Insights

Grounding Liability Insurance – What is a "Grounding"?, Insurance Policyholder Advocate

No airline wants to ground any part of its fleet unless safety considerations require such action. Likewise, no aviation product manufacturer wants its product to be implicated in a grounding order. Nevertheless, once the FAA has issued a mandatory grounding order, there are important implications for insurance coverage.

Groundings are very likely to result in a loss of revenue. Although safety is the paramount consideration, it would be natural for the affected parties to seek some type of recourse if a design or manufacturing defect is determined to exist. To protect against the financial consequences of such claims, aviation manufacturers can purchase aviation products liability insurance. For purposes of such insurance, it can make a very significant difference whether a grounding is based on voluntary action or mandated by governmental act.

"Grounding Coverage" in an aviation product manufacturer's policy is third-party liability coverage that can provide quite extensive limits to defend and indemnify a manufacturer against claims for loss of use caused by grounding. A typical grounding insuring agreement might read as follows:

COVERAGE B – GROUNDING LIABILITY

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages for the loss of use of completed aircraft occurring during the policy period after delivery to and acceptance by a purchaser or purchasers or operator or operators of such aircraft, and caused by a grounding arising out of the Products Hazard.

What is necessary for a "Grounding" to occur?


It is immediately obvious that grounding coverage must be triggered by a "grounding arising out of the products hazard." Therefore, the definition of "grounding" must be considered. This term is used loosely in news and other reports, but for purposes of grounding coverage a typical definition is as follows:

"Grounding" means the complete and continuous withdrawal at or about the same time in the interest of safety, of one or more aircraft from flight operation due to a mandatory order by Federal Aviation Administration (FAA) or any other Civil Airworthiness Authority because of a like defect, fault or condition or suspicion thereof in two or more such aircraft whether such aircraft so withdrawn are owned or operated by the same or different persons, firms or corporations.

For purposes of language such as that set forth above, a "mandatory order" is key. Although some policies might allow an agreed order of grounding also to serve as a trigger, coverage for a purely voluntary "grounding" of aircraft that is not associated with any governmental imprimatur probably would be contested under such provision.

Has there been an "Occurrence"?

Another requirement to trigger grounding coverage is an "occurrence." A standard definition of occurrence will require an "accident or event" that results in "bodily injury or property damage."

What is the period of "Grounding"?

The above-quoted policy deems grounding to occur on the date of the accident or occurrence that discloses the defect, fault or condition. However, other policies provide for a period of delay between the date of the occurrence and the date of the grounding order. An example is as follows:

A Grounding shall be deemed to commence from the date on which the first such [mandatory] order becomes effective following an Occurrence during the Policy Period and to continue until the date on which the last such order relating to the same existing, alleged or suspected like defect, fault or condition is withdrawn or becomes ineffective. Such Grounding shall be deemed to fall in the Policy Period of the Occurrence which exposed such defect, fault or condition.

Under the above definition, the grounding period begins when the first mandatory order becomes effective. The date of the occurrence must be determined in order to fix the proper policy period applicable to the loss, but (under this definition) is not relevant to the period of grounding itself.

Other definitions start the grounding period with the date of the accident or occurrence:

Grounding shall be deemed to commence on the date of an accident or occurrence which discloses such defect, fault of condition, or on the date an aircraft is first withdrawn from service on account of such defect, fault or condition, whichever first occurs.

Under typical formulations, grounding coverage will end when the grounding order is withdrawn or is ineffective, even if that extends beyond the expiration of the policy.

Grounding Exclusions

Grounding coverage also is subject to a series of exclusions. For example, if loss of use is determined to have been due to a failure by the policyholder to use reasonable diligence to eliminate the cause of the loss of use, then an exclusion on this topic might be asserted. Grounding coverage might also contain an exclusion for property damage resulting from "improper or inadequate design or specification." In addition, costs incurred to correct or eliminate the cause of the loss of use typically will be excluded.

CONCLUSION

In short, all "groundings" are not alike. When evaluating insurance coverage for an aviation grounding, it is critical to study the precise terms of the policy. If a coverage opinion, legal analysis, or a demand for coverage against the insurer is required, a policyholder should seek the input of knowledgeable professionals, including an insurance broker who specializes in this field, the policyholder's risk manager (if there is one), as well as legal counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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