Binder Vol. 42 No.4 Winter 2017

VOL. 42 NO. 4 - WINTER 2017

THE BINDER FOUR PILLARS OF THE AIA 2018 CONFERENCE Post WWII Boom and Bust in General Aviation AIAWEB.ORG

ARE YOU? AOG Protect is an insurance policy which indemnifies the aircraft owner or operator, covering part of the additional cost of a replacement aircraft in the event of an AOG incident.

Protect customer relationships Maintain operating profit Stand out in a competitive market

WWW.MOUNTFITCHETRISK.COM

IN THIS ISSUE

AOG PROTECTED

Editor Nigel Wright

XL Catlin nigel.wright@xlcatlin.com

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RECAP

PRESSURE-AN ENGINE FAILURE STORY

President’s message

LONDON 2017

SITUATIONAL AWARENESS

AGENT/BROKER DIVISION REPORT

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FOUR PILLARS OF THE AIA

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PREEMPTION IN AVIATION PRODUCT LIABILITY CASES

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ATTORNEY DIRECTOR’S REPORT

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UNDERWRITER DIRECTORS REPORT

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CAN YOU READ THE SIGNS? A LOOK AHEAD

AVIATION HISTORY POST WWII BOOM

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AIA 2018 CONFERENCE AUSTIN, TEXAS

The ideas and opinions expressed by authors of articles published in The Binder are wholly their own and do not necessarily represent those of the Aviation Insurance Association.

The articles are not provided as legal advice.

WWW.AIAWEB.ORG

Published by the Aviation Insurance Association 7200 W. 75th St. Overland Park, KS 66204

PRESIDENT’S MESSAGE the next generation

Paul Herbers - AIA PRESIDENT, Cooling and Herbers

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orty years ago, in 1977, famed economist John Kenneth Galbraith published his work The Age of Uncertainty, accompanied by a television series on BBC and in the U.S. Today, one might wonder if any of the economic and social uncertainty he described has been reduced, or whether it simply appears in different forms. Galbraith advocated a new socialism with more progressive taxes and improved medical care, among many other ideas. Today, those ideas still seem remarkably in tune with current global and social debates.

Our world of aviation insurance has certainly seen tremendous upheavals over the same period. While various types of market uncertainties may have changed, certain underlying root causes seem to have remained to strongly influence the path of the marketplace: market capacity, rates, the decline in piston aircraft along with the rise of turbines, among others. To the good, there has been a strong focus and relatively steady improvement in operational air safety over these years. To the contrary, the rise of global terrorism has introduced new forces of chaos, requiring new solutions. Thankfully, recent U.S. loss experience among the airlines has improved dramatically in comparison to the ‘80s and ‘90s.

Throughout this same period, your Aviation Insurance Association has flourished. The growth and success of the AIA is due in greatest measure to the interest and commitment of its membership. Even now, in the large recent wake of

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catastrophic hurricanes and earthquakes, which may be changing the landscape for some time to come, our membership remains steadfast.

The AIA is strong, perhaps as strong as it has ever been, and your board has taken this success as a signal for continued growth. This marvelous organization held its first meeting forty years ago in September, 1976, for the purpose of forming an “association of aviation underwriters.” The AIA has thrived during these forty years of uncertainty, and its prospects for the future are bright.

It should go without saying that our industry’s future belongs to our younger members as they enter the market and grow with it. The same is true for the AIA. Your board of directors has begun an effort which we expect to continue well into the future, to expand our efforts and promote the AIA with our newer and younger market members, so as to pass the mantle to them in due course. At that time, it will be our task to get out of their way and let the future happen as it will.

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we look forward to the ability to Boldly Go Where No AIA Members Have Gone Before.

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Where the industry may go from here is visible in part, although much remains to be discovered. To coin a phrase with apologies as appropriate, we look forward to the ability to Boldly Go Where No AIA Members Have Gone Before.

Who knows? Someday soon we may convene our annual conference on Mars.

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Thank you to those who generously sponsored the 2017 AIA London Reception. Your support of our organization and our events help make our association a success.

GOLD SPONSOR

LONDON 2017

RUBY SPONSORS

2017 AIA London Reception Update The 2017 London Reception was once again another successful event filled with excellent speakers and networking. The reception began in the late afternoon of November 9th and was followed by a cocktail reception. For those who were unable to attend, here is a highlight of the key elements: First, the association was privileged to open the reception with a presentation and welcome from Benjamin Weber, the Head of Aviation & Space from Partner Re Mr. Weber was followed by Rob Morris, the Global Head of Consultancy from Flight Ascend Consultancy who provided his in-

sight on commercial aviation demand and supply and aircraft values.

Our final speakers from Spirent, Martin Foulger, General Manager, PNT Division and Guy Buesnel, PNT Security Technologist, reviewed the vulnerabilities of GNSS and assessed the risks and impacts of current threats through a selection of real-world incidents and experiences.

Following the presentations, the attendees were offered the opportunity to network at the ensuing Cocktail Reception in Lloyd’s.

EMERALD SPONSORS

SILVER SPONSORS

BRONZE SPONSORS

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Four Pillars of the AIA JIM GARDNEr - AIA VICE PRESIDENT

MEMBERSHIP CATEGORIES The AIA Board of Directors approved the following restructuring of the Membership categories beginning in 2018. These changes provide AIA the opportunity to grow its membership base by creating an affordable membership category for those who have been in the business for less than five years and who have not previously been a member of AIA. We are calling the new category, Young Professional Membership. Executive membership takes the place of the old Individual Membership and the Premier Membership takes the place of the old Corporate Membership.

This new structure eliminates the Affiliate Membership Category by combining it into the Associate Membership Category. This “all others” category is a non-voting membership which includes vendors, aviation service professionals, and all other involved in aviation commerce. Included in this category are Corporate Risk Managers.

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he Aviation Insurance Association’s annual conference has become the Pinnacle of our organization. It is attended by more than 500 of the worlds aviation insurance professionals who are looking to network with others in the industry, create and solidify business relationships and gain valuable knowledge and practical application of Aviation Insurance from the worlds most informed experts. Every Pinnacle needs a foundation that supports it. I call that foundation the Four Pillars of the AIA.

the “Core Principals and Concepts” text book, written by aviation insurance professionals rather than academia, it is giving the Association the opportunity to bring educational opportunity to you, the membership, near or where you live. Technology is allowing us to expand those opportunities. We are working toward expanding educational opportunities through our “members only” website. Some with CE credit. Many at no cost as an enhancement of membership value.

Networking One of the primary reasons the AIA was founded was as a networking event. Our industry has become a truly international business. The conference has grown from its origins into the number one event in the world where aviation insurance professionals can meet so many others in the industry they might have never known otherwise. But, our networking has expanded beyond just the conference.

Facilitating the Business of Aviation Insurance An obvious by product of networking is making it easier to conduct business through better contacts and understanding the commonality of purpose that we all share … to create, distribute, and deliver the product of aviation insurance. Technology has also made our world smaller, so those new contacts and business associations can be further developed, creating new business opportunities.

Education If for no other reason I have stayed connected to the AIA for the educational opportunities that have become synonymous with our Association. It is the only place I can continue to educate myself on my craft of selling Aviation Insurance to all our customers. The conference remains one of the few places our licensed and degreed professionals can get up to 8 hours of Continuing Education credit. The CAIP designation created and designed by the AIA is accepted around the world as a standard of excellence in Aviation Insurance and remains another avenue for continuing education. With the creation of

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Membership The first Pillar for any organization has always been the membership. It is no different for the AIA. We as an organization have done a great job in promoting the industry and creating a vibrant membership that includes Agents & Brokers, Underwriters and Insurers, Claims, Attorneys, International Insurers and Brokers, and Re-Insurers – All the classes of the trade that create, distribute and deliver the products of Aviation Insurance. Our membership have become experts in the nuances of Aviation Insurance, one of the most unique insurance products in the world.

The Association from its beginning has looked to broaden its membership base. Thus, the expansion to all the divisions of the Board of Directors which represents the supply side of aviation insurance. We have about 700 members, most of whom attend the annual conference. It has been estimated that there are as many as 40,000 insurance professional that participate in the specialized area of Aviation Insurance. The clear majority don’t attend the annual conference and many may not even know about it or have a full understanding of the educational,

Premier Membership - $300.00 [formerly Corporate Membership]

• Eligible to vote in AIA Elections (if agent/broker, attorney, claims, underwriter, re-insurance) • Eligible to serve on AIA Board of Directors (if agent/broker, attorney, claims, underwriter, re-insurance) • A listing of premier members in the Binder • A list of premier members in the Official Conference Program • A list of the premier members on the AIA Website • A refund or discount of the $45 CIE charge or the $100 CLE charge during the Annual Conference (this is only for the person listed as premier member, not the entire company) • Special recognition during regional events in the area • Networking and developing relationships with others in the aviation insurance industry.

