Aviation Insurance – Honesty the Best Policy

Aviation insurance is an accepted necessity for aircraft operations. However, insurance policies are contracts where both parties are expected to comply with what is known as a duty of the utmost good faith towards each other. Taking the time to be accurate on the insurance application or renewal form may avert subsequent legal misfortunes.

Insurance companies regularly honour their aviation insurance contracts and pay claims within the coverage acquired by the insured. However, in certain instances, an insurance company may deny accident coverage when it bases its denial on the insured’s failure to disclose information or misrepresentations.

Just what are a commercial operator’s duties and responsibilities when applying for aviation insurance.

Insurance Law Principles

Reforms effected by the Insurance Contracts Act 1984 (Cth) do not apply to insurance for aircraft engaged in commercial operations. As a result, common law principles govern aviation insurance contracts for aircraft engaged in commercial operations.

Under common law, the duty of disclosure requires both the insurer and the insured to disclose, on their own initiative, all facts of which they are aware and which are material to the proposed insurance. And the right to avoid an insurance contract may arise through matters outside the contract such as breach of the disclosure duty or misrepresentation.

When a breach of the duty of disclosure occurs, the innocent party (in practice the insurer) may elect to avoid the contract. Therefore, an insurer may defeat an insured’s claim, by avoiding the policy, where it discovers the insured has failed to disclose a material fact. (A fact material if it would have reasonably affected the mind of a prudent insurer in determining whether he or she will accept the insurance and, if so, at what premium and on what conditions. )

Of course, an insurer is not bound to avoid the contract. However, it must elect to avoid the contract within a reasonable time, otherwise it may be presumed to have affirmed the contract by lapse of time. Even with knowledge of a breach of the duty of disclosure, an insurer may also waive its right to avoid the contract, for example by issuing a policy or a renewal certificate. There is a distinction between the avoidance of a policy and the refusal to pay a claim. Therefore, if an insurer merely refuses to pay a particular claim because of the insured’s breach ofduty of disclosure, it will not be able to avoid the policy:

Misrepresentation

To constitute an actionable misrepresentation, the representation must be false. It is not actionable unless it actually induced the insurer to enter into the contract. It need not, however, have been the only or even the decisive cause, as long as the misrepresentation contributed and had some effect on the insurer’s mind.

And while an innocent misrepresentation gives the right to the insurer to set aside the contract, a fraudulent misrepresentation, which is one made with knowledge of its falsity or with reckless indifference as to whether it is true or false, gives rise to both a right to set aside the insurance contract and an action for damages for deceit. In either instance, the financial consequences for the insured may be devastating.

Inducement is also analysed in terms of materiality. The insured’s misrepresentation must be a misrepresentation of a material fact, otherwise the insurer will fail to prove the insured induced it to enter into the insurance contract.

In one example of misrepresentation, a court reviewed a proposal for insurance on a helicopter where the insured stated that the intended pilot’s flying experience was 1,000 hours in all aircraft and ‘700 hours this type’. The insured also stated that the pilot had had two years’ experience flying in live deer recovery. The helicopter later crashed. During the insurer’s subsequent inquiries it discovered that in fact, the pilot’s total flying hours were 959 for all aircraft and 116 in a different type of helicopter; he had no experience flying in live deer recovery. The court held that the insured’s written and oral statements were material and would have influenced the judgment of a prudent insurer. The misrepresentations entitled the insurer to avoid the contact.

The Insurance Application

So, the common law is fairly clear: if you misrepresent anything to an insurance company enquiry you run the risk of the insurer voiding the policy if you present a claim. An insured can distort facts in a seemingly innocent manner to an independent observer yet those same facts are material to the insurance company.

For commercial operations an insurance application will inquire about the flightcrew’s flying time and training programme. Guessing or estimating the totals of the various categories of pilot hours is not advisable. Accuracy should be ensured by a thorough review of pilots’ logbooks.

Similarly, all information concerning flight operations must be accurate. Accurate data about maintenance programmes should be conveyed. Hours or cycles on the aircraft or any of its components should not be estimated. The insurer should be provided with the exact answers to whatever questions it poses on the application. If an estimate must be given, indicate that it is an estimate, the reasons for giving the estimate and ask whether the insurer requires further information. Putting the insurer on notice that the information provided has been estimated is in keeping with the insured’s duty of utmost good faith toward the insurer.

If doubts exist about any flight department employees’ qualifications, they should be resolved quickly. Discovering after submitting a claim that a mechanic or pilot inflated or exaggerated his certification status or experience should be unacceptable to any commercial operator.

The obligation of disclosure also occurs on each renewal. This type of insurance involves a separate contract from year to year. So, if new flightcrew have been added or the company has modified its maintenance programme, this new information should be conveyed to the insurer. Even if the insurer fails to ask for further or updated information, the insured may have a duty to inform the insurer under the common law.

An insurance policy can be voided, and the insurer therefore, is not required to pay a claim, if such misrepresentations occur. This is so even if the aircraft’s owner did not realise the inaccuracy of the answers given to the insurance company: The result is not unfair. The owner, rather than the insurance company, is in the best position for ensuring the validity of its representations on insurance applications.

An insurance company may not be in a position to do anything other than take the answers it receives as presented. Therefore, the potential insured must perform whatever investigation is necessary to ensure that the questions are answered truthfully and completely.

Thinking you are insured when you are not makes the outcome of any accident even worse. That misfortune can be prevented by treating all of the insurance application questions as being as critical to you as they later could be in court.