Chapter Twenty-Eight

• Jurisdiction: New York

Chapter Twenty-eight

Aviation and Space Insurance

Katherine B. Posner, Esq.

I. Introduction

The availability and cost of aviation insurance has played a central role in the development of private and commercial aviation.³⁷⁶⁶ Today, comprehensive insurance is indispensable for both large commercial air carriers and private pilots due to the increased value of aircraft and exposure to third-party legal liability damages in the event of an accident.

The aviation insurance market had its genesis somewhere between 1908 and 1912 when insurance policies were issued for early aviation flights.³⁷⁶⁷ Although at that time the aircraft itself was deemed uninsurable, the aircraft owners did obtain third-party legal liability coverage.³⁷⁶⁸ After a number of significant losses, however, the market all but died until after World War I, when aviation insurance began to take on increasing importance.³⁷⁶⁹

Just as aviation insurance was new and unique in the early part of the last century, so is space insurance today. The space age began in 1957 with the launch of Sputnik I by the former Soviet Union. With the development of international telecommunication satellites, public/private international organizations such as Intelsat and Landsat, and the increased involvement of private entities in commercial space ventures, insurance has become increasingly important due to the great investment in the development, launch and maintenance of satellites/space systems and the potential legal liability in the event of an accident.

II. The Aviation and Space Insurance Market structure

Modern aviation and space insurance may be written by individual insurance companies, insurance companies who write through insurance pools, insurance syndicates, or through placement that involves some or all of the above. Commercial aviation risks are generally written by a number of different underwriting entities, a method of underwriting that enables insurers to “spread the risk” of a potentially great loss. This method is often referred to as “subscription business” or a “subscription placement,”—“subscription” referring to insurers’ participation on a risk. Risk is also spread through reinsurance.

Under a pool arrangement, a number of contracting insurance companies agree to undertake a certain ratio of one risk, and the risk is then shared by participants in proportion to each company’s holding in the pool.³⁷⁷⁰

In the United States, the two largest pools for aviation insurance are United States Aircraft Insurance Group (USAIG), organized in 1928, and the former Associated Aviation Underwriters (AAU), founded in 1929, which merged with British Aviation Insurance Group (BAIG) to form Global Aerospace Inc. in 2001. These pools underwrite and manage the aviation business of their member companies and enable them to bring the specific expertise needed in writing and handling the specialized underwriting risks associated with aviation insurance.³⁷⁷¹

In the London insurance market, a similar result for both aviation and space risks is achieved through syndicates³⁷⁷² which operate at Lloyd’s of London.³⁷⁷³ In addition to the Lloyd’s market, the London insurance market is comprised of various insurance companies (which also includes insurance pools).³⁷⁷⁴

The New York Court of Appeals summarized “how Lloyd’s of London conducts its business,” as follows:

Lloyd’s policies can only be obtained by registered Lloyd’s brokers who have been appointed either by the prospective insured or by the insured’s non-Lloyd’s broker. In placing policies, a registered Lloyd’s broker prepares a “slip” which states the details of the insurance required and then offers the risk to the active underwriters. Any underwriter who wishes to underwrite all or a portion of the risk indicates this on the slip. Once the entire risk has been subscribed, the Lloyd’s broker informs its principal that the insurance has been effected. A policy is prepared by Lloyd’s Policy Signing Office, a department of the Corporation of Lloyd’s, and the transaction is consummated. ³⁷⁷⁵

The insurance broker negotiates the terms of the aviation insurance coverage on behalf of the insured and thus is the agent of the insured.³⁷⁷⁶ In certain circumstances, the broker may act also as the agent of the insurer for limited purposes.³⁷⁷⁷

Because Lloyd’s of London is not an insurance company and does not underwrite risks, it is not a proper party to any litigation commenced against the actual insurers.³⁷⁷⁸ Rather, the leading syndicate,³⁷⁷⁹ which may or may not be the syndicate subscribing to the highest percentage of the risk, may provide a “representative name”³⁷⁸⁰ to be used as the party defendant.³⁷⁸¹

