Welcome back to the Aviation Insurance Blog!
Aircraft Liability, Commercial General Liability (CGL), and Products Liability are policies that pay for damages that the insured occurs arising out of the bodily injury, or property damage arising out of an occurrence. In the CGL policy or Products/Completed Operations coverage, these losses arise out of the product sold or the service provided. But many aviation businesses provide advice and consulting. These exposures aren’t covered under the CGL or Products Liability policy. Some examples of these exposures in aviation are aircraft sales brokerage and aircraft pre-purchase inspections. These exposures can be insured by a Professional Liability policy.
According to the Insurance Risk Management Institute (IRMI), the definition of professional liability is “a type of liability coverage designed to protect traditional professionals (i.e., accountants and attorneys) and quasi-professionals (i.e., real estate brokers and consultants) against liability incurred as a result of errors and omissions in performing their professional services.” So, these are economic and financial occurrences.
Professional Liability is designed to cover economic and financial exposures out arising out of a consultant’s or professionals’ errors and omissions in performing their professional services. In aviation, it is important to consider those services that we offer that are advice or counsel. It’s not providing a service like maintaining/repairing an aircraft or fueling an aircraft. It is not selling a product like fuel or parts. It is the advice that is provided.
As mentioned above, a great example of this exposure is pre-purchase inspections. A lot of maintenance providers will perform pre-purchase inspections. Here is a potential scenario for this exposure. A Maintenance, Repair, and/or Overhaul (MRO) facility conducted a pre-purchase inspection for an aircraft purchaser. That purchaser becomes the aircraft owner once the transaction closes. After learning of an issue with the aircraft, the determination is made that it isn’t worth the price they paid. The purchaser subsequently sues the MRO for the lost value/overpayments of a faulty aircraft. That’s not covered under an aviation CGL policy. There’s no other coverage unless you have a Professional Liability policy.
Aircraft brokers and aviation consultants that provide advice or counsel as part of their business, also have a professional liability exposure. A professional liability policy (errors and omissions policy) is important for most businesses to consider if they’re providing advice or counsel in their professional capacity.
Professional Liability policies are written on a claims-made basis. On an aircraft or aviation CGL policy, they’re written on an occurrence basis. The occurrence is the sudden and accidental loss resulting in bodily injury or property damage to a third party. The occurrence-based policy will respond to a claim that occurred during the policy period even if the claim is made after the policy expires. In a professional liability policy, the coverage only responds when the claim is made. So, if the issue transpired this year, during this policy period, and the claim is not made until next year, the only way the claim may be covered is if there is a professional liability policy in force next year when the claim is made. This means that if a business ceases providing a consulting/advice service, they need to continue to insure that exposure into the future via what is often called a runoff professional liability (or runoff errors and omissions) policy. Given the tail risk of these exposures, a runoff policy should be carried for at least a few years after the exposure ends, if not indefinitely.
In a Professional Liability policy, the legal defense is typically provided on a shrinking limit basis. The defense costs are “inside” the limits of liability and reduce the overall limit. For example, if there is a $1,000,000 Each Occurrence limit of liability, and the company spends $250,000 preparing to defend a loss, there is only $750,000 left of the limits of liability to pay the remaining defense costs and any potential judgment/awards for that loss. This is different from Aircraft and aviation CGL policies that typically have a legal defense provided “outside” the limits and separate from that limit of liability. In an aircraft or aviation CGL loss, the legal defense doesn’t reduce the limits of liability available in a claim.
If your organization provides advice or counsel, where there could be a potential economic or financial loss to someone else, you need a professional liability (errors and omissions) liability policy to protect your business from these exposures.