Sofema Online (SOL) www.sofemaonline.com considers aircraft lease operations, insurance and maintenance reserves to serve distinct purposes and are critical for ensuring the financial and operational stability of both the lessee (airline) and the lessor (aircraft owner).
Insurance provides risk management against unforeseen incidents, whereas maintenance reserves ensure funds are available for scheduled and necessary upkeep.
Insurance is about transferring risk to an insurer, whereas maintenance reserves are about managing and pre-funding the predictable expenses of aircraft upkeep
Note – The lessee is responsible for securing insurance, and maintenance reserves are a contractual requirement managed by the lessor but funded by the lessee.
Potential Insurance Claims Could Include any of the following:
- Accidents and collisions pose significant risks to aircraft hulls. This includes runway mishaps, mid-air collisions, and ground handling damage.
- Natural disasters like storms, hurricanes, hail, and lightning can severely damage aircraft.
- Terrorist attacks and acts of sabotage can lead to catastrophic hull losses.
- Human errors during operations, such as improper loading, fueling, and maintenance errors, can cause significant damage.
- Malfunctions in critical systems like avionics, engines, and flight controls can lead to accidents.
Here’s a detailed comparison between the Role of Insurance & Maintenance Reserves:
Insurance
Purpose – Insurance protects against financial losses from unforeseen events such as accidents, natural disasters, or mechanical failures.
Types of Coverage:
- Hull Insurance: Covers physical damage to the aircraft.
- Liability Insurance: This covers legal liabilities arising from the operation of the aircraft, such as passenger injuries or third-party damage.
- War Risk Insurance: Covers losses due to war, terrorism, or other hostile acts.
Responsibility:
- The lessee (airline) typically is responsible for procuring and maintaining insurance coverage throughout the lease term.
– The insurance policy must meet the minimum requirements set by the lessor.
Cost:
- Insurance premiums are a recurrent operational expense for the lessee.
- Factors like the aircraft type, age, operational routes, and the airline’s safety record influence costs.
Claims and Coverage:
- In the event of an incident, the lessee files a claim with the insurance provider.
- Payouts cover repair costs, replacement, or legal liabilities stipulated in the policy.
Maintenance Reserves
Purpose:
- Maintenance reserves are financial provisions set aside to cover the cost of future maintenance and overhauls of the leased aircraft.
Types of Maintenance Covered:
- Engine Overhaul Reserves: Funds allocated for periodic major engine maintenance.
- Airframe Maintenance Reserves: Funds for structural inspections and repairs.
- Landing Gear Reserves: Funds for overhauling and replacing landing gear components.
- Auxiliary Power Unit (APU) Reserves: Funds for the maintenance of the APU.
Responsibility:
- The lessee makes periodic payments into maintenance reserves, typically based on flight hours or cycles.
- The lessor manages these funds to ensure they are available for maintenance activities.
Cost:
- Maintenance reserves are calculated based on the expected maintenance cost over the lease term.
- Payments are often structured as part of the lease agreement and are a significant ongoing expense for the lessee.
Usage:
- The lessee performs the required work when maintenance is due and may draw from the reserve fund to cover the costs.
- Depending on the lease agreement, any unused maintenance reserves may be refundable to the lessee at the end of the lease term.
Typical Clauses Found within Aircraft Hull Insurance Policies:
- The party receiving the monetary benefits from insurance coverage must have an “insurable interest” in the aircraft.
– This includes any lawful and substantial economic interest in protecting property from loss, destruction, or pecuniary damage.
- Declarations: Information including the identity of the named insured, policy number, insurers, effective dates, description of the named insured’s business, type and amount of coverage purchased, premium charged, and a list of endorsements.
- Endorsements: Specific changes or amendments to the terms and conditions of the standard-form policy language.
- Named Insured: The person or organization to whom the policy is sold.
- Additional Insured: A party who is not automatically insured under the policy but is extended a measure of protection under the policy by the named insured.
- Limits of Insurance: A ceiling on the amount the insurer will pay, regardless of the number of insureds, losses, claims, or claimants.
- Deductibles: Clauses requiring payment by the named insured of a specified portion of the loss before the insurer’s obligation is triggered.
- Cancellation and Changes: The insurer owes no duties to provide notice of cancellation, non-renewal, or changes to additional insureds or loss payees; these duties are owed only to the named insured.
- Loss Payee Clause: This clause names a person to whom the hull insurance proceeds are to be paid if a loss occurs. Lessors and financiers can arrange to be named as loss payees under the policy.
- Breach of Warranty Endorsement: This endorsement provides that the insurance maintained by a lessee or borrower shall not be invalidated as to a lender or lessor by reason of any act or neglect of the named insured.
- Subrogation: The right of the insurer to “take over” the rights of a party receiving an insurance payment.
- Geographical Limits: Traditionally, insurances have been worldwide, with exceptions based on operational departures.
- Reinsurance/Cut-Through Clause: This clause ensures that reinsurers make direct payment of a claim to the loss payee in the original policy.
- Political Risk Insurance: Protects financiers from the inability to recover possession of their aircraft due to governmental actions or inactions.
- Tail Coverage: Extends liability coverage for lessor or lenders for an agreed period after the transfer or lease/loan expiry.
Considerations Related to Insurance Premiums and Payments
- Premiums: Lessors and financiers should not be liable for any premiums, although insurers may deduct any due premium from any claim payment.
- The 50/50 Clause Deals with claims for which it is unclear whether they are covered by the “all-risk” or “war and allied perils” policy.
Summary
Integrating maintenance reserves with insurance claims in aviation ensures comprehensive risk management and financial planning. Organizations can optimize their operations, reduce risks, and achieve significant cost savings by addressing the key challenges and implementing best practices. This integration fosters a safety culture, enhances asset management, and provides better protection for insurers and insured parties.
Next Steps
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Sofema Aviation Services (www.sassofia.com) and Sofema Online (www.sofemaonline.com) provide Classroom, Webinar, and Online Training related to Aircraft Lease and Maintenance Reserves. Please see the websites or email Team@sassofia.com.
Please take a look at the following course – Aircraft Leaseholder & Maintenance Reserve Insurance Considerations – Essentials – 1 Day
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SAS blogs, Maintenance Reserves, Aircraft Insurance, Hull Insurance, Aircraft Lease Operations, Engine Overhaul Reserves, Airframe Maintenance Reserves, Landing Gear Reserves, Insurance Premiums, Insurance Payments
