Aviation Maintenance: Aftermarket: Confused About Aviation MX Insurance?

Insurance is figured into the cost of doing business, but with a limited number of insurers in the aviation industry, what’s a small shop to do?

Whenever aviation mechanics or shop managers congregate, the subject of insurance almost always comes up. There are constant complaints about the cost, the lack of availability and the complexity of obtaining insurance. To really understand the problems and solutions, we need to look at the risks a given business presents, and ways to mitigate them. Each business has to look at what risks are present, what the potential liability of that risk may be and the value of purchasing insurance protection from that risk. By eliminating or limiting the risk, documenting the steps taken and presenting them to their insurance broker or underwriter, an organization should see a reduction in their premiums for the type of insurance that covers that risk. Another method of reducing insurance costs may be to increase the deductible for a given type of coverage. In effect, the company would self insure up to a preset amount and the insurance company would only pick up the amount of a claim beyond that deductible.

All insurance is based on statistical analysis. The basic concept is that many premiums are collected and out of all those premiums, a certain percentage of losses will have to be paid. As long as there are more premiums collected than losses paid and expenses in managing the business, the insurance company is profitable. The greater the number of participants (policy holders) the larger the population from which to calculate the probability of a loss. When you consider that the total global aviation insurance premiums collected, including all the airlines, are less than the private automobile insurance premiums collected in a single mid-sized state, you can see that we are dealing with a very small part of the insurance industry and a very small population from which to generate probability statistics. With insurance markets like automotive and homeowners, there is such a vast amount of data available that the underwriters can accurately predict what losses will occur and cut the cost of their policies to the consumers with a very high degree of accuracy. There are a large number of companies that provide insurance to these markets, so competition keeps the rates low. While watching television you can see the various insurance companies compete for your homeowners and automobile insurance dollars.

The Players

The aviation insurance industry is so small that there are a limited number of players competing for your business. In total, only about half dozen. The primary aviation underwriters are Global Aerospace, Inter Aero, C.V. Star, AIG Aviation, USAIG and Phoenix Aviation Managers. Each of these underwriters is represented by agents and working with an agent is the way to find the insurance that fits your organizations needs. Many times the agent will shop your insurance requirements with each of the underwriters to find the best policy at the lowest premium. Membership in a trade association can also help in finding affordable insurance. The National Air Transportation Association (www.nata.aero) offers two different workers compensation programs, and the Aeronautical Repair Station Association (www.arsa.org) is working on a program to provide members with product liability coverage. Aircraft Electronics Association (www.aea.net) also has a workers compensation and liability insurance program available to members.

Insurance 101

The only required insurance by law is workers compensation. Any business that has employees has to cover those employees with workers compensation. Some businesses have tried to circumvent the requirement for this by hiring "contract" employees. If your business does this, be absolutely certain that those "contractors" are not truly statutory employees or you may run the risk of future fines and judgments. Workers compensation insurance is readily available to any business and your insurance broker will be more than happy to assist you with this.

When looking at the insurance needs of a business, a careful review of the types of risk posed by the business is necessary. Premises liability coverage is usually one of the first types of coverage considered and is often a requirement of the building lease. This coverage will provide protection for customers and other persons not part of the business while in and around your facility. The limits of liability for this type of coverage vary and each business will have to analyze what protection best suits their needs.

The next area of coverage to consider is the protection of our customer’s equipment. While an aircraft is in the care and custody of a shop, the shop is responsible to see that it isn’t damaged. As careful as we all may be, I’ve seen aircraft dropped from jacks, propellers damaged and a host of other occurrences. Hangar keepers insurance is what is needed to cover these items. Hangar keepers insurance covers your customers aircraft while in your possession. If you work on aircraft at locations other than your facility (i.e. the customers T hangar), be sure to ask for protection for these areas as well. The limits of protection for hangar keepers should be in line with the types of aircraft that you service. If all you work on is older single engine aircraft, the limits of your hangar keepers insurance should be in line with the value of those aircraft. If your shop services new aircraft or larger turbine powered airplanes, then again, maintain insurance that would cover a potential loss to one of those aircraft.

Now that we have the premises covered and the customers equipment covered, what else do we need? How about product liability or completed operations insurance? This type of coverage is designed to protect the shop in the event of a quality escape that results in litigation. To prevent all quality escapes would be the ideal, but unfortunately, due to human factors, they do happen. Having systems in place like a good inspection department will minimize this, but they will still happen. Purchasing this type of insurance will provide protection in the event of damage awards and legal expenses.

