Costello Insurance Associates Aviation Insurance

 Costello Insurance
 Associates, Inc.
 Tel: 800.528.6483
 Tel: 480.968.7746
 Fax: 480.967.3828

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When You Rent, Are You Really Covered?

By Pat Costello, Costello Insurance Assoc.

This is a story about Mr. Pilot Error and the fixed-based operator (FBO) Moment Air Service from whom he rents aircraft. Both are located in Arizona.

On a cross-country flight in one of Moment Air's Cessna 172's, Mr. Pilot Error runs out of fuel. In the inevitable forced landing two passengers are injured and a person on the ground is hurt. The Skyhawk is totaled. Mr. Error is clearly negligent and stands no chance when the injured parties sue.

Mr. Error turns to Moment Air Service for defense and liability coverage from their insurance carrier. Sorry, Arizona (like most states), doesn't require FBO's to extend insurance protection to renter pilots. The only insurance Moment Air has protects Moment in the event they are sued by the injured parties for negligent entrustment of the airplane to Mr. Error. The poor pilot finds he's on his own. Worse, Moment Air is going after Mr. Error for the loss of the plane and the loss of its use.

The FBO carried no physical damage (hull) coverage on the Cessna 172. Error's negligence entitles Moment Air to the value of the aircraft plus the loss of revenue from not having the plane to rent to others until it can be replaced or until Mr. Error and Moment can come to some financial settlement.

Pilot Error could have transferred his risk of financial ruin to an insurance carrier for a small annual premium under a "Non-Owned Aircraft Liability Insurance Policy". Such a policy provides coverage in two areas:

Section one is for aircraft liability. It covers bodily injury to persons outside the aircraft as well as bodily injury to passengers. It also covers property damage that might be done with the aircraft. This property damage coverage does not include the aircraft being operated. Carriers will not sell a policy without this section.

Section two is optional. It affords coverage for the renter pilot negligently damaging the aircraft being rented and coverage for the loss of use he/she may be responsible for. It pays up to the limit selected; as little as $5,000 can be acquired. It's recommended that the amount of Non-Owned Hull Coverage purchased be equal to the value of the aircraft being operated plus a little extra for Loss of Use.

A very important item that is included with a Non-Owned Policy is 'free defense'. This means the carrier will provide an attorney at their expense to defend you if needed. Lawyers cost a great deal of money. It's better to have their expenses come out of the carrier's pocket instead of yours.

Suppose Moment Air Service had paid the extra dollars for Renter Pilot Liability Insurance and for hull coverage on the Cessna? Moment's typical liability limit would be $1,000,000 combined single limit of bodily injury and property damage limiting each passenger to $100,000. When the carriers sell the FBO's Renter Pilot Liability Coverage it's merely an extension of some of the FBO's limit. It's not an additional amount of coverage. Therefore the FBO can ill afford to supply the renter pilot much of their coverage. A usual extension is $50,000 for bodily injury and property damage 'excluding passengers'. Mr. Error would have a little coverage for bodily injury and property damage to persons or things outside the aircraft but no coverage for passengers or the aircraft he was operating.

If Moment Air Service carried hull insurance on the Cessna 172 it would matter little to Mr. Error. The FBO's carrier would pay the FBO for the damaged aircraft and cut its losses by going after the negligent pilot for the amount they paid out plus the FBO's deductible. This is called subrogation. Meanwhile, Moment Air may still put the arm on Mr. Error for the loss of use which is not covered by Moment's hull insurance.

Pilot Error certainly would have been better off had he rented from an FBO that provided its renter pilots with Renter Pilot Liability Insurance. But with the typically low amount of protection provided and the likelihood of the insurance carrier subrogating against him to recoup its hull loss, Pilot Error would have been much better off purchasing his own Non-Owned Aircraft Liability Insurance policy.



1. It's in your best interest to provide some Renter Pilot Liability Insurance. A renter whose own money is used for his/her defense may be represented by the attorney who did their last Will rather than an aviation legal specialist. This could hurt your case before you even get to court.

2. Be cautious about the amount of coverage supplied the renter. Whatever the carrier pays out on the renter's behalf is subtracted from your liability limit. Don't give away all your coverage.

3. If your rental agreement limits the renter pilot's responsibility to the amount of your deductible your may void the carrier's right to subrogate for its loss. This may provide them with grounds to deny a claim. Further, the money you've collected from the renter towards the deductible actually belongs to the carrier until it has recouped its losses from the negligent pilot.

It is recommended your rental agreement not limit the renter pilot's liability on the plane, but that you advise renters that they "may" be held liable for any damage they do. The renter will be more aware of his/her liability exposure, and you may avoid the risk of voiding an insurance policy upon which both you and the renter may depend.

Those renting or borrowing non-owned aircraft should consider having their own policies as opposed to depending on what the aircraft owner may (or may not) have.

Because these are complex issues, I recommend to those in the business of renting out aircraft and to the renter pilot that they consult an aviation insurance broker. We deal with these issues daily.
(Updated 9/30/03)