VOL. 45 NO. 1- SPRING 2020
JIM GARDNER FOCUSING ON THE RIGHT STUFF
GROUND HANDLING OCCURRENCES WHERE ARE THEY NOW? FRANKLIN BASS
AIAWEB.ORG
IN THIS ISSUE Editor John Murray
Murray, Morin and Herman
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President’s message
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CLAIM DIRECTOR’S REPORT JUST ANOTHER DAY IN PARADISE
EDUCATION UPDATE
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GROUND HANDLING OCCURRENCES
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AVIATION HISTORY BREACH OF WARRANTY
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WHERE ARE THEY NOW? FRANKLIN BASS
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.
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Published by the Aviation Insurance Association 7200 W. 75th St. Overland Park, KS 66204
PRESIDENT’S MESSAGE JIM GARDNER - AIA PRESIDENT, The James A Gardner Company Inc.
Focusing on
“THE RIGHT STUFF” This was not the article I thought I would be writing! For the first time in AIA history, we will not have an annual conference. In my nearly 70 years on this planet, I have never seen anything like this. It goes beyond 9/11. Beyond Polio. We were within 60 days of the conference, getting all the final plans in place when the “Royal Sierra” hit the fan. I was really pumped because we had a great plan for a fantastic conference in Tucson. Within days we went from full speed ahead to a
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full stop, assessing the situation which was changing hourly. On March 11, when the governor of Arizona declared a state of emergency and the virus count started escalating, we realized that the conference was in jeopardy. By the end of the week we were in full blown negotiations with the Marriott Starr Pass with the end result of agreeing to move the conference, without penalty, to May 5- 8, 2023 at the Tucson Marriott Star Pass.
We have a lot of people to thank for finding a negotiated solution in which both the AIA and the Marriott Starr Pass benefited. Mandie and Elton both stepped up their game. However, Ray Mariani, the AIA General Council, really saved our bacon. His accurate and detailed legal assessment was the cornerstone of our analysis and negotiating strategy. With the advice and consent of the Executive Committee, and with the entire board in the loop and very supportive at every phase, the four of us were able to work with the Marriott and get to a negotiated settlement within a very short timeline defined in the contract. Getting to this conclusion was not guaranteed. It could have gone in an entirely different direction. We would have likely been forced to go down a very costly and uncertain legal path. That doesn’t mean we came away without a loss. As it is for most associations, the annual conference has always been our main source of income. That is income we will lose this year. We need to find alternative ways to fund our association. Fortunately, we have reserves, but the lost revenue will cut into the reserves far more than I feel comfortable. Some people have inquired about Conference Cancellation Insurance. One of the main benefits of Conference Cancellation insurance is that it works similar to business interruption insurance, insuring again the loss of revenue. To my knowledge, the Association has never purchased it. A triggering event would be similar to what is in our Force Majeure clause of out contracts. I am told that unless we had a very robust (and expensive) policy, there is an 80% chance it would not have been applicable here. This is a question we will be fully exploring in the future. However, I have always felt that a good, strong membership base is the best insurance we can have.
The 2023 AIA Annual Conference will be held at the Tucson Marriott Star Pass.
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So Where do we go from Here? The Association has been working toward becoming more financially independent from the conference for a while. Several years ago, I came to the conclusion that our dependency on the conference was a crap shoot. Two bad conferences in a row would test our financial solvency. That is why we have been focusing on membership and member services as a way to increase our membership numbers as well as other non-conference revenue streams to gradually reduce our dependency on the conference.
Enter 2020! We a have a whole new ballgame. The time for change is now. First, CIE and CLE will be held via webinar. The show must go on. By the time you have read this, we may have already
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conducted webinars for both CIE and CLE with the associated insurance and legal credits. We have petitioned each state for their approval. We must describe to them an outline of how we are conducting the classes to meet the accreditation standards. At present we are planning to have the CIE webinar on May 6. A full day with 8 hours of CIE credit all done through Zoom. AIA Keynote Speakers Series We were very fortunate to have several aviation industry stalwarts to the bring you wisdom from the ages. Our Keynote speakers: • Aviation Insurance Industry VIP – Steve Blakey from Starr Aviation • New Helicopter Association International President – Jim Viola • Representing the NTSB – Bruce Landsberg • AOPA President Mark Baker • Chairman of the flight Department at Embry-Riddle – Dr. Ken Byrnes • Director of Embry-Riddle School of Business – Dr. Thomas Drape
They will be making their presentations via webinar in the weeks following the CIE and CLE courses.
