Ownership Risk

After 9/11, there is no need to invent catastrophic-damage scenarios involving airplanes. The attacks on the World Trade Center and Pentagon demonstrated conclusively that jets can cause damage on a previously unimagined scale.

So far, damage caused by business jets has been largely unintentional. But unintentional damage can still be significant, and as lawyers well know, where there is damage, there is potential liability. The question is: whose liability?

The first people to get blamed in an aircraft accident are usually the members of the flight crew. But even if they were negligent, potential liability doesn't stop there. FAA regulations provide that the party with operational control at the time the accident occurs is responsible for the aircraft's safe operation. The operator and pilots are often covered by the same insurance policy with the same liability limits.

Another typical target-one that the same insurance policy doesn't cover-is the manufacturer of the aircraft. The manufacturer can be liable in various ways, including as a result of defective design or manufacture, either on a negligence theory or because the law holds the manufacturer strictly liable. Other liability targets include manufacturers of the engines and other components, maintenance facilities and air traffic controllers.

But the least obvious and sometimes least protected liability target is the aircraft owner. Even if the owner didn't have operational control at the time of the accident, he or she can still be held responsible for damage caused by the aircraft. A sobering New York statute provides, for example, that "every owner of an aircraft shall be liable and responsible for death occasioned or injuries to person or property sustained, within or above this state, as the result of the use or operation of the aircraft in the business of the owner or otherwise..."

Statutes like this will catch many owners by surprise, and with some justification. In aviation's early days, many people regarded airplanes as inherently ultra-dangerous. People on the ground worried about injuries and damages resulting from things falling out of airplanes, not to mention airplane crashes. Before World War II, roughly half the states enacted legislation that made an airplane owner absolutely liable for damages to people or property on the ground caused by the airplane regardless of whether the owner was negligent. Later, as aircraft came to be viewed as a common means of transportation instead of a hazardous amusement for daredevil aeronauts, many of these statutes were repealed, but some states (e.g., Delaware and New Jersey) still have such laws.

There are important differences between such laws and the New York statute. First, the New York statute applies to any damage, not just to damage to people or property on the ground. Second, it applies whether the owner operates the aircraft or makes it available (by lease or rental, say) to another person to operate, but only so long as that other person would be liable. Here are some ways that can happen:

• The owner puts the aircraft out for charter on another party's air carrier certificate.

• The owner of a share of an aircraft makes the aircraft available to other participants in a fractional-share program.

• The owner leases the aircraft for a few days to another company to operate.

In all these scenarios, if the aircraft is involved in an accident and its operator is at fault, the New York statute makes the owner liable as well.

Is there any way to avoid such liability? The New York statute contains an important exemption for cases where the damage was caused while the aircraft was under lease to another party for 30 days or more. Unfortunately for owners, many lease, charter and fractional arrangements may be deemed to involve leases of less than 30 days. When trying to arrange a short-term lease, the owner may request that the lessee indemnify him from damages. This could be helpful in shifting liability to the operator, but it obviously won't work if the operator is another entity under common control with the owner.

Given the difficulty of avoiding liability as an owner, an aircraft buyer may seek to shield himself from liability by setting up a corporation or similar entity (such as a limited liability company) to own the aircraft. One of the purposes of a corporation, after all, is to limit the liability of shareholders to their investment, in this case the aircraft. But a corporate shield will be effective only if the corporation (or a third party) operates the aircraft.

In other words, a corporation is of dubious value as a liability shield unless it shields the shareholder from liability as both an owner and an operator. In a typical scenario, where the corporation leases the aircraft back to the shareholder to operate, the fact that the shareholder is shielded from liability as an owner will be largely irrelevant.

For this reason, many business lawyers will structure their client's aircraft acquisition so that the new company, often referred to as a "flight department company," both owns and operates the aircraft. From a business-law standpoint, this makes perfect sense. From the standpoint of FAA regulations, however, it's a disaster. The FAA's position is that an aircraft operated by a company with no business other than owning and operating an aircraft isn't eligible to operate under Federal Aviation Regulations Part 91. Instead, it must have a commercial operating or air carrier certificate-something few flight department companies possess.

You can try to create a structure to limit ownership liability without undertaking operational liability and still operate under Part 91, but it's not easy. In the end, you may wind up relying on insurance, and here there is actually some good news. Liability insurance is available up to $500 million. So far, no damage award arising out of a business jet accident has come close to that amount. Moreover, if your aircraft is owned by one company and leased to and operated by another, each company could purchase up to $500 million of liability protection.

If you own an aircraft or a share in one, it is worth reviewing what your liability exposure might be in the event of an accident.