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  • NAFA Administrator posted an article
    Aircraft Insurance Considerations in a Tightening Insurance Market see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses aircraft insurance claims in a tightening insurance market.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published in BusinessAir Magazine, March 2020, Volume 30, No. 3 on May 12, 2020.

  • Tracey Cheek posted an article
    The Closing: The Final Step to Completing the Aircraft Acquisition! see more

    NAFA member, Amanda Applegate, Partner, Aerlex Law Group, discusses steps to completing your aircraft purchase.

    At long last, you have found the aircraft that fits your needs, the pre-purchase inspection is complete and the discrepancies have been remedied. It is now time for the closing. What does this mean and what needs to be done? For many first-time aircraft buyers, they think the closing will be a long drawn out event. However, I tell all of my clients that the closing should be a non-event and if all of the work has been done in advance, the actual closing should take less than 10 minutes. Once the purchase agreement is executed, a closing checklist should be developed to track all of the deliverables needed through closing. Here is a list of the important items that need to be accomplished shortly before closing:
    1. Aircraft Positioning –
    The purchase agreement should identify the delivery location and who is required to pay the movement costs, if any. The closing cannot occur until the aircraft arrives at the delivery location and in the required delivery condition.
    2. Closing Documents –
    There is an actual filing window at the Federal Aviation Administration (“FAA”) registry in Oklahoma City, OK. All of the closing documents should be pre-positioned with the escrow agent in Oklahoma City, as the escrow agent will be responsible for filing the applicable documents with the FAA. As the buyer, the required FAA closing documents are a registration application FAA Form 8050-1, a statement in support of registration if the purchasing entity is a limited liability company, lender documents if applicable, and a declaration of international operations if there is an upcoming international trip. As the seller, the required FAA closing documents are a bill of sale FAA Form 8050-2, as well as any lien releases if necessary. Additionally, the buyer and seller will each need an active transacting user entity account with the international registry in order to register the contract of sale at closing. Further, the purchase agreement more than likely requires other non-FAA closing documents, such as a delivery receipt and warranty bill of sale.
    3. Insurance –
    During the purchase process an insurance carrier should have been selected and a determination on the amount of coverage required. Shortly before closing, insurance should be bound and the buyer should receive and review the certificate of insurance. If the aircraft is financed or managed by a third party, these parties will have specific insurance requirements which need to be evidenced on separate insurance certificates.
    4. Maintenance Programs and subscriptions – 
    If the aircraft is enrolled in any maintenance programs or subscription services, the third party providers must be contacted to confirm the account is in good standing, paid in full and transferrable upon closing.
    5. Closing Statement –
    The escrow agent will prepare a final accounting statement based on the terms of the purchase agreement and information provided by the parties. The statement will usually include the purchase price and any other fees due under the purchase agreement or to third parties, such as brokers. Any movement costs or similar expenses should be calculated a few days prior to closing and agreed upon by the parties prior to the day of closing.
    6. Inspection Facility Invoice –
    Oddly this is an item that can often cause a delay in closing. The aircraft cannot depart the inspection facility for the delivery location until all invoices are paid. However, invoices can’t be paid until they are final. The invoices from the inspection facility are very detailed and often take a long time to get into final form. Once received they must be reviewed in detail since certain costs are buyer costs and other costs are seller costs as dictated by the purchase agreement.
    7. Tax plan – 
    The tax planning at the federal and state level for the acquisition should have been completed while the pre-purchase inspection was occurring. At closing, the tax plan should be implemented. 

    All of the items above can be accomplished in the days leading up to closing. If done properly the actual closing is a series of emails or a conference call with all parties lasting less than 10 minutes!

    This article was originally published by BusinessAir Magazine, The Latest, on November 19, 2019.

  • Tracey Cheek posted an article
    Hot Topics for Bizav in 2020 see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the top-five challenges in business aviation for 2020.  

    The U.S. finished 2019 at the top of the world of business aircraft transactions and it is well-positioned to continue its leadership this year. Of course, every year presents important challenges and there are five that I believe will affect many aircraft owners, lessors, lenders, managers, insurance and buy/sell brokers, technical consultants, and other industry participants in 2020. Here are my top-five challenges for this year:

    ETHICAL BUSINESS TRANSACTIONS

    The International Aircraft Dealers Association (IADA) expects its member brokers and other aircraft transaction professionals to abide by professional standards and ethics rules under IADA’s code of ethics. To put its standards into practice, among other steps, IADA admits new members under an accreditation process administered by an independent outside firm.

    IADA is far from alone in its important efforts. By issuing its statement regarding ethical conduct, the National Air Transportation Association (NATA) strongly asserts that every member company should use these guidelines to enforce high levels of ethical behavior, safety, integrity, accountability, and respect for others. NATA urges its diverse general aviation members to use these guidelines to enforce compliance and deter wrongdoing. Further, NBAA published ethical business aviation transactions guidelines to establish core ethics and business conduct standards in transactions between buyers and sellers of business aircraft products and services.

    It’s no secret that some industry participants believe others act outside such ethical guidelines. Still, each person has a new opportunity in 2020 to renew his or her efforts to play by the applicable rules urged on them by their respective associations regardless of inconsistent or questionable behavior of others.

    ILLEGAL CHARTERS

    After seeing the FAA take multiple actions against illegal charters in 2019, you might conclude that illegal charter operations will be unstoppable in 2020. Not so.

    In my experience, most charter and on-demand flight services operate legally, will happily demonstrate their capabilities, and explain how they comply with the FARs. Unfortunately, other operators test the limits or flat out operate illegally in violation of the FARs.

    The FAA focuses on safety and enforces the FARs. Two big buckets of rules in the FARs, among others, cover legal operation of business aircraft: private flight operations under FAR Part 91 and commercial or on-demand flight operations under FAR Part 135.

    A Part 135-compliant operator must obey stringent operational, training, and other rules designed to assure passenger safety. Part 91, not so much; an operator has fewer requirements under the FARs in part because they do not, if in compliance, transport persons or property for compensation or hire as permitted for certified operators under Part 135.

    Anyone, including prospective passengers, can help curb illegal flight operations in 2020 by doing modest diligence on charter operations you observe or might use. For example, as a prospective passenger, you can potentially identify violators, reporting your concerns to the FAA and taking your charter business elsewhere. NATA’s website posts a hotline telephone number for customers or others to report violators.

    One tell-tale sign of a potential problem might appear if the price of a flight is much lower than one provided by another operator. Although that may be good news for your wallet, it might also reveal an illegal operation that lowers its prices to edge out operators that incur higher costs to comply with FAR Part 135.

    If a charter operator tells you, or you discover, that you, and not the charter operator, will exercise “operational control” of the flight, that is a red flag warning of a potential illegal charter operation under the FARs. Operational control means you will be responsible for the initiation, conduct, and termination of the flight (14 CFR 1.1), a position that puts you in the personal liability hotseat should certain things go wrong with the flight.