In the course of maintaining aircraft, do you have the need to operate the customer’s aircraft? If you fly a customer’s aircraft, non-owner liability and hull coverage may be a possible choice. If you own and operate an aircraft in the furtherance of your business, you most likely already have liability and hull insurance on that aircraft and an addendum to that policy can be added to cover non-owned aircraft. Like hangar keepers, consider the value of the aircraft that you will be flying and be sure your coverage is in line with that.

Smart Business

So far we’ve looked at insurance from the standpoint of protecting the business from financial hardship in the event of a loss. Another point when dealing with insurance is the positive impact certain types of insurance can have. Maintenance facilities should advertise that their facility is covered by insurance. Customers want to know that their assets are protected. There are those that will shop around and bring their aircraft to the least expensive shop, but the customers that want to keep their aircraft in top condition will also want to know that it is protected while in your custody. This can be a huge marketing advantage for the shop that caters to this type clientele. If you’re paying for the coverage, use that as a selling point to differentiate your shop from your competitors.

"When searching for insurance, review your potential losses and purchase insurance to protect the financial stability of the company." — Jeff Lake, Duncan Aviation

Use insurance as a recruiting tool for new employees. In recent years, we’ve all seen the availability of quality mechanics dry up and along with supply and demand. The price we have to pay for mechanics is also going up. Fringe benefits offered to employees can make the difference in the decision of a potential employee to come on board or go to another shop. Offering insurance benefits such as health, dental, vision and life are important factors for any potential employee to consider. Another insurance benefit that could be offered as an enticement is insurance on the employee’s tools. Most mechanics will have anywhere between $10,000 and $30,000 invested in tools and knowing that their employer values that investment will go a long way in the decision to work for your shop or the one down the road.

A final insurance product a shop manager may want to consider is insurance for acts of terrorism. Since 9/11 and the Patriot Act, the definition of terrorism has changed. If you read most policies, they will have an exclusion clause for terrorism. Terrorism, today, includes things as simple as acts of sabotage from disgruntled employees. If a loss occurs as the result of something like this, and you are not covered for acts of terrorism, your other policies will leave you without coverage.

Availability and Costs

So far we’ve reviewed the types of coverage that may be available. What is really available for your shop? If you are just starting a business with no track record, insurance coverage will be problematic at best. Hangar keepers and premises liability may be available, but product liability will be hard to find. If you are a one-man shop, working under 14CFR65 using your A&P, unless you have a very good résumé with verifiable history, expect to pay high premiums if you can find an underwriter that is even willing to cover you. On the other hand, if you manage a repair station under 14CFR145 and have a proven track record with no losses, the various insurance products listed here should be available at reasonable rates.

The premium a company pays for insurance is a function of several issues. "The insurance industry runs on a four- to seven-year rating cycle," said Don Kenny of Falcon Insurance Services. "Premiums will typically be based on where in the cycle we are, what you do or what you fix, how long you have been in business, what is the annual sales volume of the business, how many mechanics you have and what is the loss history for the business."

When rating a shop for insurance, the underwriters look at the overall shop, the experience of the work force, the attention to safety in the workplace, and the level of training and qualifications for the mechanics. Recently one underwriter (AIG Aviation) forged an agreement with the Professional Aviation Maintenance Association (www.pama.org). PAMA just introduced an advanced certification program through the SAE Institute and AIG will factor in the participation of shops mechanics in this advanced certification program when rating the shop for insurance needs.

While not actually insurance, PAMA also offers a legal services plan. This plan provides members with access to services from the law offices of Yodice and Associates in accordance with the plan. Primarily it covers legal council in the event of FAA enforcement actions, drug and alcohol testing issues and other legal issues.

"When searching for insurance, review your potential losses and purchase insurance to protect the financial stability of the company," said Jeff Lake CFO of Duncan Aviation. "With the number of lawsuits today, a value of $3 to $5 million per seat for product liability is not out of the question for a small shop, and for a shop that deals with aircraft that will be carrying Fortune 500 CEOs, a limit of $15 to $20 million may not be unreasonable." Obviously each maintenance shop will have to evaluate the level and type of insurance appropriate for their facility. The type of organization and what regulations you are working under will all play a part in determining premium costs. Methods to consider for reducing those costs include increasing the amount of the deductible, operating under a repair station rather than just an A&P certificate, participating in programs offered by the various trade associations, and developing good safe work habits to minimize the potential for a loss.

Work with both your insurance broker and your underwriter to develop a plan for loss mitigation. Many times they will be willing to come to your facility to conduct a safety audit and make recommendations for actions to reduce the premium. Keep in mind, operating a safe shop and providing quality service is the best method to preclude potential litigation. Insurance is a cost of doing business, but its purpose is to protect the long-term solvency of the business.