Have you signed a new hangar lease lately?
There is a growing trend that you may be confronting when negotiating your future hangar leases. Fixed Base Operators (FBOs) and hangar owners all over the country have begun to include certain clauses in their lease contracts. They are requiring their tenants to hold the lessor harmless from any and all liability incurred out of the operation of the tenant or in the FBO’s handling or movement of the tenant’s aircraft.
Some lease agreements are so broad as to include hold-harmless clauses for the landlord’s negligent acts. They also require blanket waivers of subrogation (the insurance company’s right of recovery against negligent third parties) for aircraft handling and, in some cases, product liability.
Is it “passing the buck” or just good business?
It may seem that the contractual elimination of the lessor’s legal liability may go with the current national infection of not accepting responsibility for one’s actions. In this case, however, it is just good business to pass the financial responsibility off to some other party if at all possible. Keep in mind, the insurance coverages protecting FBOs for their legal liability are very expensive. Anything they can do to minimize this exposure can reduce the insurance costs that must be passed along to their customers.
In this endeavor, attorneys lay awake at night trying to outsmart their client’s business associates. We, as well, have encouraged clients to pass off their liability exposure by contract whenever they can. It is certainly less expensive than buying insurance. In this article, however, we will be dealing with the hangar lessee’s plight and what can be expected in the event of a loss.
Supply and demand
The success of the hangar owner/lessor to impose a hold-harmless agreement upon a tenant usually depends on the demand for hangar space in the area. In most of the metropolitan areas today, hangar space comes at a premium. Because it is in short supply, rent is expensive and the hangar lessor can call the shots in negotiating the contract. This will continue as long as there are waiting lists for hangars.
So, the aircraft owner must make the most of the situation. Some of our clients are attempting to dodge this bullet by negotiating a land lease and building their own hangar only to find the same hold-harmless requirements tied to the land lease.
Where do you start?
You must first understand the interrelationship between the lease requirements and your insurance policy.
Lease agreements vary in content and substance but usually have two parts that we will address. The first part deals with and is often entitled INDEMNIFICATION. The second part deals with your insurance requirements and may be appropriately named INSURANCE. The Indemnification section deals with the lessee’s liability responsibility. Some contracts are very fair, only stipulating the lessee’s responsibility arising out of the occupancy or use of the leased premises. Some agreements, however, are very unfair requiring the lessee to assume the lessor’s liability or responsibility for negligent operations. Usually, this section will impose a hold-harmless agreement upon the lessee. Such wording will eliminate the lessor’s liability for any damage to the lessee’s aircraft or other property.
Typically the lease agreement will contain wording similar to the following: “The lessee hereby releases and will defend, indemnify and hold harmless the lessor from and against any and all liability, claims, penalties, fines, and suits accrued against, charged to or recoverable from the lessor by reason of any occurrence in, upon, or at the premises, however caused,“…etc.
Possible insurance policy conflict
Unfortunately, such agreements do not caution the lessee to obtain approval from their aircraft insurance underwriter before signing the contract. As a result, the acceptance of increased liability may void coverage under the lessee’s aircraft insurance policy. When a contract requires the lessee to “hold the lessor harmless from any and all liability for bodily injury or property damage arising out of…”, most policies will respond as follows: “Assumed liability – We won’t cover any liability you assume under a contract or agreement other than an airport contract you sign with a governmental body so you may use an airport.”
In addition, the lessee’s aircraft policy may say: “We won’t cover any person or organization or their agents or employees that manufacture or sell aircraft, aircraft engines or aircraft accessories. Nor will we cover people or organizations that operate an aircraft repair shop, aircraft sales agency, aircraft rental service, commercial flying service or flying school or any person engaged in commercial aviation.”
The insurer’s right of “subrogation”
As mentioned above, many contracts require the lessee to hold the lessor harmless for damage to the lessee’s aircraft. In essence they are asking for a “waiver of subrogation” from the lessee’s insurance company. Each policy form will treat this problem differently. Some companies will not extend coverage if the company’s rights of recovery are diminished by contract.
An example of policy wording is “This insurance is for your benefit alone and not for any other person or organization. Except for what you agree to do under an Airport Contract, you promise not to do anything that will take away our right to collect for damages caused by others.” (Note that an airport contract is a contract you sign with a governmental body so you may use an airport.) Others policies will not allow the insured to waive the company’s right of subrogation after the loss.
Let your insurer review the lease agreement
Let’s assume you find there is a shortage of hangar space, the lessor is not willing to negotiate, and you want to keep your aircraft inside. What can be done? Keep in mind, your underwriter wants your aircraft to be hangared just as much as you do. It certainly reduces the “not in motion” exposure. We suggest, before the final contract is negotiated and before executing the agreement, that you forward a copy of the contract to your agent for underwriter approval.
Request that any increased exposure be accepted under the policy and that certificates of insurance be issued to confirm compliance with the lease contract. If there are sections of the contract that are too rigid for the underwriter to accept, request suggested changes that can be offered during your final negotiations with the lessor. Remember that it is in everyone’s best interest to agree.
In the insurance section many contracts require the lessee to carry specified limits of aircraft liability. In many of these cases the limits required are in excess of the limit actually offered in the lessee’s policy. Don’t assume you can increase your liability limits. In some cases, due to the pilot’s lack of experience, increasing the liability limit is not possible. In other situations, increased limits can be purchased but they may be very expensive. Again, check with your agent before you conclude your contract negotiations.
As agents, we have assisted in the hangar contract negotiations in several ways. We have found it productive to find out exactly what the lessor wants from his very intrusive and often unreasonable contract wording. Many times the lessor carries hangarkeepers legal liability insurance and is just worried about his deductible. This is usually $2,500 or $5,000 per occurrence. In such situations, we have suggested waiving the insurance company’s rights of subrogation for the deductible amount only. Other times we have reached an agreement by waiving rights of subrogation above $1,000,000. This seems to work when the FBO carries relatively low limits of liability and the lessee has a very expensive aircraft. By putting a cap on the lessor’s exposure, we eliminate his need to purchase higher and very expensive Hangarkeepers Liability coverage limits.
Find out the needs of those involved and discuss them with your agent. You will find both your agent and your underwriter more than eager to help.