Everyone seems to talk about risk management in their businesses and even their personal lives. But what does risk management mean in the context of business aviation, and what risks matter the most to aircraft owners and operators?
When I talk with prospective and current aircraft owners or operators, they often seem content that liability insurance will cover all their liabilities. Yet navigating through aviation risk management entails a far wider perspective.
Whether you use or operate aircraft in your company flight department, via a charter company, or with your own crew, you should be clear-eyed about the value and purpose of insurance as part of business aviation risk management. Even if you carry aircraft liability and property insurance, and you definitely should, your insurance may only respond—wake up—after something bad has already happened involving your aircraft.
Insurance does not mitigate or eradicate the risk of liability or property damage or loss. Rather, insurance shifts to your insurer the responsibility to pay covered claims up to policy dollar limits on your insurance policy terms.
Your insurer has a duty to defend you, as its insured, at the insurer’s cost, against a covered lawsuit and a lesser duty to indemnify you, meaning they should pay for covered liability and property claims up to the policy limits.
From a 50,000-foot perspective, business aviation risk management refers to the process of identifying, assessing, and mitigating business, legal, operational, and personal aviation-related risks. These concerns affect not only your aircraft but also you and your businesses, operators, financiers, and others.
Aviation risks arise everywhere and any time your aircraft is involved in transactions, operated, positioned, registered, or stored. Aircraft-related obligations and occurrences can drag you and others into the fray of complex disputes far broader than aviation insurance. In short, aviation insurance will not cover all risks you encounter involving your aircraft.
Risk management starts by planning and taking actions to protect the lives and welfare of your family, friends, business colleagues, and other individuals or organizations; maintain your aircraft; preserve your personal net worth; use precautions around third parties; and comply with Federal Aviation Regulations (FARs), FAA edicts, and manufacturer’s standards.
Although many transactional, economic, and tax issues intersect with liability risk factors, let’s focus primarily on three risks my clients often mention first: personal liability, security/privacy, and structuring their ownership and operations correctly to avoid a run-in with the FAA. Aircraft owner and operator priorities vary, of course.
Personal liability. Aircraft are powerful machines that, despite your best intentions, can create liability to third parties for property damage or loss, personal injury, or wrongful death. Personal liability risk drives aircraft owners and operators to find ways to minimize exposing their enterprises or personal net worth to third-party claims.
Security/privacy. Aircraft owners and operators often attract attention because of their net worth, power, or stature. That should not invite, and does not excuse, invasions of privacy, which I discussed in a recent blog on privacy. This includes publishing aircraft owner or operator photos, tracking aircraft, or prying into corporate or personal secrets. Neither should their public persona encourage threats or perils to them, their families, or anyone else.
Regulatory compliance. You may not think of structuring aircraft ownership or operations to comply with the FAR and FAA guidance as the top priority. However, if you fail to do so correctly, you may create uninsurable risks, become subject to FAA scrutiny, or make other avoidable mistakes.
Risk assessment refers to identifying potential threats to your security, privacy, or other adverse events that may negatively affect you, your family, friends, business colleagues, aircraft, or personal net worth. That may take the form of conducting a security study of potential targets.
Broadly, you may appreciate the detailed examination of security issues and practices conducted by the National Business Aviation Association (NBAA) in its “Security Risk Assessment Process” paper.
Business aviation risk mitigation should naturally flow from identifying and assessing appropriate risks. Mitigation generally refers to the process of avoiding, eliminating, reducing, sharing, or controlling the possibilities of personal liability or property damage or loss relating to your aircraft.
Properly structured and implemented, five actions should mitigate most of your aircraft-related risks, but there is no bulletproof strategy:
• Do not manage risk alone; form and trust your team. In a web of interrelated risk factors and a highly regulated industry, you will feel a higher level of confidence in your aviation experience by using seasoned aviation professionals to identify and help you manage aviation risk on your journey of purchasing, owning, operating, maintaining, managing, and selling your business aircraft.
These pros should be capable of helping you assess your risks competently and implement mitigation strategies effectively. You should judge whether your support team members possess the quality, skill, experience, and integrity on which you can comfortably rely; imprudent compromise elevates your risk.
• Structure for privacy and security. Your aviation counsel can structure your ownership to shroud your identity as the owner or operator of an aircraft. For example, you can use a double trust or form one or more limited liability companies (LLCs) to hide you from prying eyes or ease security concerns. LLCs may shield you from some liabilities whereas the trusts will not. Remember to confirm your structure aligns with the FARs and FAA guidance.
• Check safety and quality. As I discussed in my blog, “Managing to Fly,” about the key attributes in aircraft management, mitigation of risk also includes evaluating whether and to what extent a management organization or flight department has developed and implemented a safety management system (SMS) and a quality repair and maintenance regime; what safety rating the management company has received from independent safety inspection companies; and whether you sense a culture of safety around the aircraft you use.
• Spread or transfer risk. You can limit, spread, or transfer risk in several ways starting with buying the best insurance you can for your risk profile. You can transfer risk to another person or entity that will indemnify you against specified situations.
You can shift operational control of your aircraft to a FAR Part 135 operator so they assume legal and operational control of flights under Part 135. Doing that relieves you of direct and primary liability for actionable incidents or accidents that you would otherwise assume when you operate your aircraft under Part 91. I sometimes say this change puts the liability target on the back of the Part 135 operator.
Risk management in business aviation is neither an art nor a science. It represents a process designed to mitigate risk factors that, if not addressed, may otherwise cause harm to people or organizations, personal liability, diminishment of net worth, damage or destruction of property, or a loss.
Aviation risk management is not a choice. Instead, it is an imperative that can alleviate risk and afford you and others the substantial benefits of business aviation.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton in Dallas, which provides broad legal services in private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing, and financing (a sub-specialty of David’s), risk management, insurance, aircraft management and operations, hangar leasing, and related corporate work. Mayer frequently represents corporations and high and ultra-high-net-worth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, corporations, and managers, as well as lessors and lenders. He can be contacted at [email protected], LinkedIn, or by telephone at (214) 780-1306.
None of the discussions in this blog creates an attorney-client relationship or provides legal advice of any kind. Each person should consult their trusted advisors on the topics in this blog, which is intended to inform but not advise on its subjects. Readers should consult their trusted aviation advisors for transaction and other assistance in matters contemplated in this blog. The opinions expressed in this column are those of the author and are not necessarily endorsed by AIN Media Group.