NBAA News Hour: Is Your Aircraft LLC Insurable?

July 24, 2023

NBAA’s latest News Hour webinar took a fresh look at the legal minefield of aircraft ownership, with a lively discussion between five industry experts offering deep insights on how the registering of aircraft in limited liability companies, or LCCs, and the use of the dry leases, can impact insurance coverage.

According to David Hernandez, a shareholder at Vedder Price and a member of the law firm’s global transportation finance team, understanding the principle of operational control is essential for anyone considering LLCs and dry leases.

“Federal aviation regulations don’t actually define a dry lease; what they define is a wet lease, and that’s simply an airplane plus a crew. Over time, primarily through advisory circulars, we have been given guidance that defines the purpose of a dry lease as the transfer of operational control for the aircraft,” he said.
“That knowledge is essential because you need to know who the operator of the airplane is to determine if they’re operating under the right rules.”

Hernandez, along with the other panelists, also are members of NBAA’s Regulatory Issues Advisory Group.

Determining operational control is a complex but essential element of any dry lease as it has regulatory, as well as insurance implications, said Joanne Barbera, partner at Barbera & Watkins. Determining who has operational control should be a priority of everyone involved in a dry lease “because the FAA is going to hold that party responsible if something goes wrong on that flight.”

She added that once operational control is established, the identified party should become deeply involved in every aspect of the flight. “Talk with the pilot, contact the owner, talk to the maintenance provider to make sure the aircraft is in good shape, talk to the scheduler, know the routes,” Barbera explained.

Uncertainty on who has operational ownership can also impact insurance coverage, especially if an LLC is issuing multiple dry leases, noted Ryan Waguespack, partner at investment firm JetQuity. “When you’ve got multiple dry leases, there’s the potential for confusion in the market, and then that gets back to the underwriters. If the leases are legal and transparent, then good, but you don’t want confusion when considering risk management,” he warned.

For Kent Jackson, managing partner at Jetlaw, many aircraft owners mistakenly believe LLC registration offers protection from liability. “It is important to understand that owning the airplane and the company, separately from where it’s going to be operated, can have some advantages, but don’t think that one of those advantages is liability protection,” explained Jackson. “I see this misunderstanding across the spectrum of aviation.”

That LCC structure could even open owners to greater liability, added David Norton, partner and head of aviation practice at Shackelford, Bowen, McKinley & Norton.

“You’ve got to understand that many of the concepts associated with aircraft ownership are tax concepts, not regulatory concepts held by the FAA. There are a lot of nuances involved, but if you have a structure where money is flowing back into your airplane LLC… that could be considered per se a charter operation,” said Norton. That charter status would expose a Part 91 operator to the costly burdens and responsibilities of a Part 135 certificate.

Many more aspects of aircraft LLCs were discussed during the hour-long webinar and this episode should be considered an essential tool for anyone seeking to understand the topic, said Brian Koester, CAM, NBAA’s director of flight operations and regulations, and moderator of the session.

“We covered a lot of ground, and thanks to the many thoughtful questions submitted by our participants, we were able to address a lot of misconceptions about the use of dry leases and the transfer of operational control as well as the fine line that sometimes exists between a legal and illegal charter,” Koester said. “This was an important conversation and will help everyone in our community – owners, lessors, lessees, crewmembers or passengers – gain a deeper understanding of this complex topic.”