Renters Beware

by William R. Trippett BSME, JD

            Over the years I have been alarmed by the limited amount that renters, and for that matter owners who lease their aircraft to FBO’s, know about the nature of the insurance that covers them and the aircraft.  Having negotiated hundreds of insurance contracts on aircraft even I was startled by the attitude of an insurance agent the other day regarding my questions on the coverage of an aircraft I was planning to rent.

            The trouble is most FBO’s don’t reveal what their coverage is unless asked.  Some tell you that you are covered by their insurance.  But are you?

            There are two categories of coverage: liability and hull. 

            Liability coverage provides protection to those who might be hurt as a result of an accident.  As an operator of the aircraft, a renter is exposed to liability for actions that may result in injury or death.  But many policies only cover the owner and the FBO.  It is very likely that in case of an accident the operator will be sued with everyone else who has some relationship to the aircraft.  Unless the insurance covering the aircraft, the owner and the FBO also treats the renter as an additional insured, the insurance company has no obligation to provide a defense in the event of an accident.  In cases where there is major damage or injuries, the other defendants will look for someone else to lay the blame on. 

            Even if the insurance covering the aircraft also covers the renter/pilot, what happens if the owner/FBO have made misstatements on the insurance application or have otherwise violated the terms of the agreement?  A renter/pilot has no control over the representations that were made at the time of the application for insurance and thus is exposed if the insurance company refuses to honor the policy because of these “breaches of warranty.”

            In airline leases the airline is generally the owner of the insurance policy and thus is the “named insured.”  The owner/lessor of the aircraft, which is usually a financial investor, will require an endorsement that makes the owner an “additional insured” and sometimes an “additional named insured.”  Still, actions by the airline can cause the insurance to be invalid and so the owner will usually require a “breach of warranty exclusion” endorsement on the policy that provides that the owner will be covered no matter what the operator does.  This is more common with hull insurance but I have seen it in liability policy endorsements as well.

            The analogy to the renter is obvious.  Unless there is some arrangement between the renter and the insurance company, a default by the owner of the policy will void its coverage.

            Hull coverage is not without its own pitfalls.  When an accident happens, even if the insurance is fully in effect, the renter may be liable to the insurance company after it pays off the owner. 

            The right to collect from the renter is known as a “right of subrogation.”  Unless the policy provides a waiver of subrogation with respect to the renter, the insurance company is fully entitled to come after the renter for all damages, not just the deductible, that result from his or her negligence.  The economic interest in collecting back the loss can be overwhelming so the renter should not rely on the representations of the FBO that only the deductible will be claimed. 

            Which brings me back to my own situation.  The insurance agent involved, who had the attitude that my questions were out of line given that I was a mere renter, suggested that the likelihood of the insurer claiming subrogation was minimal.  That representation is worthless when you get sued by the insurance company. 

            In my view the coverage afforded to renters is almost always inadequate.  The losses involved in an aircraft accident can be huge, whether they involve loss of or damage to the aircraft alone or also include injuries or death of persons.  For the protection of the renter as well as the public it would be good if FBO’s were required to disclose the exact nature of the coverage in writing, including the exposure to the renter.  Absent that disclosure it is a wise pilot who gets his own renters coverage to fill in the huge gaps in coverage provided by the owner or FBO.

[Bill Trippett is an aviation attorney in Wopodinville, Washington and an expert in the negotiation and documentation of aviation insurance agreements..  As the former Vice President and General Counsel of an aircraft manufacturer he has chaired an international conference on aviation insurance law.]