Magazine article Risk Management

Flight to Quality

Magazine article Risk Management

Flight to Quality

Article excerpt

To risk managers who deal with myriad exposures, aircraft liability may seem to be a relatively unimportant issue. This is particularly true if the risk manager's company owns aircraft, since it is fairly easy to identify and manage the risks associated with the maintenance and use of owned aircraft.

But what about a company's exposure to non-owned aircraft? Organizations that rent or hire aircraft on an as-needed basis can be liable for accidents resulting from the operation of these craft. Examples of this "non-owned aircraft liability" include: a company that has an arrangement with several fixed base operators (FBOs) to charter aircraft to transport company personnel and clients; a real estate division of a large company hiring aircraft to photograph land sites it is interested in purchasing; a construction contractor that hires a helicopter to transport building materials to various project sites; and an agricultural cooperative that frequently hires aircraft crop dusters on behalf of its members.

Since the operation of non-owned aircraft can result in significant exposures, risk managers must identify and properly analyze their aircraft programs and develop an appropriate method for managing these risks. Accomplishing this requires a full understanding of the company's program for aircraft use.

As with automobile liability exposures, aircraft liability involves legal duties pertaining to ownership, maintenance and use. With respect to non-owned aircraft, the degree of exposure will depend on the total bodily injury and property damage exposure and the level of responsibility for the operation of the craft.

Identifying non-owned aircraft exposures is not always easy, particularly for global organizations that are engaged in many different types of business. In these organizations, the risk manager's ability to identify the company's exposure depends on his or her knowledge of company operations.

TECHNIQUES FOR MANAGING EXPOSURES

Once the risk manager has identified the loss exposure, he or she must choose an effective method to manage the risk. Contractual transfers may be an option. However, attempting to transfer aircraft liability risks by relying on the legal theory that the principal is not responsible for the negligence of an independent contractor can prove problematic since the courts may have a different viewpoint. Technically, a company could transfer this risk to the FBO or aircraft operator using a "hold harmless" agreement. However, this agreement is only valid if a court upholds the contract and the transferee (in this case, the FBO) is financially able to pay.

Should a company retain this risk? Due to the low frequency/high severity nature of the exposure, self-insured retentions are not likely to be an effective risk financing method. Retentions make sense if the losses are relatively low in severity and predictable -- which is not the case with aircraft exposures.

Insurance can be a more reliable method for transferring this type of risk. In most cases, FBOs will agree to include their customer as an additional insured under the FBO's insurance policy. Risk managers may decide to use this approach if they are comfortable with the coverages and liability limits provided and are able and willing to monitor the FBO's insurance program and subsequent policy renewals. This can become cumbersome, however, if the risk manager has to deal with several FBOs, each with a different insurance program.

Consider, for example, the case of a manufacturing company employee who is a licensed pilot and frequently uses his aircraft on company business. If his plane is being repaired, he may rent another aircraft. This can cause problems for the company if the employee is carrying inadequate coverage or is insured with an underwriter that is unwilling to add the company as an additional insured. Some FBO insurance policies do not provide additional insured status to renter pilots or provide only low limits. …

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