    For more, NATA and NBAA offer valuable materials on illegal charter operations.

    Although a bit different than illegal charter, I have seen and discussed with many colleagues illegal private operations under Part 91 categorically called “flight department companies.” Often taking the form of limited liability companies (LLCs), LLC members sometimes erroneously believe that the LLC, which has no business enterprise, can operate its aircraft and receive “compensation” from family, friends, associates, or others that “borrow” or “use” the LLC’s aircraft.

    Compensation is a very broad term in the FAA’s view and occurs in many ways, including when passengers share expenses or reimburse the LLC for aircraft operating costs. With very limited exceptions, these flight operations are illegal, prohibited under the FARs, and subject to FAA enforcement action.

    Expect both illegal charter and flight department company operations to be on the FAA’s radar in 2020, likely more so than you have ever seen before.

    BONUS DEPRECIATION AND OTHER TAX PLANNING

    A buyer committed to purchasing an aircraft should make a New Year’s resolution to analyze primary tax aspects of owning, operating, and storing the aircraft, and tax minimization structures, ideally, before signing a letter of intent to buy an aircraft. This analysis should at least cover federal income, state sales/use, and local property taxes to calculate the total tax costs of, or potential tax write-offs with respect to, acquisition and ownership of an aircraft.

    Typically, clients start with questions on claiming 100 percent “bonus depreciation,” which continues to be available in 2020. For this year, the Tax Cuts and Jobs Act of 2017 allows aircraft owners, with limitations for personal use, temporarily to take 100 percent bonus depreciation deductions on new and preowned aircraft against gross income if the taxpayer uses the aircraft in its trade or business or for production of income. (For more, see AINsight: Maximize Aircraft Bonus Depreciation in 2019 and AINsight: 100% Depreciation and Aircraft Personal Use.)

    Early in the buying experience, many buyers also express an understandable aversion to paying any property, sales, or use tax—and often believe they can avoid these taxes entirely. It is imperative to consider recent changes in law and tax rates that came into effect on January 1 and how to eliminate or reduce these taxes.

    To advance your planning, determine the expected storage/hangar location(s), project the use outside of the aircraft’s home state, and consider various structures to lease your aircraft. Also, determine if or when local tax law imposes an annual property tax on the aircraft for possible tax planning relating to the location of your aircraft on that date. Using all this information, talk with your advisors for structures and strategies that may defer, allocate, eliminate, or otherwise minimize the property, sales, and use taxes.

    Once a purchase closes, always keep accurate, clear, complete, and contemporaneous records on relevant tax-oriented facts for all federal, state, and local tax authorities. Don’t wait for an audit letter to update your books.

    ADS-B OUT PRIVACY

    The ADS-B technology mandate, which became effective January 1, has great merit for safety, flight communications accuracy, and other reasons.

    However, private third-parties can—using inexpensive, commercially available receivers—pick up the aircraft’s broadcast of its unique ICAO address and thereby capture information directly from ADS-B transmissions that an aircraft operator might prefer to remain confidential. Such information includes an aircraft’s identification, altitude, GPS positional data, and velocity.

    To address these privacy concerns, ADS-B operators should quickly evaluate and, if using 1090-MHz ADS-B equipment, decide whether to participate in the FAA’s Privacy ICAO Address (PIA) program, starting this month. In December, the FAA established an application process for operators to use and periodically change temporary ICAO aircraft addresses that aren’t tied to an operator in the Civil Aviation Registry (CAR).

    The PIA program is limited to U.S. domestic operations to avoid potential conflicts with other ICAO member states that currently do not offer this capability. That means privacy breaches might still occur on flight operations outside the U.S.

    The PIA program differs from the FAA’s new Limiting Aircraft Data Displayed (LADD) program. Operators that do not wish to allow the FAA to share aircraft data the FAA receives, including tail number, call sign, and flight number, can submit LADD requests via FAA’s dedicated LADD website. The LADD program, which replaces the Block Aircraft Registry Request (BARR) program, does not impact the ADS-B broadcast data, which, as noted, transmits information directly to capable receivers.

    For maximum privacy domestically in the U.S., sign up for both the PIA and LADD programs.

    INSURANCE TURBULENCE FOR OWNERS, OPERATORS, LESSORS, AND LENDERS 

    If you plan to buy or renew insurance coverage in 2020, buckle up. Plagued by years of huge payouts and financial losses, some insurers have exited the market, resulting in reduced liability insurance capacity for all aircraft and much higher premiums (anecdotally, 20 percent to up to 300 percent of 2019 rates).

    The best operators should still be able to maintain or even improve coverage in 2020 at higher premiums provided their insurers agree that the customers have a stellar safety record, outstanding training programs, and experienced pilots with high hours in the type of aircraft insured by the carrier. The story is different for single-pilot, owner/operated aircraft or new pilots who might not be able to find insurance at any price or, if insurance is available, must accept reduced liability limits at higher premiums than in 2019.

    Lenders and lessors might have a different predicament. From transactional activity in 2019, it seems financiers generally required and successfully obtained yesteryear’s high liability insurance limits. In 2020, lenders and lessors may have to ease back on their demands for such high liability insurance levels and concentrate more on property damage coverage.

    In supporting this easing, lenders and lessors can point to a 2018 federal law amendment that might facilitate approving transactions with reduced liability insurance limits. Under 49 U.S. Code § 44112, Limitation of liability, Congress provided a preemptory shield of business aircraft lessors and lenders from personal injury and property damage liability if they do not have possession or control over the aircraft at the time of the accident.

    Customers should contact specialized aviation insurance brokers well before signing a purchase agreement in 2020, to allow much more time than the week before closing to find insurance with the best terms and lowest cost. (For more, see AINsight: Limiting Risk as Liability Insurance Tightens.)

    CONCLUSION 

    Amid the many challenges that business aviation will face in 2020, rather than debate the topics above for long, it is more important to take action now and throughout the new decade for the benefit of clients, customers, and colleagues involved in the business aviation industry. Will you take action and suggest others do too?

    This article was originally published by AINonline on January 10, 2020.

     

  • Tracey Cheek posted an article
    Insurance Will Not Cover An Unqualified Pilot in Command see more

    NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses aircraft insurance coverage regarding an unqualified pilot in command. 

    If you buy insurance to cover the aircraft you own or fly, you want to make sure the policy covers you and your aircraft if you ever have a problem. It is important to understand that your insurance policy is a contract between you and your insurer. That contract has terms and conditions that spell out the rights and responsibilities of both you the aircraft owner and/or pilot and the insurer.

    As you may be aware, if an aircraft owner and/or pilot does not comply with the requirements of the insurance contract, the insurer can deny coverage. This can sometimes lead to arguments between the insurance company and the insured aircraft owner or pilot.

