up, insurance is a contract and insurers have to make a profit to stay in business. While we complain about rates, they are still a bit below inflation from 40 years ago. (I keep repeating that when I write the check). To help keep your rates down, take regular recurrent training or stay current in the FAA Wings program. It is still enormously expensive to insure yourself in the first year in a step-up airplane, complex single or a twin. You may find you cannot get adequate coverage in some types of airplanes, so you may have to fly for a year in that step-up airplane without carrying passengers; most of the time your rates will drop after safely operating the airplane for a year.
Insure the hull of your airplane for its market value and be sure to review that amount each year when you renew your policy, because your airplane may be appreciating. It may also bump in value if you do an avionics upgrade or redo the interior or paint it. (If that happens in the middle of the insurance year, call your broker and nudge up the stated value.)
Buy a smooth policy if you have assets; don't put them at risk.
Finally, always read your policy, to make certain you got what you intended to buy.
See you next month.