Caveat: USA-specific Discussion
This COPApedia article concerns aircraft insurance in the USA. Insurance and general aviation practices in other countries are sufficiently different to require separate treatment
The purpose of insurance is to manage risk. As an aircraft owner you face a risk of damage or destruction to your airplane for any number of reasons. Should you do something with your airplane that results in injury, death or property damage, you may be held financially responsible for such losses. If you are sued, you face the cost of defending yourself, whether or not the legal system finds you liable.
If you are wealthy enough that potential financial losses associated with airplane ownership do not worry you, you can do without insurance. If that is not the case, you need aircraft insurance.
Before going any further it is appropriate to point out that neither owning your airplane through a corporation or LLC, nor forming a professional corporation with you as an employee, nor putting into practice any other sure-fire lawsuit-avoidance ideas you may hear from your pilot buddies help protect you from a possible lawsuit if you fly the plane into an accident. Such dodges have been tried for years, largely unsuccessfully.Now, if two or more pilots share ownership in an airplane, having a US corporation or LLC own the plane may be helpful in some situations. Suppose you own your airplane in an LLC or corporation with other pilots. If one of your partners or fellow shareholders has an accident that leads to liability, your personal liability may be capped by your investment in the entity: typically the cost of the airplane. Such arrangements can be complicated, varying from state to state. If you are a part-owner, it may be worth your time and money to seek the advice of an attorney familiar with the nuances of joint airplane ownership.
The reality is that there are certain steps to take when faced with a risk: First do what you can be done to reduce the risk. In aviation that means taking regular recurrent training and making decisions with regard to the type of flying you do and whether you will carry passengers and, if so, who and how many. And then, once the risk is as low as possible, either decide it is still too great and that you are not willing to fly, or purchase insurance.
The next step is to treat insurance as a consumer good and make sure that it fits your circumstances and needs.
Insurance is a contract that you enter into; you and the insurer are bound by the terms of the contract and you each have obligations should certain events occur. Therefore, it is utterly essential that you take the time to read the insurance policy as soon as you get it.
The Aviation Insurance Market
The aircraft insurance market is small, risky and expensive. The 200,000-odd US general aviation fleet represents a pitifully small market for any insurance company to consider entering. Aircraft flown by amateur pilots have a high accident rate, making the market even less attractive. Finally, general aviation attracts a well-to-do demographic, so injury and death usually lead to higher awarded damages than the typical automobile accident.
There are roughly a half dozen companies that are willing to write insurance on aircraft. Of those, none write for all types of aircraft. So you have limited choices when it comes to selecting an insurer. The underwriters at each insurance company identify and price insurable risk. Each company uniquely interprets actuarial data to make its underwriting decisions, which is the primary reason that insurance quotes from different companies vary so dramatically.
There are two ways to buy insurance for your airplane: through a broker or directly from the insurance company.
There is currently only one company, Avemco, that is a "direct writer" of GA insurance. In other words, Avemco is the only company you can call up and buy insurance from without going through an intermediary. You call Avemco and speak with an individual who takes the information regarding your airplane and you as a pilot, you then receive a quote for hull and liability coverage and you can "bind" the policy right then and there, that is, make it effective immediately. The only thing to keep in mind is that the person you are speaking to on the telephone is an employee of the insurance company and owes no fiduciary responsibility to you, only to the company.
The more common way to purchase insurance is to contact an aviation insurance broker. A broker owes his or her fiduciary responsibility to you, not to an insurance company, and functions as your agent. S/he takes down details on your airplane and your piloting experience and then goes into the market and shops coverage for you. It is a good idea to be prepared when you speak to the broker as you should give him or her as much ammunition as possible to make you a very attractive risk to the market. Different insurers use different techniques for rating risk, so if you are taking recurrent training every six months, tell your broker because that may make a difference with one or more of the insurers, resulting in a lower price for your insurance.
Most brokers represent that they shop all of the aviation insurers. That is not necessarily the truth, so it pays to ask the broker to name the insurers they work with.
Insurers keep track of your airplane's N number; so if you don't like what your broker told you and you go to another, the second broker will not be able to get a quote from the insurers; they have already given a quote. The only way to get another quote is to give the second broker a letter stating that you have pulled your business from the first one. Even then, an insurer may refuse to re-quote, or to lower the price.
The Two Types of Insurance
When you purchase insurance you will be quoted a price (premium) for coverage for damage or destruction of the airplane itself (hull insurance - aviation insurance evolved from admiralty insurance) and for coverage for damage or injury you may cause to others or their property (liability insurance).
Hull insurance pays to repair your airplane if it is unintentionally damaged. (Other typical exceptions include war or terrorism, so be sure to read the policy).