• Reduced registration fees to all AIA meetings and educational programs.

• A copy of the AIA Magazine, The Binder, published 4 times per year.

• Access to the online membership directory • Use of AIA logo for business cards and other collateral materials.

• Annual Membership Card • Membership Pin for those earning milestone years

Executive Membership - $150.00 [formerly INDIVIDUAL Membership]

• Eligible to vote in AIA Elections (if agent/broker, attorney, claims, underwriter, re-insurance) • Eligible to serve on AIA Board of Directors (if agent/broker, attorney, claims, underwriter, re-insurance) • Networking and developing relationships with others in the aviation insurance industry.

• Reduced registration fees to all AIA meetings and educational programs.

• A copy of the AIA Magazine, The Binder, published 4 times per year.

• Access to the online membership directory • Annual Membership Card

Student Membership - $50.00 • Only eligible for a full-time college student, 22 years of age and under – must supply proof of enrollment.

• Networking and developing relationships with others in the aviation insurance industry.

• Reduced registration fees to all AIA meetings and educational programs.

• Eligible for special student rate of $450.00 during annual conference • An electronic copy of the AIA Magazine, The Binder, published 4 times per year.

Associate Membership - $300.00 This is a non-voting member category designed for individuals not directly involved in the creation, sales, and delivery of aviation insurance products and services. Vendors, Aviation Service Providers and Corporate Risk Managers would fall into this category. Benefits Include: • A listing of Associate members in the Binder • A list of Associate members in the Official Conference Program • A list of the Associate members on the AIA Website • Preferred pricing for Booths during Annual Conference and Regional Receptions • Special recognition during regional events in the area • Networking and developing relationships with others in the aviation insurance industry.

• Reduced registration fees to all AIA meetings and educational programs.

• A copy of the AIA Magazine, The Binder, published 4 times per year.

• Access to the online membership directory • Use of AIA logo for business cards and other collateral materials.

• Annual Membership Card

Young Professional Membership - $75.00 • Only eligible if in the Aviation Insurance industry five years or less – must supply letter of employment • Networking and developing relationships with others in the aviation insurance industry.

• Reduced registration fees to all AIA meetings and educational programs.

• An electronic copy of the AIA Magazine, The Binder, published 4 times per year.

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networking, and career opportunities the Association currently offers and is expanding. Focusing on becoming relevant to not only our member but also our nonmember aviation insurance professionals is the best way to improve our Association and our Industry.

Regional Receptions That is the reason we created the Regional Receptions open to members and nonmembers alike at no charge. They are an opportunity to reach out beyond our conference and beyond our current membership. It is set up very similar to our London Reception held every other year. Our first one in Dallas was well attended. It was held an aviation museum in conjunction with our quarterly Executive Board Meeting. I was able to meet people who I deal with almost daily on the phone but have never met. I especially enjoyed meeting some of our unseen heroes, professionals who provide our policies, certificates, endorsements, invoices etc., supporting their underwriters. I believe it makes a great difference to put a face to a name.

Our second Regional Reception was held in Atlanta in conjunction with the Weekend “Core Principles and Concepts” class put on by the Education Committee. Attendees were able to sign up and get 1 hour CE credit with the presentation as well as meet and greet over 100 Atlanta regional aviation professionals from all disciplines. I addition, non-member attendees were offered a complimentary membership for the year.

The next Regional Reception will be held in Los Angeles after the first of the year. We are planning on having at least 3 Regional Receptions every year reaching out to our membership in New York, Chicago, San Francisco and other areas as well Our continuing effort to “Focus on Membership” needs to go beyond regional meetings and the conference. Coming soon will be educational opportunities through online meetings and webinars. We need to develop other ways to reach those who work every day in our industry.

Changing the Membership and Dues Structure One of the changes the Association is making this coming year is to realign the Membership Categories. There are 3 categories of “regular” Members plus Associate Members and Students. Regular members are those actively employed as Agents & Brokers, Attorneys, Claims, Underwriters, International, and Reinsurance professionals active in the development, creation and delivery of Aviation Insurance products worldwide.

Associate Members are all others who wish to join the AIA. Vendors, Aviation Service Providers and Corporate Risk Managers would fall into this category.

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Regular Membership Categories Young Professional Membership One of our first priorities was recognizing the need to do more for our young professionals entering our industry. We have created a new category named Young Professional Membership aimed at those with 5 or fewer years in the industry. The membership dues are half of the Executive Membership (formally Individual Membership) with the privileges of access to ‘member’s only” sections of the AIA website and being able to take advantage of the educational opportunities at the vastly reduced “membership rate” rather than the non-member rate.

Executive Membership The Executive Membership category becomes the basic individual membership with full voting eligibility and all the privileges of regular membership including holding office as a Director of one of our divisions making up the board of directors.

AIA MembershipS Expire DecEMBER

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Premier Membership The Association also decided to replace the Corporate Membership with the Premier Membership along with the extra benefits shown on the membership chart that were traditionally targeted toward business owners and corporations within the industry including use of the AIA logo on business cards and other collateral material.

Other Membership Categories Associate Membership The other big change was to fold the Affiliate Membership into the Associate Membership as one category. This category is for all non-voting Association members who are not represented by one of our Divisions making up the Board of Directors.

Associate Members are vendors and all other aviation service providers and professionals involved in aviation commerce.

Corporate Risk Managers are included in this category as well.

We want to hear from you!

We want to hear from you. How can we make a difference in your professional career? What product, service or information can the AIA provide that benefits all of us? Send your ideas to me or to your division representative on the Board of Directors listed in this issue of the Binder and on the Website at www.aiaweb.org

RENEW TODAY! VISIT AIAWEB.ORG TO RENEW

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Preemption in Aviation Product Liability Cases LAURA HEFT - ASSOCIATE BUTLER WEIHMULLER KATZ CRAIG

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reemption is still a valid defense for manufacturers in aviation products liability cases. A recent case out of the District Court in Pennsylvania, Sikkelee v. AVCO Corp., No. 4:07-CV-00886, 2017 WL 3317545 (M.D. Pa. Aug. 3, 2017), on reconsideration, No. 4:07-CV-00886, 2017 WL 3310953 (M.D. Pa. Aug. 3, 2017, granted judgment against a plaintiff’s products liability claim alleging, in part, negligent design because the claims were conflict preempted and could not proceed.

The case adds a new nuance to existing preemption law in aviation cases relating to aviation safety and products liability.

What is Preemption?

Preemption is a doctrine coming from the Supremacy Clause of Article VI of the Constitution: This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.

Because of the Supremacy Clause, federal laws will preempt or supersede conflicting state laws. However, there is always a presumption against preemption, i.e., that a state operates within its traditional police power and that Congress has not derogated state law unless it is the “clear and manifest purpose of Congress” to preempt state law. Abdullah v. Am. Airlines, Inc., 181 F.3d 363, 366 (3d Cir. 1999).

Preemption as a doctrine is not so straight forward. Indeed, it is rare, although not unheard of, that Congress explicitly preempts state law. See, e.g., 49 U.S.C. § 41713(b)(1) “[N]o

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State or political subdivision thereof and no interstate agency or other political agency of two or more States shall enact or enforce any law, rule, regulation, standard, or other provision having the force and effect of law relating to rates, routes, or services of any air carrier...”).

Much more common, courts determine whether implied preemption applies. In any implied preemption case, the court is tasked with determining legislative intent. Abdullah v. Am. Airlines, Inc., 181 F.3d 363, 366 (3d Cir. 1999) (“Accordingly, ‘[t]he purpose of Congress is the ultimate touchstone’ of pre-emption analysis.”).

Implied preemption can be in two forms: field preemption or conflict preemption. Under field preemption, “federal law so thoroughly occupies a legislative field ‘as to make reasonable the inference that Congress left no room for the States to supplement it.’” Abdullah v. Am. Airlines, Inc., 181 F.3d 363, 367 (3d Cir. 1999) citing Fidelity Fed. Sav. & Loan Assn. v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982).

Whereas conflict preemption exists when there is a direct conflict between federal and state law. For conflict preemption to apply “compliance with both state and federal regulations [must be] impossible” or “a challenged state law [must] ‘stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of a federal law,’” Sikkelee v.

Precision Airmotive Corp., 822 F.3d 680, 688 (3d Cir.), cert. denied sub nom. AVCO Corp. v. Sikkelee, 137 S. Ct. 495, 196 L. Ed. 2d 433 (2016) (internal cites omitted).

Preemption plays an important role in aviation cases. Indeed, aviation is unique in that it is almost entirely “federal.” See Abdullah v. Am. Airlines, Inc., 181 F.3d 363, 368 (3d Cir. 1999)

citing S.Rep. No. 1811, 85th Cong., 2d Sess. 5 (1958) (“[A]viation is unique among transportation industries in its relation to the federal government—it is the only one whose operations are conducted almost wholly within federal jurisdiction, and are subject to little or no regulation by States or local authorities. Thus, the federal government bears virtually complete responsibility for the promotion and supervision of this industry in the public interest.”).

