Introduction
Situational awareness is a term very familiar to pilots. Magazine articles, accident reports, and safety seminars drive home the concept of being constantly aware of the factors influencing the flight. One of the major elements of situational awareness is the condition of the airplane. Hopefully, any discrepancies will be discovered during the preflight inspection and not when they become a problem in flight. Maybe part of that preflight inspection should be a look at the liability exposure of the pilot before it becomes a problem after a flight that had a less than desired ending.
Most pilots are very responsible individuals. They are gainfully employed or operate their own business; they pay their bills, they care for their families, and they take care to fly safely. They look after the financial security of their families by having retirement accounts, homeowners’ insurance, auto insurance, and life insurance. Yet, the financial well being of many, if not most, pilots is seriously at risk when they fly. While liability for a situation in which some aluminum gets bent or someone gets hurt or worse is nothing new, it seems to become a bigger problem every day due to the increasingly litigious nature of American society. The purpose of this article is to increase the situational awareness of a pilot regarding the potential financial exposure after an accident or incident.
While this article is primarily targeted toward those who rent airplanes, it can also apply to pilots who borrow airplanes from friends or family members, flying club members, and even pilots who, on occasion, use an airplane owned by their employer for business travel.
More at Stake than Just the Deductible
The familiar scenario is the renter pilot who botches a gusty crosswind landing and redesigns the nose gear and prop. Just a few years ago, the FBO’s hull insurance, the “collision” insurance of the aviation world, would have paid for the damage, less the policy deductible, usually from $1,000 to $3,000. Most operators would have absorbed the loss of the hull deductible as an operating expense, but some would have passed that cost on to the renter pilot. So, the worst-case scenario for the pilot would have been to be on the hook for a few thousand dollars. That wouldn’t make for a pleasant day, but probably would not be financially devastating.
My how things have changed. Today, many operators, squeezed between skyrocketing costs of fuel, parts, airplanes, and insurance, have had to make some hard choices. No, wait; the choice isn’t really very hard. Without the airplanes there is simply no business. Without the fuel to operate and the parts to repair the airplanes, there is also no business. But, hull insurance isn’t mandated by anyone, if the airplane isn’t financed or leased. Even if a finance company is looking over the operator’s shoulder, they frequently allow extremely high deductibles or even go along with schemes in which the renter is required to buy his or her own insurance to cover any hull loss. Sometimes, this requirement is not adequately communicated to the renter and the pilot can be at risk for the entire value of the airplane if things go wrong. Isn’t it great to be flying that brand new Cessna 172?
Unfortunately, it gets worse. As everyone knows, liability insurance is intended to pay for damage or injury caused to the property or person of others. The concept here is very good, providing a liability policy is in effect. Many areas of the country do not require operators to carry any liability insurance. When liability coverage is required, it is usually very minimal. So what happens when the operator has either decided not to carry liability insurance, or the policy was cancelled last week for non-payment?
The renter can’t be sure that a liability is actually in effect. Even if there is a valid liability policy, insurance policies are designed to protect those who are paying the premiums. The operator may have an excellent liability policy, but it may only protect the operator. In today’s litigious society, it is not uncommon for the lawsuit to name as defendants, everyone involved in an accident, including the renter pilot. After all, the pilot certainly shares some of the responsibility for the accident.
In a hypothetical case involving a fuel starvation accident resulting in a destroyed airplane and a seriously and permanently injured passenger, the award from the lawsuit can easily exceed one million dollars. The operator, the manufacturer of the airplane, and the pilot were all named as defendants.
Courts routinely apportion awards based on a perceived percentage of responsibility. In the hypothetical case, the pilot encountered unexpected headwinds and did not keep track of the time the airplane had been flying. In the trial, other renters of the accident airplane testified that the fuel gages had not been operational for several months. An expert witness testified that fuel gages in that make and model of airplane were notoriously unreliable, so the manufacturer should be held liable. Another expert witness testified that it was the responsibility of the operator to maintain the airplane in an airworthy condition and that operating fuel gages were required by the Federal Aviation Regulations and that if the fuel gages were not operating, the airplane was not considered to be airworthy and that the operator should be held liable. Yet another expert witness testified that the pilot-in-command had the ultimate responsibility for ensuring safe operation and that not keeping track of the time the airplane had been flying, as well as flying an airplane with inoperative fuel gages should result in the pilot being found liable.