When you arrange your hull insurance, you and your insurer agree on a value for your airplane. It is normally what it would bring on the market in its current condition, current time on the airframe and current avionics. If your valuation is higher than the Blue Book or Vref value, you will need to explain, for instance, by providing data on special avionics or mods to the airplane. Otherwise you will be limited to an insurance limit not much over Blue Book or Vref.
An airplane's value usually changes over time, so check it and adjust as necessary at renewal time.
There will be a deductible, which, depending on the company and the amount of the deductible, may affect the price of the insurance.
Hull insurance pays for repairs following unintentional damage. However, it does not pay for repairs to a part that fails, only to other parts that are damaged as a result of the initial failure. If a connecting rod in the engine breaks and then trashes the inside of the engine, causing it to fail and leading to a forced landing, your insurance will pay for repairs to everything but the connecting rod itself, minus the amount of the deductible. It will pay to repair the engine, not overhaul it, as that is "betterment". You are entitled to have the engine returned to the condition it was in before the connecting rod let go, which means a repair. It will pay to repair the airplane as well. If you manage to land without any damage to the airplane, the insurance will still pay to repair the engine. Nevertheless, you must read the policy to determine precisely what is covered. The policies are not identical between companies.
If your airplane is damaged and cannot be repaired for less than the agreed upon value for the airplane (or, in some cases, for less than 75% of the agreed upon value of the airplane - read your policy) the insurance company has the right to consider the airplane "totaled" and simply pay you the agreed-upon value of the airplane as per the policy. If the company offers to pay and you accept the money for the agreed value of the airplane, you will be required to sign a Bill of Sale for the airplane and turn it over to the insurance company. It will probably try to sell the wreckage to someone who wants to rebuild it, or to a salvage yard so as to get something back after it has paid out on your policy. Yes, you often can bid on the wreckage if you are so inclined.
If you wish to insure your airplane for a lower than market value, your insurer will likely be agreeable. But while that will reduce your hull insurance premium, it carries a serious risk: If the airplane is damaged, but not badly, and repair estimates approach the agreed upon value, the insurer can consider the airplane totaled. You then are faced with a decision: You entered into a contract - all insurance is governed by contract law - and you agreed with the insurance company on a low value for your airplane. You can either sign over the airplane to the insurance company and get a check for that amount, or you can say that you don't want to take the money. If you chose not to take the money, you are on the hook for the cost of repairs; the insurance company offered to live up to its end of the contract and you declined, the insurance company's obligation is over. Yes, there have been owners faced with such a situation and who could not afford to fix their airplane on their own and had to turn over an airplane that could be fixed to the insurance company for less than it was actually worth!
Liability insurance covers you for injury, death or property-related loss, up to the stated amount of the policy. It also pays for the cost of defending you if you are sued. That is crucially important because the cost of defending a lawsuit may be greater than any damages owed, especially if the court absolves you of blame.
Types of Liability Policies
An aviation liability policy will have a "limit". That is the maximum amount that the company will pay for damage you cause. The standard aviation policy has a $1 million overall limit.
Read your policy carefully, because the most popular aviation policies contain what are known as "sublimits". A sublimit is the maximum paid to any one person or passenger. Such policies are popular because they make a lot of money for the insurers. Pilot/owners have learned to their dismay that they did not have the insurance they thought they did. The most popular million dollar policies have $100,000 sublimits, meaning that if you crash with two passengers who are injured or killed, there is only a total of $200,000 to pay any claims by those passengers ($100,000 each). That is unlikely to be enough coverage for anyone who has the financial wherewithal to own a Cirrus. If the pilot is found to be negligent, a passenger who suffered a broken leg could well be awarded more than $100,000 by a jury. In case of death due to pilot negligence, $100,000 is usually not even close to covering a likely jury award.
From time to time there are policies that have extremely low sublimits for injury to family members, reasoning that they are less likely to sue the pilot after an accident. Sometimes that reasoning is accurate, sometimes it is not, to the eventual financial despair of the pilot.
A policy that does not have sublimits is called a "smooth" policy. In the accident described above, with two injured passengers, there is a total of one million dollars available to split between the two. Historically, such amounts are enough to resolve most lawsuits unless the pilot is quite wealthy.
A smooth policy is more expensive to buy than one with sublimits and may not be available to low time pilots, those with low time in type, or without an instrument rating.
Who Is Covered?
Generally, the "named insured", the owner of the policy, is covered by the policy. Additional persons or entities may be added to the policy as named insureds, so that they are covered by the policy as well. In such a scenario, they are provided a defense if sued and the money available to pay damages caused by them is available to them. Often a hangar rental agreement will require that the airport or city that owns the airport be added to the aircraft policy as a named insured. If you have an instructor who often flies with you, it's wise to add him or her to the policy as a named insured.
