Aviation Insurance or CGL – What Insurance Do I Need?

“Aviation in itself is not inherently dangerous. But to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect.” – Captain A. G. Lamplugh, chief underwriter and principal surveyor of British Aviation Insurance Company (1931)
Often, insurance policies are defined not by what they cover, but by what they don’t. This is especially true for all-risk property and casualty policies. If something is not specifically excluded, you’re covered.

All property and casualty insurance policies contain sections that define certain terms used in the policy and that explain what exposures are excluded from coverage under the policy.  Contrary to the insurance industry’s typical fondness for vague and technical language, those definitions and exclusions can be found under clearly identified sections called “Definitions” and “Exclusions”.  Insurers want to avoid confusion relative to what they’re covering and what they’re not, particularly in front of a judge, so those sections in the policy are typically easy to find and easy to understand.

Nearly all non-aviation property and casualty insurance policies such as Commercial General Liability (CGL) and homeowners, exclude coverage for aircraft.  But to understand exactly what is excluded, an insured must also understand what an aircraft is.

The most common exclusionary wording found in non-aviation insurance policies is Exclusion G.

Exclusion g. – Use of an Aircraft, Auto or Watercraft

“Bodily injury” or “property damage” arising out of the ownership, maintenance, use or entrustment to others of any aircraft, “auto” or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and “loading or unloading.”

Although the exclusionary language goes on to generally define watercraft and auto, it does not define aircraft therefore an insured must look to other sources for that definition.  For Insured’s that are domiciled in the United States, the most reliable definition would be that of the Federal Aviation Administration (FAA).

That very broad definition reads:

Aircraft means a device that is used or intended to be used for flight in the air”.
Although the FAA’s definition would certainly include Unmanned Aerial Systems (UAS) (and  paper airplanes, footballs or Frisbees for that matter), some confusion was introduced when Congress required the FAA to avoid inclusion of hobbyist or RC aircraft in the definition of aircraft under the FAA Modernization and Reform Act of 2012. The FAA interpreted that instruction liberally and the UAS community largely disagreed with the FAA and the community pushed.  The FAA pushed back and the definition of aircraft was tested before the National Transportation Safety Board (NTSB) when the FAA (Huerta) sanctioned a UAS operator named Raphael Pirker.  The conclusion of the Huerta v. Pirker case on November 18, 2014 resulted in a unanimous decision by the NTSB confirming the FAA’s definition of Aircraft does include UAS.  UAS were officially aircraft and became part of General Aviation (GA).

The NTSB confirmation that UAS are in fact aircraft has resulted in tremendous impact to all UAS owners and operators.  The confirmation meant that they would have to come to terms with the fact that their drone was going to be regulated under the authority of one of the largest regulatory agencies of one of the largest bureaucracies in the world.  Not only would they have to learn the Federal Aviation Regulations (FARS) but they would have to understand that the way they operate their UAS, their culture and their attitude toward professionalism and safety would all be called into question and that they would have to align with the standards of a mature industry that does not tolerate recklessness and disregard for the rules.  Their aeronautical knowledge would have to be tested, standards would have to be met and a lot of regulatory oversight accepted. The pilot next door and every other pilot operating within the National Airspace (NAS) would become part of that oversight and none will hesitate to hold them accountable to a very high professional standard through a complicated system that they are not part of and do not understand. UAS owners and operators are now subject to the same accountability, enforcement, reporting and sanctions that every other pilot is subject to and they have to learn how to deal with it.

Most of those in the UAS industry have not yet come to terms with the fact that they have become part of GA and they face a long, difficult and unfamiliar development curve.  A zero-tolerance example is sure to be made of some UAS operator by the FAA sooner than later to help drive that point home.

For many UAS owners and operators, the first lesson on the aviation learning curve will come from their insurance agent.   An insurance contract is based almost entirely on definitions and that single confirmation of definition meant that most UASs were instantly excluded under exclusion g.  Virtually every UAS that was previously assumed to be covered under non-aviation CGL policies such as homeowners or comprehensive CGL, saw their coverage immediately excluded (cancelled) at the same moment in time.

That’s an unprecedented occurrence by the way and had it been done by the insurance industry, there may well have been pitchforks and torches in the streets Omaha.

Now what?

