October 2009

Many of our portfolio company clients design, manufacture and implement items that are component parts for aircraft. Among these products are servos, avionics, wiring assemblies, power plants and airframes. These Original Equipment Manufacturers have known aviation products exposures which must be addressed by purchasing an Aviation Products Liability policy.

However, it is the manufacturers with unknown or indirect aviation products exposures that are at the greatest risk of having an uninsured claim. These products can often include carpet, food products, lighting, rivets, placards, entertainment systems or brochures. These types of products are considered “non-critical parts.” If an underwriter learns of these exposures, they will mostly likely exclude the exposure on the manufacturers’ Commercial General Liability policy. Parts that are flight critical, such as engines, airframes and hydraulics are usually considered “critical parts” and are easier to recognize and address.

One of the more widely known claims in the aviation industry for a non-critical part involved an entertainment system. The airline incorrectly installed the wiring near the door, which eventually lead to an electrical fire. The fire caused the plane to crash, killing all 229 aboard. The resulting investigation by the Transportation Safety Board of Canada took over four years and cost CAD 57 million (at that time approximately USD 38 million). The organization concluded that flammable material used in the aircraft's structure allowed a fire to spread beyond the control of the crew, resulting in the loss of control and crash of the aircraft. Fortunately, the manufacturer purchased Aviation Products Liability and the coverage responded appropriately.

What Insurance Protection is Available?

Aviation Products Liability Insurance is designed to protect manufacturers of aviation and aerospace products (airframes, engines, avionics and other components) against claims resulting from an accident caused by faulty design or workmanship. The coverage also benefits providers of certain aviation services such as maintenance and repair facilities. The accident must have caused bodily injury or property damage and must occur after possession of the part has been relinquished to others and away from premises owned, rented or controlled by the insured. Underwriters with technical knowledge of products in the aviation industry work closely with manufacturers and service providers to identify and evaluate exposure and rate the risk potential for a product. Contracts are always reviewed by underwriters as a part of the underwriting process. Blanket Contractual Liability coverage is not available on an Aviation Product Liability policy as it is on a Commercial General Liability policy. Typically, contractual liability clauses in Aviation Product Liability contracts require notice within 30 days of signing. However, if you share the contracts prior to signing, underwriters can often assist with negotiations on contract language to better protect their insureds.

Grounding Liability insurance can be added to the Aircraft Products Liability insurance policy. The insurance company will pay on behalf of its Insured, who is found legally liable for causing the "loss of use" of an aircraft, following an aircraft accident which was caused by the faulty design or workmanship of the insured. Before coverage applies, the Federal Aviation Administration or any similar Civil Airworthiness Authority must have issued a mandatory "grounding" order. As an example, if your product causes an entire make and model of aircraft to not be flown, there may be lost revenues for the operators. Insurers will also pay to defend their insured against any claim or suit alleging bodily injury, property damage or grounding - even if the claim or suit is groundless, false or fraudulent. They will pay these amounts in addition to the Insured's limit of liability.

Some of our portfolio companies and private equity clients have acquired businesses that did not purchase Aviation Products Liability in the past. The coverage is written on an occurrence basis, which can be problematic if coverage was not purchased by the seller and pre-close liabilities are the buyer’s responsibility. We have successfully created programs for clients that create a “tail” that addresses the pre-close uninsured period. The coverage that the policy provided gave the buyer a level of security that allowed the transaction to go through; and the cost associated with the tail was passed along to the seller. This can be easily replicated in order to address a similar exposure in other deals.

How is Pricing Determined and What Limits of Liability are Available?

The main rating factors in determining pricing are the types of products (critical or non-critical), sales and contractual protections built-into the contracts. Many underwriters will not offer a quote if the contractual terms are onerous.

Most underwriters prefer products that are designed for corporate or commercial airline aircraft or government related contracts. General aviation manufacturers are often priced more expensively as these smaller aircraft purchase lower limits of liability. For an underwriter it means that they have a greater chance of being sued because the aircraft owner may be carrying limits that are too low to address a sizeable claim.

Limits are available from $1 million to $500 million. Minimum premiums for non-critical parts can sometimes be as inexpensive as $5,000. Often the limits carried are determined by the requirements in the manufacturer’s contracts. Limit requirements are sometimes open for negotiation.

Summary

Aviation products, including non-critical parts, can cause catastrophic accidents as the result of relatively minor failures. Regardless of whether your exposures are known or unknown, it is prudent to have properly designed coverage in place. Especially when as a part of the due diligence process, you may discover that there are product exposures from the past that may negatively impact your company on a go-forward basis. A solid insurance program allows you to say to your stakeholders that you are well prepared in the event of a loss and that you addressed pre-close liabilities properly

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J. Jeffery Rasmussen,
CPCU, ARM, CAIP, AAI 
Vice President 
Johnson Aviation Insurance 
525 Junction Road, Madison, WI 53717 
608-203-3878 Phone / 262-619-2805 Fax 
jrasmussen@johnsonins.com