Contracts and Insurance: The Facts of Life

In the aviation aftermarket industry, as in any business, contracts are an inescapable fact of life. It comes as no shock that they typically are written in favor of the party that has drafted the contract. However, even the most savvy business owners can neglect the key role that contracts play in your risk management plans, or how they interact with your insurance placement. Assuming you have contractual liability coverage in your policy, it’s your responsibility to provide a copy of any contract you sign to your insurance broker and, ultimately, your insurer.

 

Liability coverage

Contractual liability essentially means that your insurer steps into your shoes and agrees to accept the insured contracting parties’ obligations in the contract. For example, assume someone slips and falls in your office and sues both you and your landlord claiming you failed to properly maintain your leased premises. Your lease required that you indemnify and hold harmless the landlord for any claim arising from your negligence. It also required that they be named as an additional insured. Through contractual liability coverage, your insurer would hire and pay for an attorney to defend the landlord and would also pay any settlement or verdict against the landlord. Of course, this all assumes you have contractual liability in your insurance policy and that you provided your insurer with a copy of your contract with the landlord.

It is important to note that most polices give the insurer the right to approve or disapprove of a given contract. In other words, the insurer could decide not to accept a given contract; in that case, none of the above protection would be available. Most polices also give the insurer another option, which is to accept the contract but charge an additional premium for doing so.

Contractual liability provisions also impose a duty to provide these contracts to an underwriter in a timely fashion — either a fixed period of time after the contact is executed, or after the insured first becomes aware of the contract. It’s a good habit to simply send the contract to your broker as soon as it is signed.

 

Before you sign

This all makes sense for contracts that you have already signed. How about contracts that you have been presented to you for signature? Can your broker assist you in this “pre-execution” period?

In some cases, the answer is yes. NationAir, for example, feels that it is vitally important to assist their clients in the review of a contract prior to signing, so that changes might be made to better protect our clients’ interests. For that reason, NationAir clients have access to a longtime aviation contracts expert to ensure their interests are properly represented. Aviation attorneys with a background in aviation contracts can also help you understand the implications of your contracts and can suggest changes that will tailor them to a greater advantage.

One area where changes are typically suggested is in required liability limits in an airline contact. A contract may require large liability limits for any aircraft part, even though that part may not be vital to an aircraft’s function or safety systems. For example, your firm may manufacture waste receptacle covers. The airline you supply typically requires hundreds of millions of dollars in liability coverage from its suppliers, but in your case, that represents liability overkill. Your insurance broker can and should act as your advocate to seek a lower required liability limit, which can greatly reduce the cost of complying with the terms of this type of contract.

You can also reduce your liability footprint through a good, structured and accredited quality control program, such as an ISO program, that includes provisions for vendor approval. You should also require that your vendors carry product liability insurance, both to meet your contractual obligations and protect your own interests. If you have vendors that provide you spare parts or if you outsource repairs, you must ensure those vendors are carrying proper limits of insurance, so that you are not essentially carrying them on your policies.

Any form of business involves contracts, whether they are verbal or written. Be careful what you agree to, and work with your insurance broker to make sure your interests are represented and you are adequately covered from an insurance standpoint. While contracts are inescapable, make sure they work for you, not against you.

 

Jamie Benthusen is the director of aviation products liability for NationAir Aviation Insurance, one of the country’s oldest and largest aviation insurance specialty brokerages. Benthusen has more than 15 years’ experience in sales and manufacturing for airframe and engine products and test equipment.

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