While the effects of the Pandemic may be overshadowing the other accomplishments of the Association this year…
Virtual Networking
The AIA Speaks out on behalf of the industry
Networking has always been the cornerstone of the Aviation Insurance Association. Since most of us are in Work from Home, Stay at Home mandates, we understand the monotony and even loneliness of being isolated and working in a silo. For that reason, we are initiating a Virtual Happy Hour Every Tuesday evening at 5PM Eastern. We encourage you to join Mandie, myself, other board members and anyone else who wants to join us for a Virtual Happy Hour where we can see one another, exchange stories and just visit. If nothing more, it will break up the monotony of being “home alone” with the upside of seeing others you have only dealt with via email.
The AIA has been making great strides improving our visibility in the aviation industry by networking with other Aviation Associations and organizations, focusing on safety issues as well as the current trends in aviation insurance. We have given presentations to the GAMA Board of Directors as well as The Georgia Business Aviation Association. Recently we were invited back by GAMA to help manufacturers and operators of the new urban on-demand mobility and eVTOL systems better understand how aviation insurance, safety culture, and operational issues will impact their industry and operations. We have also been invited to give an encore presentation on the pilot shortage to the Pacific Northwest Aviation Association which I now understand has also been cancelled.
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Looking for Ways to improve the membership value proposition. AIA Training Facility Data Base We are in the final stages of launching the new AIA Training Facility Database. We are seeking input from the underwriting companies as well as brokers so that we can create the most complete data base possible. The idea is to give our members a single place to go to locate and learn about where their clients may get the need training to meet their insurance requirements. It will give the Association an additional revenue source from the training providers who want to advertise their service or improve their visibility to the insurance community. Because every Underwriting companies forms section are in different places on their website, it has been suggested that we provide our member brokers an “Underwriters” tab with a direct link for each underwriting company’s forms section to easily download forms,
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sample policies, and endorsements. These additions are to be located on the Members Only section.
Throw it up on the Wall and see what sticks! If you have any other membership enhancement ideas you would like to see or explore, we are all ears. Whatever your idea may be, let us know about it. The craziest ideas have turned into some very popular and successful programs.
Clearly, the Association needs your help and support more than ever. What can you do? Be A Member! Just because you don’t come to the Annual Conference, doesn’t mean there isn’t value in being a member. And, you can be an ambassador for the Association within your own company. If we can recruit 1000 new dues paying members who never come to the conference, we would not be dependent on the conference for revenue.
And, we could put those dues dollars to work by creating programs and initiative that benefit your career. It can all start with you. One new member at a time.
We can put your Conference Fee or Sponsorship to good use. Invest in your Association. A portion of your conference fee has always gone to the cost of conducting CE and CLE courses. Since we are going to get our CE and CLE credit approved by webinar, contributing your conference fee to the Association will go a long way to helping us recover and give you the licensing credits you need. And, as a bonus, a series of webinars from industry leaders and their take on the most game changing event of our lifetime! So, you don’t need the continuing education credits or care for the Keynote Speaker Series? Consider your contribution an investment in the future of the Association and how a strong Association might benefit your career and company. We can use your investment to build a better virtual world with more member resources, better educational opportunities, and better member communications. I have instructed Mandie to keep my conference fee as well as my sponsorship as an investment in our future. How about you? Help us find Advertisers for the binder. We have a first-class quarterly magazine that is virtually untapped as a revenue resource. Our Magazine is mailed in hard copy to our approximately 700 Association, Premier, Executive, Jr. Executive, and Associate/Affiliate members. In addition, it goes out electronically to over 3000 aviation insurance professionals worldwide. Who are potential advertisers? All of us are salesmen in some degree. Who do you think would benefit from getting in front of Underwriters, Brokers, Claims, and Aviation Attorneys?
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Aircraft Training Providers, both simulator and “in aircraft”? This is my favorite. With an emphasis on training these days, advertising in the Binder seems a natural to get your attention. Who is your favorite “in Aircraft” training provider? Aviation Attorneys? Even though you may already be a member there are a lot of us Brokers who would may need your service one day. What are your ideas? Recruit an advertiser.
Adversity Creates Opportunity. Focusing on “The Right Stuff”. The fact that we need to restructure the Associations revenue streams is obvious. The events of the past few months have changed the timeline. The Aviation Insurance Association serves the Aviation Insurance community worldwide. We have the opportunity to identify and implement those needed changes now rather than later. At a faster pace rather than gradually. We need your ideas, your enthusiasm for a terrific industry and a fantastic career. But more than that, we need your involvement and support. Be A Member. Be a leader. Help us make our Association change with the changing times.
