Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

There are no captive insurance regimes applicable to commercial aircraft and insurance cover in the US. Instead, aviation insurance is typically placed through commercial aviation markets.

Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

A cut-through clause is a contract provision found in a primary insurance policy that allows a party not in privity with the reinsurer to seek payment directly from the reinsurer in the event that a triggering event enumerated in the primary policy, such as insolvency, occurs. A cut-through endorsement creates similar rights in a separate agreement between the reinsurer and the insured that is integrated into the reinsurance agreement. The legal efficacy of these provisions depends upon the applicable state law. Despite some courts holding that cut-through provisions produce unfair preferences in insolvency proceedings and unfair discrimination among insureds, these provisions are legally effective in most states.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

Assignments of reinsurance policies are legally effective, but are not typically provided on aviation leasing and finance transactions in the US because of the lack of uniformity in state laws on obtaining priority over competing assignments. Because of these priority issues, lessors typically avoid assignments of reinsurance. Instead, lessors will include contract provisions creating cut-through endorsements and naming them as additional insureds and loss payees under the reinsurance policy.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

Pursuant to 49 USC section 44112(b), an owner, lessor or financier (or other secured party) is liable for personal injury, death or property loss or damage only when (i) a civil aircraft engine or propeller is in the actual possession or operational control of the owner, lessor or financier, and (ii) the personal injury, death or property loss or damage occurs because of the aircraft, engine or propeller, or the flight of, or an object falling from, the aircraft, engine or propeller. The majority of US courts have interpreted this provision broadly so as to pre-empt causes of action seeking to impose liability under state laws. A Florida court, however, narrowly construed this provision to pre-empt only those state law claims for personal injury, death or property loss or damage caused to people or property physically on the ground or in the water. Under this minority view, an owner, lessor or financier not in actual possession or control of the aircraft would be subject to state law liability for injuries, death or damage caused to people or property in the air. However, US federal legislation passed in 2018 changed the language to the regulation to close such an exception.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

Whether owners, lessors, financiers or others with no operational interests in the subject aircraft are strictly liable depends upon the laws of the state where the accident occurs, where the defendant is located or where the legal proceeding is held.

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

Pursuant to the minimum cover requirements of the US Department of Transportation, codified in 14 CFR section 205.5, the minimum requirement that US and foreign direct air carriers must maintain in third-party aircraft accident liability cover for bodily injury to or death of persons other than passengers and for damage to property is US$300,000 for any one person in any one occurrence and a total of US$20 million per involved aircraft for each occurrence. An exception exists for aircraft of not more than 60 seats or 18,000 pounds maximum payload capacity, in which case, carriers need only maintain cover of US$2,000,000 per involved aircraft for each occurrence.

When an air carrier provides air transportation for passengers, additional cover is required for bodily injury to or death of passengers with minimum limits of US$300,000 for any one passenger and a total of US$300,000 times 75 per cent of the number of passenger seats installed in the aircraft per involved aircraft for each occurrence.