Unlike automobile and boat owners who had long since become accustomed to buying special policies because of the same exclusion, most UAS owners were surprised to learn that they were likely uninsured for their own, their company’s and their family’s operation of UAS.  They would have to go bare or find coverage elsewhere.

But where? 

Fortunately the aviation insurance market had begun writing policy language and was prepared to meet the needs of this exciting new aviation risk exposure.  But if they can insure it, why couldn’t standard insurance companies also respond to this need on behalf of their many insureds? Because aviation insurance is special that’s why.
The aviation insurance policy definition of aircraft is as follows and aircraft are INcluded under the coverage:

Aircraft, means the aircraft described in the Declarations….including the propulsion system and parts and equipment installed in or on the aircraft (1) while installed and (2) while temporarily removed until replacement has commenced; tools and equipment in the aircraft which have been designed for use with the aircraft and are ordinarily carried therein.”

What makes aviation insurance special?

The airline industry has unlimited liability by written treaty under the 1999 Montreal Convention. That distinction requires special underwriting, large capacity and regulation.  The air transport industry is not only open to liability; every ICAO member nation has also agreed that its exposure to liability is unlimited.  Roughly translated, unlimited liability by treaty means “Special” and because the same insurers that cover airlines also cover GA/UAS, that makes them special in the eyes of insurers as well.

Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the special risks involved in aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.

The first aviation polices were underwritten by the marine insurance underwriting community and probably by the same three guys that underwrote the Mayflower in the same dark, damp London pub. It is because of that marine heritage that aviation insurance policy language relies on terms such as “Hull” for aircraft physical damage coverage’s and other marine terminology. The first specialist aviation insurers emerged in 1924 and for all practical purposes can be traced to same insurers who continue to underwrite aviation today.

In 1929 the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the aviation industry as we know it today and the first attempt to standardize and limit liability exposure to the aviation industry.  You can still find some of those limitations on the back of your airline boarding pass.

Because the Warsaw convention contained limitations to liability that were in conflict with U.S. tort laws, the United States was not a signer to the agreement.  In turn, the U.S. was viewed by insurers as an unlimited exposure relative to aviation liability and that classification resulted in a many insurers refusal to cover U.S. air carriers and aviation exposures.  Costs went up, coverage went down and insurance was hard to find. The international aviation insurance market still views the U.S. as the highest exposure any type and will not even entertain the option to participate on a U.S. placement.

On July 31, 1999, the Montreal Convention, a culmination of over four decades of efforts by the United States to eliminate the “unconscionably low limits of liability”, was approved and revised the terms of the 1929 Warsaw Convention. The United States became a signer to that treaty.

The significant changes contained in the Montreal Convention include:

  • Completely eliminating liability limits for death or injury of passengers.
  • Allowing lawsuits in cases of passenger death or injury to be brought in the courts of the passenger’s “principal and permanent residence” where the carrier has a commercial presence in that state, which will in almost all cases, ensure that U.S. citizens and permanent residents can bring an action in U.S. courts.
  • Retaining, in all important substantive respects, the cargo provisions of Montreal Protocol No. 4, which updated the Warsaw Convention’s outdated rules for cargo documentation.
  • Clarifying the joint liability of the ticketing carrier and operating carrier in code-share operations, which are now widely used in international air transportation.

The United States has a large percentage of the world’s general aviation fleet and has a large established market. According to the 2014 report from GAMA (General Aviation Manufacturers Association), there are 362,000 general aviation aircraft worldwide, and 199,000 (or roughly 55%) are based in the United States.  The large number of insured general aviation (GA) aircraft certainly benefits the UAS community and we anticipate that with the addition of millions of UAS to the fleet, UAS will likewise provide substantial insurance benefit to GA fleet as a whole simply through the increased spread of risk.

No single insurer has the resources to retain a risk the size of a major airline, or even a substantial proportion of such a risk. The catastrophic nature of aviation insurance can be measured in the relatively small number of losses that have cost insurers hundreds of millions of dollars (Aviation accidents and incidents).  That exposure impacts GA because the insurers that cover major airlines are the same insurers that cover GA and the emerging UAS industry. That level of exposure to few insurers with a relatively small spread of risk across the market makes aviation “special”.

UAS are now special. Like it or not, UAS owners and operators have become part of aviation and are subject to all of the same expectations, exposures and share of the risk. It’s important for UAS operators to learn and understand as much about aviation as possible as they begin to negotiate the steep curve of integration.