As with any major asset purchase, when acquiring an aircraft, it’s important to understand insurance requirements and protections. Of course you should have insurance coverage to protect your investment, but you also need to consider the insurance coverages that your lender may require.
Lenders will detail their insurance requirements prior to closing (usually when the loan is approved). Having a Certificate of Insurance and Lienholder Endorsement in place at closing will be required, and you must keep insurance in place throughout the life of the loan. Here are a few things to know:
Why Understanding Insurance Matters for Aircraft Financing
Aircraft loans and leases present considerable exposure for both financing institutions and aircraft owners or operators. Aircraft insurance serves two key purposes:
- Financial Protection: Comprehensive insurance coverage ensures that the asset remains protected against unforeseen risks, damage, or accidents. Lenders are named as lienholders on policies, and in the event of total loss, the lender will be made whole on the loan before the owner is paid out for any remaining value.
- Risk Mitigation: Aviation operations entail inherent risks like mechanical failures, natural disasters, operational errors, or accidents. Adequate insurance transfers these risks from the lender and operator to specialized insurers, offering security and stability to stakeholders.
Key Categories of Insurance Mandated by Aircraft Lenders
When considering airplane financing options provided by aircraft financing companies, buyers or lessees must recognize the common categories of insurance required:
- Hull Insurance — Hull coverage safeguards the physical structure of the aircraft against physical damage originating from emergencies, weather events, or accidents. Insurers will undertake to pay for, replace, or repair physical loss of or damage to your aircraft, arising from the risks covered, up to an agreed value and subject to any deductible (an amount of money you will contribute to any claim).
In case your aircraft is damaged, Insurers have the option to arrange for it to be repaired and to cover the cost, to make you a payment or to pay for repairs carried out by you or to your order.
The risks covered are of the flight of aircraft, whilst the aircraft is on the ground or is taking off / landing / taxiing. Insurance coverage will also include the disappearance of the aircraft if it has been unreported following the start of the flight.
- Liability Insurance — Liability insurance protects against claims resulting from bodily harm or property damage caused by the aircraft’s operation. This type is compulsory for every financed aircraft, with stipulated minimum coverage levels mandated by the lender.
- War Risk Insurance — This specialized insurance covers risks excluded in standard aviation policies, specifically related to conflicts, terrorism, sabotage, and hostilities. Given global geopolitical uncertainties, this insurance is often required for international travel or when operating within sensitive regions. Most lenders will require this coverage.
- Breach of Warranty Coverage — This policy protects lenders from coverage denial by insurers due to the operator’s unintentional breach of a stipulated warranty or policy condition. It ensures lender protection continuity even amidst policy breaches.
Meeting Insurance Coverage Limits Required by Your Aircraft Financing Providers
Aircraft financing companies set stringent insurance policy limits to secure their financial interests. Understanding these aspects ahead of time enhances your negotiation leverage and streamlines financing proceedings. Typical considerations include:
- Agreed Value vs Actual Cash Value (ACV): Typically, lenders prefer agreed value protection, which predetermines insured amounts, avoiding possible disagreements after a loss.
- Liability Limits: Liability coverage limits vary depending on aircraft type, passenger-carrying capacity, operations purpose, and geographical region. High-value jets used internationally usually require significantly greater coverage than smaller domestic airplanes.
- Deductibles and Premium Payments: Higher deductibles can lower premiums but may create additional risk responsibilities. Aircraft financiers usually set deductible ceilings to balance affordability and risk sharing.
Understanding Insurance Endorsements and Special Requirements
Your financing partner likely will require specialized endorsements naming them as additionally insured or loss payee:
- Loss Payee Clauses: These are standard conditions, designating your lender as the direct recipient of all claim payments if substantial damage or loss occurs. It ensures lenders have priority recovery rights, limiting their financial exposure.
- Additional Insured Endorsements: Your lender generally must be named as an additional insured party, thereby extending liability protection directly to their organization.
- Notice of Cancellation Endorsements: Insurers must provide timely notifications to lenders before policy cancellations or alterations. Such endorsements ensure the lender’s visibility and response capability to maintain uninterrupted coverage throughout the funding terms. A 30-day notice requirement is typical for lenders.
Practical Tips for Managing and Maintaining Aircraft Insurance Compliance
- Engage Specialized Aviation Insurance Brokers: Work closely with expert aviation insurance brokers who understand aviation finance intricacies. They can tailor policy solutions specifically addressing lender requirements and operational needs. Good financing brokers, such as The Aircraft Lenders can refer you to a good insurance broker who will shop the market for you and help you get the best rates and terms.
- Regularly Review Insurance Provisions: Conduct periodical compliance audits, reviewing insurance coverage, deductibles, limits, covered territories, and endorsements regularly. Such diligence ensures your insurance remains aligned with both lending agreements and operational risk assessments.
- Establish Effective Communication: Maintain good communication between insurers, lenders, and internal teams. Clear exchanges help proactively address changes, such as operational shifts, additions to the fleet, altered mission profiles, or international expansions requiring policy review. It’s worth noting that a change in mission (chartering instead of Part 91 use), will require different insurance coverage than coverage for art 91 use.
Common Challenges Related to Aircraft Insurance Compliance
Though insurance compliance is manageable, owners sometimes encounter challenges now familiar to those engaged in the airplane finance industry. They include insufficient coverage, exclusion oversight, inaccurate insured asset valuations, or missed compliance notifications. By preemptively addressing these through professional advisory and thorough document reviews, such pitfalls become easily avoidable.
Frequently Asked Questions (FAQs)
What are common consequences of non-compliance with aircraft financing insurance requirements?
Non-compliance can result in loan or lease default, insurance pay-out denial, forced repositioning, or substantial financial penalties. Lenders maintain strict compliance guidelines to ensure risk management integrity and financial stability, making thorough understanding and adherence essential.
How frequently should I review my aircraft insurance policy?
A comprehensive review is recommended annually or when significant operational or ownership changes occur to ensure continuous policy appropriateness, compliance with requirements, and updated risk exposures adequately addressed by insurance.
Is War Risk coverage mandatory?
While the necessity of war risk coverage depends on operational territories and missions, most Aircraft Lenders require this inclusion due to global volatility and heightened exposure when operating internationally or in sensitive geopolitical regions.
How might insurance coverage levels affect available airplane financing rates?
Comprehensive coverage demonstrating reduced risk exposures tends is required by all aircraft financing lenders. Rates are not directly related to coverage, but the banks with the most competitive rates and terms are likely to require the use of an insurance company that is rated A- or better by A.M. Best.
