Indemnity Insurer Calls for Clearer Charter Contracts

Ambiguities in charter flight contracts are giving rise to misunderstandings between operators, brokers, and their clients, according to professional indemnity insurance specialist ITIC. The London-based group is urging the industry to adopt more consistent contracts that would provide more transparency over the terms of remuneration and clearer roles for service providers.

“Aviation is very heavily regulated and safety conscious, but too many charter contracts create ambiguity and are making money for lawyers,” ITIC aviation director Melanie Daglish told AIN.

One source of confusion can hinge on compensation terms for brokers. In air charter, brokers generally earn a margin on a flight, and Daglish said this can create some “tension” and contractual confusion over payment terms.

In the shipping industry, which ITIC also serves, brokers earn a defined commission. This is spelled out clearly in a single contract that states who is doing what and how the parties are getting paid.

According to Daglish, in air charter, where typically there is a separate contract between the broker and their client and another between the broker and the operator, these need to be consistent and “back to back” in how they apply. In her view, the fact that there are often differences between the two contracts—in some cases with the broker margin being less than transparent—can create problems between the parties.

“The main issue is that when a flight is being arranged, the broker is going to collect money from the charter customer and pass that along to the operator, minus the broker margin,” Daglish explained. “If the aircraft goes tech [and the flight does not happen], the charterer will want their money back, but at that point the money is with the operator and the terms may not make it clear how the money gets returned, and could leave the broker out of pocket.”

Compounding these disconnects is the fact that some contracts do not make it clear enough what happens if a charter booking cannot be fulfilled. “If an aircraft goes tech at the last minute, the charterer has to find a second aircraft and then somehow claim for the difference in what they pay,” Daglish said. “Cancellation terms are not always mirrored between the two contracts.”

In ITIC’s experience, the way legal duties are dealt with under English “agency law” can be very complicated to resolve. This can result in contracts that are not clear about payment terms and include what Daglish described as “secret profits.” She said that broker margins can vary massively based on market conditions.

The ITIC team provides risk management advice for the charter sector to help all parties protect their interests. More recently, it has been focused on the insurance complexities resulting from the ongoing Iran war, with the cost of cover rising significantly to dent operating margins.

“It is important to get professional security advice because the implications [of military threats to aviation] are very serious for hull liability,” Daglish said. “Operators need to have very granular day-to-day discussions with their insurance brokers [about specific flights].”