Insurance Issues for the Aircraft Dealer

Consider the following scenario. An aircraft dealer signs an exclusive sales agreement with an aircraft owner to market and sell their aircraft. Upon learning the aircraft would be sold, the owner’s pilots take positions flying for another company. In addition, the owner’s current insurance policy is due to expire soon. The owner approaches the dealer to ask if they would insure the aircraft under their fleet policy, which appears to be more advantageous on many fronts, but here are a few:

1. The dealer’s insurance program is written on a monthly reporting form basis. This allows the aircraft owner to simply pay a monthly premium to the dealer rather than a full annual premium in advance if they renewed their own individual policy. 
2. The owner’s insurance policy required all pilots who flew the aircraft to complete simulator based recurrent training for their make/model aircraft within the preceding 12 months of flight. The dealer’s fleet insurance policy typically allows more pilot flexibility and in addition the dealer normally has numerous pilot contacts they can call on to fill in when needed.  
3. Once the aircraft is sold, the aircraft would simply be deleted from the dealer’s reporting form insurance. This allows the aircraft owner to avoid incurring a short-rate cancellation penalty they would have paid had they renewed their own separate insurance policy.

From the dealer’s perspective, this all sounds very reasonable. It helps them “sign the prospect” by solving their insurance problem which makes for a better client experience. At the same time, it helps solve the age-old problem of finding pilots (an often-tough task made more difficult if the owner happens to reside in a smaller rural town).

The Fine Print

On the surface, this all seems very straightforward and logical - until a loss occurs. For insurance purposes, when the dealer adds the aircraft to their fleet insurance policy as a consigned/for sale aircraft, it is treated no differently than an aircraft the dealer owns and insures. Let’s say the dealer arranges a “demo flight” for a prospective buyer in the aircraft, and the pilot the dealer approved to fly has an accident (gear up landing). The dealer’s insurance policy will pay for the resulting direct physical damage to the aircraft but will not pay for any diminution in value or loss of use. Unless this issue has been previously addressed with the owner of the aircraft (generally via the sales agreement), it most certainly will result in more than hurt feelings. In addition, since the aircraft dealer is a commercial operator, they may carry substantially lower liability limits than the seller had carried on their own insurance policy increasing the exposure for the owner. (If this is the case, the owner can request the seller secure a quote to increase the liability limit as respects the owner’s aircraft.)

What to do?

As a general rule, it is best that each party be responsible for their own insurance.

In our example, if the aircraft owner had continued to carry their own insurance protection (rather than go under the dealer’s insurance policy), and the aircraft dealer carried liability coverage for their use of non-owned aircraft, the claims process would have proceeded more smoothly. The aircraft owner would have turned in the insurance claim to their insurer who would pay for the direct physical damage. If the owner’s insurer felt the damage had been caused by the negligence of the dealer’s pilot, they would subrogate against the dealer’s insurer to be reimbursed for the dollar amount of the damages paid.  Since the damage was caused by a third party (the dealer), the owner could also seek payment from the dealer’s insurer for diminution in value and loss of use.

There are occasionally circumstances when it just makes sense to insure a seller’s aircraft under the dealer’s insurance policy. If you are going to take this route, be certain both parties understand the insurance ramifications clearly to avoid an unpleasant conversation after a loss.

For help with a plan to tackle complicated scenarios, contact the AssuredPartners Aerospace broker team. They have the experience and knowledge to help you navigate all of your complex insurance needs.