Beginning almost immediately with the achievement of flight, Congress saw a need to regulate it. The 1926 Air Commerce Act was a major step. The Air Commerce Act gave power to the Secretary of Commerce to develop an Aeronautics Branch and to promote air commerce, establish airways, license pilots, issue airworthiness certificates and investigate accidents.

Later, the 1958 Federal Aviation Act (“Act”) repealed the Air Commerce Act and centralized aviation regulation, formed the Federal Aviation Administration, and gave the power to regulate air safety to the Administrator of the FAA. The Act was passed on the heels of a series of fatal air collisions between civil and military aircraft that were operating under separate sets of rules to provide uniformity and consistency in the skies.

United States v. Christensen, 419 F.2d 1401, 1404 (9th Cir. 1969). The Act permits the FAA to form rules and regulations for safe flying.

The vast array of regulations makes aviation cases rife with preemption issues. Not long after the passage of the Act, cases began determining that federal law preempted state law in aviation. See City of Burbank v. Lockheed Air Terminal Inc., 411 U.S. 624, 630, 93 S. Ct. 1854, 1858, 36 L. Ed. 2d 547 (1973).

Tort cases, in particular, commonly find preemption to be an issue. Tort law is designed to protect individuals from harms suffered at the hands of another, and is fundamentally state law, based on a state’s prerogative to protect its citizens from harm.

The carburetor is the focal point of the case. The main cause of the accident was the carburetor, which has two halves, the float bowl and the throttle body, that are bolted together. These bolts became loose causing the engine to lose power shortly after take off. (I say “main cause” because in the case it was not disputed that the pilot had relatively minimal hours in this plane, which may have been another contributing cause.) This accident occurred only 400 hours after a complete overhaul.

Sikkelee brought suit, in part, against Lycoming, the engine manufacturer, and Kelly, who performed the overhaul on the carburetor. Kelly settled with Plaintiff in relatively short order for $2 million dollars, but the case continued as to Lycoming.

Lycoming manufactured the engine, model O-320-D2C, that was in the plane at the time of the crash.

Type Certificates v. Parts Manufacturer Approval Important to the complexity of the case are the regulations relating to obtaining a type certificate.

A manufacturer who wants to make a plane needs to have three certificates issued by the FAA: a type certificate, a production certificate, and an airworthiness certificate. Broadly speaking, a type certificate is the initial certification of plans for a particular aircraft or part, a production certificate allows replica parts to be made under a type certificate, and an airworthiness certificate is given to each individual plane produced. A type certificate certifies a particular plane, engine, propeller, or other part “is properly designed and manufactured, performs properly, and meets [FAA] regulations and minimum standards.” 49 U.S.C.A. § 44704 (West). Supplemental type certificates can be issued for changes to the design under the type certificate. Id. Type certificated aircraft go through an extensive process with the FAA. These submissions

Sikkelee’s Contribution to Preemption Recently, a district court in Pennsylvania added another chapter to the long preemption battle.

The case, Sikkelee v. AVCO Corp., No. 4:07-CV-00886, 2017 WL 3317545 (M.D. Pa. Aug. 3, 2017), on reconsideration, No. 4:07-CV-00886, 2017 WL 3310953 (M.D. Pa. Aug. 3, 2017), involved a deceased pilot’s wife suit against a number of manufacturers related to the death of her husband, David Sikkelee, who crashed soon after take off in a Cessna 172N in 2005.

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“THE ABDULLAH COURT HELD BROADLY THAT FEDERAL LAW PREEMPTS STATE LAW STANDARDS OF CARE IN THE FIELD OF AIR SAFETY, BUT PRESERVES STATE LAW REMEDIES.”

are no small feat, normally entailing hundreds of thousands of pages of drawings, schematics, reports, and thousands of flight test hours. Once a type certificate is granted, the FAA prohibits any changes to the type design without explicit approval.

Changes to the type design are again subject to a rigorous approval process. However, the FAA does allow certain documented minor alterations without prior approval as long as the alteration is completed using data acceptable to the FAA. A major alteration is one that “might appreciably affect weight, balance, structural strength, performance, powerplant operation, flight characteristics, or other qualities affecting airworthiness.” All other alterations are minor.

Once a type certificate is issued, it belongs to the manufacturer who went through the process to get it. It remains “effective until surrendered, suspended, revoked, or a termination date is otherwise established by the FAA.” 14 C.F.R. § 21.51.

This manufacturer can authorize other manufacturers to make replica parts under its type certificate through a licensing agreement. Only the type certificate holder, or supplemental type certificate holder as the case may be, and a licensee may apply for a production certificate. 14 C.F.R. § 21.132. The holder of a production certificate is only permitted to manufacturer and install parts identified in its production certificate. 14 C.F.R. § 21.142.

The rules are just as stringent on manufacturers who want to make parts but do not hold a production certificate. These so called “after-market” parts manufacturers go through a separate process to receive a parts manufacturer approval or PMA. The PMA is required for any entity producing replacement parts for type certificated aircraft. 14 CFR 31.303. Type certificate holders and PMA holders are generally competitors. The FAA will issue PMA approval in one of three forms: identicality with the type certificate with a licensing agreement, identicality with the type certificate without a licensing agreement, and tests and computations. As a matter of practice, identicality without a licensing agreement is rare for most complex parts. Identicality is only permitted to type certificated parts not to another PMA. 14 CFR 21.303(a)(4). The later involves the manufacturer submitting its own set of assessments, computations showing regulatory compliance, and testing. The part is approved for installation only on specific aircraft. 14 CFR 21.311; 21.303.

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Unfortunately, this is a time consuming process and the FAA cannot handle the extent of the approvals necessary to keep this system in order. To make up for this deficiency the FAA certifies designated engineering representatives (DERs), who operate as an extension of the FAA in this role, even if they work for a manufacturer normally. DERs recommend approval of PMAs.

Sikkelee One In Sikkelee Lycoming was the holder of a type certificate for its engine. Kelly was the holder of a PMA relating to carburetor components. Sikkelee claimed that Lycoming improperly designed and manufactured the engine, and brought claims alleging both strict liability and negligence.

The case’s first important brush with preemption came from the 3rd Circuit Court of Appeals in 2016, when it reversed the District Court’s determination that the claims against Lycoming were field preempted. There the Court began its analysis with Abdullah v. American Airlines, Inc., 181 F.3d 363 (3d Cir.1999).

In Abdullah, passengers who were injured in turbulence after the seatbelt sign had been illuminated, were preempted only as to the standard of care to be used in the case. The passengers brought suit alleging a failure to warn the passengers of the impending turbulence. The Abdullah Court held broadly that federal law preempts state law standards of care in the field of air safety, but preserves state law remedies. Thus, in the field of air safety, federal standards of care apply in state tort cases.

The 3rd Circuit in Sikkelee distinguished Abdullah noting that it related only to in-air operations, and cited various cases subsequent to Abdullah further demarking a line between cases in-air and cases once the plane has landed.

The Sikkelee Court then determined that the presumption against preemption applied in aviation cases, noting that historically, aviation products liability claims have been controlled by state law.

The Court went on to look for clear Congressional intent that the Federal Aviation Act was intended to preempt state products liability claims, but was unable to do so. The Court noted that the Federal Aviation Act contains a saving clause allowing other remedies. Additionally the Act and the CFR for manufacturing are fundamentally different than those for in-flight operations. The Court explained, “these regulations do not purport to govern the manufacture and design of aircraft per se or to establish a general standard of care but rather establish procedures for manufacturers to obtain certain approvals and certificates from the FAA.” Sikkelee v. Precision Airmotive Corp., 822 F.3d 680, 694 (3d Cir.), cert. denied sub nom. AVCO Corp. v. Sikkelee, 137 S. Ct. 495, 196 L. Ed. 2d 433 (2016). The Court also found that unlike aviation safety regulations, the type certificate regulations provide only “discrete, technical specifications,” which are “exceedingly difficult to translate into a standard of care that could be applied to a tort claim.” Sikkelee v. Precision Airmotive Corp., 822 F.3d 680, 694 (3d Cir.), cert. denied sub nom. AVCO Corp. v. Sikkelee, 137 S. Ct. 495, 196 L. Ed. 2d 433 (2016). Finally the Court noted that unlike safety regulations, there is no catchall standard of care given for manufacturers.

The Court declined to find that the issuance of a type certificate alone would preempt all state products liability claims, and instead found that courts should apply conflict preemption on a case by case basis. Noting that the District Court had not examined the case on a conflict preemption basis, the case was remanded back to the District Court for further proceedings.

