If your shop is struggling to pay ever-increasing insurance premiums, then you are not alone. Skyrocketing rates are an epidemic causing many small facilities to shut down and large shops to cut coverage to a bare minimum.

AvDyne AeroServices in Baltimore, Maryland has seen insurance costs triple in the past two years. The same $5-million policy that once cost $22,000 annually now costs $57,000, according to company president Jerome Hodge. "Costs are going up at the same time as customers are looking for cutbacks on service prices," said Hodge. "How can you compete in an environment when the costs are going up but your service prices have to stay the same or even decrease?"

�That's a good question, said Irene Hatfield, spokesperson for Central Aviation Supply & Equipment Co. (CASE). Travel southwest from Baltimore to CASE headquarters in Houston, Texas and you will find a similar situation. CASE once paid $37,000 annually for its $10-million policy. The company was recently offered the same level of protection for $77,000 and opted to cut its liability limits in half as a result. Hatfield said the insurance company put her on notice that rates could increase up to $20,000 for the same policy next term. "The airlines have been tasked with cutting budgets and they want us to cut our rates, but our costs are spiraling out of control. There's no way for us to control them," said Hatfield. "Once you cancel your policy, no one will insure you. They are picking and choosing their risks now."

Meanwhile, Banyan Air Service in Ft. Lauderdale, Florida has also seen insurance premiums triple in the past two years, according to vice president of technical services Walter Rittenhouse, who declined to disclose hard figures. Rittenhouse, however, did share that Banyan has cut its coverage in half, in-creased its deduct-ibles, and resorted to self-insuring for anything less than catastrophic incidents in response to the rising rates. "Insurance is a major issue as far as the viability of staying in maintenance and being able to keep a repair station going," he said. "The expense is huge. The impact is terrific."

Indeed, maintenance shops all across the U.S. are experiencing rate increases that make it difficult to remain profitable. While aviation insurers declined to publish specific rates, United States Aviation Underwriters (USAIG) vice president Christopher O'Gwen noted that it is not uncommon for a maintenance operation to have experienced a 50-percent increase in rates each of the last two years.

"These costs continue to rise because losses continue to exceed premiums," explained O'Gwen. "Currently the insurance market pays $1.50 in losses for every dollar it collects in premium. While the rate increases of the past several years have helped move the industry towards profitability, we are still not there."

A multi-faceted problem

That's the corporate answer, but what's really going on? Why are losses exceeding premiums? And how can maintenance shops keep rates from climbing any higher? The problem is multi-faceted, say insurance experts, but shops that are dedicated to demonstrating safety can mitigate risks and keep rates in check until the industry stabilizes and premiums become once again more affordable.

For now, many maintenance shop owners point fingers at the structure of the general aviation industry, increased litigation, insurance companies themselves, and terrorism threats.

Some blame the General Aviation Revitalization Act (GARA) for contributing to the rising cost of insurance. To be sure, GARA shifted much of the liability to repair facilities as opposed to aircraft manufacturers, which are for the most part off the hook when aircraft more than 18 years old are involved in lawsuits. Plaintiffs attorneys instead turn their attention to allegedly negligent repair shops.

"The problem is that our court system has become perverted," said Chris Jones, executive vice president and director of underwriting for Aerospace Insurance Managers in Dallas. "When there is an aircraft accident, the plaintiff does not actually have to prove that the shop did anything wrong. Rather, the maintenance shop has the burden to prove that it did everything right."

This is an unfair practice, said Banyan's Rittenhouse, because it is well documented that nearly 90 percent of general aviation accidents are due to pilot error. Still, the claims typically go against the service industry instead of the pilot, he said, because pilots do not have pockets as deep as maintenance shops and manufacturers are regularly freed from liability under GARA.

Others point to a failure by some insurance companies to require maintenance and repairs to be completed by insured shops. "If owners have maintenance done by non-insured shops, then you can't go after them so the insurance claim then falls automatically back on whoever is insuring the hull," said Rittenhouse. "You would think an insurance company would insist the aircraft it insures be maintained and repaired by insured entities so that when there is a claim there would be at least two insurance companies to go after."

Costly litigation

Increasing litigation is another culprit causing rate hikes. Insurers admit that many claims against their clients are groundless and some are crying out for tort reform. But the bottom line is that every suit filed puts a responsibility on the shoulders of the insurance carrier to investigate the cause of the incident and, if necessary, pay for it.

"The cost of litigation is driving the prices up," said Jones. "In many states, if the plaintiff tries to settle for the policy limit, then you have a number of days to accept or reject it. From an insurer's standpoint, you are playing Russian Roulette because your client could be absolutely innocent and you could go fight it in court and still lose way more than the policy limit. You have to know beyond a shadow of a doubt that you will win."

But as many insurance companies and maintenance shops have learned, attorneys have little control in the courtroom if the shop does not provide good maintenance records.

