Insurance for a Leaseback C-172N

Hello, 

I am buying a Cessna 172 and am leasing it back to my flight school. I have a few questions with what I should do with the insurance. The flight school wants me to be a ‘named person’ on their policy. As in they hold a policy on the plane itself and liability and they are the sole name on that policy while I am just there. They are also expecting me to pay for this insurance in its entirety. In the event something happens, we would both have to sign to use any funds. I am assuming this is unreasonable if not risky for me? 

I am also wondering if I should just have my own insurance for liability and replacement. Can I get an insurance policy for the replacement costs even if that is more than what the plane appraises for? Can I get insurance for loss of revenue?

If anyone has advice or can point me in the direction of someone who may have some answers please let me know!

15 Replies

For years I had a charitable organization on my insurance policy as a named insured. My agent warned me that the liability coverage was cut in half for each party when I did that. I would have them get their own insurance policy and you keep yours. It's unlikely that you will be able to get hull coverage that allows you to replace the airplane. You have to convince the insurance company that your airplane is worth the amount of hull coverage. An older airplane is seldom worth enough to justify that unless you recently had it rebuilt. I've never tried to convince an aviation insurer to include loss of revenue but I highly doubt that they would agree. The policies that I've had over the last 23 years use standard format terms and waivers. For three years I ran a part 91.147 air tour business with my Maule and there was nothing in the policy about loss of revenue.

Leaseback arrangements tend to weight benefits towards flight schools.
They paint you a picture of earning money but in reality, they are accelerating ware and tear on your airplane making it depreciate in value faster that it should, your plane is also more exposed to accidents and if one happens it will have ‘damage history’ making it less valuable in the resale market and lastly what’s the use of ‘owning’ an airplane when you have to be in a flight schools schedule to use it!?

Flight schools have a long history of taking advantage of solo owners by waiving some dollars and getting access to assets (ie your plane) without having to place any capital or risk out there, in your case with the added slap in the face of paying for insurance!! I’ve never understood why an owner would be lulled into this- 

if you need the money from leaseback consider a less expensive plane or just rent for now. By leasing back, it’s going to feel like you’re renting (your own plane) anyways!

 
Gary Justus
13 Posts

I would be very careful here with your leaseback insurance. I did a leaseback for almost 5 years and there were four “incidents” by low time renter pilots, three of which could have easily injured or even killed someone. Any one could have exceeded the liability policy limits, and I would have been next in the line of responsible parties who could have been sued and liable. (I was not sued.) You need to talk first to an aviation attorney (an AOPA benefit) as to how to structure the named insureds. Then contact an aviation insurance broker to implement the attorney's advice into a policy. My personal preference would be to have the aircraft owner also listed as a named insured. That means you have to also sign any insurance claim check rather than permit the leaseback company to have sole possession of the money. I also would have the leaseback contract specify that the renter pilot and the leaseback company are both jointly and severally responsible for paying you the hull deductible for any claim. I would insist on high per passenger liability limits, not the usual $100,000 PP found in many policies. Finally, consider titling the aircraft in the name of a limited liability corporation (LLC) to shield yourself from personal liability in case of a legal judgment against you from an accident caused by someone else, either a CFI, renter pilot, an airplane mechanic or the aircraft manufacturer. This all may seem like excess caution…until it isn't.

Kent Shaw
8 Posts

When I was a student pilot, I bought a Cessna 152 and placed it under a leaseback with a flying club.  The insurance requirement was similar to the one you are considering.  This was a commercial policy with a high liability coverage and named both the flying club and me on the policy.  The leaseback worked out great for me.  There were a few months when I was getting over 100 hours of flight revenue.  I was able to pay off the loan for the plane and the cost of an engine overhaul.  I kept the plane for about four years and used it to get my PPL and build up my cross-county flight hours.  

I’ve had my C172N under a leaseback to my local FBO/flight school for about six years. My agreement is different from most others I’ve seen. I saw the constant hassles of paying for repairs and misc. expenses and I wanted a peaceful and profitable arrangement. My lease has the school pay for everything except normal wear-and-tear of more expensive parts. For these larger expenses, we split the cost of the parts above $1,500 and they provide all labor. That’s only happened twice, and they were pre-existing conditions that weren’t caught in any inspection. Engine overhauls are separate, but I get a reduced labor rate for all they do. They have adequate insurance and my LLC, my spouse, and I are all named on the policy. I do not pay for this insurance. There is a fixed monthly base amount for up to 20 hours on the Hobbs and a higher hourly rate above the initial 20 hours. Hobbs time for MX is not counted. I also specify some other terms such as always hangared, notifications for all incidents and repairs, oil test results, etc. For all these considerations, I accept a lower hourly rate.

I had AOPA legal services review the original agreement. They advised some changes such as making sure everyone is individually named for legal defense purposes. I was told by AOPA legal and my insurance underwriter that there was no reason to have my own policy under this agreement. Even though I am very risk-averse, they refused to even quote me. One oddity is that if I fly my own airplane, I have no personal insurance. If I wreck the airplane myself, the flight school’s insurance provider might sue me to recover unless I agree to no recovery. A solution is obtaining a renters policy which is very affordable.

In the end, it’s to whom you are leasing your aircraft that really makes it a good or poor situation. I’m lucky that my flight school has its own maintenance shop, and they keep my C172N in good condition. They are easy to work with and honest. Yes, students have damaged the aircraft, but the repairs have been well done, inspected, and approved. During the first year I had to learn to “let go” and stop treating my airplane like my oldest child. Buying a second, much nicer, airplane helped!

My best advice to you is to either retain an attorney with aviation lease experience (probably unrealistic for leasing one airplane) or join AOPA's Pilot Protection Services (PPS). In my case, it was money well spent.

Hello Kensington,

Like several members have just recently mentioned below, I would recommend adding and using your AOPA Legal Service Plan (LSP or PPS) to have your leasing/commercial insurance position and Federal tax situational-concept reviewed under the plan. Caveat: although I am not a licensed insurance agent, we have seen the following:

  1. the overall cost, for you the owner, of a commercial policy is probably least expensive via the FBO/flying school.
  2. the policy should/will also name you, the aircraft owner, as an additionally insured; you would be insured to the same amount the the FBO is under the policy ownership. But yes, verify those limits. Depending on your net-worth, you may wish to get pricing for higher limits. Your ownership entity will probably want to be an LLC, but discuss that with the attorney.
  3. You may wish to hear our Federal tax primer to understand your tax situation for passive vs. active income. Again, make sure that you understand that this is ‘your’ active leasing business- our sample lease agreement confirms to an operating business with the FBO as your marketing manager-- not a direct leaseback to the FBO as that would always be passive. IRS expects a profit, not counting depreciation, 3 years out of 5. Passive losses can only be used against passive income; and that's not what owners expect. To operate as non-passive, you must manage the business portion a certain number of hours per year, but that is doable. 
  4. I have had two “so-called leasebacks” myself , and probably talk with 4-5 potential leaseback buyers every month, (so I know the areas of concern :-)