An Introduction to Aircraft Hull Insurance by Sofema Online

Sofema Online (SOL) considers the basics of an Aircraft Hull Insurance

Introduction

Ensuring the Lessee secures and maintains both hull and liability insurance is a pivotal requirement from a Lessor's perspective.

This aligns with the fundamental principle that the Lessee bears all risks associated with the operation and usage of the aircraft throughout the lease period.
Hull insurance covers the value of the Lessor’s asset in the event of physical damage to or loss of the aircraft (including records and any removed engines or parts).
Liability insurance, provides coverage for general legal liability, including Third Party, Passenger, and baggage legal liability, protecting the Lessor and associated parties.

Hull Insurance

Hull insurance is a policy that covers damage or loss to the aircraft. If the aircraft sustains physical damage, the insurance policy will cover the restoration of the aircraft to its pre-damage condition.

In the case of irreparable damage (total loss), hull insurance typically provides a fixed payment based on the agreed hull value.
The insured hull value generally aims to match the higher of the market value or “agreed value,” with the latter often reflecting a premium over the Lessor’s book value during the lease period.
Upstream financing requirements can also influence the agreed hull value specified for insurance purposes during the lease term, sometimes resulting in an inflated insurance value relative to the market.

Lessee Best Practice

Lessee is advised to negotiate these levels down to closely align with the actual market value or seek a contribution from the Lessor towards a portion of the insurance premium.
Many lease agreements allow for a reduction in the agreed hull value during the lease period, consequently lowering the associated premiums for the Lessee.
Additionally, the lease will specify the maximum deductible amount that the Lessee may agree to, which is the amount of damage the Lessee must cover before the hull insurance policy responds.

ICAO Recommended Practices

Article 50 of the Montreal Convention 1999 mandates that state parties “require their carriers to maintain adequate insurance covering their liability” and may demand evidence of such insurance.

Important Note - The Montreal Convention does not specify what levels of insurance are considered “adequate,” leaving it to each contracting state to define adequate levels under its national law.

Many states have established their minimum requirements for liability insurance, though these requirements vary significantly worldwide, with developed countries typically demanding higher levels of insurance.
National law-based insurance levels are calculated mainly considering the aircraft's maximum take-off weight and the number of passengers carried, along with a specified level of Special Drawing Rights.
The minimum level of mandatory liability insurance is determined by multiplying the number of passengers by the Special Drawing Rights amount.

Next Steps

Sofema Aviation Services (www.sassofia.com) and Sofema Online (www.sofemaonline.com provides Classroom, Webinar and Online Training related to Aircraft Lease and Maintenance Reserves. Please see the websites or email [email protected].

For the following course - Aircraft Leaseholder & Maintenance Reserve Insurance Considerations – Essentials – 1 Day