The Petition for Certiorari to the Supreme Court was denied on this case, and the case went back to the District Court. AVCO Corp. v. Sikkelee, 137 S. Ct. 495, 196 L. Ed. 2d 433 (2016).

Sikkelee Two In the latest chapter, Sikkelee v. AVCO Corp., No. 4:07-CV00886, 2017 WL 3317545 (M.D. Pa. Aug. 3, 2017), on reconsideration, No. 4:07-CV-00886, 2017 WL 3310953 (M.D. Pa. Aug. 3, 2017), on remand in the District Court, Lycoming moved for summary judgment both on conflict preemption and on liability for third-party modifications. The District Court ruled that the case against Lycoming is conflict preempted and also that the claims fail for lack of proximate causation under state law.

Here, there was no dispute that Kelly rebuilt the carburetor using aftermarket parts; that Lycoming did not see the engine after 1969; that the engine went into storage for 29 years instead of being put into a plane; that it was taken out of storage and put into a plane that it was not type certificated for; that the engine operated in the plane from 1998 to 2004 for 1,262.6 hours problem free; that the plane was then struck by lightning, which necessitated the overhaul of the engine; and that as a part of that overhaul the carburetor was sent to Kelly to be rebuilt. At the time the engine was made, and according to its type certificate, it was equipped with a Marvel-Schebler model MA-4SPA carburetor. When Kelly rebuilt the carburetor, it used a hodgepodge of after-market parts from different decades. Kelly and Lycoming did not have a licensing agreement to permit Kelly do the work on the carburetor, instead, Kelly worked under a separate PMA. There was no dispute that Lycoming not only did not approve of any of Kelly’s work, but that Lycoming in fact was not aware the work took place until this case.

Plaintiff’s argument that Lycoming was responsible for the rebuilt carburetor centered on the type certification process, which made the Court delve deep into the depths of the Code of Federal Regulations that regulates the approval process both for original manufacturer and “after-market” manufacturers.

The court noted that in conflict preemption, a state law will be preempted when it is impossible for an entity to comply with both state and federal requirements. Indeed, “When federal regulations prevent the defendant from ‘unilaterally’ doing what state law required, the state law is conflict preempted.” The Court then examined federal regulations relating to Lycoming’s responsibilities as a type certificate holder and compared those with duties imposed by state tort law. Relying on cases involving the Food and Drug Administration, the Court held that Lycoming could not have independently made the changes Plaintiff suggested would have prevented the accident. Indeed, Lycoming would have been required to go through the FAA to make any design changes to the carburetor. Lycoming would have been forbidden to install even a different model carburetor, much less change the design. Nor would Kelly have been permitted to alter the requirements of the PMA in its rebuild of the carburetor. The Court noted that although historical approval is relevant, what is determinative

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2018 LOS ANGELES REGIONAL RECEPTION

is that approval is needed to implement any future changes.

This makes state tort law in this regard conflict preempted.

Plaintiff continued to argue that Lycoming should be held responsible for Kelly’s changes to the carburetor because Kelly was bound to manufacture its carburetor parts as it did because of Lycoming’s type certificate. This the Court rejected, citing to the separate PMA process. The Court found particularly persuasive that even had Lycoming modified its type certificate, Kelly under a separate PMA was not required to follow suit. The Court also rejected Plaintiff’s argument that although Kelly has the benefit of a preemption defense, Lycoming does not, finding in line with other precedent that defenses are both for the manufacturers and distributors.

The Court also granted summary judgment both on strict liability and negligence counts on an independent basis of a lack of proximate cause. The Court noted that generally a manufacturer is not liable if a safe product is made unsafe by subsequent changes. The Court found that the engine was not defective when it left Lycoming in 1969, and that Lycoming could not have foreseen the introduction of the alleged defect. The Court noted that the engine, which sat in storage for almost 30 years missed required overhauls, the replacement of bolts was a major change cutting the line of causation, and that it was too tenuous to hold Lycoming responsible for alterations 36 years after the engine left Lycoming’s hands.

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On reconsideration of a separate decision, Plaintiff argued that its claim against Lycoming under 14 CFR 21.3 for failure to report known defects should survive. The Court noted Plaintiff’s claim here too fails because the regulation only applies to type certificate holders who also manufacture the product that caused the failure. Sikkelee v. AVCO Corp., No. 4:07-CV00886, 2017 WL 3310953, at *2 (M.D. Pa. Aug. 3, 2017). Because Lycoming did not manufacture the carburetor, Plaintiff’s claim here failed.

The Sikkelee cases have clarified to a certain extent the preemption defense for manufacturers. Although all product liability cases are not field preempted, it seems clear that, at least in the 3rd Circuit, a manufacturer operating under a type certificate will have the defense of preemption when Plaintiff’s claim involves changes that could have been made in the design of the part. Because alterations under a PMA encompass a similarly rigorous approval process to that under a type certificate, it is likely that case can be expanded to apply to a PMA manufacturer as well. The Third Circuit will have the opportunity to weigh in on the latest development, as a notice of appeal was filed mid-September.

Laura Heft is a pilot and an associate at Butler Weihmuller Katz Craig in Chicago.

3:30 pm – 6:30 pm

LOCATION:

SAVE THE DATE

FEB. 8, 2018

Museum of Flying 3100 Airport Ave Santa Monica, CA 90405

If you are a member of the Aviation Insurance Association or if you are working in the aviation insurance business, join us for the 2017 AIA Atlanta Reception. This is an incredible education and networking opportunity, and the best part is, REGISTRATION IS FREE for members AND non-members!

This event is at NO COST to attendees and is open to both members and non-members of the Aviation Insurance Association. The only requirement is you must register for the event.

PRELIMINARY SCHEDULE 4:30 – 5 :00p.m.

Arrivals and Registration 5:00 – 5:15p.m.

Welcome and Opening Remarks 5:15 – 6:00p.m.

Guest Speaker - TBA 6:00 – 7:30p.m.

Networking Cocktail Reception

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aviation history

Post WWII Boom

and Bust in General Aviation ALEX WELLS - AIA Education Consultant

T

he 2016 run-up to the election reminded me of the parallel with general aviation in the post WWII period where virtually all pundits, experts, and the media predicted the market world to go one way and it went the other. How could so many people get so much wrong?

Everyone had seen the advances in aviation during the war years. Even during the darkest days of WWII, the general aviation aircraft manufacturers were aware of the ordinary citizen’s desire to fly and were preparing for the post war period. In 1943, Cessna advertised in Flying Magazine that “Texas won’t be much larger than Rhode Island when you are driving your Cessna Car-ofthe-Air, the airplane that everyone can fly”. Piper called for: “Wings for all America”. Other advertisements featured attractive girls in bathing suits, fishermen in remote trout streams, flying couples basking under the Florida sun while non-flying friends faced winter winds up north.

Surveys, polls, questionnaires, and other marketing studies conducted for and by the industry and the government were the basis for highly optimistic predictions

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of a staggering potential requirement for light aircraft after the war. The Department of Commerce which administered civil aviation at that time, informed the Congress that there would be a demand for as many as 200,000 light aircraft a year for the civilian market.

With an eye on the 12 million veterans who would be taking advantage of the educational benefits under the newly legislated GI Bill, industry experts concurred that there would be at least 1.3 million private pilots within five years after the war and as many as 400,000 privately owned aircraft by 1950.

Many leading magazines in 1943 and 1944, including journals under such diverse audiences as Business Week and Better Homes and Gardens, regularly carried major articles featuring post war airplanes for the common man and woman. Time reported that there were 5,750,000 people “conditioned to flying”. These included Army and Navy pilots, who at the time numbered 350,000; civilian pilots and students, 150,000; skilled aviation personnel (other than pilots), 2,500,000; students taking aviation courses, 250,000; and employees during the war in air-

craft factories listing 2,500,000 men and women. A Woman’s Home Companion survey showed that 39 percent of the women interviewed were interested in flying themselves and 88 percent had no objection to anyone in their family owning a plane.

The aviation industry acted as quickly as it could to meet the anticipated avalanche of new student pilots and returning veterans who would be the first buyers of post war civilian aircraft. Insurance companies were caught up in the enthusiasm and expectations of creating aviation departments to handle the risks commensurate with the expected growth. Surveys indicated that prices should be a four-place plane. All the wartime light aircraft manufacturers wanted to be in on the market with new models within a few months.

Piper, which had delivered 5,000 Cubs to the armed services, announced that it would soon come out with a two-place, low-wing, tricycle-gear, all-metal plane to be called the Skycycle. Beech and Cessna reorganized their production times to roll out all-metal planes. Some of the manufacturers of combat aircraft entered the market. Republic Aircraft, which had produced thousands of P-47 fighters, geared up to offer a four-place single engine amphibian called the Seabee for sportsmen pilots at an announced price of $3,995. North American Aviation, developer of the P-51 fighters and B-25 bombers, designed a bulky, four-place retractable-gear “family car of the air” called the Navion for a price of $5,000.

