AIRCRAFT ENGINEINSURANCE

BARRY MOSSAVOCET

ABOUT US

AVOCET provides specialist advisory, compliance and risk management services to the Airfinance industry:

Aviation insurance

Aviation EU ETS – AVOCETS

AGENDA

1. Overview - types of aviation insurance

2. Differences between engine and aircraft insurance

3. What insurance risks are peculiar to engines?

4. How does AVN67B relate to aircraft engines

5. Other specific insurances for engine owners & lessors

6. Summary & Key Take Away Points

HullSparesHull/Spares War RisksHull DeductibleLiability (third party, passenger, products etc.)

OVERVIEW - TYPES OF AVIATION INSURANCE

WHAT ARE THE DIFFERENCESBETWEEN ENGINE & AIRCRAFT INSURANCES?

WHAT ARE THE DIFFERENCES?

Nothing much – provided an engine is attached to the aircraft

Considerable – if an engine is detached from the aircraft

Let’s explore some of the issues. . .

This may depend on whether the engine is the original engine or a replacement engine

If the original engine – it will usually be insured as part of the ‘Hull’ and within the ‘Agreed Value’ of the aircraft

If a replacement engine – the aircraft ‘Agreed Value’ should be increased by the value of the replacement engine

WHEN IS AN ENGINE NOT AN ENGINE?

The original ESN(s) may or may not be identified on the insurance certificate

If ‘on wing’ the ‘deductible’ will be the same market deductible as for the aircraft it is attached to:

CFM56 –B737/A320 - USD750,000A340 - USD1,000,000

IF IT IS THE ORIGINAL FINANCED ENGINE. . .

WHAT INSURANCE RISKS ARE PECULIAR TO AIRCRAFT ENGINES?

Then it will probably be insured as a spare engine and not within the ‘Agreed Value’ of the aircraft

The deductible will usually reduce to $10,000 except when the engine is being tested

If the engine is being tested then the full market deductible for the aircraft will apply

IF AN ENGINE IS DETACHED FROM AN AIRCRAFT. . .

Whilst in the care, custody and control of the aircraft operator . . .

The engine must be located at a secure facility

It must be kept in good condition and in accordance with OEMs storage directives

An aggregate ‘fleet’ spares limit will usually apply (for any one location/sending etc.)

STORAGE

Whilst in the care, custody and control of the aircraft operator . . .

An aggregate ‘spares’ war risk limit will usually apply which may include a sub-limit for confiscation by Government of registry

‘Excess war risk liability’ cover (Extended Coverage Endorsement Aviation Liabilities -AVN52E) up to fleet liability limits (usually excess of USD150,000,000)

‘Spare’ engines only insured whilst in transit by air or sea – not whilst on the ground

WAR RISKS

Reduces the deductible to a more acceptable limit (i.e. from USD750,000 to USD250,000)

Usually applies to the aircraft rather than the engines

May or may not apply whilst an engine is removed for testing

DEDUCTIBLE INSURANCE

Minimum air carrier liability limits within Europe under Council Regulation (EC) No 2027/97 & Regulation (EC) No 889/2002

Elsewhere is usually benchmarked against similar carriers operating similar services with similar equipment

The same ‘third party’ liability limits will usually apply whether an engine is attached or detached from an aircraft

‘Products’ liability subject to an annual aggregate

LIABILITY INSURANCE

An engine financier/lessor should be named as a ‘Contract Party’ on the aircraft operator’s insurance and/or reinsurance certificate

The ‘Contract’ should also be identified on the aircraft operator’s insurance and/or reinsurance certificate

The engine financier/lessor should be included in the list of contacts

AVN67B - AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT

Aviation insurance is often subject to local laws and regulations - often subject to minimum local insurance retentions

Reinsurance should be placed into the London and established international markets

A ‘cut through’ provision should be obtained where permissible

REINSURANCE

SPECIFIC INSURANCES FOR AIRCRAFT OWNERS AND LESSORS

Can be expensive if insured within the aviation market

The marine cargo market can be much cheaper

Check whether the engine is covered by the haulier or shipping company

If applicable, check that the storage facility has ‘hangarkeepers’ & products liability coverage

‘OFF LEASE’ STORAGE & TRANSPORTATION

What it is

What it is not

Do you need it?

Need to price it into transaction

Insurance risks still need to be effectively managed

‘CONTINGENT’ HULL & LIABILITY INSURANCE

Aircraft/engine non-repossession insurance = Confiscation, Expropriation Nationalisation & Detention (CEND)

Inability to repossess financed equipment

Currency inconvertibility

Is it a political or commercial risk?

Cape Town Convention?

POLITICAL RISK

SUMMARYAND KEY TAKE AWAY POINTS

SUMMARY & KEY TAKE AWAY POINTS

Ensure that insurance clauses within engine lease/finance contracts are sufficient and comply with current market practice?

SUMMARY & KEY TAKE AWAY POINTS

Obtain current certificates of insurance/reinsurance and letters of undertaking

SUMMARY & KEY TAKE AWAY POINTS

Ensure that the engine lessor/financier is named as a ‘Contract Party’ and an ‘Additional Insured’ in accordance with AVN67B

SUMMARY & KEY TAKE AWAY POINTS

Risk manage insurances – don’t file and forget

SUMMARY & KEY TAKE AWAY POINTS

Seek independent aviation insurance advice and written opinion from the outset

ANY QUESTIONS? BARRY MOSSbarry.moss@avocet.eu

www.avocet.eu