When you lease or finance any large asset, a fundamental aspect of the insurance coverage requirements are that your interests are noted and that you are formally recognised as having a financial interest. You will need any proceeds from a total loss to be paid to you directly by insurers to compensate for your loss.
Getting the loss payee correct
The aviation insurance market came together with financiers and leasing companies in 1990 and produced the AVN67 clause.
The insurers, brokers and the other interested parties all recognised that getting the loss payee correct was one of the most important parts of the entire process. To help insurers get it right they came up with the perfect solution which was to make the parties involved decide among themselves who insurers pay.
The language is very specific:
In respect of any claim on Equipment that becomes payable on the basis of a Total Loss, settlement (net of any relevant Policy Deductible) shall be made to, or to the order of the Contract Party(ies). In respect of any other claim, settlement (net of any relevant Policy Deductible) shall be made with such party(ies) as may be necessary to repair the Equipment unless otherwise agreed after consultation between the Insurers and the Insured and, where necessary under the terms of the Contract(s), the Contract Party(ies).
Such payments shall only be made provided they are in compliance with all applicable laws and regulations.
If the aircraft suffers a total loss, all of the “Contract Party(ies)” will be asked a simple question, “Who do you want the insurers to pay the agreed value to?” It should be very clear and obvious to all involved from the finance or lease documents who the loss payee is, and they will hopefully all name the same party.
It will be at this point that insurers will ask for banking details. Following the signing of the formal release document, the transfer of funds will be made.
When there’s disagreement
If there is any kind of disagreement between the parties then insurers will look at the contracts listed in the certification. This will most probably be the first and only time insurers will read these contracts. (So, when deciding what contracts to include in the insurance certification, please think of what documents will help insurers unravel what may be a very complex transaction.)
Insurers will not pay a loss unless they are 100% certain that they are paying the right party. They do not want to get this wrong and are not keen on paying twice!
For many years I have been involved in transactions where lawyers/financiers/lessors have asked for the certification to include a specific party as a “loss payee” or a “sole loss payee”. These terms do not exist as part of AVN67 and in the event of a total loss of the aircraft may be ignored. Insurers would still ask for the confirmation by each contract party as to whom funds be paid and would not take into consideration any other “external” instructions.
In fact what this could do is open up the insurer or broker to a possible scenario whereby the certification states one party as “loss payee” or “sole loss payee” yet insurers agree to another one of the parties being paid following a total loss, a very real potential conflict.
Glen Brighton runs Willis Towers Watson’s Aerospace Advisory Services, a niche practice offering insurance advice and expertise to the aviation finance and leasing sectors. Glen has over 34 years’ experience in the aviation insurance market, providing advice on aviation insurance matters to the lease/finance communities. He has worked on transactions involving over 6,000 aircraft, from A380’s to corporate jets.