Despite all the design activity, the first airplanes to appear on the civilian market were the prewar models: Aeronca’s Champion, Piper’s Cubs, Taylor’s Taylorcraft, Stinson Voyager, and Luscombe’s Silvaires. Cessna came out with the 120/140 series and Globe produced the Swift. Production increased and by the end of 1945, when the war was over, there were 37,789 aircraft of all categories (including airline equipment) in the U.S. civil aircraft fleet.

During 1946 hundreds of civilian flight training schools blossomed all over the country as recently discharged veterans took advantage of the new VA flight training legislation. It was apparent that the ordinary citizen did want to fly; the dream of a mass market was coming true.

In 1946, the full year of peace, 33,254 light aircraft were built and sold.

No one was concerned that the demand for 200,000 airplanes did not materialize in the first year; everything with wings that was made was sold. It would be better to have the market develop slowly to the 200,000 level. More important, the sales volume was 455 percent higher than it had ever been before the war.

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Airline services expanded rapidly after the war and it was not long before the airlines were demanding that the government regulate small airplanes to keep them out of “their” airspace and keep them out of “their” airports. The government refused and the light aircraft manufacturers seemed to be receiving good news on all fronts. In 1946 the first Federal Airport Act was passed which turned many former military training fields over to cities and counties and provided financial assistance

to states and municipalities at the same time. The year 1946 had been a record setting period: Piper-7,780; Aeronca-7,555; Cessna-3,959; Taylorcraft-3,151. The non-spinnable Ercoupe sold a surprising 2,503 and Globe and Stinson both went over the 1,000 mark.

Beech introduced the Bonanza for $7,435, and a small acrobatic biplane called the Pitts Special came on the market. However, there was still some concern about all this exuberance. The all-around utility of the automobile far surpassed that of the light airplane for the simple reason that there were not enough ground-support facilities where people could land which were close to resort and vacation areas. The airplanes also cost a lot more than people had been led to believe they would, particularly when compared with automobiles. The $3,995 Seabee of 1945 had been more realistically priced at $6,000 by the end of 1946. The Bonanza was up to $8,945, and Navion to $4,750, and the Swift to $3,750, and the Cessna 170 to $5,475 – all a long way from the $2,000 price tag advertised during the war models and not very good for cross-country transportation. They were noisy, drafty, cramped, uncomfortable, and not at all reliable for taking carefully planned vacation trips to the mountains or the beach.

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The industry also experienced a high percentage of VA students dropping out of flying soon after receiving their private pilot licenses and an increasing number quitting immediately after soloing. Once airport circling had lost its charm, many ex-GI’s began to take a hard look at the practicalities versus expenses, particularly when they learned how easily low ceiling or fog could ground them.

Army and Navy veterans who had been flying high-performance airplanes were simply not satisfied to poke along at 95 or 100 miles per hour, especially after a long cross-country flight against a headwind when they could see automobiles making better time on the highways below.

Another problem faced by the light aircraft manufacturers was the availability of war surplus aircraft at bargain prices. In 1946, the Reconstruction Finance Corporation sold more than 31,000 aircraft ranging from Cessna T-50 “Bamboo Bombers” to P-51s. Many ex-military C-47s and Twin Beeches, as well as bombers, went into the corporate market to be modified as executive transports.

The manufacturers began to realize that the general public might have been oversold on light plane flying and that they could not hope to have a mass-production industry comparable to the automobile industry.

In 1947, a year before Cessna introduced its 170 (which would eventually be developed into the 172) the world’s most successful light plane, the industry was beginning to flounder.

Manufacturing companies with delivery ramps clogged with unsold airplanes began to feel the pinch. Globe was in bankruptcy, Republic had discontinued the Seabee, North American had sold the Navion design to Ryan and Taylorcraft was looking for new capital. By the end of 1947, the severity of the problem was evident. Sales were down 44 percent from the previous year to 15,617 units.

Things got worse in 1948. Sales again dropped by more than 40 percent when only 7,302 airplanes were manufactured.

The public’s reluctance to spend money on private fly-

ing was understandable. A cold war had developed with the Russians, culminating in the blockade of Berlin in the summer of 1948. The United States countered by mounting the Berlin Airlift, and the possibility of another major conflict was on the horizon. GI flight training was restricted to vocational pursuits and tougher regulations were enacted to restrict private flying.

The downward trend followed the deteriorating international situation resulted in an even more dismal year in 1949, when 3,545 aircraft were built. The decline continued until 1951 when the market bottomed out at 2,302 units.

The early 1950’s began a period of introspection and review by the general aviation manufacturers. Executives began to look at the future from a different angle. Mass producing airplanes for everyone at low prices was not the answer to growth. The future lay in developing a fleet of airplanes that would provide solid, comfortable, reliable business transportation. Aircraft that could operate in instrument conditions with speed and range would be the wave of the future. A certain number of training airplanes would have to be built to get new people started, but a utility airplane that business people could afford was the target design for the future.

Most of the aviation insurers that joined the market during the late 1940’s retired from the business by the early 1950’s. Some like the Mutual Aviation Casualty Underwriters and the American Fidelity Companies left the business of aviation insurance. Others like Zurich joined USAIG or AAU. Others limped on like INA and Royal-Globe that represented a very small percent of the GA market and no airline coverages. By the mid 1950’s GA aircraft sales were picking up, reaching 7,588 units by 1960 and a fleet of over 76,000 airplanes.

It was against this background that the Subcommittee on Antitrust and Monopoly of the Judiciary of the United States Senate, headed by the late Senator O’Mahoney, started its investigation of the situation and commenced public hearings which lasted from August 6, 1958 through August 15, 1958. Throughout the hearings, the Subcommittee indicated that its overriding concern

was with the extent and effectiveness of competition in aviation insurance.

In summarizing its findings, the Subcommittee made its conclusions and recommendations in a report published in August, 1960. The major items among its conclusions were: 1. In 1943, a report of the Civil Aeronautics Board criticized the concentration of the aviation insurance business in the hands of three competing groups or markets. Despite the phenomenal growth of the commercial aircraft industry in the intervening years, only two groups or syndicates were available to furnish the insurance for the operation and continue growth of the industry.

2. Adequate reinsurance facilities had not developed in the United States.

3. Reverse competition had occurred in the air trip insurance business where the three insurers were engaged in a struggle for market position, not through lower rates or wider coverages to buyers, but through the payment of enormous rentals to airports.

4. State regulation of aviation insurance was not completely effective in eliminating the restrictive market practices discovered by the Subcommittee.

No specific actions aimed at correcting the above situations were undertaken by the federal government or by the New York State Insurance Department. The Justice Department, however, and a Federal Grand Jury later conducted lengthy investigations and hearings on the allegations of the Subcommittee. The conclusion of both was that no action was warranted. However, it did put the industry on notice that any appearance of collusion should be avoided.

Expansion, modernization, and increasing complexity characterized all segments of the aviation industry during the turbulent 1960’s. A new cycle of expansion and competition began in the aviation insurance industry.

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SITUATIONAL

AWARENESS HAL HUNT - Program Manager - National Hangar Insurance Program

After 30 years in the aviation industry as a pilot and underwriter I’ve come to the conclusion that pilots and agents have a lot in common. To be proficient, both professions require years of experience, practical application, the ability to react quickly or think on your feet and strong situational awareness. The USMC defines situational awareness as, “the ability to identify, process, and comprehend the critical elements of information about what is happening with regards to the mission.” Simply put, knowing what is going on around you. Marine recruits are improving their combat situational awareness through practice and preparation. This training is designed to enhance their ability to pick up on environmental cues and apply them to a given scenario. Three out of the top 5 causes leading to general aviation mishaps are due to a loss of situational awareness. These are low altitude operations, controlled flight into terrain and loss of control in flight. Improved situational awareness will lessen the risk of all 3 and as mentioned above, can be improved through practice and preparation. Pilot preparation starts with pre-flight planning and consists of an AIS brief, weather brief followed by, route selection, performance calculations, filing a flight plan and conducting a thorough preflight. Similarly for an agent, preparation begins with policy review, coverage analysis, obtaining an updated application and analyzing changes. The execution phase occurs during the meet-

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ing with the insured and can be no less stressful than an airborne emergency. Lack of preparation for a pilot can result in death or serious injury. Lack of preparation for an agent can seriously injure your business or that of the insured. The following article will improve agent situational awareness and discuss 3 of the top 5 triggers for error and omissions (E&O) claims and techniques to avoid having one of these claims. We will discuss failure to recommend a coverage, failure to adequately explain policy provisions and failure to adequately identify exposures.

