AVOIDING THE RISK CLOUD FOR YOUR BUSINESS AIRCRAFT
A Dallas-based aviation lawyer has written the article below with sophisticated insights into why the owners of business aircraft MUST adopt risk management for safety and the protection of these valuable assets with carry with them potential liability. Every point made in his paper is worth adopting. There are few additional observations that you should consider:
- Attorney Mayer uses a couple of words and phrases that collectively merit further comments:
- responsibility to pay covered claims up to policy dollar limits on your insurance policy terms.
- aviation insurance will not cover all risks you encounter involving your aircraft.
- duty to defend you, as its insured, at the insurer’s cost, against a covered lawsuit and a lesser duty to indemnify
- comply with Federal Aviation Regulations (FARs), FAA edicts,
- structuring their ownership and operations correctly to avoid a run-in with the FAA
- REMEMBER TO CONFIRM YOUR STRUCTURE ALIGNS WITH THE FARS AND FAA GUIDANCE.
Reading between the lines, clearly not explicitly stated, the risk here is that failure to comply with the complex, ever evolving FAA regulatory nether world called the Gray Market. Essentially, operators of heavy iron seek to recover some of their expenses by collecting “clever” compensation from passengers. The goal is to operate under Part 91 and to avoid the more exacting requirements of Part 135. Explanation of the set of restrictions requires pages of compound, complex sentences. Mr. Mayer and other AVIATION lawyers can guide you through this maze.
Some clever operators and/or lawyers who really do not follow the FAR system will note the likelihood that the agency inspectors will find this “cheating”; thus, the name “Gray Market” infers the difficulty of discovering these illegal flights—no advertising, no papers, smart pilot and no bragging by the passengers. This invisibility has caused industry to organize a private network to capture the gray charter operators:
The National Air Transportation Association (NATA) is staffing the toll-free hotline to report suspected illegal commercial activity. The hotline had previously been administered by the Air Charter Safety Foundation.
“Persons illegally conducting commercial flights adversely affect the safety of the air charter industry,” said ACSF President Bryan Burns. “NATA started the illegal charter hotline before the Air Charter Safety Foundation was formed. Now that the ACSF is well-established, it’s more appropriate for us to administer the hotline and track its activity.”
The Gray Market operators’ risk analysis does not see the FAA likelihood of enforcement as a deterrent.
Attorney Meyer’s 6 quotes suggest a more substantial consequence to scud running the Gray Market. If your flight does not comply 100% with all the FARS, especially the interstices between Part 91 and Part 135, your insurer may deny that the accident is covered. Most policies do not cover when the flight is without the proper FAA authority. The possibility of this most costly experience should convince the owner not to ask for compensation.
2. The article references the value of creating a safety culture for your business. This state-of-the-art safety discipline is called Safety Management System (SMS). The methodology involves data, analytics, ordering risks and 3600 collaborative solution processes. Mere copying the many available manuals to establish SMS at your hangar is not likely to achieve the benefits. To take your team to a lower level of risks, it is worthwhile to engage SUBJECT MATTER EXPERTS who have guided other business operators to true safety culture- top to bottom, proactive, insights into analysis and training.
3. One of the strategies suggested below is to allow your aircraft to be put on a Part 135 certificate. Great idea, but before transferring the plane, control of your valuable asset and the liability risk to a carrier authorized to receive compensation, you should consider A THIRD-PARTY AUDIT of the company (maybe even panel of possible 135s), its pilots, mechanics, safety culture, FAA compliance, etc. For example, it could be possible that the plane that you assigned to be managed could return with substantial airworthiness issues.
Another Part 135 alternative involves APPLYING FOR THAT AUTHORITY for your team. No risk of Gray Market violations, total control of your airplane by the personnel whom you hired, and the certification process1 is not as onerous as advertised.
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AINsight: Liability Risk Management for Bizjet Owners
by David G. Mayer, Esq.
– July 14, 2023, 1:11 PM
Everyone seems to talk about risk management in their businesses and even their personal lives. But what does risk management mean in the context of business aviation, and what risks matter the most to aircraft owners and operators?
When I talk with prospective and current aircraft owners or operators, they OFTEN SEEM CONTENT THAT LIABILITY INSURANCE WILL COVER ALL THEIR LIABILITIES. Yet navigating through aviation risk management entails a far wider perspective.
INSURANCE DOES NOT MANAGE RISK
Whether you use or operate aircraft in your company flight department, via a charter company, or with your own crew, you should be clear-eyed about the value and purpose of insurance as part of business aviation risk management. Even if you carry aircraft liability and property insurance, and you definitely should, your insurance may only respond—wake up—after something bad has already happened involving your aircraft.
Insurance does not mitigate or eradicate the risk of liability or property damage or loss. Rather, insurance shifts to your insurer the responsibility to pay covered claims up to policy dollar limits on your insurance policy terms.
Your insurer has a duty to defend you, as its insured, at the insurer’s cost, against a covered lawsuit and a lesser duty to indemnify you, meaning they should pay for covered liability and property claims up to the policy limits.
RISK MANAGEMENT IN BUSINESS AVIATION
From a 50,000-foot perspective, business aviation risk management refers to the process of identifying, assessing, and mitigating business, legal, operational, and personal aviation-related risks. These concerns affect not only your aircraft but also you and your businesses, operators, financiers, and others.