EDUCATION COMMITTEE UPDATE
EXCELLENCE IN
EDUCATION JOHN CUNNINGHAM - AIA Education Committee Chairman
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xpanding education and professional development opportunities for our members on a worldwide basis is the Education Committee’s primary purpose. Technology is allowing AIA to expand our horizons. The AIA held the first international ‘Core Principles and Concepts Course’ in London England November 5-7, 2019 in conjunction with the bi-annual AIA London Reception. Our friends at Munich RE were kind enough to host the class at their beautiful office facilities. We had eleven participants coming from as far away as Hong Kong. Instructors, Doug Johnson and Eric Barfield tell us that the material was well received by the class and that they had some lively discussions about some of the differences between conducting business in Europe versus the U.S. market. Several class members sat for the test and the AIA was able to recognize our very first international
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candidate to qualify for the CAIP designation. Congratulations to former AIA President David Sales. The AIA is planning a course in Toronto in 2020, as well as, bi-annually in London. The committee’s next educational innovation is to offer the ‘Core Principles and Concepts Course’ remotely via our first ever webinar. With leadership provided by Laura Heft, Doug Johnson, Nancy Gratzer, Luke Uitoven and Mandie Loroff conducted a session at the University of Mississippi Law School, February 22-23, 2020. The webinar was hosted through ZOOM. For those who wish to take the course via webinar, all they need (in addition to a computer) is a Webcam and microphone and they will be able to learn from the comfort of their office or home. We encourage all AIA members to get their associates involved.
There is a real possibility that this is the venue that AIA has been searching for and that will accomplish the goals of keeping the class totally interactive and broadening the audience. On another front. The Education Committee and the Board are encouraging that the CAIP designation be bestowed upon AIA members who are in the Attorney and Claims Division. Historically, the custom of AIA has been to offer the CAIP only to those members who work in the insurance industry as part of an underwriting concern or a brokerage. The committee reached this decision for several reasons, among them: 1st) the CPCU designation, which is provided by another organization, is considered one of the most prestigious designations
for persons who educate themselves on insurance industry operations. Notably, the designation of CPCU is available to attorneys, claims persons and others who do not work on a full-time basis as part of an insurance company or insurance brokerage. 2nd) our inquiry with our Attorney and Claims Division at the 2019 AIA Annual meeting found a significant level of interest among those members in achieving the CAIP designation. 3rd) the AIA should be fostering the advancement of education in the area of insurance among its members and making that pursuit as accessible as we can in all respects. Moving forward, the CAIP designation will be available to any AIA member who has satisfied all the criteria listed for the CAIP designation regarding
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the courses and education required. Any course attended and documented prior to inception of this new policy will be considered as part of the completion of course work toward the CAIP designation. As respect the Attorney and Claims Division, a member must take care to determine independently, and without guidance of the AIA, as to whether the laws of the state(s) by which that member is governed in the member’s profession will permit the use of the CAIP designation in any advertising or communications of any kind. We make this important admonishment because our research has determined that several states will not permit the use of the CAIP designation for an attorney unless the attorney has satisfied certain criteria set down by that state’s attorney ethics rules. E.g.: according to NY Disciplinary Code 7.4(c)(1), the AIA must be approved by the ABA for purposes of
bestowing insurance designations on lawyers before a NY lawyer can advertise that he has such a designation; also, Illinois Rules of Professional Conduct state that Illinois’s general policy is not to recognize any certifications besides the admission of attorneys to the federal patent bar, but Rule 7.4 allows a lawyer to identify certificates issued by organizations when 1) the reference is truthful and verifiably and not misleading; and 2) the reference states that the Supreme Court of Illinois does not recognize certifications of specialties in the practice of law and that the certificate, award or recognition is not a requirement to practice law in Illinois. We have not surveyed all 50 states but expect many other states will impose similar restrictions or possibly outright prohibitions. Thank you especially for the efforts and support on this subject from of Ray Mariani, Esquire and Laura Heft, Esquire.
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JOHN BAYLEY - REGIONAL DIRECTOR, MCLARENS AVIATION
GROUND HANDLING OCCURRENCES 12
As global aviation traffic continues to grow, what are the implications for ground collision claims? There is no doubt if you look at our workload and review the general data, that the number of ground handling incidents between equipment and aircraft is on the increase. Apart from the obvious increasing incident costs for a hull or hull deductible policy insurer, as well as for operator and ground handling insurers through subrogated claims, the operational disruption and need to move passengers onto different flights and rearrange schedules is huge – particularly so given the decrease in flag carriers and commercial operators having spare aircraft. So, what’s influencing this trend and what can be done to counter it?
Investment in infrastructure A key factor is the growth in global aviation traffic which, broadly speaking, is outpacing the development of infrastructure. We only need to look at the aircraft orders and deliveries in the last 10 years and make a simple comparison between that and the number of airport facilities that have been built. In a very simplistic way, we know that new runways have been built in various places but only a few lucky countries have seen new airports constructed. There are also other countries where these have started but stopped due to political or financial reasons. In some countries the infrastructure investment is minimal but a proud new fleet of aircraft is scheduled, or has arrived.
