Insurance and Risk Management - Beware of Shifting Liabilities
By Ali Al Naqbi, Founding Chairman, MEBAA
I have been very fortunate over the past couple of months to have been given space in the region’s major magazines Altitudes and Arabian Aerospace to express the views of our Association on key issues.
In the current Altitudes, I was able to outline one major issue – that of insurance and risk management.
Despite rapid strides in aviation technology and impressive safety records over the years, aviation is still perceived as a high-risk industry, necessitating a careful risk management. It is often said it is the perception that matters and in this respect it is imperative on the part of any aircraft operator to present himself with facts concerning his operation, concentrating on areas such as safety management, adherence to accredited practices like IS-BAO (International Standards for Business Aviation), crew qualification and training standards, to obtain a favourable insurance rate in the market.
After this, it is all the more essential to monitor every aspect of the operation, especially the contracts he enters into with various service providers such as an FBO or an MRO service centre.
It is not an uncommon event to have engine damage during take-off due to a bird strike. Fortunately, you have an arrangement with an MRO to ship a spare engine on priority and also to dispatch your unserviceable one for repairs to them.
However, the MRO in turn requires signing, prior to shipping the spare, a lease and repairing agreement that contains a provision that obligates you not only to insure the spare engine but also add the MRO as an additional assured entity under your liability policy. An endorsement to this effect is required from your insurers and a written certificate, verifying the status of additional assured, will be demanded.
By providing this Certificate of Insurance you are dividing your liability limit between you and the co-assured. The wording of the agreement and the endorsement also needs to be carefully crafted to limit the assumption of liability to specific obligations only. In the rush of events and pressure on time to tide over operational exigencies, these intricate details could be overlooked. Further, one needs to monitor many such agreements in which you have agreed to such ‘co-assured’ provisions, as this may dilute the liability values of insurance, leaving you unprotected.
Subrogation Clause
Another area of concern is the ‘waiver of subrogation’ clause in favour of the MRO provider that is required to be added into the endorsement and the Certificate of Insurance. What is a Subrogation Clause? A typical subrogation clause under an insurance policy may read “If we pay a claim under this policy, we will take your right to recover this claim amount from any other party. You agree to co-operate with us and should not do anything that would interfere in our chances of recovery.” The definition of subrogation, as given in Black’s Law Dictionary, is “the substitution of one person by another with respect to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim and its rights, remedies and securities.” A Waiver of Subrogation will prevent the insurer from such a recovery effort due to the contractual provision between you and MRO. It may lead to the negation of your insurance policy if you have not communicated properly with your insurer about your engine lease/repair agreement. Unless one looks into this provision carefully, there could be situations ‘willful negligence and gross misconduct’ on the part of the MRO which may also be covered under the liability provision that is detrimental to your insurance agreement. You must ensure such exclusions are carefully looked into, prior to the signing of contracts.
Consult your Insurer
It raises the question ‘should the MRO also carry an insurance policy on the engines that they lend or bring to their facilities for repair?’ The answer is ‘yes’, but they tend to have a favourable deal on this since they shift the liability to the operator with a Waiver of Subrogation and co-assured clauses in the agreement. This enables them to obtain the best insurance deals, not only for their engines but for other facilities. It is a common practice that an MRO provider would have a ‘Hangar Keeper’ policy to cover damages for aircraft and engines under their custody for repairs.
But invariably, the repair agreements will insist on the insurance cover for the customer engines by the customer. As per the current practice in the industry, there is no way out for the operator in need of an engine to sign such agreements, otherwise he may not receive the service that he desperately needs. However, the best an operator can do to protect his interests is to consult his insurer on such issues and obtain their nod on provisions of liability. This must be an imperative step while managing such contracts. It is my opinion that operators must get together to address such issues, negotiate hard with insurance companies and arrive at an amicable formula to restore the unevenness in the risk perception in the industry.
As the same insurers are dealing with MRO providers, lessers, lessees and operators on similar insurable interests, an equitable solution is achievable for the healthy growth of the industry. Risk and insurance management practices and the process of risk underwriting need to go beyond the realm of collective premium rate bargaining and get into areas such as liability sharing practices to evolve healthy standards.
Trade Associations such as MEBAA may chip in with their contributions to act as a common platform or as a catalyst for such efforts. MEBAA has commenced an initiative in this regard to study this matter in depth and we hope to come up with a win-win solution for all stakeholders in this complex business.