    This was the situation in one recent case in which the insurance company denied coverage to an aircraft owner whose aircraft was destroyed during an emergency landing. In Hund v. Nat’l Union Fire Ins. Co. of Pittsburgh (D. Kan., 2019), the aircraft owner was flying his aircraft along with another pilot. During the flight the aircraft’s engine experienced a loss of power and the other pilot—who was piloting the plane at the time—told the aircraft owner “your airplane,” at which point the aircraft owner assumed the role of pilot in command and attempted to restart the engine. Unfortunately, the aircraft owner was unable to restart the engine and was forced to perform the emergency landing that resulted in the destruction of the aircraft. After the accident, the aircraft owner submitted a claim to his insurer for the value of his aircraft.

    In determining whether to pay the claim, the insurer looked to the insurance policy which addressed coverage for both the aircraft owner as a named insured, and for other pilots operating the aircraft. The policy conditioned coverage on compliance with the policy’s “Pilots Endorsement” which required, unsurprisingly, that the pilot in command have a valid FAA pilot certificate, a current and valid FAA medical certificate, if required, and a current and valid flight review.

    Unfortunately, neither the aircraft owner nor the other pilot satisfied these conditions: The aircraft owner possessed a current flight review, but not a current medical certificate; the other pilot did not have a current flight review. Although these facts were undisputed, the aircraft owner argued that 14 C.F.R. § 91.3(b) suspended the policy requirements during an in-flight emergency, which he and the other pilot faced during the emergency landing.

    14 C.F.R. § 91.3(b) provides that “[i]n an in-flight emergency requiring immediate action, the pilot in command may deviate from any rule of this part to the extent required to meet that emergency.” Specifically, the aircraft owner argued that § 91.3(b)’s emergency rule was in effect when he assumed control from the other pilot, and the emergency rules “suspended all other rules” except to do what is necessary to respond to the emergency. The insurer didn’t agree, and neither did the Court when the aircraft owner sued his insurer for denying his claim.

    The Court initially observed that Section 91.3(b) allows a pilot in command to “deviate from any rule of this part to the extent required to meet that emergency.” It then concluded that Section 91.3(b) applied only to the rules in Part 91, and not the regulations governing pilot qualifications in 14 C.F.R. Part 61.

    Makes sense to me. Certainly, the aircraft owner’s argument was creative. But I agree that the plain language of the insurance policy and the regulations are inconsistent with that argument.

    The moral of the story? If you are going to act as pilot in command, make sure you satisfy both the applicable regulations, as well as the requirements of any insurance policy covering the aircraft you are flying.

    This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP, on April 1, 2019.

  • Tracey Cheek posted an article
    Title Insurance Ensures a Clean Title see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about title insurance.

    One aircraft owner recently shared his story that might be illustrative. When he bought his first airplane, a used C-182. The buyer entered into an agreement to purchase the aircraft from a respected aircraft dealer, however, after the transaction was supposed to have closed things quickly unraveled. The dealer had set up escrow with a small title company and the buyer trusted this firm was competent to coordinate the closing. Unfortunately, the escrow company never properly filed documents or distributed proceeds to the appropriate parties. After a lot of finger-pointing, the seller no longer had clear title to the plane, the buyer did not have possession of the plane, his lender was still expecting him to make payments and the dealer had a huge headache! 

    Eventually the seller got paid, the buyer got the plane and the lender began receiving loan payment but not without each of them having to expend tens of thousands of dollars on legal expenses. Had the owner obtained title insurance (along with a lender policy), they and their lender would have had all their legal expenses covered. More importantly though, the event would not likely have happened as the title insurance company would have ensured the buyer was working with a competent title and escrow company.

    Title insurance "is a contract between the insurance company and the insured that protects the title of the insured on a specific aircraft from risk and challenges to the insured’s title arising from covered events.” Events like improper lien filings.

    Or like when a title search done as part of a normal sale and the title initially comes up clean. The deal closes, but a mechanic’s shop finds out about the transaction. The shop manages to file a lien just post-closing, however, the FAA accepts the lien after the fact. The new owner now is unaware of this cloud on their title.

    Another instance is when a bank's lien release is not properly filed during a sale. The sale goes through, but the FAA subsequently rejects it due to an improperly executed lien release. Again, the owner isn’t notified so remains unaware of the cloud now on the title.

    Only when it’s time to sell the aircraft, and the new buyer conducts a title search do these issues typically get discovered. It could be a simple paperwork issue. But what if it’s not? What if the bank that held that loan is no longer in aircraft lending? Or what if it's merged with another bank that does not make aircraft loans? Without title insurance, the burden and the cost of clearing the title will fall upon the aircraft owner.

    What if a title search reveals a previously unknown tax or mechanic's lien on your aircraft? Big trouble. Usually, the courts will subordinate your rights to those of the lienholder regardless of how vigorously you spend to defend your position as the owner. Whichever individual or entity has the lien can legally take possession. At AAF, we've seen this happen. A bank or a shop will give notice of intent to take possession and liquidate aircraft.

    Let’s say a $100,000 airplane gets seized because of a $50,000 lien. The aircraft owner must satisfy the $50,000 to the lienholder to recover their airplane. If they choose not to, the lienholder can sell it. If that entity can only get $80,000 for the airplane, then the net to the owner would be $30,000-- assuming they paid cash for it. If the aircraft had been financed, that $30K goes to the lender. The owner is left with no aircraft, no equity, yet with a loan still outstanding.

    Title insurance removes uncertainty. If necessary, title insurance provides, at no cost to the insured, a legal defense team to defend or assert the insured’s title in court. If the court rules that another entity has superior title, the company will pay for loss of title. That’s a lot of peace of mind for not a lot of money.

    This article was originally published by AOPA Finance on September 17, 2019.

  • Tracey Cheek posted an article
    Limiting Risk as Liability Insurance Tightens see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares what you need to know about liability insurance.

    If you think you can call your insurance broker and secure aircraft insurance just days before you close an aircraft purchase or renew liability coverage, think again. Insurance companies have changed the underwriting game after more than a decade of losing money.

    In the last two years, many underwriters have exited aviation insurance while the remaining carriers have tightened up underwriting standards, reduced coverage limits, and increased premiums for liability coverage. These changes have impacted nearly all insureds in some fashion, including many receiving invoices with substantial premium increases. Worse still, owner-pilot and single-pilot aircraft have nearly run out of gas in finding adequate or any liability insurance coverage.

    This tightening aircraft insurance market requires aircraft owners and operators to allow significant lead time to search for insurance when buying an aircraft or renewing existing policies. In addition, legal entity structuring and contractual agreements designed to mitigate the risk of personal liability have become more important as insurance underwriters clamp down.

