What Is Breach of Warranty in Aviation Insurance—and Why It Matters

What is Breach of Warranty? In aviation insurance, it’s a policy endorsement designed to protect lenders (lienholders) who have a financial interest in the aircraft. 

Insurance underwriting carriers often include a "Breach of Warranty" (BOW) endorsement in the policy when there’s a lender involved. That’s because it essentially creates a separate agreement between the insurer and the lienholder, and outlines the rights of both parties. 

Because financial institutions often hold a lien on the aircraft, they need protection in the event the aircraft owner suffers a loss. This is where BOW plays a critical role. It ensures the lender can still recover their investment, even if the policyholder breaches the terms of the insurance policy.

Common Breach of Warranty Scenarios

Common areas for claims denial or a breach of policy language could be:

• An unapproved pilot operates the aircraft.
• A pilot fails to complete training requirements required by the policy
• The aircraft is operating in a territory not covered by the policy. 
  

Why Lenders Rely on BOW Coverage

Lenders often have a significant financial stake in the aircraft, sometimes as much as 90 percent of the purchase price. 

As such, if a loss occurs and the insurer denies coverage to the policyholder, the Breach of Warranty clause allows the lender to still recover their losses.

Typically, lenders want to cover the full value of their outstanding note. In some cases, they request 110-125 percent or more of their loan amount to account for any fluctuations in the cost of capital and additional recovery costs.

BOW for Non-Lending Entities

On rare occasions, a Breach of Warranty may be requested by a non-lender. Such instances could may be when an aircraft is insured under a charter operator or an aircraft management firm’s fleet policy. 

The aircraft owner may want protection in case the charter or management company breaches a policy condition and the insurer denies the claim. Without BOW coverage, the aircraft owner could be left responsible for the damages, even if they weren’t at fault.

Bottom Line

Breach of Warranty is typically offered to lenders but may also be available to other parties, depending on the insurer and circumstances. 

While it’s not always required, it’s often a smart move, especially when high-value assets are involved and third parties are managing operational risks.

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