Contractual Liability Insurance Coverage and why Unmanned Aerial System operators need it
by Terry Miller President - Transport Risk Management, Inc.
All aviation insurance coverage is provided under a type of policy called an “All Risk” policy form. An all risk policy is defined as follows:
“Property insurance covering loss arising from any fortuitous cause except those that are specifically excluded. This is in contrast to named perils coverage, which applies only to loss arising out of causes that are listed as covered.”
In other words, if it’s not excluded, then it is probably covered. That makes the policy exclusions a very important part of an Insured’s policy and it is important that the Insured read and understand the policy exclusions.
One such exclusion that is found in all property insurance policies, including aviation, is “Contractual Liability” or the “Assumption Of Liability Of Others.”
That exclusion will typically be long and technical but will start with something like the following:
“EXCLUSIONS
This policy does not apply to any coverage:
9) under Coverages A, B, C, D and E:
a) to liability assumed by the Insured under any contract or agreement…”
As the UAS industry begins to mature, operators will be required to sign contracts and agreements which will contain, among other things, insurance requirements and indemnification clauses. Operators must read those agreements carefully and understand what they are signing relative to contractual liability and indemnification.
It is common for businesses or organizations to agree, usually in writing, to take on the liability of someone else—liability they would not otherwise have. This form of agreement, where one party takes on or assumes the liability of another by contract, is commonly called a "hold harmless" or "indemnity" agreement. In an indemnity or hold harmless agreement, one party, the indemnitor (UAS Operator) promises to reimburse, and in some cases defend, the other party, the indemnitee (Customer) against claims or suits brought against the Customer by a third party. The purpose of the hold harmless or indemnity agreement is to transfer the risk of financial loss from the Customer to UAS Operator. This transfer or shifting of risk exposure is often called non-insurance contractual risk transfer and is considered a risk financing technique rather than a risk management technique.
Properly written hold harmless and indemnity agreements can override common law and give the Customer the right to collect from the UAS Operator, in some cases even if liability arises out of the Customer’s sole negligence. While each state has its own statutes and case law that may restrict what may or may not be transferred, it is a mistake to conclude that all hold harmless and indemnity agreement are void and against public policy simply because the agreement assumes liability for the sole negligence of another. However, because the UAS Operator agrees to assume that exposure under the contract, it does not obligate their insurer to assume those same exposures. Before any coverage is provided under the policy for contractual liability, the Contractual Liability Exclusion must be removed from the policy through an endorsement sometimes an exclusion buy-back. The Contractual Liability Coverage Endorsement will outline the conditions under which the UAS Operator’s insurer will cover the contract and in no case will it cover liability arising from the sole negligence of the Customer or a contract between a UAS Operator and a contracted aircraft crew. Likewise, contractual liability coverage does not cover exposures that are not otherwise covered under the policy. Following is an example of the wording found in a Contractual Liability Coverage Endorsement.
“Exclusion 9) a) of the policy does not apply to the assumption by the Named Insured of the liability of others for bodily injury or property damage in any contractual agreement, provided that the Named Insured submits a copy of all such agreements to the Company within thirty days after coming to the attention of the Named lnsured’s Insurance Department, however, failure to do so through error or omission shall not prejudice the insurance afforded hereunder. The Company reserves the right to review and reject submitted contracts within ten (10) days and to charge an additional premium for any such agreement so submitted. The Company hereby waives the submission requirement with respect to temporary aircraft storage and minor servicing agreements, military or governmental agreements, lease of premise agreements and agreements approved by the Company prior to the effective date of this policy.
EXCLUSIONS
This insurance does not apply to liability assumed by the Insured:
(i) under any oral contract or agreement, nor (ii) under any agreement or contract: (a) with or for the benefit of passengers, crew, or their heirs; (b) insofar as it pertains to major alterations or major repairs as defined in the Federal Aviation Regulations; (c) with respect to the manufacture, sale, or servicing of any aircraft; (d) entered into after the occurrence of a loss to which this endorsement applies”.
Most knowledgeable UAS specialty insurance brokers will ensure that contractual liability coverage will be included in the policy however those brokers are few and far between. Most brokers fail to consider or include the coverage and the only way to know for certain is for the UAS Operator to read their policy.
Other brokers and insurers may include coverage on a blanket basis however even if the coverage is included on a blanket basis, many times the broker and insurance company will charge additional premium to add a Customer as an Additional Insured to the policy which is nearly always required under any type of operational contract. Those additional premium charges can range from $150.00 to $500.00 each time a Customer is named. Those additional premiums can easily increase premium costs by hundreds or even thousands of dollars above the original cost of the policy and for no real added value.
However, because the UAS Operator agrees to assume that exposure under the contract, it does not obligate their insurer to assume those same exposures.
Before any coverage is provided under the policy for contractual liability, the Contractual Liability Exclusion must be removed from the policy through an endorsement sometimes an exclusion buy-back. The Contractual Liability Coverage Endorsement will outline the conditions under which the UAS Operator’s insurer will cover the contract and in no case will it cover liability arising from the sole negligence of the Customer or a contract between a UAS Operator and a contracted aircraft crew. Likewise, contractual liability coverage does not cover exposures that are not otherwise covered under the policy.
Following is an example of the wording found in a Contractual Liability Coverage Endorsement.
“Exclusion 9) a) of the policy does not apply to the assumption by the Named Insured of the liability of others for bodily injury or property damage in any contractual agreement, provided that the Named Insured submits a copy of all such agreements to the Company
within thirty days after coming to the attention of the Named lnsured’s Insurance Department, however, failure to do so through error or omission shall not prejudice the insurance afforded hereunder. The Company reserves the right to review and reject submitted contracts within ten (10) days and to charge an additional premium for any such agreement so submitted. The Company hereby waives the submission requirement with respect to temporary aircraft storage and minor servicing agreements, military or governmental agreements, lease of premise agreements and agreements approved by the Company prior to the effective date of this policy.
EXCLUSIONS
This insurance does not apply to liability assumed by the Insured:
(i) under any oral contract or agreement, nor (ii) under any agreement or contract: (a) with or for the benefit of passengers, crew, or their heirs; (b) insofar as it pertains to major alterations or major repairs as defined in the Federal Aviation Regulations; (c) with respect to the manufacture, sale, or servicing of any aircraft; (d) entered into after the occurrence of a loss to which this endorsement applies”.
Most knowledgeable UAS specialty insurance brokers will ensure that contractual liability coverage will be