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Size of aircraft This issue becomes more acute when you factor in the modern aircraft design. Our recent experience in several regions of the world has shown that the increased size of wingspans and additional length of some fuselages compared to earlier aircraft models are also factors in the frequency of events. Many of the infrastructure areas of the airport such as parking stands and taxiways were planned and developed many years ago when the wingspans were smaller. Typically, the airports had room for expansion of wing sizes but these factors combined with the increased movement numbers means that incidents are now occurring as a direct result. It is sometimes the result of combined circumstances of having bigger aircraft in the area, restricted movement requirements and the interaction with ground movement controllers and handlers who may not be fully aware of the geometry of an aircraft wing. A swept wing aircraft has a turning sweep ra-
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dius that increases (when viewed from the front) as the aircraft is pivoted about the main landing gear. This frequently results in wing clips either with other aircraft parked nearby or with equipment and buildings. This is not a new circumstance but as distances from the person to the wingtip increases it seems the human perception of accuracy decreases. Aircraft under tow in open areas rarely have wing walkers and turning and maneuvering is a skill that needs to be mastered, particularly so given the geometry and size of the aircraft.
Ground handling operations We have also noticed an increase in the number of operators subcontracting ground handling activities rather than keeping them in the house. This appears to be a global trend and fits with the wishes of financial departments who are able to apply more measurable control to the cost with fixed price deals for turnaround activities, handling and towing re-
quirements. As a simple matter of human behavior, the ground handling activities when performed by an operator’s own staff on their own aircraft, may well benefit from a sense of ownership and pride. We are not aware of any data to prove the contrary to this, but McLarens’ airport and operator Risk Reviews have on occasions cited the change of owner period of ground handling service, from an operator to a subcontractor, as a particularly difficult time to maintain quality, resulting in a blip in claim numbers. The anecdotal evidence appears to show a settling down of event numbers after a quality driven ground handler takes over but the changeover periods are tricky for many reasons. We can leave procedure experts and psychologists to analyze this in depth but our experience seems to show a number of circumstances that may be described in some fields as a pattern.
Costly repairs Nevertheless, small costs in aviation relate to large numbers. There is no such thing as a cheap repair. The policy will call for economic methods of repair which often means pre-used fully certified parts but these sometimes need a longer procurement time than new parts off the shelf. New parts can lead to an adjustment requirement for an insurance claim and an uninsured loss for an operator. This is another point of debate for the relevant hull deductible levels which have not changed for decades and have in no way kept up with the exponential repair cost increases we see; especially with the introduction of new generation aircraft.
Managing the risk There are many examples of independent risk surveys providing good operational pointers and airport activity suggestions to mitigate risk. Additionally, some of the schedules now being required for a turnaround are on the edge of being inflexible if unexpected events need thinking time to be factored in. Patterns of task activity are good to ensure all needed functions are performed but the wish to continue despite an anomaly has been shown to be a causal factor in many incidents. How the commercial needs and time pressures that restrict flexibility can be managed is a subject in its own right and will probably never be ideal for everyone with the number of interested parties involved in the debate. Infrastructure investment and airport changes to routes and procedures could make a notable difference, however both require time and money. At the same time, technology is constantly being developed and this may well be utilized to positive effect in the future. Perhaps a tethered drone flying above the tow vehicle, whilst generating a map with a predicted route and collision predictions on a screen in the tow cab will be possible soon. It would help but adds yet another element of drone usage legislation and would need some significant investment. We can land an aircraft smoothly in fog at 160kts directly on the centreline and stop it running off a runway, but we still have collisions at slow speed on the ground. (This article was first published in Insurance Day)
The availability of hanger facilities on an airport is more and more restricted as time goes by. It has been a while since we saw a large number of hangers being built and the short notice availability is either non-existent or comes at a rate that is a huge boost for the faculty owner and thus a cost for insurers.
McLarens Aviation is a leading provider of loss adjusting, survey and risk services to the global aviation industry. Clients include the aviation insurance market, aircraft operators, airports, maintenance and repair organisations (MROs), financiers, lessors, oil and mining companies, law firms and regulators. It has a team of over 90 in-house aviation specialists, operating across 48 offices, in 22 countries across the globe and manages in excess of 4,000 insurance related assignments each year.
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PAUL HERBERS - COOLING AND HERBERS
WHERE ARE THEY NOW? This is a new feature for the Binder – news on past and present members who have left the active business of aviation insurance. Our first featured member is Franklin Bass, a continuing member, an AIA Past President (2014-15) and a member of the AIA Eagle Society.
Franklin Bass Franklin Bass started his career as Assistant Attorney General for the State of New York, and then moved to the Port Authority of New York & New Jersey as trial attorney. While at the Port Authority, Franklin worked on high profile aviation cases, including the ONA DC-10 crash at JFK and the Eastern 66 B-727 crash near JFK. From there he joined Joe Benero (AIA President ’87, ’89) at Home Insurance / Global Insurance as Claims Manager. Next, Franklin moved to the practice of aviation law for 20 years, mostly at Wilson Elser, until he joined Catlin Insurance as Global Head of the Underwriting and Claims Counsels team. Franklin Bass retired from active participation in the aviation insurance business to his home in Naples FL, in June 2016. First, he fulfilled a lifetime desire with a stint at teaching high school senior history in Ft. Myers.
