Managing Risk: 7 key insurance contract provisions every private pilot should know

Effectively navigating the complexities of aviation contracts is essential since these agreements often contain critical provisions that can significantly impact your insurance coverage. From understanding the implications of additional insured clauses to recognizing the importance of waivers of subrogation, each element plays a critical role in shaping your risk management strategy. Below are the key provisions that you should consider familiarizing yourself with to better protect your interests and ensure you are adequately covered in various scenarios. 

1. Additional insured 

The additional insured provision is generally used when one party wants to ensure that the insurance coverage maintained by another party will provide coverage and defense on their behalf, usually in conjunction with the indemnity provisions of the contract. For example, a hangar owner may require to be added as an additional insured in your rental agreement, or a flight school may require it prior to providing flight lessons. 

If you are provided with additional insured status under someone else’s policy, it is important to request and confirm receipt of an insurance certificate and corresponding policy endorsement to verify that it provides the proper coverages under the policy. In particular, you should determine if there are any exceptions to the additional insured status. Commonly, the coverage granted by additional insured status only applies to negligence attributable to the policyholder.  

Conversely, if you agree to include another party as an additional insured under your policy, it is important not to extend the additional insured status beyond what is required in the contract, as you may inadvertently pick up the other party’s liability for losses that are not your responsibility under the contract. Keep in mind, you are sharing your liability limit with any additional insureds listed on your policy. 

2. Primary/non‐contributory 

A primary/non‐contributory provision is generally requested in conjunction with the additional insured provision. This provision stipulates that the insurance provided by the other party will be the primary source of coverage for a covered loss, and insurance purchased by the party receiving this provision — usually the additional insured — will not contribute to the loss until the primary coverage is exhausted. 

Some agreements that do not have an additional insured requirement may instead make a primary/non-contributory clause compulsory; however, its application should be limited to situations where the other party is required to indemnify the party receiving this provision under the agreement. 

3. Waiver of subrogation 

In most insurance policies, the insurer is entitled to recover funds paid on behalf of their insured, from a responsible third party. But if an entity is granted a waiver of subrogation, the insured and their insurer waive this right.  

On aircraft hull and liability insurance policies, a waiver of subrogation is usually only requested/provided with respect to aircraft hull insurance. A waiver of subrogation is generally not necessary when a party is an additional insured under the same coverage, since an insurer will not seek recovery from a party who is included as an insured. 

4. Breach of warranty 

A breach of warranty provision provides assurance that coverage will not be voided if an insured violates a warranty or condition in the insurance policy. This provision is most often requested by a lender/lessor — who does not have operational control of the aircraft — to ensure they are paid their interest in an aircraft if the policy is voided by actions of the borrower/lessee. For example, if an insured aircraft owner voids their coverage by permitting a non‐approved pilot to operate their aircraft, the coverage will still protect the interests of the insured lienholder but not those of the insured aircraft owner. Depending on the wording of the endorsement, the party that breached the warranty may be required to reimburse the insurer for losses paid on their behalf. 

5. Loss payee 

A loss payee provision specifies who will receive all or part of the insurance proceeds when covered property has been lost, stolen, or damaged. This provision typically allocates proceeds based on the ownership interest of the loss payees. For instance, a 40% stakeholder will receive 40% of the insurance proceeds. Parties with a 100% interest in the property may require designation as the “sole loss payee.” All loss payees are typically required to sign a proof of loss release form and their names will be included on the insurer’s settlement check unless waived by the payee. 

6. Severability of interests and cross liability 

Severability of interests and cross liability are two distinct provisions with separate purposes that are often incorrectly used interchangeably.  

A severability of interests clause states that the insurance provided by the policy will apply separately to each insured party as if a separate policy was issued to each. However, the overall liability limit remains unchanged. For example, if a policy has a $10 million liability limit, it remains at $10 million no matter how many insureds are covered by the policy. 

In contrast, a cross liability clause permits one insured to sue another insured under the same policy. This clause is typically included in aviation insurance policies unless specifically excluded, in which case coverage can be reinstated by removing the exclusion. 

Both severability of interest and cross liability provisions should be requested alongside an additional insured provision. However, if additional insured status is not required by the contract, these provisions become unnecessary, as they hold no value to a party who is not an insured under an insurance policy. 

7. Notice of cancellation or adverse material change in policy terms 

A notice of cancellation or adverse material change in policy terms is typically requested by one party to ensure timely notification if another party’s insurance coverage is set to change or lapse. The standard request is for 30 days’ notice; however, many aviation insurance policies provide only 10 days’ notice for cancellation due to non‐payment of premium and seven days for the cancellation of war risk coverage. 

It is important to understand the contractual reporting requirements of your insurance policy to determine if you need prior approval of the insurer before assuming another party’s liability and accepting the provisions of the insurance, indemnity, and other applicable sections of a contract. Most importantly, always have your legal counsel review contract language for applicability in any given situation.