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Aircraft Dry Leases and the Aircraft Insurance Hard Market

An aircraft dry lease is a contract whereby 2 parties agree that one can lease an aircraft from the other. The dry lease CANNOT result in any profit for the aircraft owner, the reason behind this is simple: If you provide an aircraft service in exchange for profit then you are required by law to comply with strict regulations designed to protect the flying public. If you are not subject to these rules (Part 135, Part 121, etc) due to the private use of the aircraft (Part 91), then you are not allowed to provide aircraft services.

Insurance companies have traditionally argued that dry leases increase their exposure because they are now covering 2 sets of people or organizations operating the same aircraft separately. In other words; the underwriting process addressed 1 entity (the insured operator), but the agreement increases the coverage to 2 different entities.

Due to the restriction on profitability and the insurance company argument above, aircraft dry leases have traditionally been approved in situations such as the following:

  1. Two companies with similar aircraft types enter an agreement whereby they can use each other’s aircraft when their own aircraft are unavailable for use due to a significant maintenance event or travel conflict.
  2. Two companies owned by a common companies enter into the dry lease agreement so they can use each other’s aircraft.

However, during the very soft market we experienced over the past 15 years, restrictions on dry leases were loosened by underwriters as they tried to compete with their peers for business. Almost any dry lease presented during this period was approved.

2020 has had 14 days and the change in underwriting to approve dry leases has changed dramatically for 2 reasons:

  1. The hard market is due to reinsurance contract pressure on insurers – therefore everything has to be done to maintain profitability and reduce claims. So the same reasons that have resulted in higher premiums and lower coverages have now affected dry leases. Insurers are trying to reduce their exposure as much as possible in order to survive. If the reinsurance agreement is too expensive to make a profit then the companies have to shut their doors. We can think of 4 companies that have exited the market already and we predict 2-3 more will be out of business before the next soft market.
  2. When it rains it pours: during the last weeks of 2019 the FAA issued a new set of guidance materials to clamp down on “illegal air charter operations” and announced that “the FAA works aggressively to identify and shut down rogue operators”. They also identified several “red flags” which include items such as attempting to transfer operational control via contract, which many dry leases include. Here you can read the FAA’s initiative announcement.

Our recommendation to clients is to make sure dry lease contracts are vetted by an aviation attorney before submitting them to the insurance company.

The contract will always have to be submitted to the insurance company not only because it increases their exposure and constitutes a material underwriting change, but also because any contract worth its salt will require a Certificate of Insurance from the aircraft policy.

As with any transaction in aviation insurance, working with a reputable and ethical broker increases your chance of success with insurers and decreases any uncertainty surrounding the contract. All insurance policies include language that negates coverage if laws have been broken.

The entire point of insurance is to reduce uncertainty when an accident happens, don’t enter into contracts with gray areas that increase uncertainty at precisely the worst time.