    Liability insurance typically applies to, and is often purchased by, an aircraft owner or operator as the “named insured.” The insurance indemnifies, or pays for, liability of the named insured and, when included in policies, other parties, identified as “additional insureds,” that have an interest in the aircraft or related liability risks. The obligation of the insurer to pay for potential losses is referred to generally as the “duty to indemnify” insureds. The insurance indemnifies for bodily injury, including death, incurred by someone other than the named or additional insured. Coverage should respond when claims arise out of the ownership, maintenance or use of the insured aircraft. For example, liability coverage should respond to a crash on takeoff or a collision of two aircraft on an airport ramp.

    Problems Illustrated

    To help put market challenges in context, consider two hypothetical situations.

    In the first case, a flight department operates for Big Co., a corporation with significant business operations that is owned privately by one family (Big Co.). The flight department employs professional pilots. Big Co. operates its aircraft under FAR Part 91. The fleet consists of three large cabin and three light jets. One pilot usually operates the light jets.

    Big Co. carried $300 million per occurrence in liability coverage in 2018 but at renewal in 2019, Big Co. could only obtain $100 million per occurrence for the light jets. Big Co. kept the high limits on the large cabin aircraft but absorbed a 25 percent premium increase.

    The carrier informed Big Co. that the light jets dragged down the original insurance limits and warned Big Co. that, in the next renewal into 2021, the underwriter may be able to insure the light jets only if Big Co. operates them with two pilots.

    In the second case, a prospective aircraft owner, an ultra-high-net-worth individual (UHNWI), formed an LLC of which HW is the sole member/owner. The UHNWI client signed an aircraft purchase agreement to buy a $5 million preowned turboprop from the manufacturer but could only secure $1 million of liability coverage at a surprisingly high premium. When the client agreed with the underwriter that a professional pilot would fly the aircraft for a year while the client developed skills and knowledge on how to operate the aircraft, the insurer reluctantly increased coverage to $5 million. The client originally planned to buy 10 times that coverage.

    Strategies

    As the aviation insurance market tightens, many, but not all, owners and operators seeking coverage will either pay higher premiums or be unable to purchase adequate or any coverage. In this new reality, potential owners or operators should engage, or continue to use, a specialized aviation insurance broker (not general lines brokers) to assist in purchasing, modifying or renewing coverage.

    Waiting too long to transact with carriers is hazardous in today’s market as illustrated in the Big Co. and UHNWIsituations, as underwriters seem to be circumspect about accepting or renewing certain underwriting risks, especially for single pilot aircraft. The broker should act as a trusted advisor, exhibit deep knowledge of underwriter capacity and focus quickly on policy provisions that exist or must be modified to optimize protection of the particular aircraft owner or operator.

    In addition to an insurer’s “duty to indemnify” discussed above, insurers also have a “duty to defend” their insureds against liability claims for which potential coverage may arise under a liability insurance policy. The duty to defend is significant, financially and legally, for an insured. Even a small incident can run up significant legal fees regardless of the insurance coverage limits or disposition of the claim.

    For this reason, even low limit liability policy coverage may have significant value to an insured when the insurer and not the insured foots the legal bill.

    However, it’s critical to know when the insurance company can stop paying legal fees, which varies based on the circumstances, policy terms and state law. At that point, the insurance company may be out but the burden to pay legal bills may continue for an owner or operator such as Big Co. or the UHNWI client.

    Legal Steps To Mitigate Liability Risk

    For insureds facing payment demands for successful claims in excess of policy limits, claimants may, and will almost certainly attempt to, overcome legal barriers so they can tap into an owner’s or operator’s personal assets. However, certain structures or contractual strategies may mitigate risk for owners and operators.

    Choice of the Right Owner/Operator Entity. Deeply rooted in state law, various types of entities, if properly structured and managed, can mitigate personal liability of aircraft owners and operators, including certain LLCs, corporations and trusts.

    • LLCs. Private aircraft owners widely believe that LLCs that have no function other than to own their aircraft will shield them from personal liability. In the UHNWI client’s case, they are the sole LLC member. Claimants will almost certainly sue the UHNWI and the LLC and, with a money judgment in hand, seek to pierce the LLC veil and force the UHNWI personally to pay for damages in excess of insurance coverage. This risk is particularly acute if the UHNWI exercises operational control of the aircraft or if liability arises concurrently with a violation of the FARs (see “AINsight: Piercing the Aircraft LLC Veil”). Variations on LLC structures and proper legal management of the LLC company might reinforce its shield against a claimant.
    • Corporations. In the Big Co. example, Big Co. is a corporation, which like other corporations, is designed under state law to shield its shareholders from third party claims against Big Co. However, Big Co., as the aircraft owner, might still be liable for claims in excess of insurance. And the payment by Big Co. itself could, of course, reduce the value of Big Co. to the family that owns it. Placing aircraft in an affiliated company with a lower shareholder value might provide more protection for Big Co. itself and preserve more of the net worth of the family owners.
    • Trusts. Three types of trusts deserve mention, two of which might provide some protection against liability claims. A “statutory trust,” which is a creature of state statutes, protects beneficial owners from liability like shareholders of a corporation. An “irrevocable trust,” often created for estate planning and tax purposes, might protect its beneficiaries from claims because the beneficiary does not own, and claimants should not therefore be able to access, the trust assets as a result of the beneficiary’s liability. A “grantor trust,” often used for compliance with the FARs or asset management, is a pure “pass-through entity” for a beneficiary and is very unlikely to afford any protection to the beneficiary from third-party claims.

    Operate under Part 135. In both examples of Big Co. and the UHNWI client, the owners operate under Part 91 where each of them maintains “operational control” under the FARs. As such, they have direct responsibility for the flights and potential liability for their actions as operators. By contrast, if Big Co. or the UHNWI hires a Part 135 on demand air carrier, the air carrier exercises operational control and thereby takes responsibility for liability arising from the flight’s initiation, conduct, and termination under its air operator certificate.

    Although Big Co. might mitigate its risk of liability by hiring a Part 135 operator, the UHNWI intends to fly his or her own aircraft under Part 91 only. The UHNWI, therefore, needs to look even more closely at other structures to protect themselves against liability in excess of insurance limits, assuming insurance is even available.

    By hiring a Part 135 operator, Big Co. can also access the fleet insurance policy of the operator with more comprehensive coverage including acceptable liability limits. Before signing on to the fleet coverage, Big Co. should investigate whether Big Co. can separately procure superior insurance.

    Contractual Indemnification and Waivers. If an owner or operator does not hire a Part 135 operator or cannot purchase adequate liability insurance, the owner or operator can try to spread risk to other potential claimants by obtaining contractual indemnities from them that connects to that party’s insurance.