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But he has now thrown himself into his other passions: riding motorcycles, racing cars and shooting sporting clays. And he has been living a fast, active life.
Motorcycles:
Franklin rides his Harley and BMW motorcycles. He’s crossed the U.S. twice doing 6,000 miles each time. He’s ridden in 46 states, reached the Canadian border, and covered most western National Parks, with more to go. Franklin’s riding name is “the Fish.”
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Race Cars:
Franklin races monthly at Daytona, Sebring, Palm Beach or Miami-Homestead Speedways. His stable houses a Mercedes AMG, Ferrari, McLaren and a Porsche. He has started a new business providing high performance drivers education and raceway experiences for novices through advanced drivers – Pole Position Track Experience LLC.
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Shooting:
Franklin introduced the Sporting Clays event to the AIA Annual Conference some years ago, and he maintains his enjoyment of shooting – he calls it Golf with a Shotgun – as well as bird hunting in the Everglades and overseas. His wonderful wife Sharon joins him in this passion, and often outshoots him, with her own Beretta Silver Pidgeon Shotgun. Franklin considers himself blessed in his life with Sharon, in his illustrious career in aviation law and insurance, and in his strong connection to the AIA, having only missed one conference since the late ‘80s. He wishes you all well and hopes to reconnect in Tucson in just a few months.
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CLAIMS DIRECTOR’S REPORT
STEVE TELLER - Director of Claims Division
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JUST ANOTHER DAY
IN PARADISE “If you want to make God laugh, tell him about your plans”. -Woody Allen Last year, a few days before Asheville I was really thinking about maybe starting packing (including my very keen Derby Day outfit) when I got a call. An aircraft had just crashed in Hawaii in a residential neighborhood and had shut down a major commute artery. As quickly as you can say “no sporting clays” I booked a flight west and unbooked the one east. I have worked in the Islands from Southern California for many years. Like most of the pivot-
al moments in my career, as I began in Hawaii, I was very fortunate to find a mentor, THE mentor over there. Kind of an amalgam of Yoda and (cut me) Mickey from Rocky. I hired him, watched him work, and took a lot of notes. He was so proud to introduce me to everyone on the case:
“This is Steve who is helping me. He’s not from here, he’s from the Mainland”. Not too long after that I began receiving hull survey and hull adjusting assignments. On my first one, not yet knowing the difference between my okole and a puka in the ground, I asked the mechanic
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which shop(s) over there did engine teardowns and propeller repairs. I learned that there were no such shops, and that these inspections and repairs were usually done in California (not far from my office). OK who’s the Mainlander now? I also learned that when you open a wing up for loss-related repairs, that corrosion, (lots of it) can be present…not so loss-related. And selling salvage or buying serviceable parts? No Fed Ex ground rates. I knew that eventually crash site investigation assignments, my passion, would come too. So, in preparation I started reviewing NTSB archives and found a precious jewel. A bi-plane buzzed the line-up so low at Banzai Pipeline that a non-plussed surfer “tombstoned” his board (pushed the bottom down in the water with the nice sharp pointy end up), let go of it and… Houston we have lift-off. The board impaled the lower fabric wing of the aircraft. The pilot flew back to nearby Dillingham Airfield with it still attached.
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A missile of that mass probably could not have climbed more than 10 or 15 feet. I wonder who got in the most trouble? When my first major crash site assignment did come, I learned quickly about logistics Hawaiian Style. What would have been one-stop retriever shopping on (dare I say) THE MAINLAND, it took 9 vendors to get the wreckage out of the jungle, onto a truck, to the airport, across the airport (don’t ask) into a temporary layout facility and eventually into long term secure storage. Somewhere in that process my mentor surprised me when he introduced me:
“This is Steve, we work together”. I learned also, which came in very handy a few years later, that identifying, locating and making appointments to interview witnesses in rural/off-
grid areas required a special approach. I had by that time found several retired law enforcement assets on different islands who could take me into these areas and help me to (usually) enjoy a very high level of cooperation. And as an added bonus, I came home at night. The almost-exception to this came on our way out, WAY out into the country one afternoon. We got to a fork in the road and went left, as the witness had provided my guide/interpreter/handler/security detail in his directions. We came upon a parked pickup truck. So glad to have finally found the witness, we got right out and started over to him. The truck window then rolled down, a rifle barrel trained on us, and we beat the Hawaiian land speed record to our truck and away. Back at the fork, we went right and found our witness. He gave us a great statement that broke the case wide open.
port at a meeting with a vendor (10 on this project not 9), my mentor said this:
“Don’t talk to me, tell Steve. When I am gone, he will be taking over for me”. I didn’t know at the time that this was our last job together, and a few months later he was gone, gone from the earth. I will always carry with me what he taught me, not just about the local technical and logistical aspects, but how he treated people, how he was always prepared, and how he thought outside the box. In whatever aspect of the industry you find yourself, wherever you are located, I believe that these lessons are transferable.