"The maintenance shop is not going to have very much control over these nuisance suits that come in, but if the shop has documentation as to what they did to the airplane, when they did it, and who performed it, then they can at least provide an appropriate defense," said Tom Caughlin, president of Air-Sur, an aviation and aerospace insurance management corporation in Ormond Beach, Florida. "If shops have lousy work orders, then the underwriter does not have much to go on to provide a defense."

These are all noteworthy arguments, but most would agree that the reasons for rising costs go far and above general aviation and litigation issues. The post-9/11 terrorism threat sparked an automatic rate hike when claims drained coffers of much of the insurance industry worldwide.

"Many insurance companies were making a little money or losing a little money and weren't getting too excited because they were sitting on huge buffers of cash that kept them insulated from real problems," explained Bill McGloin, president of Phoenix Aviation Managers, an aviation insurance agency in Kennesaw, Georgia. "After 9/11, a lot of the financial underpinnings were seriously damaged and insurers had to look at just how sound their business plans were. Many couldn't stand the glare."

Steps to lower premiums

September 11 was bad news for the entire industry, but insurance industry experts say there is hope for shops that seek to keep premiums in check.

• The first step is developing a true safety program that is defined properly with a policy statement from company leadership. The policy statement should explain the company philosophy and commitment to safety of its human resources and business assets. Safety has to become part of the company's culture.

Underwriters look for sincere capable management that is safety-minded," said Caughlin. "People give lip service to being safety-minded, but really don't put the proper systems and controls in place to manage safety. That's one of the bigger problems we see with aviation companies. When they were smaller, walking around and seeing unsafe conditions may have been an adequate way to manage safety. As you get larger, you had better have a true safety system in place that's monitored much like an accounting system or you will have problems."

• The next step is educating people during the hiring process. Provide training and documentation of that training to ensure employees are working according to safety standards. This will uncover any unsafe conditions in the organization, and they can be promptly addressed. Employees learn from the experience and are less likely to make the same mistakes again.

"Make your insurance broker aware that you have these safety systems in place and utilize the broker to make sure that is communicated to the underwriters," said Caughlin. "When appropriate, have the underwriters [visit your shop] in the field. Brokers can take their message to the underwriters and outline what the philosophy of the business is and what they are doing to mitigate risk."

The types of first-line defense put in place by the shop are important to the underwriter. Underwriters look at things like how well shops do at managing workorders and want to see language in the workorder that offers protection to the facility. If a pilot requests a pre-purchase inspection, the shop should use language that makes it clear that the inspection is for pre-purchase purposes only and does not go beyond those basic criteria. That safeguards the shop from problems with the airplane that may not show up in a cursory inspection.

Speaking of inspections, USAIG does annual inspections of the shops it insures. O'Gwen said the inspection allows USAIG to meet with owners and other key personnel to get an overall feel for the operation and further refine the rates charged. "Inspections that reveal active owners and managers with organized, clean, and well-maintained facilities are generally what is expected," he said.

What do you do if you have multiple claims against your shop? Options are limited in this scenario, said experts. If a shop has a laundry list of claims, then underwriters are not going to be inclined to reduce the pricing or even come to the table to quote the risk when the previous carrier is still bleeding from the veins. "If underwriters learn that the shop does not keep good maintenance records then it is an indication that claims will continue to be made by plaintiffs and there will be little defense against it," said Caughlin.

Be a risk partner

Experts say brokers and underwriters are looking for maintenance shops that take on an attitude of being a risk partner. They are looking for companies that are open to feedback from underwriters in terms of how to mitigate the risk for both parties by upgrading safety procedures or controlling operations more efficiently. A passive attitude will almost always escalate insurance costs. Shops need to approach the relationship properly because underwriters do not want to be involved with companies that don't know how to manage their risks.

�There is light at the end of the tunnel for maintenance shops. Like any market, the insurance industry will go through some self-correction. Insurance companies lately have been reporting higher profit margins and that will once again attract more insurers to aviation.

"We're probably at the bottom of the hill here because aviation has received a lot of bad publicity in the past couple of years, but things will get better," said David Kennedy, manager for government and industry affairs at the National Air Transportation Association. "There is a limit to how far markets can go, and I think we are close to that limit. Eventually people are going to make the decision that it's not worth it to be in the business if the costs are so far out of whack, and then the insurers have no business. In the meantime, keep your nose clean, run the best operation you can, and weather the storm."

Risk-Management Guidelines

Management must study its operations to determine its potential for loss by identifying the hazards, exposures, and legal liabilities. The basis for information of comparison should be your firm's past claim experience, the loss problems of others in the industry, government safety data, and your insurance carrier's guidelines.

Areas of interest may include:

• General Safety Rules
• Housekeeping
• Hazardous materials safety
• Electrical Safety
• Occupational health and safety problems
• Fire hazards
• Aircraft maintenance
• Personnel safety
• Hangar safety
• Ground Support Equipment
• Pollution Potential
• Fueling Operations
• Airport maintenance

Review your company's recent claims over the past three years to evaluate their types, trends, and severity. This will permit you to align your priorities by spotlighting the most important causes of loss. Survey the operation's hazards and exposures to identify potential loss sources.