    To make this work, the party that indemnifies the owner or operator, such as the UHNWI or Big Co., must modify that party’s insurance policy to obtain a blanket contractual liability coverage through and with the approval of the underwriter—not an easy task.

    Even if the insurance company rejects contractual liability inclusion, an insured can still reduce exposure by asking third parties to waive their rights and claims against the insured in selected circumstances. For example, the UHNWI might try to obtain a liability waiver from their passengers or fuel suppliers (assuming the UHNWI’s compliance with the FARs).

    Conclusion

    In today’s aviation insurance market, underwriters have hit the brakes on issuing cheap and unprofitable aircraft insurance policies. No longer can owners and operators wait until the last moment before aircraft delivery or a renewal date to place, renew or modify aircraft insurance. Quite to the contrary, owners and operators should continuously monitor insurance placement, legal structuring and contractual negotiations to mitigate risk or allocate liability among appropriate parties.

    Many aspects of private aviation transactions benefit from using industry experts to guide owners and operators. It is clear that insurance, regulatory, and transaction expertise in the current insurance market is not optional.

    This article was originally published by AINonline on November 8, 2019.

  • Tracey Cheek posted an article
    Aircraft Insurance Considerations In A Tightening Insurance Market see more

    NAFA member Amanda Applegate, Partner with Aerlex Law Group, discusses what to consider when deciding on aviation insurance coverage.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published by Aerlex Law Group in BusinessAir Magazine, the Latest, on October 16, 2019.

  • Tracey Cheek posted an article
    Aircraft Insurance Trends Upward - “A change is gonna come…” see more

    Competition among underwriters has kept aviation insurance rates low for more than a decade – unsustainably low. That’s why those good times have come to an end, resulting in fewer insurers, tighter underwriting standards, and more scrutiny of pilot experience and training – creating today’s hard market with increased rates.

    But that’s history. What’s in the cards for 2020 – and beyond – and what can you do to hold the line on increased overhead cost?

    Stephen P. Johns, LL Johns Aviation Insurance, and John Brogan, USAIG president, discuss the market and give you some helpful advice in Aircraft Insurance Trends Upward.

    When there’s more to be said than space and copy deadlines allow, you can rely on the Business Aviation Advisor “Above and Beyond” podcast series to get you the information you need, enabling you to make the most of your aviation investments.

    Thanks for reading – and listening!

    This article was originally published by Business Aviation Advisor on October 29, 2019.

  • Tracey Cheek posted an article
    What Are The Benefits Of Title Insurance For An Airplane Purchase? see more

    NAFA member Adam Meredith, President of AOPA Aviation Finance Company, answers your questions about title insurance when purchasing an airplane.

    Question: I’m planning to purchase a used airplane in the next 6-months. I’ve heard some owners talk about not needing title insurance? Wouldn’t this be required by a lender? I’m familiar with title insurance for a home purchase, but what exactly are the benefits of title insurance for an airplane purchase?

    Answer: Surprisingly, no, many lenders do not currently require title insurance on every transaction. 

    Similar to a home, your aircraft also has a title history which should be reviewed before buying. While most AOPA members know the importance of this and perform a title search prior to buying an aircraft, many may not know there are numerous scenarios where a lien or claim can end up in the FAA registry and/or otherwise “clouding” your ownership interest. By obtaining title insurance, the title insurance company will defend you legally against any bogus claims.  

    Question: I would like to purchase my first airplane this year. My price range is about $50k.  I’ve been looking at your website and the list of financial documents you will require, especially for a business owner like myself, seems daunting. Are there any other options for someone like me? I have good credit and good cash flow.

    Answer: While providing the full list of financial documents gives you the most lending options, some of our lenders do offer low doc products. The underwriting guidelines tend to be more constrained, however, for well-qualified borrowers all that is needed is an application. Because this product does not require supporting financials rates will average .25-.75% higher than our most competitive options. If you are interested in more details about this low doc option, please give us a call and we can give you a more specific rate quote.

    This article was originally published by AOPA Aviation Finance Company on May 3, 2019.

  • Tracey Cheek posted an article
    Aircraft Insurance Rates Take Off: Upward Trend in 2018, First in 16 Years see more

    NAFA member Stephen P. Johns, CIC, President of LL Johns Aviation Insurance, discusses the upward trend in aircraft insurance rates.

    In early 2018, most buyers began hearing that their aircraft insurance rates would be increasing for the first time in years. Rate increases of 3-5% for operators with clean loss records were common, and 15% for those who’d had claims. By the end of 2018, claims-free operators were seeing 10-15% rate increases, and those with claims history even higher.

    What Precipitated the Rise?

    After some upward movement in 2000-2001, the events of 9/11 had a significant impact on rates, especially on war-risk pricing and availability. One business jet operator watched premiums rise from $59,000 in December 2000 to more than $113,000 in December 2002. 

    By early 2003, rates began to plateau and then trend downward.  For much of the aviation industry, the ensuing “soft market” – rate reductions and broadening of coverages – continued uninterrupted for almost 16 years.

    From 2005 through 2010, the number of insurers providing aviation insurance in the U.S. grew from 9 to more than 20. These new entrants were not new to the insurance business – most were sizeable companies electing to enter the aviation segment. As new and longer-standing aviation insurers scrambled to gain and maintain market-share, rates fell, limits increased, contract language broadened, and underwriting disciplines relaxed.  

    Why the excess capacity in the aviation insurance market during the last decade? Is it the faltering economy and stock market that caused investors seeking a safe haven to infuse capital in the market? Is it that better technology and improved safety systems have resulted in safer operations and reduced claims?    

    Whatever the reasons, rates were reduced to artificially low levels, unsustainable over time. In 2018, six reinsurance companies and a number of underwriting companies pulled out of the market. Those remaining are consistently seeking rate increases, limit reductions, and tightening of underwriting standards.

    And it’s not only the rates that are changing. Underwriters also are becoming more judicious with limits offered and other policy provisions. Since it’s now harder to hire and retain pilots, underwriters are giving more scrutiny to pilot experience and training.  There’s a move back toward the “12 month motion based simulator” training requirements that were non-negotiable in the 80s and 90s.

    What Can You Expect in 2019?

    The hard market will remain and rates will continue to increase for most operators, at the rate of 15% or more. The potential loss of market share will begin to test the resolve of the insurance companies and determine whether these increases will continue throughout the year.   

    Back to that operator whose premium nearly doubled from 2000 to 2002. While he’d benefited from the “soft market,” by December 2018, he was paying less than $44,000 in premium for the same coverage limits. If this aircraft operator’s rate increases by the expected 15%, he still will be at only $50,600, approximately 15% below the rate level he paid in 2000.

    What Can You Do? 