III. Structure of Aviation Insurance Policies

Given the specialized nature of aviation insurance, the wording of aviation policies has a number of unique features. However, given aviation insurance’s traditional underpinnings in marine insurance, there are some resemblances in aviation policies to marine policies.³⁷⁸² Such policies, and the law governing their interpretation and application, are often helpful in interpreting an aviation insurance policy.³⁷⁸³

Generally, aviation insurance provides coverage for the following categories (and their subcategories) of insureds: (1) aviation/aerospace manufacturers; (2) aircraft owners and operators; (3) airport owners and operators; and (4) individual pilots.³⁷⁸⁴ The most common types of aviation insurance are (1) aircraft hull insurance, (2) aviation third-party liability insurance, (3) passenger liability insurance, (4) products liability insurance and (5) airport operations insurance.

Aviation insurance related to aircraft with a maximum seating capacity of fewer than 20 passengers and not engaged in scheduled passenger-carrying operations is usually referred to as “general aviation insurance.”³⁷⁸⁵

Although each type of insurance is intended to insure a different type of risk and will contain different provisions specific to the risk insured (e.g., aircraft hull, passenger liability or third-party liability),³⁷⁸⁶ the basic structure of an aviation insurance policy generally is the same. For example, all policies generally will contain the following sections: Declarations, Insuring Agreements, Definitions, Exclusions, Conditions and Endorsements.

A. Declarations

The “declarations” section is the first part of the aviation insurance policy and includes a description of the risk (i.e., the policy coverage) and the policy limits; identifies the insured (i.e., the person or organization covered); describes the period of coverage and the premium charged. Depending upon the type of insurance, it may include the location and form of the insured’s business; the purpose for which the insured aircraft may be used (e.g., private, business or commercial, rental, instructional or cargo); the geographic scope of the coverage; and a list of approved pilots.³⁷⁸⁷

The Declarations section should be considered by a court in determining the scope of coverage provided by the policy as a whole.³⁷⁸⁸ However, some courts have given greater weight to the declarations where there is some conflict with the other provisions of the policy.³⁷⁸⁹

The geographic scope of coverage may be contained in the Conditions or Declarations section of an aviation policy. While commercial air carriers generally obtain worldwide coverage, insurance for general aviation aircraft written in the United States usually applies only to accidents or losses “which occur while the aircraft is within the continental United States, Canada or Mexico.”

Although geographic coverage may include the possessions and territories of the United States, many policies specifically exclude Alaska, and coverage for Mexico or Canada may be limited to within 100 miles of the border. To supplement such exclusions, a territorial extension endorsement may be obtained for an additional premium.³⁷⁹⁰

B. Insuring Agreements

1. Scope of Coverage

The “Insuring Agreements” section broadly defines the scope of coverage afforded by the policy. The obligation of the insurers under the policy may be expressed in the form of a general undertaking to cover the insured against all risks of loss, subject to exclusions inserted elsewhere in the policy, or the policy may limit the undertaking of the insurers by specifying the particular risks or “named perils” for which coverage is provided. Exclusions are also used in named perils policies to further narrow the scope of the coverage provided.

The exact language of the insuring agreement will depend on the risk covered (i.e., third-party liability, passenger liability or aircraft hull). A typical aviation insuring agreement for bodily injury and property damage liability may provide the following:

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of Bodily Injury or Property Damage caused by an Occurrence and arising out of or in connection with the Insured’s operations. ³⁷⁹¹

An example of a hull insuring provision provides the following:

1. (a) The Underwriters will at their option pay for, replace or repair, accidental loss of or damage to the Aircraft described in the Schedule arising from the risks covered, including disappearance if the aircraft is unreported for sixty days after the commencement of flight, but not exceeding the amount insured as shown therein and subject to the amounts to be deducted shown below.

(b) If the Aircraft is insured hereby for the risks of Flight, the Underwriters will, in addition, pay reasonable emergency expenses necessarily incurred by the Insured for the immediate safety of the Aircraft consequent upon damage or forced landing, up to 10 per cent, of the amount specified in . . . the Schedule.

Aircraft hull coverage also may be divided into separate insuring provisions, depending on whether the aircraft is in flight, taxiing, on the ground or moored, typically in general aviation policies.

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