Failure to recommend a coverage is probably the easiest trigger to eliminate through preparation. Look over the declarations page of the policy and run down through the coverages. Are the limits adequate? Is there a coverage missing? An example might be cyber liability coverage. Are you offering your insured a cyber liability policy? According to Kaspersky Labs the average cost of a “small” business data breach is $86,500. Most small companies don’t think it will happen to them but according to Property and Casualty 360, 62 percent of all cyber-attacks hit small to mid-sized businesses. How about earthquake coverage? Have you offered flood?

Have you offered business interruption coverage? According to Blue Drop services, 40% of businesses fail to re-open following a disaster due to the lack of or mis-

calculated business interruption insurance. Does your insured have a business interruption from dependent properties exposure? Example: Your insured operates a flight school and they have contracted with another company to provide students with simulator time. The simulator gets destroyed and there isn’t another viable alternative for this training. Until the simulator is back up and running your insured could be out of business.

Does your insured have equipment breakdown? One simple and full proof method of making sure no coverage is missed is to use a checklist. Our website has an excellent checklist to get you started.

Failure to adequately explain a policy provision can be just as important as not recommending a coverage. Policy provisions are clauses in an insurance contract that lay out the exact conditions for which coverage is provided and for what amounts, along with exclusions and other restrictions. First and foremost understand what type of form you are selling. At National Hangar, we sell only a “special” form. If it’s not specifically excluded, it’s covered. Take a few moments to review the exclusions and property and costs not covered provisions. Does the policy have a water exclusion that excludes back up of internal sewers and drains? Ours does not, but this exclusion could be significant given the fact that water damage is our second leading cause of loss. Does the

policy have a roof resurfacing endorsement that limits the roof coverage to actual cash value instead of replacement cost? Or worse yet it does not cover cosmetic damage. Does the policy have a coinsurance provision that you need to explain? Make sure you review and explain the limitations section of the policy as well. An insured may believe he has a $1,000,000 limit for his business personal property only to find out that there is a limitation on how much he can recover for certain items like precious metals and alloys. Just because the policy has the recommended coverage doesn’t mean it has an adequate limit for that coverage. Does the insured understand the “vacancy” provision or the term “specified cause of loss?” Similar to the coverage checklist, creating your own policy provisions/limitations/exclusions checklist is a great way to quickly discuss the issues, cover them thoroughly and protect yourself and the insured while doing it.

Failure to adequately identify exposures makes up almost 10% of EO claims and it can be the most challenging of the 3. It can be difficult to know if an insured has provided all of the required information to allow you to do a proper analysis. Albeit burdensome, obtaining a signed updated application from the insured every year is a great way to catch changes and also provides you with an opportunity to reanalyze the risk. Consisten-

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cy is key. Document everything. For example, you have identified a business interruption exposure, presented the insured with a quote but the insured is not interested. Make sure he declines that coverage or various other coverages in writing. Another example is an inadequate building value. Insured’s often don’t know what the true replacement cost of a building is. He could be significantly exposed with a low value on his building. We watch our replacement cost values closely but not all markets do. If a higher building value is offer but declined, document it.

The insured mentions he has a fuel farm. Did you offer pollution coverage? Did you offer coverage for his fuel? Is the fuel carried on the IM floater so that it is covered not only in the tank but in the truck as well? During a jury hearing, failure to supply documentation that supports you or the carrier will likely lead to the jury siding with the insured.

There are numerous character traits that good pilots and good insurance agents share. They tend to be intelligent, organized, self-sufficient, practical, analytical and competitive to name a few. But, as any successful mentor will point out, it’s not good enough to be talented. Success is predicated upon work ethic, discipline, persistence and preparation.

Experienced pilots realize the importance of standardization and the ability to compartmentalize and focus on the task at hand. This leads to a high level of situational awareness. Successful agents should adopt these same techniques and apply them to the insurance procurement process. One of the tools I previously mention is using an insurance checklist. Another proven technique is to conduct a high quality survey to help the insured and you identify risk. Include in this survey a review of applications, leases and other contracts. This survey will help sell insurance, provide coverage for elements that may otherwise be uninsured, and documents the agent’s file. The survey should be revisited on each renewal.

Structure proposals on new and renewal accounts to address every element identified in the survey. It is fine for the insured to elect to not insure an element or to select lower limits. But make sure it is the insured’s decision and is documented in the file. Remember, document, document, document.

Hal Hunt has been a pilot for more than 30 years.

He is a 20-year USMC veteran and a retired squadron commander. He is currently the program manager at the National Hangar Insurance Program.

PRESIDENT PAUL HERBERS Cooling and Herbers pherbers@coolinglaw.com

VICE PRESIDENT JAMES GARDNER The James A. Gardner Company, Inc. Jim.Gardner@jagardner.com

TREASURER JON DOOLITTLE Sutton James, Inc. jdoolittle@suttonjames.com

SECRETARY ERNEST DE SPAIN W. Brown & Associates EDeSpain@wbais.com

DIRECTOR OF AGENT & BROKERS DIVISION LUKE UITHOVEN Kimmel Aviation Insurance Agency, Inc luke@kimmelinsurance.com

DIRECTOR, ATTORNEYS’ DIVISION NICOLE WOLFE STOUT, ESQ Strawinski & Stout, P.C. nws@strawlaw.com

DIRECTOR OF CLAIMS DIVISION STEVE TELLER Aviation LS steve.teller@aviationls.com

DIRECTOR OF INTERNATIONAL DIVISION BRUCE CARMAN bcarman7@googlemail.com

DIRECTOR, UNDERWRITERS’ DIVISION GREG STERLING

DIRECTOR-ELECT, AGENT & BROKERS DIVISION CHRISTOPHER ARNOLD,

AIG greg.sterling@aig.com

Sutton James, Inc. carnold@suttonjames.com

DIRECTOR OF REINSURANCE DIVISION IAN WRIGGLESWORTH Guy Carpenter & Company Ltd ian.wrigglesworth@guycarp.com

DIRECTOR-AT-LARGE CHRISTOPHER MORIN Murray, Morin & Herman cmorin@mmhlaw.com

DIRECTOR-AT-LARGE MATT ROWLEY Berkley Aviation, LLC mrowley@berkleyaviation.com

IMMEDIATE PAST-PRESIDENT DAVID SALES Ed Broking LLP david.sales@edbroking.com

AIA EXECUTIVE DIRECTOR MANDIE LOROFF Aviation Insurance Association mandie@aiaweb.org

AIA BOARD COUNSEL RAY MARIANI Murray, Morin & Herman raymarianilaw@gmail.com

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THE AIA WAS FOUNDED IN 1977 BY E.R. “BUTCH” KINNEBREW, III.

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AGENT/BROKER DIVISION REPORT

Pressure an Engine Failure Story

Luke Uithoven - Director of Agent/Brokers’ Division

P

icture this: Ten pilots attending EAA Airventure in OshKosh, Wisconsin sitting around a campsite in one night, letting the “war stories” fly. Lies and “fish tales” so thick that you could hardly see through them. In this group were airline pilots, cargo delivery pilots, recreational pilots, and aerobatic pilots; most of which have logged over ten thousand flight hours. One of the pilots posed a question to the group, “How many of you have had an engine failure?” Only two hands were raised and all of the eyes cut to us, two Mississippi boys, sitting in the corner. I don’t know if it was a badge of honor that Frank and I lived to tell our stories or if it was a badge of shame when they all busted out laughing about the equipment that we must be flying. Either way, I was grateful to be able to tell my story in person.

Pressure - that is the name of the game in life, flying and our industry these days. I feel more and more that we are sitting in pressure cookers about to scream out with a high pitched sound. We are all so fast paced, spur of the moment, ever changing, and pressured to perform or risk being passed over and forgotten. How we handle the pressure translates directly into our success or failure as a broker. The stakes have never been higher for us and if we don’t perform to the client’s expectations, they will leave us at the drop of a hat. If the client doesn’t have any patience to start with, it doesn’t give us much of a leash to perform on. It is very hard to give the client the best product and most thorough job, when they expect an answer in just a few hours. But unfortunately, that is the hand that we are dealt and it is only going to get worse.

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However, we cannot sacrifice our values and duties as a broker in order to give into the pressure. If we follow lowest price, underwriter favoritism, or higher commissions, are we giving our client the best product for their money? They have instilled a lot of trust in us that we will give them a product that will pay a claim fairly and appropriately. We have to remain advocates for the insured and vigilant of their concerns in order to give them the product that best suits their needs.

Newsflash! These insureds do still talk to one another. Word of mouth is still a viable referral system and can trump a shiny website or app. It can make or break our reputation as brokers and reaffirms the need for us to put the customer first, and not ourselves.

Pressure is going to continuously mount as each day and year passes by. Much like an engine failure at 1800 feet as a Student pilot on solo cross country, the pressure is ON. You either face the opposition head-on, working out an emergency procedure with a clear mind, or you become distracted by fear and fail. As brokers, we must keep a clear mind and face change /pressure head on. We must adapt to the changes in our industry, because it is not going slow down or go easy on us. The client has a need for instant gratification and we must be able to handle it while providing the best service that we are able to give them.