So, back to last year’s project (the Derby Day outfit in still the closet). When we were back at the air-
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AVIATION HISTORY
Breach of Warranty
Lienholders Interest Endorsement
ALEX WELLS - AIA Education Consultant
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ircraft do not depreciate like automobiles. In fact, the steady decline of new aircraft sales since the heady days of the 1960’s has resulted in the appreciation of many models of used aircraft in all segments of the industry including turbo-prop and jet equipment. According to GAMA figures in the beginning of 2018, the average single engine piston-powered aircraft in the U.S. fleet was over 46 years and the average multi-engine piston powered airplane was 44 years old. The average age for all aircraft is 37.5 years.
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Aircraft make great collateral, but, as with all collateral, the prudent lender must insist that the borrower carry insurance to protect against its destruction. The aviation insurance policy generally specifies the lender’s in one of two ways: (1) identifying the lender as a loss payee or (2) by attaching a special endorsement to the borrower’s policy. The acknowledgment of the lender’s interest as a “loss payee” merely requires that whatever insurance is available (subject to all available exclusions and defenses) be paid jointly to the lender and insured/borrower. Under the second alternative, a special endorsement, traditionally referred to as a “Breach of Warranty” (BOW) endorsement, is attached to the borrower’s policy. (In and attempt to use plain language, insurers now commonly refer to this endorsement as the “Lienholder’s Interest” endorsement or the “Additional Interest” endorsement). This endorsement often protects the lienholder’s interest even when the insured violates (breaches) provisions of the insurance policy that would otherwise result in a coverage denial. For this reason, most lienholders require the use of this endorsement over the loss payee approach. Courts have generally held that the BOW endorsement creates a separate contract between the insurer and the lienholder. Since the endorsement itself does not contain all of the terms of the contract, many of the basic policy provisions that apply
to the lienholder must come from the underlying policy. However, not all of the underlying policy is incorporated into this separate “contract” between the insurer and the lienholder, because some of those provisions would conflict with the extra protection provided by the BOW. In the event of such conflict, under the basic rules of legal interpretation, specific terms control over general terms. In insurance interpretation, the endorsement controls over the underlying general policy. Within the specific form itself, handwritten or typed words control over general printed provisions. However, where no conflict exists between gain an endorsement and the underlying policy, the policy controls. These guidelines should be considered when evaluating the coverage afforded to a lienholder under a BOW endorsement.
Acts and Neglects of the Insured As discussed above, under the BOW endorsement, the lienholder is protected against the “acts or neglects of the insured” which would ordinarily violate the policy and entitle the insurer to deny coverage. These typically involve violations of the exclusions and conditions of the policy. The exclusions most
commonly violated are those that require the aircraft to be maintained in an airworthy condition, specifically requiring an annual inspection as mandated by the Federal Aviation Regulations (FARs), and violation of the pilot warranty by which the insurer has set forth specific requirements for pilot experience. In these situations, the insurer will pay the lienholder named in a BOW endorsement. The same is true for any other policy violation that falls within an exclusion. The insured may also violate the policy by breaching a policy condition, such as by failing to immediately notify the company of a loss, file proof of loss as required by the policy, and protect the wreck after the loss. Again, a lienholder who is named on a BOW has protection in the event of such a breach. One caveat, however is that the BOW itself may impose specific duties on the lienholder, such as filing a proof of loss when it learns that the insured has failed to do so. As a general rule, whenever the lienholder learns that the insured has violated a policy condition, the lienholder should attempt to take the correct action under the policy. Another reason for an insurance coverage denial is when the underlying policy simply does not apply
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to the claim or particular aircraft. For example, the policy may be written to provide ground coverage only or the insured may have failed to effect coverage on a newly acquired aircraft. In these cases, the insured did not commit any act or neglect that violated the policy conditions or came within the terms of an exclusion-there simply was no coverage to begin with. Accordingly, there is no protection for the lienholder. The most common problem area for this lack of coverage is the use of the aircraft outside the policy territory. The policy territory is stipulated in the insuring agreement provides coverage for flights within the United States, Canada, and Mexico. Insurers have argued that insurance within the policy territory is all that is “afforded” by the policy. Courts have divided on the question of whether the lienholder receives protection for flights outside the policy territory. Some have ruled for the lienholder, saying that the flight outside the policy territory was an “act or neglect of the insured” against which the BOW provided protection. More recent cases, however, have held that the lienholder receives no protection under the BOW because there never was any insurance to begin with.