The court awarded $1.8 million and said that each party was one-third responsible. That sets the award at a mere $600,000 each. The manufacturer’s product liability insurance pays the manufacturer’s share. The operator has a $1 million limit on the liability policy, so the insurance pays up for the operator.
Then there is the renter, a young man in his mid 30s, married with two children and the usual financial responsibilities. He had been considering purchasing a non-owned aircraft policy (commonly called “renter’s insurance”), but put it off because it just wasn’t in his flying budget. He is now faced with a judgment against him for $600,000, more than his after-tax income for the next twelve years. Additionally, he is looking at a legal bill of $75,000 for his legal defense. So much for putting money away for the kids’ college.
If only the renter had gotten around to purchasing that renter’s policy things would be fine. Well, maybe not. Many renter’s policies have very low limits of liability. It is not uncommon to find these policies with liability limits ranging from $100,000 to $500,000. In our hypothetical case, if the renter had purchased such a policy, he would be required to pay any amount awarded by the court in excess of the liability limit of the policy. If the unfortunate renter had been a big spender and had opted for the $500,000 policy limit, he would not owe only $100,000. That’s only a couple of years take home pay and should make him very happy. At least, since he had the policy and the insurance company needed to protect their interest, the insurance company would have paid for his legal defense so he won’t have that bill to worry about. If you think it can’t get any worse, read on.
Many pilots haven’t heard of “subrogation.” It’s sometimes in the fine print of those renter’s agreements that must be signed before an airplane can be rented. The word means “substitution.” It’s a tactic that insurance companies use to avoid actually having to pay a claim. They would like to subrogate against a pilot to avoid having to pay a liability claim.
Another hypothetical case is needed to illustrate how it works. The runway was a little slippery and there was a gusty crosswind. Upon landing, a pilot lost control of the airplane and departed the runway. As the airplane careened across the area between the runway and the ramp, the pilot tried desperately to get back to the runway. Unsuccessful at this, the airplane slammed into the nose of the turboprop twin that was used by another operator for charter. Fortunately, there were no injuries. The pilot gathered her composure and walked over to the operations building to report the mishap. Once safely home, she pulled out her copy of the rental agreement that she signed when she first got checked out to rent airplanes from this operator. She was relieved to confirm that she was responsible for only the $1000 deductible on the hull insurance. She was even more relieved to learn that she had a $100,000 liability limit on her renter’s insurance policy. That would certainly cover the deductible on the airplane she was flying, plus the apparently minor damage to the turboprop. She reported the incident to her insurance company and several months went by without hearing any more about the unfortunate mishap. She had all but forgotten about the liability aspect of the situation and had assumed that the insurance companies had settled the claims amongst themselves.
One evening after a long day at work, a knock came to her door. A well-dressed gentleman confirmed her identity and then handed her an envelope and left. The gentleman was a process server. The envelope contained a notice that she was being sued by and aviation insurance company. It was the very same company that provided the liability insurance coverage to the operator from whom she had rented the airplane on that unfortunate day of crosswinds. She was being sued for $185,000.
It seems that the damage to the rented airplane she was flying was rather substantial, requiring a new propeller, spinner, and an engine inspection, as well as a new cowling. Also, the turboprop had been more seriously damaged than originally thought. The radome and radar antenna had to be replaced along with one prop spinner, one propeller blade, and its ice boot. Plus the insurance company had paid nearly $40,000 to the operator of the turboprop to compensate for lost revenue while the airplane was awaiting repair.
This is the concept called “subrogation.” The insurance company that issued the policy was required to pay the claim. However, the company maintained that the mishap was a result of pilot negligence and therefore the pilot should be responsible for the loss. In other words, the insurance company was attempting to “subrogate” or “substitute” their loss to the pilot.
The pilot remembered her renter’s policy and promptly contacted her company again. She learned that the total amount of the loss was actually $285,000 and that her renter’s policy had already paid the $100,000 liability limit of her policy. She was now faced with having to provide a legal defense that would most likely cost upwards of $30,000 to defend her interests. If she lost, she would have the legal bill in addition to whatever judgment was awarded by the court.
Summary
So, with all this financial risk, how can a pilot mitigate the potential liability associated with flying an airplane? Unfortunately, there isn’t one foolproof solution, but constantly having situational awareness regarding what insurance coverage is in effect for each flight goes a long way. Renters should certainly have a non-owned insurance policy with the highest liability limit possible and hull coverage for non-owned airplanes with a limit at least as high as the most expensive airplane ever to be flown. |