Being a broker is tough, always pulled in so many directions, and trying to please everyone. But, being a successful broker is like surviving an engine failure. “War stories” and lies so thick in the air that you can’t see through them, but in the end, you are laughing and enjoying a successful career and have lived to tell about it.

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attorney director’s REPORT

Are

“Nuclear” Jury Verdicts a Real Risk?

NICOLE STOUT - Director of Attorneys’ Division In the last several years, we have seen a concerning trend of large jury verdicts that cannot be justified or discerned from any multiple of the special damages alleged or proven in the cases. Some of these “shock verdicts” have been rendered for personal injury claims with substantial but not devastating injuries and have been in the tens of millions, hundreds of millions, and even billions. A Wall Street Journal article in 2016 concerning insurers’ increasing aversion to insuring tractor-trailers, referred to such verdicts as “nuclear.” (See Baskin, Brian, “Nuclear Verdicts Have Insurers Running from Trucks,” Wall Street Journal October 14, 2016).

There are multitudes of theories on why we are seeing this trend. One of the prevailing theories is that the pervasive use of the “reptilian argument” made famous by Don Keenan and David Ball in their book the “Reptile: The 2009 Manual of the Plaintiff’s Theory” is a part of the reason. The theory relies on the assumption that instinctually people seek to protect their own safety and security at a base level. By making the argument that what happened to the plaintiff could happen to the juror or a family member, the jury comes to a verdict to ensure their own safety. The theory and the defense strategies to overcome it have been widely written about since the book was first published.

Some of the largest verdicts are not necessarily insured, but the possibility of these nuclear verdicts is being raised in litigation and must to some extent be reckoned with in evaluating case value in complex cases. The rational idea of damages being awarded for alleged harm done is being replaced with the intent to punish or get the attention of the defendant, which is often a corporation. While many cases can be evaluated using the traditional approach, cases that seem to arguably involve

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a societal wrong are the cornerstone of these nuclear verdicts.

On the other side, but much less sensationalized, we are seeing defense verdicts in cases where the defendant may have some liability, but the plaintiff also bears some responsibility, or when the injuries alleged are perceived by the jury to be exaggerated or overblown. Disputed liability cases are being won by the defense at trial, particularly with the increasing use of expert testimony to help the jury become educated and to truly understand the complex issues at play.

In some ways our ability to predict jury verdicts is becoming increasingly difficult. It seems that the potential for an unreasonable verdict is often juxtaposed with the real possibility of a defense verdict. With the potential for a windfall, plaintiffs and their counsel are setting practicality aside and sticking it out for the 1 in 10 or 1 in 20 chance for one of those verdicts that defies prediction based on the damages incurred. This is risky for plaintiffs particularly when the expense of preparing a case for trial is increasing. The potential for a defense verdict most of the time, can lure defendants into not considering in the evaluation the possibility, albeit small, of one of these nuclear verdicts.

The assumptions that both sides could generally rely on 20 years ago have to be balanced with the new reality that we are living in. While we are at a point where the swing of risk is significant for both sides, early and aggressive investigation and preparation ensures the likelihood of a predictable outcome.

The goal on the defense side is to demonstrate to the plaintiff and counsel that the expenses and cost of obtaining the chance of a nuclear verdict are not worth the risk.

I look forward to seeing everyone in Austin next spring!

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UNDERWRITER DIRECTORS REPORT

Can You Read the Signs?

A Look Ahead

GREG STERLING - AIG Aerospace

P

lease allow me to begin this month’s article by saying I hope everyone had a safe and happy holiday season and add my wishes for a healthy and dare I say, a prosperous New Year!

As 2017 draws to a close, I’m reminded of a saying from the famous New York Yankees’ baseball player and 20th century philosopher Lawrence Peter “Yogi” Berra, who once said, “It ain’t over `till it’s over”. While sugar plums may be still dancing in the heads of some, every underwriter in the industry is rubbing their rabbit’s feet hoping for a quiet claims wrap up to the year.

It’s fitting that Mr. Berra was a baseball player. No other sport has woven it’s nomenclature into the modern vernacular like baseball. Each of us knows instantly what it’s like to be thrown a “curveball”, to have something come at us “out of left field”, or cringe when we see something done in a “hit or miss” fashion. It’s little wonder then that Yogi’s pearls of wisdom resonate so clearly with us.

Sayings like, “If you come to a fork in the road – take it”,

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“You can observe a lot by watching”, and my personal favorite, “It’s like déjà vu all over again”.

This is also the time of year when the oracles of the industry dust off their crystal balls, boil up their tea leaves, and look to the stars in an effort to forecast market conditions for the coming year. Will this be the year when the market finally “takes the fork in the road”? Or will it be another year of “déjà vu all over again”? For many underwriters a year-end review of financials may signal a time to return to core risk selection principles and pricing discipline. For others it may signal a time to “back up the truck” in order to meet year-end goals.

Whichever strategy is being employed, we are undoubtedly still conducting our business in unprecedented soft market conditions.

While some might debate as to the exact timing, most industry experts agree that the current soft market in aviation insurance began around 2005. That’s twelve years of steadily declining prices in a business segment his-

torically felt to have a seven year cycle. During the same period the market witnessed the largest expansion of carriers offering aviation coverage in its history. If Yogi Berra saw how many aviation insurance companies there were today he might again say, “No one goes there nowadays, it’s too crowded!” As a result, underwriting parameters and requirements which were once considered sacrosanct have become significantly more flexible.

Required minimum experience levels, requirements for annual recurrent training, and single pilot operations are but a few of the areas where underwriters have been forced to adapt to what many have termed, the “new normal”.

Collectively conditions have created an unparalleled buyers’ market where nearly every aviation risk can be placed. Good news for pilots, aircraft operators, and aviation business owners, but a challenge to an aviation insurer who may be seeing greater volatility in combined ratios. To underwriters a healthy combined ratio is like altitude to a pilot - safety. Just as a 50’ deviation in altitude may have minimal impact on a pilot cruising at 10,000’ AGL, it can be disastrous when you’re “treetop flying” where there’s little room for error.

Of course as go premiums so goes commission revenue

which tightens operating margins for brokers. 2017 saw several acquisitions and mergers within the brokerage ranks as firms sought ways to maximize profit and reduce expenses through economies of scale. In an earlier BINDER article I spoke about the growing importance the role technology will play in our industry as a means of reducing both expense and transactional friction for underwriter and broker alike.

That need is ongoing and will undoubtedly be an area of discussion as goals and objectives for the coming year are set.

Many market prognosticators will point to the effect of the numerous storms and natural disasters of 2017 as being a possible impetus for a market turn.

Any discussion of the financial impact of these events however should be properly prefaced with recognition of the untold human suffering left in their wake and a collective offering of thoughts and prayers for the many thousands affected. With that important point noted, according to Property Casualty 360 high end estimates for Hurricane Maria alone are $85 billion, $50 billion for Irma, and $25 billion for Harvey. Combined with other losses global property cat totals for the year are expected to top a record $190 billion pre-tax. But according to a September 2017 Aon Benfield report, the 2011 global cat loss total of $135 billion was also a record

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SAVE THE DATE – more than double the preceding four years – and had little to no effect on our market as a result.

All this makes one wonder, in the face of record global cat losses in property, rising liability case awards, and continually contracting premium levels, how the soft market can continue. The answer is quite simply that these factors have not been enough to stem the tide of capital available to the market. Estimates vary, but general consensus is that global reinsurance capital totals in excess of $600 billion – up almost $150 billion in the last five years alone. An additional factor adding to the soft market is the increased presence of alternative capital – monies drawn into the reinsurance market as investors seek better returns than they can obtain in the current low-interest rate environment. According to the same Aon Benfield report cited earlier, capacity provided by capital market investors has more than tripled since 2011. Whether or not the strengthening in the US equities market will prompt the Federal Reserve to be more comfortable with future increases in interest rates is a topic of strong debate. While no real consensus exists on either side, a November Kiplinger’s forecast points to rising interests rates in 2018, fueled by low US unemployment and a bullish stock market. Whether or not these will provide enough attraction to pull significant alternative capital out of the global reinsurance market remains to be seen.

Still there are more than a few pieces of positive news to start off the New Year on the right foot. Among the best of these is that aviation is getting even safer. The FAA recently announced that it expects 2017 to the safest year on record for general aviation with the fatal accident rate expected to fall below one per 100,000 flight hours. Likewise, according to the Aviation Safety Network the five-year moving average for fatal airline accidents continues to fall. Of course not all aviation accidents involve fatalities. The reality of our market is that aircraft physical losses which make up the majority of aviation claims are becoming more costly to repair.

