Introduction

Approximately a hundred years ago, Lloyds London were the first to make it possible to offer insurance in Aviation prior to the World War in 1914. Ever since, aviation insurance has now become one of the largest sub-sectors in the global insurance market. This article gives an insight into aviation insurance in Nigeria, its types, what it covers and what it does not, how much can be insured and what aviation practitioners should consider when reviewing a client’s insurance policy.

Aviation insurance is the insurance that caters specially to the operation of aircraft, as well as all the risks involved. Therefore, in simpler terms, you get financial compensation for your assets, if they get damaged in transit.

The fundamental principle of all forms of insurance is that ‘the premiums of the many will pay the losses of the few’. As insurance businesses exist in the commercial realm, they use conventional business management principles applied in the way they operate. Insurance companies should cover the cost of running the business, expenses, and commissions and, together with any investment income, provide a reasonable profit and return on the capital employed. Similarly, the insurance market works to spread the risk between many insurers and reinsurers so that the amount any one insurer is exposed to is kept within acceptable limits.

Who needs aviation insurance?

Every year air accidents occur, no doubt. There have been over sixty military aircraft accidents and over a hundred total air accidents in Nigeria since 1925 when the first aircraft flew across Nigerian skies. A lot of people have a misconception that only pilots, and plane owners need aviation insurance but that is not totally the case, you may need aviation insurance if you:

1. Own an aircraft.
2. Operate a charter service or airline.
3. Pilot commercial or recreational airlines
4. Handle baggage or ground services
5. Refuel aircrafts
6. Fly drone’s commercials
7. Owners of aircraft garages and airports

This is because aviation insurance does not just cover the physical aircraft but insures passengers, cargo and third parties.

Legal framework for Aviation insurance in Nigeria

The current enactment regulating insurance business in Nigeria is the Insurance Act, 2003. The Act applies to all insurance businesses and insurers. The Aviation Insurance business is classified as general insurance.

In Nigeria, the Nigerian Civil Aviation Authority is saddled with the responsibility to ensure that all persons engaged in aviation operations comply with the minimum aviation requirements for air carriers to ensure compliance with their potential compensation obligations.

Pursuant to the Civil Aviation Act, any carrier or aerodrome operator, aviation fuel supplier, or any provider of ground handling services, meteorological services, air traffic control services, aircraft maintenance services, or provider of such other class of allied service as the Authority may from time to time determine in writing operating air transport services to, from or within Nigeria, shall maintain adequate insurance covering and also its liability towards compensation for damages may be sustained by third parties for an amount to be specified and in absence of such insurance shall be sufficient reason for refusal, suspension or revocation of the permission to operate the air transport service or services in Nigeria.

Also, the Nigerian Civil Aviation Authority requires aviation operators to submit copies of valid insurance certificates quarterly evidencing payment of premium and policy documents.

Regulation 18.11.17 of the Nigerian CAR- Air Transport Economic Regulations, 2015 prescribes the minimum third-party liability insurance limit for aircraft engaged in aircraft operations in Nigeria to be the maximum  take-off weight (MTOW) of an aircraft. The regulations also prescribe the minimum insurance cover for carriage of passengers, mail, and cargo to be aircraft available seat capacity.

Aircraft Operation Insurance

Aviation insurance for owners and/or operators is covered under the following forms:

1. Public liability Insurance – This provides cover for surface damage occasioned to persons or property by aircraft in flight or while taxiing, taking-off or landing. It also covers aerial damage caused to persons or property in the air. Aviation operators clearly recognize the importance of public liability protection. Capital cannot be secured for development without the assurance of protection supplied by public liability insurance. When there is a possibility of huge damage suits-greater than the total capital invested, the risk of going without liability insurance is readily seen.

2. Passenger liability Insurance – This deals with compensation for passengers on board an aircraft who died or were injured in an air crash. Here, coverage is provided on per seat basis and there is a limit to each passenger seat.

3. Combined Single Limit Insurance – This policy coverage combines public liability and passenger liability coverage into a single coverage with a single overall limit per accident. This type of coverage provides more flexibility in paying claims for liability, especially if passengers are injured, but little damage is done to third party property on the ground.