The most common destinations that create coverage problems are the Bahamas and Central or South America. These cases often involve seizures and confiscations by local authorities, who allege that the aircraft was used for smuggling. Usually the person whose involvement with drugs is alleged, is not the owner/borrower, but someone operating the aircraft under a lease. While these decisions involve territorial coverage problems, they also invoke policy language about “conversion” and “seizure and confiscation.” (Most BOWs exclude conversion by the person in lawful possession.) The BOW also does not protect the lien-holder whose customer (the borrower) hides the collateral from repossession. That is not an insured loss under the aircraft hull coverage. Basic policy language typically excludes coverage for “damage due to conversion, embezzlement, or secretion by any person in possession of the aircraft under a lease.” The BOW itself typically excludes protection for the lienholder for “conversion, embezzlement, or secretion by or at the direction of the Named Insured….” As can be seen, the basic policy voids coverage in the event of conversion by any person. Under the
narrow language of the BOW, the named insured (typically the borrower) must be implicated.
Blanket Breach of Warranty Aircraft insurance is usually item specific. Most policies insure an airplane or a specific list of airplanes (“a schedule of insured aircraft”). If the aircraft is not listed, it is not insured. A more troubling problem is where the insurer issues a “blanket” BOW to a given lender. The blanket BOW is traditionally used for commercial operators that have a high turnover of aircraft. Some insurers issue blanket endorsements to avoid issuing specific endorsements each time there is an addition or deletion to the fleet. This poses a potential coverage problem for the lienholder in that the insurance policy to which the blanket endorsement attaches only insures specifically listed airplanes. A blanket acknowledgment of the bank’s potential interest in the aircraft is of little consequence if the aircraft itself is uninsured. The insured borrower’s policy may provide for automatic attachment and deletion of aircraft as its fleet changes. Reporting form policies have such
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provisions. Most policies provide automatic attachment of newly acquired aircraft but only when the insurer already covers all owned aircraft, and even then there is generally a maximum limit with regard to the hull coverage.
Time of Payment The insurer will not make a payment to the lienholder unless there has been a determination of no coverage for the insured by the time payment would be due to the customer. In most cases, an ordinary payment will be made within 60 days of the loss. If the borrower fails to do so, most-but not all-policies obligate the lienholder to file a proof of loss. While the specific reference is rarely invoked by insurers, the quoted provision means that the lienholder could be forced into arbitration over the amount of the loss. The lienholder’s concern for
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the amount of debt is not the same as the insurer’s concern. The insurer’s concern is the amount of the insured loss, typically either repair cost or market value of the airplane, without regard to the loan balance. The insured loss must be determined before the amount payable to the lienholder can be determined. The amount the lienholder can collect is dependent on the amount the insured would have been entitled to collect since the insurer is liable for no more than this amount. Limits on costs of repairs by the named insured, Component Parts Clauses (less used now than in the past), and limits on transportation charges may further restrict the available policy proceeds. Some insurers have traditionally insisted that the lienholder repossess the salvage of the wrecked aircraft before making payment. Unless this is spe-
cifically required by the BOW endorsement (which is very uncommon), repossession is not normally necessary as a prerequisite to payment. Theoretically, the deductible should be subtracted from the amount the lienholder can collect, and many insurers take this position (although a few specifically waive the deductible as to the lender in the BOW). Subtraction of the deductible is justified by the observation that in a “clean” loss, with no policy violation, the lienholder would only recover the insured loss net of deductible as an appointee of the insured customer’s interest. It is difficult to see why the lienholder should recover more simply because there is a policy breach. After the amount of basic policy proceeds has been determined, the BOW itself must be examined for any further limitation on the amount payable to the lienholder. Many BOWs have a dollar limitation on the loan that is less than the insured value. The limitation is frequently expressed as a percentage of the insured value, usually 80 or 90 percent. The underwriting intent is to require the insured to have an economic interest in the airplane-something to lose personally if the policy is violated. The lienholder is almost always barred from recovering unearned interest and matured but unpaid installments. Some policies also restrict the amount payable to amounts remaining after the lienholder has “used all reasonable means to effect collection of the debt.” Where this provision is applicable, insurer liability under the policy is postponed in those rare instances where a solvent debtor continues payment on the note or contract-leaving the insurer as sort of contingent guarantor of the obligation to the extent of the insurance payment it would have had to make.
