Self-insurance a good idea?

[Areeda]

Our club has 7 planes. We own 2 and lease back 5 (soon to be 6) from members. We're starting to think about discussing self insurance and I'd like to sound like I know something about it.

What we're thinking about is to start with the club owned 152 and insure it for liability only. We can't afford to cover that nor do we want to give up on the insurance company legal defense team.

The difference in price would go into a separate fund.

So the questions are:

• To start with we have enough money to replace the 152 if totaled.
• Next plane to cover would be our 172 what level of reserves would you keep for 2 planes?
• The club has a 40+ year history. I know of a few accidents that totaled a plane. Insurance company seems to do a good job of determining the odds with a fair but sizable pad.

So is it a good idea? Has anyone done this for a while? I'd like to hear some stories.

Thanks
Joe

 

[twdeckard]

Today: Are the club members assessed for the deductable in the event of damage?

Is the intention to shift the hull insurance burden to the members themselves? Or is the club "self insurance" anticipating that it covers the 150 lock, stock and spinner.

Its a straightforward actuarial: how often do you expect to total an airframe? Whats the least worst case scenario that the club can survive and are you comfortable with that (two accidents in a year).

As a general principal the group insurance lets you pump up the denominator and distribute this risk so you will never "self insure" more cheaply unless there is something unique about your population over the group.

 

[Dave Siciliano]

Joe: I know some folks that have dropped hull value coverage and only carry liability. I don't know many folks that don't insure at all (self-insure) with significant assets at risk.

If the club is a non-profit, that could offer some protection. You probably want to know what could pass through to officers and members of the club if there was a large award against them.

I have a friend that has only carried liability for years and claims to have offset the complete loss of his plane if it occurs.

Of course, you should consider something outside your control could total the plane--it's not just that you have safe pilots.

Best,

Dave

 

[weilke]

So is it a good idea?

The way you are planning to do this, I don't think it is a good idea. The 152 is probably used as a trainer and as such stands the highest risk of damage. If you keep the other aircraft on commercial insurance, you are also not saving enough premiums to build your own risk fund.

Another way to go about it would be to build a risk fund and to start increasing the deductibles on your policies accross the board. The savings can go into the fund. At some point, the risk fund will be big enough to cover either complete loss of one of the cheapo planes or a major damage on one of the higher end ones.

Are you a not-for-profit ? How would that risk fund (that represents retained profits) be treated tax wise ?

I used to work for a not-for-profit corp that was self insured. For tax reasons, the risk fund was actually structured as a insurance company chartered in the Cayman Islands. That way, the money was taken off the balance sheet of the US company but remained available to cover damages if need be.

 

[bbchien]

Does your club have D&O Liability insurance? If not, self insurance of ANY kind is a no-no.

 

[ScottM]

I can see dropping hull coverage and self insurance under certain circumstances. But I cannot see dropping liability coverage. Especially in a club setting where so many people are flying and there is less direct control of an aircraft by a person. All it takes in one club member to get hurt and then state that the aircraft was not maintained well.

Not too mention if a club airplane does something to a non club member. I am sure that estate would like to see if it could extract a pound of flesh. BTW if you club is chartered under California law you might also wish to check on the liability of your club's board members. I am on the board of directors for a non-profit corporation in California. Each board member, under California law, can be held personally responsible for certain claims against the corporation.

 

[Areeda]

Thanks for the comments. Some answers to the questions:

Yes, we are a non-profit. I'm not an accountant but I (naively) assume that insurance reserves would be treated similar to our engine and maintenance reserve funds therefore not considered profits. I could be wrong, what do I know.

I want to point out that we are not considering dropping liability insurance, only hull insurance.

We have talked about increasing deductibles we will be getting quotes to compare dropping hull insurance on the 152 vs raising deductibles a similar total amount on all planes.

The way the club operates, if an accident is the pilot's fault (fuzzy definition I know) then they are responsible for the deductible otherwise the club covers it. If we were to raise deductibles we would most likely keep max member's responsibility at the current $2,500.

Current plan is to have the ability to completely replace a totaled plane before we drop hull insurance.

We do not have D&O insurance now. We've brought it up in the past but have never progressed to actually getting it. Thanks for reminding me, it will be on next months agenda.

Thank you all for the discussion.

Joe

 

[Dave Siciliano]

Joe: I'm on several non-profit boards and we struggle with the amount of money we can keep on hand and stay a non-profit as has been raised by Weilke. We also carry D&O coverage.
I might add, when I borrow in my business, the subject of pending litigation always arises. My attorney, insurance agent and bankers always advise me to get off those boards.

