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Part 5: Liability Insurance for Homebuilders Buying & Selling a Homebuilt
By Arthur Wasserman (originally published in EAA Sport Aviation, July 2000)
As pilots, we use a checklist to reduce the possibility of loss due to overlooking something. In the same vein, this series of articles on selling a homebuilt is designed to create a checklist approach so homebuilders can reduce their possibilities of financial loss. Awareness of what homebuilders’ exposure is (and is not) can foreclose many of the problems. An earlier article in this series explained the risks in terms of negligence, product liability, and warranty. Others have dealt with the contract for sale, as well as what releases and disclaimers can and cannot do.
Insurance is another avenue for builders’ protection, and it can cover two “parties.” First-party coverage is insurance that is available to protect owners against damage or loss of the property itself, such as fire, theft, hull loss, or the like. Third-party protection is liability coverage that protects the insured against claims made against them by others arising out of the ownership, maintenance, operation, or use of the aircraft.
Most pilots understand first-party protection and have little difficulty obtaining it. Because it is similar to the protection we can buy for any of our personal assets, the insurance industry generally will write coverage for homebuilts or homebuilt projects. In effect, this coverage is a contract by which owners pay a premium in exchange for the insurance company reimbursing them if certain types of losses to the insured property take place.
Third-party coverage deals with a common homebuilder question-”What can I do if someone sues me because of the aircraft I built?”
Theoretically, the risk to builders is enormous. To enable us to build our own aircraft, the FAA has created a special set of regulations. These regulations encourage ingenuity, enable self-certification (compared to factory-made aircraft), and allow builders to work on the aircraft they build (just like mechanics) and to determine their homebuilts’ airworthiness. The downside of these privileges is that, legally, homebuilders are manufacturers with all of the potential liability of any other manufacturer for negligence, product liability, and warranty exposure when the aircraft is sold.
Before passage of the General Aviation Revitalization Act of 1994 (GARA) a manufacturer’s exposure to liability existed throughout the aircraft’s life. After GARA, it’s limited to 18 years. Manufacturers of production aircraft can and do insure to protect themselves for liability for such losses. Such coverage for an individual builder, even if it were available, would not be economically practical.
Some manufacturers do not carry liability coverage. If a company is large enough and can fund a liability defense, it is said to “self-insure.” In the case of an individual or small company, the same concept of going without liability coverage is called “going bare.” There was a period, for example, after the Piper Aircraft Corporation went into bankruptcy, that its successor elected to self-insure. The same situation exists for some of the kit manufacturers, as well as most of the ultralight manufacturers. The downside to this, especially in the case of the individual builder, is obvious. Overlooking, for the moment, the potential for liability, the costs of defense in an action brought could become enormous.
In actuality, the risks to an individual aircraft homebuilder are relatively small. The average individual aircraft builder is simply not an attractive target. Claimants and their lawyers are not set up to collect large amounts from individuals. Despite this, the potential for liability can be very large and the costs of defense, even if successful, can become prohibitive. Of course, as time goes by, the sellers’ liability exposure diminishes.
Logically, GARA’s 18-year liability limit (statute of repose) may protect homebuilders just as well as it does manufacturers such as Cessna, but there are no cases decided yet to confirm whether homebuilts qualify. Additionally, once the aircraft is finished and in the field, it goes through a series of annual inspections that, over time, insulate the original builder. Still lurking, however, is the remaining exposure that eventually led to the enactment of the GARA, namely, the individual builder will always be in the books as the manufacturer, subject to manufacturers’ liability exposure.
The key question is, “Can the risk, whether it’s large or small, be insured against?” Until recently, the answer was no. In recent years, however, EAA was able to prevail on Avemco Insurance Company to partially alleviate the problem. Avemco now issues a policy designed to protect, to the extent reasonably possible, homebuilders generally and EAA members in particular. The Avemco policy carries with it a so-called EAA insurance plan endorsement that provides coverages not available anywhere else in the insurance market. It even gives a series of discounts for EAA members, including a 5 percent discount for membership, as well as an additional 5 percent premium discount for participation in the EAA Technical Counselor program.
Of particular importance in the Avemco/EAA insurance plan endorsement is that the policy extends liability coverage, with certain limitations, even after the aircraft has been sold. This exposure to liability long after the manufacturing process was the stated reason for the production manufacturers to threaten to cease manufacturing and the justification to Congress for enactment of GARA.
This latter type of coverage should be of vital interest to homebuilders. The key provision in the policy is that coverage extends for one year after the builder sells the aircraft. Moreover, if the builder keeps the aircraft for three years with coverage in full force, the extension is two years after the sale; if the builder keeps it for at least five consecutive years, the extended coverage exists for a total of three years.
There is no perfect way for homebuilders to protect themselves against liability, but the existence and availability of the EAA insurance plan endorsement from Avemco goes a long way in protecting homebuilders.
In today’s litigious society, there is, perhaps, some justification for the anxiety homebuilders express about theoretical financial loss arising out of their efforts. Experience, to date, does not support these fears. I checked carefully with other aviation attorneys and insurers, and the number of lawsuits that have actually been litigated against homebuilders is minuscule.
Moreover, at the time of this writing there doesn’t appear to be any instance in which an actual case was filed, tried, reduced to judgment, and collected against a homebuilder. There is one pending arising out of the John Denver crash, but that case is focused against the fuel valve manufacturer and its retailer, who appears to have coverage, although the builder is also being sued.
This doesn’t mean homebuilders should completely ignore their theoretical liability. However, if they follow what has been suggested in earlier articles with the contract for sale and they get the appropriate releases, waivers, and purchases the insurance provides, they have gone a very long way to obviate the problem.