Subrogation Against the Insured When the insurer has no obligation to the customer because of a policy breach, but it is obligated to pay the lender because of the BOW endorsement, the insurer is subrogated to the rights of the lender. This right of subrogation has to be reserved in the policy because of the general principle that the insurer cannot sue its own insured under the policy, and all BOW endorsements create this right of subrogation. The subrogation is obviously to the extent of payment. However, the timing is generally limited by the important proviso that exercise of the subrogation rights will not impair the right of the lienholder to recover all its debt. The significance of this limitation would apply where delinquent installments and prepaid interest were excluded in the insurer’s BOW payoff. The lender can still collect these before the insurer starts pursuing the customer for its BOW subrogation. The insurer can avoid the delay if it elected its right to pay off the airplane account. All of the BOW endorsements grant this right and the lender must then assign its rights to the insurer. Borrowers financing aircraft purchase are frequently general commercial customers who often have other loans. It appears that the limitation on the insurer subrogation about “impairment of the debt” relates only to the debt for the insured airplane which was the subject of the BOW endorsement. Nothing would preclude the insurer from attempting collection from the borrower merely because this might impair its ability to repay other loans.
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It is not uncommon for pilots to attempt to obtain more favorable insurance rated by completing applications and pilot history forms that exaggerate their flight experience.
Notice of Cancellation The BOW typically provides for 30 days’ notice to the lienholder of the insurer’s intent to cancel the policy. It does not require notice of cancellation by the named insured or of the policy’s expiration. Many lienholders now require the insurer to give the lienholder 30 days’ notice of any request by the insured borrower to cancel the policy. In one case, termination of insurance was effected when the lessee that had insured the aircraft deleted it from its monthly retrospective reports of aircraft used or flown during the month. The court held that this failure of the insured to afford coverage constituted an “act or neglect” of the insured against which the lienholder was protected. The lack of any policy provision for notice of policy termination was undoubtedly an additional factor in this case. While this principle may protect the lender from the debtor’s termination of coverage, natural expiration of the policy does not normally require notice. The lender must maintain a file on insurance and require new evidence of insurance each year.
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It is not uncommon for pilots to attempt to obtain more favorable insurance rated by completing applications and pilot history forms that exaggerate their flight experience. Underwriters and claims departments get rather upset about this when a reputedly high-time pilot crashes, and they learn he had minimal real experience. If the exaggeration is bad enough, the insurer may attempt to rescind the entire policy ab initio for fraud in the inducement. While many states have statutory restrictions of the use of recession which require that the misrepresentation have affected the decision to insure or the rates charged, lies about pilot time usually qualify. The key question for the lender is whether its BOW protection is affected when the insurer is entitled to rescind the whole policy. At first analysis it would seem that no coverage should apply to the lender under the BOW because it is only an endorsement that is attached to an invalid policy. However, since the lender is innocent of knowledge about the misrepresentation, it should be entitled to the protection of its separate policy. This is consistent with the approach in those states that allow innocent coinsured to recover even in the event of arson by a partner or spouse.
PRESIDENT JIM GARDNER The James A. Gardner Company, Inc. Jim.Gardner@jagardner.com
VICE PRESIDENT GREG STERLING AIG AEROSPACE greg.sterling@aig.com
SECRETARY CHRISTOPHER MORIN Murray, Morin & Herman cmorin@mmhlaw.com
TREASURER LUKE UITHOVEN Kimmel Aviation Insurance Agency, Inc luke@kimmelinsurance.com
DIRECTOR, ATTORNEY DIVISION ROBERT J. WILLIAMS Schnader Harrison Segal & Lewis LLP rwilliams@schnader.com
DIRECTOR, CLAIMS DIVISION STEVE TELLER McLarens General Aviation stephen.teller@mclarens.com
DIRECTOR-ELECT, CLAIMS DIVISION ERIC WEIDNER
DIRECTOR, AGENT/BROKER DIVISION CHRISTOPHER ARNOLD,
McLarens General Aviation eric.weidner@mclarens.com
Sutton James, Inc. carnold@suttonjames.com
DIRECTOR OF REINSURANCE DIVISION WALTER VOIGTS-VONFORSTER
DIRECTOR ELECT, AGENT/BROKER DIVISION DAVID HAMPSON
Munich Re WVoigts-vonForster@munichre.com
Schrager Hampson Aviation Insurance Agency LLC david@planeinsurance.com
DIRECTOR, UNDERWRITER DIVISION JEFFREY TIPPINS Starr Aviation jeffrey.tippins@starrcompanies.com
DIRECTOR, INTERNATIONAL DIVISION IAN WRIGGLESWORTH Guy Carpenter ian.wrigglesworth@guycarp.com
DIRECTOR-AT-LARGE NICOLE WOLFE STOUT Strawinski & Stout, P.C. nws@strawlaw.com
DIRECTOR-AT-LARGE JONATHAN DOOLITTLE Sutton James, Inc. jdoolittle@suttonjames.com
AIA EXECUTIVE DIRECTOR MANDIE LOROFF Aviation Insurance Association mandie@aiaweb.org
AIA BOARD COUNSEL RAY MARIANI Leader, Berkon, Colao and Silverstein LLP rmariani@leaderberkon.com
IMMEDIATE PAST PRESIDENT PAUL HERBERS Cooling & Herbers, P.C. pherbers@coolinglaw.com
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