Risks in Fractional Aircraft Ownership
Flying private and fractional aircraft ownership offers an exceptional travel experience, but it also brings high levels of exposure. These aircraft are constantly in use worldwide and can be jointly owned by 16 or more entities. As a fractional owner, you do not typically know who is flying on your aircraft or how many passengers are onboard. To further complicate matters, none of the fractional owners carry or own the insurance policy covering the aircraft, and therefore have little to no control over the limits or breadth of coverage that the policy provides.
However, even though you as a fractional owner have no operational control over the aircraft, you are still exposed each minute the aircraft is in use by the fleet manager. Owners can be held liable when a loss occurs — even if they were not aware their aircraft was operating.
Because aviation claims are costly and there can be so many owners and passengers involved, a standard aviation owner’s policy may not suffice if an incident occurs as the limits are divided and diluted amongst all the owners, additional insureds, and guests. When this occurs, the limits may be exhausted before the claim is settled, leaving you as the fractional owner fully exposed.
Why do high-net-worth fractional aircraft owners, and members of private jet programs, need non-owned aircraft insurance?
Although air travel fatalities and accidents are statistically rare, the number of total dollars paid in aviation claims continues to rise. Specific to fractional ownership and private membership programs, a range of incident types contribute to greater aviation insurance claims and losses, including:
- Ground collisions and accidents during movement and storage by fixed base operators
- Third-party slips & falls
- Pilot error
- Guest negligence
- Catastrophic loss settlements
- Supply chain issues for repairs
Many people in fractional aircraft ownership arrangements falsely assume that the private jet membership programs and the fleet manager’s insurance fully covers these kinds of incidents. However, without sufficient additional coverage, many fractional owners and private jet members are surprised to find themselves exposed to complicated lawsuits and having to settle these incidents out-of-pocket. With some of these claims adding up to millions of dollars.
Where else are you exposed as a fraction aircraft owner and/or member of a private jet membership program?
Leaseback liability exposure
Since the individual fractional owner is named on the registration of a specific aircraft, and since they have essentially agreed to “lease back” the aircraft to the fractional operator, the individual owner does not carry the policy on the aircraft but does maintain the liability associated with its ownership. Further, since it is common to see 16 owners (or even up to 100 in some situations) named on each aircraft, any insurance coverage for future claims or litigation associated with the ownership or operation of that aircraft must be split among the operator and each of the owners individually.
Products liability exposure
Because fractional owners are considered to be “in the stream of commerce,” they take on products liability for the sale of the aircraft when it is sold. This is of particular concern when the aircraft reaches 18.5 years of age, since the General Aviation Revitalization Act of 1994 provides the aircraft manufacturer relief from products liability associated with the manufacture of the aircraft 18.5 years after the date of manufacture. There is no way for the individual owner to ensure that their “tail” exposure for products liability for the sale of the aircraft is covered after they leave the program since the operator controls the insurance policies at the time of and after the sale. In other words, this exposure could come back to the individual fractional owner at any time over the life of the aircraft.
Breadth of fractional ownership exposure
Since there can be many individual owners on a specific aircraft, it is nearly impossible for all fractional operators to always have a program aircraft available when an individual fractional owner may need one. When that situation occurs, it’s common for the factional operator to outsource this charter to a third-party charter operator. Because there is no way for the individual owner to control or even be aware that they are flying on a third-party aircraft, it becomes very important that coverage extends to meet this need. It is also very important that all coverage provided to the individual owner under the fractional program follow them to any third-party aircraft and that they be named under the third-party policy as well.
- To take this exposure a step further, it is also not uncommon to see the third-party operator outsource the charter to another fourth- or even fifth-party operator without any party in-between being aware of the arrangement. Many of these multiple parties are not aircraft operators at all but charter brokers.
- Since the owned aircraft is actually “leased back” to the fractional operator, the individual fractional owner (lessor) has “no” operational control over that aircraft but still retains the exposure associated with that ownership. Therefore, the individual owner becomes exposed each minute that the aircraft is being operated by the fractional operator (lessee). Although the owners are not operating the aircraft at the time of loss, and in fact were not even aware that “their” aircraft was flying at the time of loss, each individual registered owner will likely be claimed against individually in the event of loss or third-party claim — catching them completely by surprise.
- Owners do not typically fly on their own aircraft. Instead, they call the fractional operator and request an aircraft be made available for them. This means they need a non-owned provision in their primary policy or an added non-owned liability policy.
Passenger load liability exposure
Within fractional ownership programs, the fleet is likely to include aircraft with a range of capacity limits, from as few as six passengers to as many as 19 passengers. This is when load liability exposure comes into play. If a person owns a fraction of a six-passenger aircraft but is using a 15-passenger or larger aircraft for a particular trip, it is important to consider and confirm that coverage is increased to compensate for this increased exposure.
Jet card members (without fractional ownership stakes)
Many members of private jet programs do not have an ownership stake in any aircraft. These members, often referred to as jet card members, instead purchase single trips from the charter market or buy packages of flight hours. It is important for these consumers of private jet flights/hours to secure a non-owned aviation liability policy because they are unlikely to be listed as a named insured on the fleet manager’s or aircraft owner’s policy, leaving them with little to no coverage, and possibly fully exposed if named in a lawsuit.
What kind of non-owned aircraft insurance is right for you?
There are two main types of non-owned aircraft liability insurance: corporate non-owned and personal non-owned.
Corporate non-owned aircraft insurance
This coverage is suitable for corporations and high-net-worth individuals involved in fractional ownership. This primarily covers contingent liabilities when you do not employ the crew and are not directly involved with the operation and maintenance of the aircraft. Fractional aircraft ownership is a very popular and cost-effective way for many individuals with the need for aircraft transportation to gain access to those types of assets without the complete commitment that 100% ownership requires.
Personal non-owned aircraft insurance
While by name this may seem applicable for high-net-worth individuals in fractional ownership programs, this coverage is actually best suited for individual operators such as licensed rental pilots and student pilots.
Further coverage considerations
Non-owned aircraft liability insurance provides essential coverage in the case that an injury or property damage occurs on your aircraft. For damage to the aircraft itself, non-owned hull coverage is an important option to consider.
Hull coverage protects you and your guests from property damage losses such as spilled food or beverages, torn seat upholstery, or accidental breakage of parts onboard the aircraft — such as a bathroom door handle. With the right combination of liability and hull coverage, you’re better prepared for any incidents that might occur onboard your aircraft.
Get the right coverage, so you can focus on your next destination
Fractional aircraft ownership through private jet memberships and other programs certainly offer an unmatched traveling experience without the excessive costs and responsibilities associated with owning and maintaining an aircraft individually. But with these arrangements come substantial financial and liability risks, which should be discussed in detail with an insurance advisor who specializes in aviation insurance solutions. Getting the right aviation insurance in place will enable you to enjoy the benefits of luxury air travel with the protection you need if something doesn’t go as planned.
