Potential liability for the aircraft is always top of mind for new and experienced plane owners. Since putting the plane in a special-purpose entity doesn’t work to protect against liability (see here), what are the real options? Here are the five key steps to consider to protect an owner in the event that something goes wrong.
Insurance
Similar to most potential liabilities in life and business, the first line of defense is your insurance policy. The liability limits need to be high enough to serve as a ransom payment to the plaintiff’s lawyer. It needs to be substantial enough that a plaintiff will settle for policy limits now rather than pursue a “jackpot” against the operator of the aircraft that could drag on for half a decade or longer.
Working with an aviation insurance broker is key; most other business or umbrella policies typically exclude coverage for aircraft operations. Your aviation insurance broker can also ensure that the proper entities are insured (e.g., owner, operator, related parties).
Management
Keeping the plane in good mechanical condition and crewed by skilled pilots is also key. Anything that can be done to avoid an incident in the first place has obvious value. Most clients accomplish this by hiring a great management company to oversee maintenance, crew hiring, and dispatch.
Some clients try to handle these tasks “in-house,” but their time is usually better spent generating income and focusing on their business rather than trying to save a few nickels on management.
Another key benefit of a good, larger management company is access to its fleet insurance policies. These can provide ten times the insurance coverage, often at a lower premium than an owner or operator could get on their own.
Charter
An often overlooked but highly effective way to avoid liability is to lease the aircraft to a charter company. Under this arrangement, the owner is an aircraft lessor with little liability. The charter company operates all of the owner’s flights and serves as the operator (remember, the role with the most liability). The owner can then charter their own plane as a charter customer, typically at cost, and there should be no liability if something goes wrong when they’re simply a passenger.Â
This strategy is relatively new. Charter flights typically incur a 7.5% Federal Excise Tax, which is a lot for an owner to pay to fly on their own plane. But recent changes to the tax code have exempted charter flights by an owner on their own plane from this tax.
Training and Education
For owner-pilots, there are no tricks to avoid liability, and the insurance coverage available is usually less than ideal. So, instead, the focus should be on keeping liability theoretical by running the operation as safely as possible. This means regular, ongoing training; joining owner groups for their make and model to attend training workshops and share best practices; and staying humble to avoid becoming cavalier about flight in subpar conditions or circumstances.
Estate and Risk Planning
For all operators, it is important to understand the impact of a judgment against the individual or the business. Any individual who can afford an aircraft can afford a good estate planning attorney. Their assets should be protected by whatever means are available in your home state, so that a judgment cannot take away everything you’ve worked your whole life to build.
For businesses, it is ideal if the plane can be operated by an entity that is fairly asset-light, such as a management services company that oversees the rest of the company’s operations. If the plane is operated by a business with a billion dollars in assets, it will be hard to avoid a large judgment against it.Â
While potential liability is real, an understanding of who has the liabilities and what can be done to mitigate them can help owners sleep at night. When combined with good tax planning and an operations plan, owners can fly confidently and enjoy how their aircraft serves their family and business.
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This article is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this article are those of the individual author, John Farrish, and are purely informational. Each aircraft owner’s situation is unique and requires its own thorough discussion and analysis. This article does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, each person should retain and consult an attorney with knowledge of the subject matter.
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