Starting a Shop: Insurance Issues

With a few years of aviation maintenance experience behind you, you've decided to quit your current job and start your own maintenance service business. Perhaps you've already leased your shop space, purchased equipment, and hired employees. But when you start calling aviation insurance brokers, you find that insurance is prohibitively expensive or worse, that your new enterprise cannot get insured at all.

"It's not easy for service centers to obtain insurance," said Eric Barfield, certified aviation insurance professional for South Carolina-based Hope Aviation Insurance. "[Aviation maintenance] has been one of toughest lines of insurance in the last five years, so underwriters are just now getting comfortable with commercial repair stations."

According to Barfield, most service centers opt for a commercial general liability (CGL) policy composed of three different liability coverages:

� Premises and Operations--Liability coverage for exposures arising out of an insured's premises and business operations but not directly related to work performed (e.g., a customer slips on an oily spot in your facility).

� Products and Completed Operations--Provides liability coverage against claims arising out of products sold, manufactured, handled, or distributed, or operations that are complete (e.g., a faulty repair performed by one of your mechanics contributes to an accident).

� Hangar Keeper's--Provides liability coverage against damage to aircraft owned by others and in your care, custody, or control (e.g. one of your employees damage an aircraft while moving it out of the facility). Note that Hangar Keeper's insurance does not cover aircraft damaged by, for example, a tornado that flattens your hangar and damages customer aircraft stored inside. This damage would be covered by each customer's own hull insurance because it was not a result of negligence but an "act of God."

Coverages generally start at $1 million per occurrence for Premises and Operations, plus $1 million per occurrence for Products and Completed Operations with an aggregate multi-million dollar annual cap. Hangar Keeper's coverage will depend on the type of aircraft serviced; if you will be maintaining only small single-engine Cessnas and Pipers, then $100,000 per aircraft with a $250,000 cap per occurrence may be adequate. If, however, your hangar will be filled with King Airs, Learjets, and Gulfstreams, much higher and more expensive coverage will be required.

Annual premiums start at $5,000 for minimum coverage, but rise rapidly depending on a number of factors, including the types of aircraft being serviced, expected business volume, training and experience of the mechanics, and the level of service being performed.

"The heavier the maintenance, the more [the operation] will be scrutinized," said Jeff Bauer, president of NationAir Insurance Agencies. "A shop performing complete engine overhauls will be more scrutinized than one performing only light maintenance. If the shop works on a critical part, such as the engine or propeller, it will be more difficult to insure."

Increased scrutiny translates to higher premiums and even the possibility of being denied coverage. Ironically, service centers that work on small Cessnas and Pipers may find it harder to obtain liability insurance than shops servicing more expensive business jets, due to repercussions of the General Aviation Revitalization Act of 1994 limiting manufacturers' liability to 18 years. Because manufacturers of older aircraft can no longer be targeted for liability damages after an accident, plaintiff's lawyers have turned to maintenance shops to pad settlements after the aircraft owners' liability insurance reaches its cap.

"There is an issue with doing work on piston aircraft since the aircraft owners do not have the ability to purchase significantly high liability limits," said Christopher O'Gwen, vice president for general aviation underwriting at United States Aviation Insurance Group (USAIG). "The best [small aircraft owners] can buy is $1 million in liability coverage subject to $100,000 per person caps. What this has done is shift the liability burden to the aircraft maintenance center [which may have a multi-million dollar policy]."

Because corporate operators insuring turbine aircraft generally carry $100 to $300 million liability policies, service centers working on these aircraft are not likely to be dragged into a lawsuit unless actual negligence can be shown. Bizjet service centers also enjoy an easier time shopping for insurance because they often keep their staff well-trained, sending them to periodic refresher training at OEM-sponsored schools or third-party training providers such as FlightSafety, SimuFlite, or Global Jet.

"Training and safety go hand in hand," Barfield said. "A huge factor [in determining insurance premiums] is your training and safety program. As a new service center, you don't want to be nonchalant about it...you want to be able to show your training program and the types of operations that training will cover."

Here are a few more tips that insurance professionals offered to individuals starting their own service centers:

� Present a thorough business plan to your agent. The business plan should indicate projected gross receipts broken down into service and parts sales, detailed description of the type of maintenance to be performed and aircraft to be serviced, resumes and/or detailed explanation of staff's maintenance experience, any service center agreements with manufacturers, and training and safety programs.

� Focus on one type of maintenance or aircraft. In general, insurance underwriters will be more comfortable writing a policy for a start-up that focuses on one area of expertise, especially if the founder or chief of maintenance has extensive experience in that area. Your insurer will be a lot less comfortable (and therefore may quote higher premiums or deny insurance) with a start-up that wants to work on everything from small Cessnas to Learjets to Hueys.

� Participate in a recognized training program. Demonstrating that your employees are well trained and will receive periodic refresher training can help lower your premiums. The National Air Transportation Association (www.nata.aero) Safety 1st program can be an excellent way for a start-up to initially train its staff because the program includes videos, CD-ROM manuals, tests, and training verification forms for a variety of line maintenance tasks. The National Business Aircraft Association (www.nbaa.org) has also published a set of guidelines for maintenance training.

- By Kim Rosenlof