    Even top flight departments with no claims should expect some upward movement in rates, so budget accordingly. Particularly if your operation has a loss history, start the renewal process early – about 120 days before policy expiration – providing updated information on the aircraft, pilot hours and training, and evidence of the safety and professionalism of your operation. This gives your broker time to approach new markets on your behalf, or to suggest you stay long-term with one underwriter, as there are costs other than the premium to consider.  

    As Colin Powell once said, “Bad news isn’t wine. It doesn’t get better with age.” An experienced and trusted broker with good underwriter relationships will help you navigate the process. 

    Finally, keep the increases in perspective. While no buyer likes to see prices going up, it’s remarkable that aircraft insurance in 2019 may cost less than it did in 2000!

    This article was originally published by Business Aviation Advisor on March 1, 2019.

  • Tracey Cheek posted an article
    Preparing for an Aircraft Purchase: How to Become the Most Prepared and Qualified Buyer see more

    NAFA member, Amanda Applegate, Partner at Aerlex Law Group, shares tips on how you can become the most prepared and qualified buyer when purchasing an aircraft.

    As the supply for quality pre-owned aircraft inventory has begun to shrink (especially in certain large cabin models), I see more buyers devoting time to advance preparations to ensure that they are perceived by sellers as the most qualified, attractive buyer. If you are in the market for an aircraft and want to expedite your purchase and closing, consider taking the following steps prior to making your first offer.

    BUILD YOUR ACQUISITION TEAM EARLY & PRIOR TO THE FIRST OFFER
    Aircraft Broker/Consultant – Select a consultant or broker who knows the global market for the aircraft type you are purchasing. The broker/consultant must also be respected among his peers. There are certainly instances when an offer is not taken as seriously if the broker representing the buyer lacks experience with the particular category of aircraft being sought or has had previous conflicts with the broker on the other side.

    Aviation Counsel – Retain counsel in advance so she is ready to jump into a deal once the aircraft is selected. This will save valuable time later. Including a provision in the Letter of Intent (“LOI”) that the buyer will have an initial purchase agreement to the seller within three days of signing of the LOI will be very appealing to a seller. But this can only happen if aviation counsel has already been identified, retained, and is up-to-speed on the specifics of the deal.

    Technical Representative – Hire the right technical expert so that he is ready to start immediately once the aircraft is identified. The technical representative will review aircraft maintenance records and identify any inspection items that must be rectified. The technical representative can also help determine which aircraft is the best aircraft to make an offer on, based on aircraft pedigree.

    Lender – As in all transactions, sellers prefer cash deals. But if the aircraft is going to be financed, contact lenders and select a lending partner before a specific aircraft is chosen so that lenders are able to close quickly once the aircraft is identified.

    Management Company – Is the aircraft going to be managed by a third-party provider? Will charter be allowed on the aircraft when not being used by the aircraft owner? Selection of a management company early in the process means you will have the management company acting as your advocate throughout the acquisition. Many management companies don’t start charging management fees until the aircraft is acquired, so there is valuable advice available at little cost by selecting early.

    Insurance Broker – Decide if the insurance will be procured through the management company or if you need an insurance broker to provide the comprehensive coverage to diminish liability concerns.

    Escrow Agent – Identify your escrow agent and obtain their wire instructions so you are ready to send a deposit as soon as you have an accepted LOI. This demonstrates to the seller that you are a committed buyer.

    ESTABLISH YOUR OWNERSHIP STRUCTURE

    Your aviation counsel can help you determine the following: What entity will own the aircraft? Does the proposed structure make the most sense, based on the intended use of the aircraft and the potential tax implications for those who will use the aircraft? Is the ownership structure legal under the Federal Aviation Regulations?

    Retain a qualified aviation tax attorney and CPA who can review the ownership structure to make sure it is the best tax-plan available. 

    What are the sales and use tax consequences of the ownership structure?

    Are there adequate liability protections under the ownership structure or at least adequate insurance for all parties involved in the ownership structure?

    DON’T SWEAT THE SMALL STUFF

    There are a number of miscellaneous items that often get negotiated in the LOI and purchase agreement. These items comprise a small amount of the overall transaction cost, and having flexibility on them may make your offer stand out. Understanding the cost of these items and your position on them before the LOI may allow your offer to appear more competitive than another offer. One approach is to have the seller pay all of these costs and then adjust the purchase price higher since that is the number the seller will most likely focus on. Some of the small items are Escrow Fees, Aircraft Movement Costs, Customs and Registration Change Fees (if applicable), and Registration Number Change Fees.

    Spending time and effort at the beginning of the aircraft acquisition process to prepare as much as possible, can lower the naturally-occurring stressors related to aircraft transactions.

    Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.

    This article was originally published in BusinessAir Magazine, May 2019, Volume 29, No. 5.

  • Tracey Cheek posted an article
    Airplane Acquisition Checklist Series: Part Two: Purchase and Delivery see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, follows up with part two of the Airplane Acquisition Checklist covering Purchase and Delivery.

    In Part 1 of this series on airplane acquisition, we discussed the most efficient way to approach buying an aircraft by using three checklists—Pre-purchase, Purchase and Aircraft Delivery. We also detailed the Pre-purchase Checklist.

    You're now staring at your ideal airplane on your screen. Time to run the Purchase Checklist:

    • Escrow, Letter of Intent and Purchase Agreement
    • Notify Lender
    • Pre-purchase Inspection
    • International Registry (if applicable)
    • Insurance
    • Title Search and Background Checks

    Escrow, Letter of Intent and Purchase Agreement. Escrow appears in all three checklists. Before it was a reminder to get your down payment together. Now it triggers you to move money into an escrow account that you set up through your escrow agent. If you're unfamiliar, AOPA has a strategic partnership with Aerospace Reports and as a member you’ll get discounted pricing and we can help get things set up. Likewise, if you’re working with another escrow company AOPA Finance can help coordinate that too. Plan on a deposit of 5%-10% of the aircraft's asking price.

    The letter of intent puts a clock on the deal, enables you to withdraw from it without penalty under certain conditions you and the seller negotiate, and establishes the parameters for the final price.

    This is also time to have your aviation attorney to draw up a detailed purchase agreement. If you don't have one, AOPA has a sample purchase agreement you can view here. You may want to consider signing up for Pilot Protection Services which includes consultation with an attorney regarding your purchase of an aircraft specific to your state and the legal requirements there. What it covers includes, but is not limited to, purchase amount, refund terms, deadlines for the process, representations and warranties, even the location of aircraft delivery.

    Notify Lender. The sooner you notify the lender, the sooner the lender can convert the pre-approval into an approval. Your lender will conduct background checks, damage history queries, etc. If the aircraft is missing logbooks, that may affect the stipulations of the pre-approval with the lender. Each has a set of tolerances for missing logbooks. Ask before you commit to a particular lender. AOPA Finance may be able to help.