4. Air Cargo Insurance – Aircraft operators now obtain cargo liability insurance covering his legal liability in the event of loss or damage to goods shipped in his plane. This is because there is now an increased number of merchandise shipped by air

5. Aircraft crew insurance/Workmen compensation – This insurance policy is designed to provide financial compensation to an injured employee, and in the event of his death, to his dependents if such injury or death occurs during, or as a result, of his occupation.

6. Airport Liability Insurance – This insurance policy insures against loss by reason of the liability imposed by law upon the assured for damages on account of bodily injury, whether fatal or otherwise, suffered or alleged to have been suffered by any person or persons, not employed by the assured, while within or upon, over or about, the premises of the Airport.

7. Aircraft Hull Insurance – This insurance policy provides compensation for losses due to physical damage to the aircraft. It is divided into two mainly;

I. In-flight Insurance – This provides coverage against damage during flight or ground operations

II. Ground risk Insurance – This provides coverage for an aircraft when it is not in motion e.g., Vandalism, Theft, Fire etc.

This insurance coverage is usually subject to a deductible, which may be a flat amount or a percentage of the insured value.

Hull insurance coverage typically excludes damage caused by wear and tear, electrical breakdown, war, and related perils (including terrorist acts), excessive heat (to the engine), hijacking, and confiscation by a government authority. Both the not in flight and not in motion coverage options exclude damage caused by fire or explosion following a crash or collision that occurred while the aircraft was in flight.

8. Rental Aircraft Insurance/Non-Owned Aviation Insurance – This covers the rental pilot, the aircraft rented, your passengers and anyone or anything else you might accidentally or inadvertently hurt or damage. 

Here are instances where non-owned aircraft insurance is needed, they are;

1. Where you charter an aircraft, and the pilot is furnished by the owner.
2. Where a student pilot is taking a flying lesson with someone else’s aircraft. 
3. Where you borrow or rent someone’s aircraft.
4. Where a flight instructor is giving lessons in a customer’s aircraft.
5. Where you are delivering an aircraft owned by another person.
6. Where an independent professional contract pilot is operating the owner’s aircraft.
7. Where an engineer is test-flying a customer’s aircraft, etc.

Rental aircraft insurance is secondary, which means it pays out after the owner’s insurance.

What aviation insurance covers?

Airplanes, seaplanes, amphibians, and flying boats may be insured against loss or damage under four general forms-fire, theft, windstorm, and accidental damage (including mooring perils in the cases of seaplanes, amphibians, and flying boats). These are: 

A. Fire: This form of insurance may be divided into two classes

1. Fire on the ground only – Fire, arising from any cause whatsoever (including self-ignition and explosion of gasoline) and lightning; excluding fire during flight or any attempt thereat, descent, or while the engine is running immediately subsequent thereto; and excluding fire in consequence of or directly after crash and/or collision with any other object and/or the ground.

2. Fire under all circumstances – Fire, lightning, and transportation: 

a. Fire, arising from any cause whatsoever (including self-ignition and explosion of gasoline), and lightning, under all circumstances, excepting fire in consequence of, or directly after crash and/or collision with any other object and/or the ground. The stranding, sinking, burning, collision, derailment and/or overturn of the conveyance in or upon which the insured property is being transported on land or water, including general average and salvage charges for which the insured is legally liable.

b. This coverage is the same as the above, except that in the event a plane crashes and is destroyed by the ensuing fire, claim can be made on that part of the plane, which was undamaged by the crash, but later destroyed by fire

– excluding fire following the crash. 

– including fire following the crash. 

When a choice is to be made for fire insurance, we recommend fire under all circumstances, excluding fire following a crash. The premium rate is slightly higher than fire covering. on ground only, and lower than fire coverage, including fire following crash.

B. Theft, robbery, and pilferage: Theft, robbery and/or pilferage, including damage done by thieves to property insured hereunder.

C. Windstorm, tornado, and cyclone: Some contracts exclude any loss or damage by fire caused by windstorm, tornado, or cyclone, such as a fire that would start when a hangar would be blown down, crossed electrical wires, or a mishap to the heating plant. Other policies, however, include loss or damage by fire that would follow and be caused by windstorm damage to a hangar building. Because of the possibility of unattended planes.

