July 29, 2024

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Sofema Aviation Services (SAS) www.sassofia.com considers key requirements related to the Aircraft Leasing and Insurance Fundamentals.

Overview of Aircraft Leasing

Properly structured insurance policies protect lessors and lessees from a wide range of risks, ensuring the sustainability and security of the leasing arrangement.

There are two primary types of aircraft leases:

  • Operating Lease: Similar to a rental, the airline uses the aircraft for a period shorter than its economic life and returns it to the lessor at the end of the lease.
  • Finance Lease: This is closer to a loan, where the airline essentially finances the purchase of the aircraft over its useful life and usually retains ownership at the end of the lease term.
  • While leasing offers financial flexibility and risk management for airlines, it also requires comprehensive insurance coverage to protect the interests of the lessor and the lessee.

Insurance Fundamentals in Aircraft Leasing

  • Insurance is a critical component in aircraft leasing, ensuring that both parties are protected against various risks associated with aircraft operations.

Consider the following types of insurance:

  • Hull Insurance: Covers physical damage to the aircraft. This includes damage from accidents, weather events, and other perils. Hull insurance ensures that the financial interests of the owner (lessor) are protected if the aircraft is damaged or destroyed.
  • Liability Insurance: Protects against claims arising from third-party bodily injury or property damage caused by the operation of the aircraft. This type of insurance is crucial for covering legal costs and settlements in an incident involving the leased aircraft.
  • War Risk Insurance: Provides coverage for losses resulting from acts of war, terrorism, hijacking, and other politically motivated actions. Given the global nature of aviation, this insurance is essential for mitigating risks in unstable regions.
  • Deductible Insurance covers the lessee’s deductible in case of a claim under the primary hull and liability policies.
  • This helps manage the lessee’s out-of-pocket expenses in case of a loss.
  • Loss of Use Insurance: Compensates the lessor for the loss of lease income if the aircraft is grounded due to damage or repairs.
    • This type of insurance ensures that the lessor receives income even when the aircraft is not operational.

Critical Considerations in Aircraft Insurance for Leasing

  • Policy Customization: Insurance policies for leased aircraft must be carefully tailored to meet the specific requirements of both the lessor and the lessee.
    • This includes determining appropriate coverage limits, deductibles, and exclusions.
  • Joint Insured Clause: Under the insurance policy, both the lessor and the lessee are typically named as insured parties.
    • This ensures that both parties are protected and can claim benefits in a loss.
  • Breach of Warranty Clause: Protects the lessor if the lessee breaches the insurance policy terms.
    • This clause ensures that the lessor’s interests remain covered even if the lessee fails to comply with the insurance requirements.
  • Compliance with Lease Agreement: The lease agreement often stipulates specific insurance requirements that the lessee must maintain.
    • Ensuring compliance with these requirements is crucial for both parties’ validity and lease protection.
  • Regular Review and Updates: Given the dynamic nature of the aviation industry, it is essential to regularly review and update insurance policies to reflect changes in aircraft value, operational risks, and regulatory requirements.

Next Steps

Follow this link to our Library to find & download related documents for Free.

Please see the link for the following course – Aircraft Leaseholder & Maintenance Reserve Insurance Considerations – Essentials – 1 Day

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.

 

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Aircraft Leasing, SAS blogs, Aircraft Insurance Fundamentals, Aircraft Insurance, Hull Insurance, Liability Insurance, War Risk Insurance, Loss of Use Insurance, Joint Insured Clause, Breach of Warranty Clause, Compliance with Lease Agreement, Regular Review and Updates