Contracts and agreements are a natural part of our aviation business and risk management. Transferring risk between parties is an integral part of these agreements. Some types of agreements common in aviation include aircraft lease agreements, hold harmless agreements, repair and service contracts, hangaring and tenant agreements, pilot services agreements. Whatever the agreement, it probably has an effect on the insurance needs of both parties of the agreement.
Your aviation insurance broker cannot offer advice or counsel on contract language. However, one of the most valuable services a good aviation specialty broker should provide is to help interpret the agreement as it pertains to the insurance policy and recommend changes that need to be made to meet the terms of the contract.
The following is an adaptation of a recent contract review between a maintenance provider, his attorney and broker.
XYZ Aviation, a charter operator, and ABC Services, a maintenance provider, were negotiating terms for ABC to provide major overhaul and refit services for several of XYZ’s leased aircraft. XYZ presented a contract proposal to ABC for their approval. After consulting with an attorney, ABC forwarded the insurance and indemnity sections of the agreement to their insurance agent for review and comment. While most of the document was straight forward, the below two paragraphs caused concern for the attorney as well as the broker.
Insurance
5.1 ABC Services shall at all times during the term of this agreement maintain a general liability insurance policy to include Hangar keepers liability insurance and Products/Completed operations insurance insuring ABC Services liability for the aircraft and XYZ Aviation’s other property in ABC Services care custody and control in the amount of not less than $5,000,000. ABC Services shall ensure that XYZ Aviation is named as an additional insured under this insurance which shall contain a breach of warranty endorsement, be deemed primary as to any valid and collectible insurance available to XYZ Aviation and shall waive all rights of subrogation against XYZ Aviation.
Indemnity
6.1 ABC Services agrees to indemnify, defend and hold harmless XYZ Aviation … against any and all liabilities, damages, losses, expenses, claims, suits or judgments (including, without limitation, all attorneys’ fees costs and expenses in connection therewith or incident thereto), for the death or bodily injury to any person (including, without limitation, ABC Service’s employees) and for the loss of, damage to or destruction of any property whatsoever in any manner arising out of the negligence or willful misconduct in connection with this agreement or the performance of the services by ABC Services, its agents, employees or subcontractors.
The first sentence in paragraph 5.1 is reasonable and prudent. However the requirements for XYZ to be named as additional insured on the general liability policy with a waiver of subrogation is out of the ordinary. In addition XYZ is asking that ABC’s insurance be “primary” over any insurance available to XYZ and to provide a breach of warranty. At first glance it appeared XYZ was not or did not intend to insure the aircraft for hull and liability and was asking ABC to provider first party hull and liability coverage instead.
The “boiler plate” indemnity clause in paragraph 6.1 is not uncommon. While some think it unenforceable, it could be interpreted as ABC agreeing to stand up and take a bullet for XYZ for almost any reason at any time. The unlimited nature of this clause disturbed ABC Services. They wanted their liability to be limited to their insurance coverage.
After reviewing the partial document, the broker properly requested the entire document for review and dutifully sent it to the underwriters for comment.
In order to clear up the ambiguity, ABC’s legal counsel set up a conference call with XYZ and the legal counsel representing the aircraft lessee. From that conversation it became obvious that the aircraft lessee’s attorney was driving the agreement language process and did not have a full grasp of all the terms and coverages in a general liability policy. He was insisting on similar insurance requirements in the ABC contract that might be expected in an aircraft lease agreement.
The following is an email sent to ABC Services and their attorney as a summary of the insurance issues:
Reading and understand an insurance “contract” requires a basic understanding of the principles and definitions of basic terms. Some terms are not the insuring agreement but in basic text books covering the subject. However, if you will read the definitions, exclusions, what is covered, and what is not covered, the overlaying logic will reveal itself.
Part of the lessee attorney’s issue is the need for a little clarity on the difference between physical damage (property) and liability (casualty) insurance and how they are combined in both an aircraft policy and an aviation general liability policy.
Aircraft insurance is properly called Aircraft Hull and Liability Insurance. It originally came in two parts and is still sold as two separate policies outside the US. Early on in aviation insurance industry the US companies were required combined it into one “Property” and “Casualty” policy.
Hangar keeper’s legal liability insurance is part of the general liability policy. It insures against any physical damage done by the policy holder (ABC Services) to a “non-owned” airplane (third party liability) while in the care, custody, and control of the policy holder. It also obligates the insurance company to defend the policy holder against claims that were not caused by the policy holder (i.e. acts of God). By definition it pays for a legitimate “liability” incurred by the policy owner.
Another problem may be the misuse of the term “primary”. It appears the lessee’s attorney wants to make sure that ABC Services’ policy will respond without getting XYZ’s policy involved (a reasonable request). It will, unless the damage was not caused by ABC Services. XYZ should carry first party (primary) hull and liability insurance as protection against your insurance company not responding “in the manner they would like.” It is then their option to allow their insurance policy to respond to the damage and ‘subrogate’ against ABC Services for recovery. That is how insurance is designed to work when parties can’t agree on a settlement.
Your insurance company has indicated a willingness to name XYZ as additional insured with waiver of subrogation (for a price) on the general liability policy to be effective “within the terms, conditions, and limitations of the policy”. This comes with the understanding that the contract does not and cannot change the terms, conditions, and limitations of the policy. In other words, if XYZ does not have an insurable interest, the insurance company will not respond. They WILL respond to a claim from XYZ against ABC Services for damages arising from the fault or negligence of ABC Services. It will not respond to the faulty part or the improper installation of the faulty part such as an engine. This is a warranty issue. It will pay for all the ancillary damages caused by the failure (liability) of the engine, but not for the engine itself (warranty). In addition, the underwriter will not offer a breach of warranty under the general liability policy as it is inappropriate.
Regarding the broad language in paragraph 6.1, both XYZ aviation as the operator of the aircraft and ABC Services as a maintenance provider have a liability exposures and limits of liability for which they cannot transfer. It is an inherent part of doing business. In this case, it is unreasonable to expect ABC Services to accept responsibility for XYZ’s potential negligence stemming from the operation of the aircraft once it leaves ABC Service’s care, custody, and control. In fact, it is the insurance company’s obligation to defend ABC against a wrongful claim stemming from XYZ’s operational negligence. (For example: the engine failed due to improper operation or exceeding the engine limitations).
Many times insurance policy modifications can and should be made to address the insurance needs of all parties involved. In this case some contractual accommodations were found that clarified and limited the liability of ABC while addressing XYZ and the lessee’s insurance concerns.
Finally it is important to remember any contract you enter into cannot change the terms, conditions, and limitations of your insuring agreement even though the underwriter might accept it. Only the underwriter can make those modifications.