D. Accidental damage (crash): Accidents of an external and visible nature arising during flight or any attempt thereat and/or during taxiing immediately prior and immediately after flight. 

What Aviation Insurance does not cover?

Some risks may be excluded from aircraft insurance policies. Common exclusions include:

1. Expected or intended injury.
2. Bodily injury to employees.
3. Liability imposed under a workers’ compensation law
4. Contractual Liability, which is when you assume liability by signing a contract.
5. Injury or damage caused by the application of fertilizers or other substances (crop dusting)
6. Injury or damage caused by pollution, noise, or electrical or electromagnetic interference.

How much should I insure?

Aircraft, including drones, are insured based on an “agreed value”. Premiums charged for physical damage to the aircraft are a percentage of the value on which you and the insurer agree. Knowing that, you may be tempted to insure a value less than the true value of your aircraft to save some premium dollars. On the other hand, it might seem sensible to select a higher value, so you’d have more options in the event the aircraft sustains damage that cannot be repaired. But there are other considerations. If you place a low value on the aircraft and it suffers substantial damage, you may find yourself in a situation where it must be declared a total loss, even if it is repairable. On the other hand, if you place too high a value on your aircraft and it is severely damaged, the cost of repairs may not exceed the insured value, and you could be left waiting for an extended period while your airplane is being extensively rebuilt.

Like any vehicle, the value changes over time depending on depreciation, equipment upgrades and other factors. It is important when insuring your aircraft to insure at the right amount, as over-insuring or underinsured can cause issues when a claim arises.

Over-insuring

Insuring an aircraft for more than it is truly worth can lead an insurer to opt for repairs instead of a payout. For commercial operators, this means staying grounded for a long time.

Under-insuring

Failing to increase your insurance policy to reflect an aircraft’s actual value may lead to it being prematurely written off. That is, your plane is taken away for salvage, leaving the owner without enough funds to replace it.

What to look for when reviewing your existing policy

For aviation practitioners in Nigeria, it is important to review your client’s aircraft insurance policy at least once a year. In reading the insurance policy, you should pay attention to all the aspects of the policy, and these features:

1. Has the insurer maintained strong financial performance and a positive reputation?
2. Do your deductibles still seem reasonable? 
3. Does the policy specify different in-motion, not-in-motion, and moored deductibles?
4. What are the exclusions, and could they limit the way you operate your aircraft?
5. Are all pilots who fly the aircraft covered by the policy?
6. Is any lender or leasing company that has an interest in the aircraft covered in case of a loss? Most require that they are named on your policy.
7. Are there any extensions on the policy? This could include things like “premises coverage” for situations where someone is injured on premises you use in conjunction with the operation of your aircraft, or hurricane repositioning coverage that pays a portion of the cost of repositioning your aircraft out of harm’s way to prevent damage.

Conclusion

There is no gainsaying that aviation is the bedrock of the national economy. In 2019, the contribution of the aviation industry to the nation’s gross domestic product, GDP, was put at ₦198.62 billions, according to a release from the National Bureau for Statistics (NBS). In fact, aviation was adjudged the fastest growing sector for 2019 despite the harsh operating environment. 

It is important to note that aviation is regarded as a strategic industry, not only for its potential for economic growth but also for its crucial role in national development and regional integration. Our indigenous airlines are faced with enormous challenges like high insurance premium, multiple taxation, and disadvantageous policies. Nigeria’s insurance premium on aircraft is recognized as the highest in West Africa and every aircraft parked at the ramp of any airport is guarded by security operatives at the expense of the airlines and this is added to the cost of operation and cost of leasing, especially wet leased aircraft.  

We are not just talking about airlines alone, the service providers, the Federal Airports Authority of Nigeria (FAAN), the Nigerian Airspace Management Agency (NAMA) and the Nigerian Civil Aviation Authority (NCAA), and the rest are also having their own challenges. We need bailout funds to function optimally. The Federal Government’s ₦4 billion bailout to the airlines is too small. The Airline Companies need at least ₦50bn bailout funds. We are requesting that other mechanisms should be introduced as a support to avert the impending collapse of the Aviation sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm can be reached by email at info@marcusokoko.com.ng