A young pilot recently furloughed from a large carrier went to work for a small charter company. He was used to having an employment contract which provided language holding him harmless for any damage done to the company aircraft. He never thought about insurance issues or his liability to third parties and passengers. He assumed the air carrier would defend him and pay for damages in any case that arose. The charter operator called his agent, asking him to talk with the pilot and give him an explanation of insurance protections in their policy as they pertained to a contract pilot or 1099 employee. The pilot was concerned about several issues in the event of an accident:
1. Being held responsible for damages to the aircraft
2. Being sued individually by his passengers, other third parties
3. Being sued by the insurance company for recovery of any liability awards or damages paid
4. Having an adequate legal defense
All of these are legitimate concerns for which every contract pilot should be cognizant. However, what this young pilot really wanted was absolute indemnity without limitation in which he would be held harmless by the charter operator, the insurance company, and that either or both would protect and defend him from any financial cost of mounting a defense or paying any judgments.
There are 5 key insurance issues or definitions involved.
Named Insured and Insured. The “Named Insured” is the owner of the policy, in this case the charter company. From the Omnibus Clause, an “insured” party includes all of the employees while they are performing their duties on the behalf of the policy owner. It usually specifically excludes non-employees or services providers engaged in aviation commerce such as contract pilots, whether working as an individual or as an employee of professional pilot services company.
Subrogation. This is the right of the insurance company to seek financial recovery for any loss they paid on behalf of the insured from any party they feel is responsible for the loss. The Named Insured gives up this right of recovery to the extent of the terms, conditions, and limitations of the policy. An insurance company will not usually subrogate against a contract or permissive pilot. However that is no guarantee, especially if there is any severe gross negligence involved. A “waiver of subrogation” must be agreed to by the insurance company. It is a contractual agreement by the insurance company NOT to seek recovery from the pilot regardless of the transgression. This usually applies to aircraft physical damage but could also apply to third party liability.
Additional Insured. This is an agreement by the insurance company to add an addition person or entity to the policy as an “insured” party within the terms, conditions, and limitations of the policy. This could include a lien holder, contract pilot, service provider, or other party who had an interest in the ownership, maintenance, or operation of the aircraft. The insurance company will offer the same protections to the additional insured as they do the insured “as their interest may appear.” This could include assigning separate defense counsel if the insured and additional insured have sufficient conflicting interests. Adding an additional insured to the policy does not increase the liability limits of the policy. Instead it has the potential of diluting the limits of liability available to either or both parties.
Defense and Defense Costs. One of the most important reasons to buy insurance is for professional aviation defense in the event of an improper claim or claim that is asking for damages beyond reason. The defense costs are defined in the insuring agreement and are usually “outside” the overall liability limit. For instance, if the policy liability limit is $10,000,000, the judgment is $10,000,000 and the legal defense cost are $500,000, then the total costs paid by the insurance company would be $10,500,000. Be careful. Some policies deduct defense costs from the liability limit available for a judgment.
The Terms, Conditions, and Limitation of the Insurance policy. Whether or not a formal professional services contract exists which promises to indemnify and hold harmless the contract pilot without limitation, the protections promised cannot alter the terms, conditions and limitations of the insuring agreement. Once those are met, the insurance company has no further obligation. If, for instance, the pilot fails to meet the training requirements of the policy, any subsequent accident may not be an insured occurrence. Or, if the judgment is likely to go beyond the liability limits of the policy, the insurance company may elect to pay to the limits of the policy rather than defend the case. The charter company, the pilot, or both, may be left to defend themselves and pay additional damages with their own resources.
In finality, all of us operating an aircraft are exposed to limitless liability depending on the egregiousness of our error.
Airlines and large charter companies have detailed employment contracts with hold harmless and indemnification language for their employees backed up by anywhere from $50,000,000 to $500,000,000 in liability insurance or more. This is usually more than adequate to keep any judgment within the limits of the insurance. It is extremely rare to find one of these operators using a contract pilot or a pilot services company.
However, the use of contract pilots by smaller charter companies and individual aircraft operators is common. Liability limits are generally much lower—as little as $1,000,000 with a sublimit of $100,000 for passenger bodily injury—but can be $250,000,000 or more depending on the type of operation and aircraft being flown. The lower the liability limit the greater the contract pilot’s exposure to the insurance company settling the claim for the maximum liability limits in the policy, thus allowing themselves to be absolved from any further involvement, including defense.
Ideally every contract pilot should be protected by their own professional liability insurance in the form of Non-Owned Aircraft and Hull Liability. While professional pilot services companies should have ready access to this insurance, for the individual pilot it is expensive if available at all. In addition or as an alternative, they should have themselves named as an “additional insured” with “waiver of subrogation” on the aircraft operator’s insurance policy.
Every pilot, whether a contract pilot or an employee should know and understand the terms, conditions, and limitations of the insurance policy of the operator and specific airplane they are flying. For an “Additional Insured” the insurance company will issue a certificate of insurance which outlines the coverage of the applicable policy. Unless the company has a formal dispatch system with tracking and support services, I encourage all small operators to carry a copy of the policy on the aircraft for the pilots to review and refer to in case of questions or an accident.
In finality, for the risk you cannot transfer to your insurance company, the best and cheapest retained risk option may be a sound operations plan, well thought out standard operational procedures, good training, and an active safety awareness and accident prevention program that starts from the top down.