Best,

Dave

 

[Areeda]

Thanks Dave,

I know I should quit instructing and get off the board but that's too much like surrender.

I do get some rewards from the feeling like I'm doing some good.

Our CPA is also a club member and we will be covering this. Thanks for the pointers.

Joe

 

[Gmaper]

Thanks for the comments. Some answers to the questions:

Yes, we are a non-profit. I'm not an accountant but I (naively) assume that insurance reserves would be treated similar to our engine and maintenance reserve funds therefore not considered profits. I could be wrong, what do I know.

I want to point out that we are not considering dropping liability insurance, only hull insurance.

We have talked about increasing deductibles we will be getting quotes to compare dropping hull insurance on the 152 vs raising deductibles a similar total amount on all planes.

The way the club operates, if an accident is the pilot's fault (fuzzy definition I know) then they are responsible for the deductible otherwise the club covers it. If we were to raise deductibles we would most likely keep max member's responsibility at the current $2,500.

Current plan is to have the ability to completely replace a totaled plane before we drop hull insurance.

We do not have D&O insurance now. We've brought it up in the past but have never progressed to actually getting it. Thanks for reminding me, it will be on next months agenda.

Thank you all for the discussion.

Joe

Are you talking about having enough to replace any one of the planes or all of the planes? How is your weather there? Any chance of storms that damage or destroy multiple planes in one incident? Common hangar? Fleet together on the ramp? I think of the pictures that we see from time to time of a lot of planes destroyed by one incident.

 

[flyingcheesehead]

Whats the least worst case scenario that the club can survive and are you comfortable with that (two accidents in a year).

I was thinking more in terms of natural disasters - What if an earthquake levels the hangar or high winds rip all the planes off their tie-downs? Can you replace all of the airplanes, or is the club toast at that point?

Does the club (or any of the lessors-back) have any loans on which the bank has liens on the airplanes? I bet they'd have something to say about self-insurance... Probably

 

[Areeda]

Let see. 2 of the planes have hangars, 5 in tie-downs. Natural disasters are a possibility but my 12 years none have done significant damage. I'll ask about history further back.

The exact plan is not defined. My personal position is it may be feasible if we have cash on hand to cover one plane, we drop hull on one plane. If we can save a similar amount of money by raising the deductible on all 7 that is probably the safer course.

I believe out of the 7 one maybe 2 have outstanding loans.

This is exactly what I was hoping for. A discussion of the issues. Lots of things to think about. I really appreciate everybody's time and insight.

Joe

 

[weilke]

To hedge against the possibility of a storm wiping out your entire fleet, you may be able to get a different deductible for 'not in motion' hull coverage. So if someone chops a runway light with the prop ($18,000), you pay it out of the risk fund. If a hurricane flattens your hangar row, you cough up a deductible of 2k per plane. Find a broker interested in your business to run different scenarios for you.

Oh, and get that D&O insurance (unless you are an assetless retiree).

 

[Joe B]

Let see. 2 of the planes have hangars, 5 in tie-downs. Natural disasters are a possibility but my 12 years none have done significant damage. I'll ask about history further back.

You're not going to find anything in LA history that will give you a quantitative answer. Your position is similar (in some ways) to a pre-Katrina resident of New Orleans looking at the historical record to estimate the odds of getting wiped out by a hurricane. That study would have concluded zero percent - because New Orleans hadn't ever been wiped out by a hurricane. Similarly, none of the Los Angeles area airports have ever been wiped out by a natural disaster. History is the wrong place to look.

What are the odds of your airport taking a bullseye from a hurricane? From a rampaging wildfire? What will be the effect on your fleet of The Big One? You need to answer those questions (and probably others) with scientific forecasts if you want to develop any kind of estimate.

 

[weilke]

You're not going to find anything in LA history that will give you a quantitative answer. Your position is similar (in some ways) to a pre-Katrina resident of New Orleans looking at the historical record to estimate the odds of getting wiped out by a hurricane. That study would have concluded zero percent - because New Orleans hadn't ever been wiped out by a hurricane .

Mh, you had to be deaf and blind to not to receive the well founded warnings that New Orleans would be in the drink with a category III or higher hurricane. The historic record indicated that the founders of the city built it on the 'crescent' as it was regularly flooded by tidal or river floods and that it depended on a system of dikes and pumping stations to stay afloat.

In LA it's a seismic event you are worried about. Harder to forecast.