For these and other reasons trying to call the bottom

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of a market is like trying to catch a falling knife. But there are signs that the market has, if not leveled out, is at least shallowing its decent. 4Q renewals are seeing more stable outcomes than in prior years and within every brokerage and underwriting firm a renewed focus on profitable operations over the long term will always build better results for companies and clients alike.

So despite my repeated questions about 2018 the Magic 8 Ball I keep on my desk for really important decisions keeps answering, “Concentrate and ask again”.

But come to think of it, that’s probably sound advice. Whatever our respective roles in our industry may be - from underwriting to brokering to claims to reinsurance each of us would do well to concentrate on delivering excellence in both product and service to our respective clients and customers in the coming year. We can always “ask again”, or wait until February 2nd to see if the market groundhog sees his shadow and predicts another seven years of a soft market. Until then, while we may not be able to alter the conditions of our market at large in the New Year, we can certainly alter the conditions within our individual corners of it - for the better.

Location JW MARIOTT, AUSTIN, TX

The 2018 AIA Annual Conference is the best venue to trade experiences, create business partnerships, and discuss the current state of the industry from each segment of the association. Network with your peers over cocktails during the opening reception and learn what is to come for the aviation insurance industry during the general education sessions.

After all, like Yogi said: “It ain’t the heat, it’s the humility.”

Save the dates for the 2018 AIA Annual Conference and you will be sure to see that AIA continues to be THE conference for those in the aviation insurance industry!

Sources & Acknowledgements: Aon Benfield. “Reinsurance Market Outlook” Sep. 2017 Aviation-Safety.net. Statistics.

Heft, Jayleen R. “Catastrophic Global Reinsurance Losses” PropertyCasualty360.com. Sep. 27, 2017 JLT Specialty. “Uncertainty in the Aviation Insurance Market Post US Hurricanes” Oct. 9, 2017 Payne, David. “Rates Due for Modest Increase” Kiplinger’s. Nov. 16, 2017

The Aviation Insurance Association is THE place to make the connections that matter. In addition to the knowledge you will gain from the education sessions, the available networking opportunities are what truly makes this conference the place to be for those working in the aviation insurance industry. This is the one time per year when all facets of the industry are together at once. It is your opportunity to renew old acquaintances, build new relationships and your business.

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SCHEDULE AT A GLANCE SATURDAY, APRIL 28

7:30am - 2pm 8:30am - 2:30pm 2 - 5pm 4 - 5pm 5:30 - 7pm 5:30 - 6pm 6 - 7:30pm

MONDAY, APRIL 30

AIA Golf Tournament and Lunch for Golfers AIA Sporting Clay Tournament Registration Desk open Education Committee Meeting Quick Pick-Up Registration Open New Member/First-Timer Reception Opening Reception

7am - 3pm Registration Desk open 7:30am - 8:45am Past Presidents’ Breakfast 8 - 9am Breakfast with exhibitors 9am - 12:30pm General Session 9 - 9:15am President’s Welcome 9:15 - 10am Doris Höpke , Munich Re 10am - 10:15 CAIP/CAIP Gold Award 10:15 - 10:30am Break 10:30 - 11:10am Ed Bolen, President, NBAA 11:10am - 12pm Martin Foulger and Guy Buesnel, Spirent SUNDAY, APRIL 29 12 - 12:15pm Pinnacle Award 7am-4pm Registration Desk open 12:15 - 1pm Lunch 7-8am Breakfast with Exhibitors 1 - 1:45pm LUNCHEON SPEAKER ANNOUNCED SOON 8am - 5pm Continuing Insurance Education Sessions 2 - 4pm DIVISION SESSIONS 8 - 9am The Pilot Shortage: If it’s real what can we do about it?

Attorney/Claims • Mitchell Young, USAIG • Glenn Vallich, USAIG • Katie Pribyl, AOPA Agent/Brokers 9 - 10am Claims Presentation – Claims Gone Bad o Queuing Up at AIA • Paul Leonard, Charles Taylor Aviation 6 - 9pm Monday Night Party at Austin City Limits 10 - 11am Space Insurance Update • Scott Ross, Global Aerospace 11am - noon E & O Claims from Beginning to End • John Scott Hoff, Cremer Spina TUESDAY, MAY 1

noon - 1pm Lunch 7 - 8am Breakfast 1 - 2pm Drones 5.0 8am - 12:30pm Continuing Legal Education sessions • Anthony Mormino, Swiss Re Management 8 - 9am Air Show Panel • Gerald Deneen, Swiss Re Management • Paul Lange, Law Offices of Paul A. Lange, LLC 2 - 3pm Power Down or Fire Up: Lithium Battery Risk at Altitude 9 - 10am Litigating with the FAA • Ted Dunlap, RTI • Jim Strawinski, Strawinski & Stout, P.C. 3 - 4pm SMS Panel Featuring USC Safety 10 - 10:15am Experimental Aviation Claims and Releases • Ray Mariani, Murray, Morin & Herman • Laura Heft, Butler Weihmuller Katz Craig LLP 4 - 5pm Bad Faith Decision 10:30 - 11:30am Recent Developments • Deborah Elsassser, Clyde & Co • Kerry Mahedy, Montgomery, Rennie & Jonson

REGISTRATION OPENS JANUARY

WWW.AIAWEB.ORG 32

7200 W. 75th St Overland Park, KS 66204 913-627-9632 mandie@aiaweb.org

KEYNOTE SPEAKERS Dr. Doris Höpke, Member of the Board of Management Munich RE Dr. Höpke joined Munich Reinsurance Company in 1999, where she worked as in-house legal counsel until 2001 and was head of section at Munich-American RiskPartners (MARP Munich) until 2003. In 2003, she took on the project management for “Business Group Master” as part of Munich Re’s global IT project GLORIA (Global Reinsurance Application). From 2006 to 2010, Dr. Höpke was head of the divisional unit Aerospace & Special Services. In 2011, Dr. Höpke became head of Munich Re, Madrid.

Since 1 May 2014, Dr. Höpke has been a member of the Board of Management of Munich Reinsurance Company and was responsible for Munich Health until 31 January 2017. In February 2017, she took over responsibility for the division Special and Financial Risks. At the end of April 2017, she also assumed global responsibility for human resources in the reinsurance field of business, including the function of Labour Relations

Guy Buesnel, CPhys, FRIN PNT Security Technologist, Spirent Guy is Spirent’s PNT Security Technologist, with the responsibility of developing Spirent’s approach to address the issues of GNSS vulnerability such as Jamming, Spoofing and Cyber-attack.

Guy has more than 16 years’ experience working protecting GNSS Receivers from emerging threats , having started his career as a Systems Engineer involved in the development of GPS Adaptive Antenna Systems for Military Users at Raytheon Systems Limited in the UK. Guy has a BSc Honours degree in Physics with Atmospheric Physics and a Master’s Degree in Communications Engineering.

As well as being a Chartered Physicist, Guy was elected a Fellow of the Royal Institute of Navigation in 2015 for his services

Director.

in the field of GNSS vulnerabilities.

Ed Bolen, President and CEO NBAA

Captain Mark Kelly Commander of Space Shuttle Endeavour’s Final Mission

Ed Bolen became the president and CEO of the National Business Aviation Association (NBAA) in Washington, DC, on Sept.

7, 2004.

Prior to joining NBAA, Bolen was president and CEO of the General Aviation Manufacturers Association (GAMA) for eight years. Bolen joined GAMA in 1995 as senior vice president and general counsel. GAMA’s board of directors elected him president and CEO in November 1996.

In 2001, Bolen was nominated by President Bush to serve as a member of the Commission on the Future of the U.S. Aerospace Industry. Established by Congress, the commission’s objectives were to study and make recommendations on ways to ensure American leadership in aerospace in the 21st century.

Bolen was nominated by President Clinton and confirmed by the U.S. Senate to serve as a member of the Management Advisory Council (MAC) to the Federal Aviation Administration (FAA). He chaired the council from 2000 to 2004.

Bolen is the incoming chairman of RTCA, Inc., a not-for-profit corporation that functions as a Federal Advisory Committee to the FAA on matters related to communications, surveillance, navigation and air traffic management. He previously served as RTCA’s vice chairman. He also serves on the Aviation Advisory Board of the Mitre Corporation, a federally funded research and development corporation.

NASA space mission commander and American hero Captain Mark Kelly demonstrates how focus, dedication and persistence can help you tap into your potential to succeed in any competitive setting.

With an extraordinary career of service to our military, our nation and humanity, Mark has secured his place in history as a role model, modern-day pioneer, and leader of distinction.

Together with his identical twin brother, Scott, he has laid the groundwork for the future of space exploration as the subjects of an unprecedented NASA study on how space affects the human body. Currently, Mark is on the Commercial Crew Safety Board at Space X—and is the only person at Space X who has commanded a space mission—and is co-founder of World View, a full-service commercial space launch provider.

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