Aviation risks arise everywhere and any time your aircraft is involved in transactions, operated, positioned, registered, or stored. Aircraft-related obligations and occurrences can drag you and others into the fray of complex disputes far broader than aviation insurance. In short, aviation insurance will not cover all risks you encounter involving your aircraft.
Risk management starts by planning and taking actions to protect the lives and welfare of your family, friends, business colleagues, and other individuals or organizations; maintain your aircraft; preserve your personal net worth; use precautions around third parties; and comply with Federal Aviation Regulations (FARs), FAA edicts, and manufacturer’s standards.
TOP-THREE RISKS
Although many transactional, economic, and tax issues intersect with liability risk factors, let’s focus primarily on three risks my clients often mention first: personal liability, security/privacy, and structuring their ownership and operations correctly to avoid a run-in with the FAA. Aircraft owner and operator priorities vary, of course.
PERSONAL LIABILITY. Aircraft are powerful machines that, despite your best intentions, can create liability to third parties for property damage or loss, personal injury, or wrongful death. Personal liability risk drives aircraft owners and operators to find ways to minimize exposing their enterprises or personal net worth to third-party claims.
SECURITY/PRIVACY. Aircraft owners and operators often attract attention because of their net worth, power, or stature. That should not invite, and does not excuse, invasions of privacy, which I discussed in a recent blog on privacy. This includes publishing aircraft owner or operator photos, tracking aircraft, or prying into corporate or personal secrets. Neither should their public persona encourage threats or perils to them, their families, or anyone else.
REGULATORY COMPLIANCE. You may not think of structuring aircraft ownership or operations to comply with the FAR and FAA guidance as the top priority. However, if you fail to do so correctly, you may create uninsurable risks, become subject to FAA scrutiny, or make other avoidable mistakes.
WHAT IS RISK ASSESSMENT?
Risk assessment refers to identifying potential threats to your security, privacy, or other adverse events that may negatively affect you, your family, friends, business colleagues, aircraft, or personal net worth. That may take the form of conducting a security study of potential targets.
Broadly, you may appreciate the detailed examination of security issues and practices conducted by the National Business Aviation Association (NBAA) in its “Security Risk Assessment Process” paper.
WHAT IS RISK MITIGATION?
Business aviation risk mitigation should naturally flow from identifying and assessing appropriate risks. Mitigation generally refers to the process of avoiding, eliminating, reducing, sharing, or controlling the possibilities of personal liability or property damage or loss relating to your aircraft.
Properly structured and implemented, five actions should mitigate most of your aircraft-related risks, but there is no bulletproof strategy:
• Do not manage risk alone; form and trust your team. In a web of interrelated risk factors and a highly regulated industry, you will feel a higher level of confidence in your aviation experience by using seasoned aviation professionals to identify and help you manage aviation risk on your journey of purchasing, owning, operating, maintaining, managing, and selling your business aircraft.
These pros should be capable of helping you assess your risks competently and implement mitigation strategies effectively. You should judge whether your support team members possess the quality, skill, experience, and integrity on which you can comfortably rely; imprudent compromise elevates your risk.
• Structure for privacy and security. Your aviation counsel can structure your ownership to shroud your identity as the owner or operator of an aircraft. For example, you can use a double trust or form one or more limited liability companies (LLCs) to hide you from prying eyes or ease security concerns. LLCs may shield you from some liabilities whereas the trusts will not. REMEMBER TO CONFIRM YOUR STRUCTURE ALIGNS WITH THE FARS AND FAA GUIDANCE.
• Check safety and quality. As I discussed in my blog, “Managing to Fly,” about the key attributes in aircraft management, mitigation of risk also includes evaluating whether and to what extent a management organization or flight department has developed and implemented a SAFETY MANAGEMENT SYSTEM (SMS) and a quality repair and maintenance regime; what safety rating the management company has received from independent safety inspection companies; and whether you sense a culture of safety around the aircraft you use.
• Spread or transfer risk. You can limit, spread, or transfer risk in several ways starting with buying the best insurance you can for your risk profile. You can transfer risk to another person or entity that will indemnify you against specified situations.
You can shift operational control of your aircraft to a FAR Part 135 operator so they assume legal and operational control of flights under Part 135. Doing that relieves you of direct and primary liability for actionable incidents or accidents that you would otherwise assume when you operate your aircraft under Part 91. I sometimes say this change puts the liability target on the back of the Part 135 operator.
TAKEAWAY
Risk management in business aviation is neither an art nor a science. It represents a process designed to mitigate risk factors that, if not addressed, may otherwise cause harm to people or organizations, personal liability, diminishment of net worth, damage or destruction of property, or a loss.
Aviation risk management is not a choice. Instead, it is an imperative that can alleviate risk and afford you and others the substantial benefits of business aviation.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton in Dallas, which provides broad legal services in private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing, and financing (a sub-specialty of David’s), risk management, insurance, aircraft management and operations, hangar leasing, and related corporate work. Mayer frequently represents corporations and high and ultra-high-net-worth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, corporations, and managers, as well as lessors and lenders. He can be contacted at dmayer@shackelford.law