    Pre-purchase Inspection. Even before you go to the airplane, have the logbooks sent to you. Nowadays, most sellers have their airframe and engine logbooks scanned into PDF format for ease of emailing. Get your mechanic started perusing those logs. You and your lender will want to know whether the logbooks are complete as soon as possible. An incomplete set can frequently impact the final price, and it may also affect the plane's insurability.

    In most instances, it's best that a mechanic other than the regular mechanic for that airplane perform the pre-purchase inspection. That may mean flying your assigned A&P to the airplane's location, with a hotel stay.

    International Registry. If your plane is subject to the Cape Town Treaty (see here for more info), you should begin the International Registry process simultaneously with contacting your escrow agent. It's complex and time-consuming and may affect the timing of your closing date. Subject to some exceptions, an aircraft must be registered with an appropriate aviation authority before it can be legally operated in any country. Suffice it to say, better to have your team of experts handle this checklist item.

    Insurance. As far as your lender is concerned, typically, they’ll require you to maintain full ground and flight insurance, as well as "Breach of Warranty Coverage" for the amount of the loan with a carrier acceptable to the lender.

    The lender must be named as "loss payee" and be protected by a "lien holder's endorsement." Once you have been placed with the appropriate lender, we will send you the specific insurance requirements for that lender.

    Title Search and Background Checks. Usually, this will be a straightforward process. If a plane has been in an incident, involved in an estate dispute or part of a bankruptcy, though, then things could get complicated. Your prospective insurer, your lender and your escrow agent may all play a part in these searches and checks. We've heard too many stories of airplane deals falling through at the last minute because of lack of due diligence by the buyer, so be thorough.

    All that complete, what's left is to take delivery. There's one last checklist to run—the Aircraft Delivery Checklist:

    • Punch List
    • Technical Acceptance
    • Escrow
    • Closing and Delivery

    Punch List. Here's where the due diligence of your title, escrow or insurance representatives pays off. They'll work with you to clear up any liens or estate claims. Similarly, the list of deficiencies and discrepancies your mechanic delivered will have been either rectified or negotiated into a lower price.

    Technical Acceptance. Once the Punch List is complete, the buyer then executes and delivers a Technical Acceptance Certificate to the seller. This says the buyer accepts the condition of the aircraft, subject to "no material damage and/or total loss affecting the aircraft upon or prior to arrival of the aircraft at the delivery location." The deposit usually becomes non-refundable at this stage.

    Escrow. The remaining purchase price is deposited into the escrow account, and the seller is paid.

    Closing and Delivery. The title is transferred and the aircraft is registered to the new owner, once the new owner insures it. Finally, the aircraft is turned over or delivered to you. Congratulations.

    Considering aircraft ownership? AOPA Aviation Finance will make your purchase experience as smooth as possible. For information about aircraft financing, please visit the website (www.aopafinance.com) or call 1-800-62-PLANE (75263).

    Click here for The Acquisition Checklist: Part One

    This article was originally published by AOPA Aviation Finance Company on March 5, 2019.

  • Tracey Cheek posted an article
    AINsight: Tip to Tail—Buying New vs. Used Bizjets, ADS-B Out, ADS-B, TCJA, aircraft transactions, see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses unique perspectives of OEMs on negotiating sales and dispute resolution as well as planning for ownership.

    Purchasing a new business jet from the manufacturer (OEM) is a far different transaction than buying a used aircraft from a private third party. And planning for aircraft ownership is also part of this story.

    The contrast in new versus used aircraft is especially pronounced when the used aircraft does not comply with the FAA’s January 1, 2020 Automatic Dependent Surveillance-Broadcast (ADS-B Out) mandate. The lack of ADS-B Out compliance almost certainly will alter the negotiation for such used aircraft and, if the aircraft is not compliant by 2020, it could morph into a fancy paperweight. New OEM aircraft already comply with ADS-B Out requirements.

    This blog covers a few significant strategic, legal, and negotiating differences relating to new and preowned aircraft sale deals and briefly touches on ownership tax planning, risk management, regulatory compliance, and financing/leasing. This blog also briefly touches on OEMs’ perspectives on negotiation and dispute resolution.

    WHAT'S FOR SALE?

    The big-money aspects of a new aircraft deal start by selecting the right aircraft from the OEM and negotiating the aircraft purchase price. Unlike used aircraft deals, OEM agreements include terms on such items as upgrades, installment payment amounts, and pilot and technician training.

    The used aircraft market enjoyed a record year of sales in 2018 that depleted much of the desirable inventory. However, some experts suggest that the cost of ADS-B equipage and a slowing global economy may cause more used aircraft to come to market in the near term; and the lack of ADS-B Out technology may prolong or complicate buy/sell negotiations even if more aircraft become available.

    When purchasing a new or used aircraft, the parties should engage a team of knowledgeable business aviation experts, consisting primarily of an experienced aircraft broker, a technical inspector/analyst, accounting tax advisor, aviation counsel, aircraft management company, insurance broker, and capable title company or special FAA counsel. A non-aviation participant on the buy or sell side can make transactions more difficult or inefficient for experienced buy/sell teams and their principals.

    Every used aircraft should (but surprisingly does not always) undergo a “pre-buy” inspection before a purchase occurs. The inspection should involve technical experts that delve into the records of the aircraft, ADS-B Out compliance, and the physical/mechanical condition of and required repairs to the aircraft. Counsel should conduct or order title, lien, and other searches at the FAA and on the International Registry with a focus on understanding the domestic and any international ownership since birth of the aircraft.

    For new OEM aircraft, the pre-buy inspection process is dissimilar to preowned aircraft, so much so that OEMs often say that an independent inspection of a factory-new aircraft is unnecessary and the OEM can handle everything from contract to delivery.

    Although some purchasers accept exclusive OEM oversight, all purchasers should still consider engaging a technical expert to interact with the OEM’s teams and inspect the aircraft during construction, knowing that OEMs usually will facilitate such inspections but with appropriate limits. Fundamentally, the expert can assure the purchaser that the aircraft conforms to the agreed specifications and the OEM delivers the aircraft in pristine condition. Also, the parties should always conduct legal diligence similar to a used aircraft sale.

    CONTRACT NEGOTIATIONS AND DISPUTE RESOLUTION

    Contractual provisions for used and OEM purchases have some common terms as well as major differences. OEMs believe the form of purchase and sale agreement they provide to their customers works well with few changes. Consequently, the extent of document revisions negotiated and accepted by an OEM may, but not always, pale in comparison to extensive changes drafted into used aircraft purchase agreements.

    OEM contracts personnel, most of whom are not lawyers, have flexibility to make reasonable contract revisions, but their authority has well-honed limits. For example, their authority probably does not extend to accepting unusual revisions, settling a dispute, or altering fundamental OEM liability protections. Accordingly, purchasers should expect these contracts people to seek authority from senior managers or general counsel for revisions to obtain policy or legal guidance on an acceptable contract revision or dispute management.