If you allow another pilot to fly your airplane, you are covered if that pilot meets the "open pilot warranty" in the policy. That is, the pilot must hold the ratings and have the flying time required in the policy. If that pilot has an accident, then you are covered for the loss and the insurance company will pay for the repairs and defend you should you be sued. That pilot is not covered by the policy. Meeting the open pilot warranty means that you are covered, not that pilot. To ensure coverage, s/he must be added to the policy as a named insured. It has happened that an insurance company has subrogated against a pilot who wrecked an airplane when that pilot met the open pilot warranty requirements and the insurance company paid out to the owner for repairs. That is legitimate under the insurance contract.
If you allow a pilot who does not have the ratings or flight time required in the open pilot warranty to fly the airplane, you are not covered if that pilot has an accident.
Your policy will include coverage to defend named insureds against a law suit. The cost to defend you is not included in the dollar limits. While you are the defendant, the insurance company has the right to settle the case. They must also defend you for claims exceeding the limits of the policy although they will only pay an award per the limits of your policy. It is not uncommon for a damage award to be less than the legal bills.
The Insurance Application
At some point in the process of obtaining insurance, you will be required to fill out an application that asks you a number of questions about your history. Do not lie! Do not inflate your flying time, by even one hour. Insurance contracts fall under state law, so the effect of padding your flight time on the application varies by state. But keep in mind that in some states padding your flight time by even one hour is grounds for the insurer to deny coverage.
Denial of Coverage
It happens. Something bad happens involving your plane and your insurance company informs you it is denying coverage. Of course, you have the right to challenge that denial, and in some states you are entitled to recover incurred expenses plus a penalty against the insurance company for a wrongful denial.
As mentioned above, your insurance coverage might be denied because you lied on your application. But there are other reasons. Most policies have language stating that coverage is effective when the plane is airworthy. As an example, an airplane that is "out of annual" is not considered to be FAA airworthy.
Case study: Pilot Bob buys a used plane that is due its annual in three months. Immediately after the purchase Bob takes the plane to his favorite A&P and asks him to give it a good look over and to fix whatever is wrong. Bob's A&P notes the annual is not due for three months. He gives it a good look over and fixes what he finds. Bob picks it up and assumes it has a new annual. Bob's A&P, however, did not do a full-blown annual and does not include an annual inspection sign off in the log books.
Bob does not look at the log books when he picks up the plane. He flies off thinking all is well and he has twelve months before another annual inspection. Four months later Bob buys some contaminated fuel. The contamination leads to an off airport landing. Bob is fine, but the plane is totaled.
After investigation, Bob's insurance company, noting the plane was not airworthy because it was one month out of annual, denies coverage. But the annual or lack thereof had nothing to do with what caused the damage and an annual the day before the fuel purchase would have changed nothing.
Who wins in such denial of coverage cases? It depends your state.
Some states say the cause of the damage must be related to the policy provision that was not met. Others states say there does not have to be a relationship to what caused the damage and the policy provision that was not met. Unfortunately, most states side with the insurance companies on this one.
Also, as noted above, be sure and check your "open pilot clause" or "open pilot warranty." That is the policy clause defining the qualifications other pilots must have to fly your plane while keeping your coverage active. Some insurance companies, particularly when insuring a Cirrus, are less than clear about this. The policy may have an open pilot clause that looks fairly liberal in terms of qualifications, but read further and you find another endorsement or clause that says, in effect: "Just kidding about that other open pilot clause stuff. We only insure your plane when you, and we mean you, are PIC."
How Much Insurance Should I Buy?
That is a discussion to have with your personal attorney. The usual aviation liability policy is for $1 million in liability coverage. For a person who can afford a Cirrus, it is worth considering trying to get more coverage, perhaps two million dollars. Depending on your experience level and ratings, and the condition of the insurance market, you may or may not be able to reasonably buy what you need.
Be careful about the valuation of your aircraft for the hull coverage. There are risks both to over- and under-insuring. The under-insuring risk is apparent; you may not get enough money to replace your loss. But over-insuring also has a risk; if you over-insure your aircraft, then the insurance company may insist on repairing damage which would more sensibly suggest a total loss and replacement.
What If I Cannot Get Enough Liability Insurance?
It is not uncommon to find oneself with insufficient liability insurance, either due to absurdly low sublimits or a low overall limit. In that case you may decide to not carry passengers at all, or to only carry selected passengers. Or, you may hire a pilot to fly your airplane; professionally-flown airplanes are more insurable. There are even examples of pilots who gave up flying because their risk profile couldn't be adequately covered by available insurance.
COPA Insurance Data
Further reading: http://www.avweb.com/news/pilotlounge/189307-1.html