    For OEMs, each customer and its sale agreement is unique. As such, OEMs uniformly frown on aviation counsel using as precedent sale agreement provisions negotiated in other unrelated transactions with the selling OEM or other OEMs. However, aviation counsel can add value in serving their clients by using their prior experiences to negotiate appropriate terms in the current deal.

    If a customer alleges material breaches by or makes serious litigious claims against the OEM, most OEM general counsel or his/her inside litigation counsel step in and try to reach an accommodation or, if necessary, circle the wagons to protect the OEM’s interests.

    OWNERSHIP PLANNING

    Under the Tax Cuts and Jobs Act of 2017, buyers of new aircraft, like used aircraft buyers, may use 100 percent bonus depreciation if the aircraft buyer qualifies for the tax benefit. Planning for ownership is critical to successful tax structuring. For more, read AINsight: 100% Depreciation and Aircraft Personal Use and AINsight: Maximize Aircraft Bonus Depreciation in 2019.

    A purchaser of a new aircraft can potentially obtain a financing benefit that does not apply to used aircraft. Lenders and lessors often agree to fund installment payments to the OEM as the OEM invoices the customer during construction and upon delivery of the aircraft. In addition, these lenders or lessors are often willing to convert the installment payment arrangement into a long-term loan or lease. Either financing or leasing provides substantial benefits to the parties but requires some additional effort to negotiate the agreements. For more, read  AINsight: Should You Finance or Lease a Bizjet?.

    Business aviation insurance brokers not only place appropriate insurance coverage but also can negotiate effectively with aviation underwriters. Purchasers of used and new aircraft generally understand that insurance is a crucial piece of protecting themselves from liability and property damage. However, they may not fully appreciate that a limited liability company (LLC) that buys the aircraft may not provide the LLC owner with the anticipated liability protection. For more, read AINsight: Piercing the Aircraft LLC Veil.

    Operations of private aircraft under Part 91 (private use) or Part 135 (charter use) in the U.S. demand compliance with the applicable regulations by owners and operators of all aircraft. For example, owners of all aircraft must keep their aircraft in the condition required by the applicable regulations for flight operations, not conduct illegal charter operations, and meet technology requirements, including ADS-B Out. Importantly, the FAAis looking for violators of the regulations, in part as described in AINsight: FAA Actively Pursues Illegal Flight Ops.

    Although purchase transactions of new and used aircraft share certain similar elements, they differ in significant respects. Assisted by knowledgeable professionals, a purchaser can and should address business, tax, financing/leasing, risk management, and regulatory issues as part of each deal. A reasonable and pragmatic approach to these transactions should foster amicable negotiations and ultimately produce the right travel solution for the purchaser.

    This article was originally published in AINonline on May 9, 2019.

  • NAFA Administrator posted an article
    Podcast: Business & Legal Issues to Consider When Acquiring An Aircraft see more

    David Mayer, a Partner with the law firm of Shackelford, Bowen, McKinley & Norton, LLP, discusses some of the business and legal issues one should consider when acquiring a new or pre-owned aircraft.  Topics covered include:

    • The kinds of business professionals a buyer should engage for an aircraft purchase.
    • The terms a Letter of Intent (LOI) should include when it comes to the acquisition process.
    • Why use an LOI rather than enter into an Aircraft Purchase Agreement immediately?
    • Should the LOI state the purchase be contingent on securing financing?
    • Drafting the Aircraft Purchase Agreement.
    • Issues that are important to address in the Aircraft Purchase Agreement.
    • How Federal Aviation Regulations can affect aircraft purchases and structuring.
    • The benefit of establishing a Limited Liability Company (LLC) or Trust to own an aircraft.
    • Tax planning and bonus depreciation.
    • The “fly-away” sales tax exemption.
    • How aviation insurance protects an owner or lessee.
    • The importance of Uniform Commercial Code (UCC), FAA and International Registry filings.

     

     

    This podcast was originally published by Asset Insight on July 21, 2020.

     

    About David G. Mayer

    David Mayer has decades of experience in guiding clients through domestic and international transactions, disputes, and other matters. Currently, most of his work relates to business aviation and aircraft finance.

    He likes to describe when he can first help clients: “When they say airplane, I’m in.” In this regard, David advises his clients at all stages of their experiences in buying, selling, structuring, leasing, financing, maintaining, and upgrading private aircraft. His tasks range from simple to complex.

    David helps clients evaluate and, when feasible, minimize local, state, and federal taxes, particularly bonus depreciation, associated with purchases and sales of business aircraft, turboprops, and other private aircraft, comply with federal aviation regulations, and manage liability risk that they worry an aircraft may cause.

    He represents, among others, high wealth individuals, large private and public companies, private jet owners and lessees, Part 135 and Part 91 operators, flight departments, charter operators, brokers, consultants, and management companies. By representing various lessors, lessees, lenders, and borrowers, David knows both sides of the transaction, enabling him to expedite and achieve favorable results for his clients in a wide array of legal matters.

    David has experience as a corporate counsel in addition to his longer experience as a partner in law firms. Adapting to the client’s interest, David provides insightful, thoughtful, and common-sense advice honed in part by calling on his extensive industry contacts in business aviation to enhance the quality and value of the client experience.

    He writes blogs for Aviation International Network, in the industry’s AINsight series, which, in part, positions David at the leading edge of legal and business developments in business aviation.

    Shackelford, Bowen, McKinley & Norton, LLP

    Shackelford, Bowen, McKinley & Norton, LLP represents clients in matters involving business, commercial and entertainment law based on years of experience in courtroom trials and negotiations across the U.S. We assist large corporations as well as individuals in a variety of industries, including aviation, energy, entertainment, financial institutions, health care, hospitality, real estate, and retail automobile sales.

     

  • NAFA Administrator posted an article
    NAFA Webinar: How the Priorities of the Aviation Industry Have Changed see more

    NAFA Webinar:  How the Priorities of the Aviation Industry Have Changed

    The Global Pandemic has had a profound effect on the industry and the way we do business.  What long-term effect will the CARES act have?  What about sustainable fuels, pilot shortages, and insurance rates?  Have those been affected, too? 

    Come listen to our distinguished panel of experts discuss the many ways industry priorities have changed in 2020.

    Meet our Moderator and Panelists:

    Gil Wolin, Publisher, Business Aviation Advisor Magazine.

    Ed Bolen, President and CEO, NBAA (National Business Aviation Association) 

    Pete Bunce, President and CEO, GAMA (General Aviation Manufacturers Association)

    Tim Obitts, President & CEO, NATA (National Air Transportation Association)

    Mark Baker, President, AOPA (Aircraft Owners and Pilots Association) 

     

     

    This NAFA webinar originally aired on October 15, 2020.