Welcome to Aviation Insurance Australia : ISSUES : PILOTS - When Someone Else Files Your Aircraft

Selecting an Aircraft Insurance Broker

Why can't an aircraft owner shop among two or three different brokers to get the best quote? What's the scoop on "exclusive quotes" and "broker-of-record letters" and whose interests do they serve? What's the procedure if I'm unhappy with my agent and want to change?

"By Tom Chappell and Darrell Hyde

"Broker-Of-Record Letter"

What is it?..

Who requires it??

Should you sign one?

Aviation insurance can be purchased in two ways:

from an insurance company where the insured contacts the company direct; or
through an independent insurance broker who represents the client

Occasionally, an insurance buyer is asked by an independent insurance broker to sign a "Broker-Of-Record Letter" (BOR). Often there is much confusion about what such a letter is and why it may be necessary. We have seen a BOR issued only to be rescinded later when its meaning and effect was fully understood. We have heard comments such as "unfair trade practices", "restraint of trade", "communist plot", "I don't have to do this with my auto and home owners insurance", etc.

Our intent in this article, is to clear some of the confusion.
First, a few terms as used in this article:

Insured: The insurance buyer

Risk: The aircraft and the insurance details pertaining to it

Insurer: An insurance company or the aviation managers for a group of insurance companies

Broker: A person licensed by the Federal Government to transact insurance business, who may place business with several Insurers. The Broker discusses the risk with the Insured to develop the details of the risk and the needed coverage, then presents the risks to an Insurer(s)

Underwriter: An employee of an Insurer who will negotiate coverage terms with the broker, provide a coverage proposal and issue the insurance policy

Specialised Field

Aviation insurance is a highly specialised field because of the complex nature of the risks involved and the relatively small statistical base upon which rates are calculated. Risks are largely "judgment rated" in accordance with a company's overall underwriting standards and philosophy. An individual underwriter usually has a broad range of rating latitude on a given risk and can be influenced by his personal evaluation of a risk.

A knowledgeable broker who has done his homework can, in many cases, negotiate improved terms with an underwriter by clarifying information or offering additional details. For example, if the pilot has marginal experience for the aircraft involved, a discussion of the training and checkout procedures planned can be very helpful.

"Exclusive" Quote Basis

With rare exceptions, aviation insurers have traditionally chosen to deal with only one broker on a given risk. They quote on an exclusive basis. The first broker to contact the insurer becomes the exclusive broker of the risk. In the case of a renewal, the broker presently handling the account with the Insurer remains the exclusive broker. Any other broker who subsequently contacts that insurer is precluded from discussing it.

Without this rule, it would be possible for two different brokers to contact two different underwriters with the same aviation insurance underwriting company and be given two different quotes on the same risk. Such differences can create confusion with an insured. The broker with the higher quote may accuse the insurer of showing favouritism to the broker with the lower quote. The difference in premiums could be justified by the differences in coverage's requested by each broker and the varying extent and accuracy of the underwriting information developed. The details of coverage's requested (limits, pilots, uses, geographical areas, etc.) could result in varied quotes on the same risk.

Examples of Confusion

For example, imagine a quote request on a Beechcraft Bonanza, a fairly complex single engine aircraft (six place, variable pitch prop, retractable landing gear, 230 h.p. engine). Imagine one broker aware of the significance of an instrument rating held by the pilot and the other broker not. The instrument rating would be considered a very important factor by underwriters for this type aircraft and the broker confirming this bit of information stands to get a better quote.

On the other hand, a broker who provides underwriters with details of previous losses may get a higher quote, or even a declination, than the broker who fails to provide the information. Any broker who would omit such critical information stands to have the quote withdrawn when the underwriter receives a completed application. If the loss details are not furnished to the underwriters, serious problems could arise in the event of a claim.

Another area which can cause confusing differences in premium quotations is the specific liability coverages being offered, whether from a direct writing company or through an independent broker. Sometimes major differences in coverage are stated with subtle differences in their description. For example:

$1,000,000 Combined Single Limit (CSL) Bodily Injury (BI) and Property Damage (PD)
$1,000,000 CSL BI & PD with passenger BI limited to $100,000 per passenger
$1,000,000 CSL BI & PD with BI limited to $100,000 per person

A non-aviation insurance professional may not realise that:

Coverage #1 provides a full $1,000,000 "level" limit of BI and PD without restriction on the amount available for any bodily injury claims
Coverage #2 restricts the amount of protection available for bodily injury to passengers to $100,000 each, but with no further restrictions for persons outside the aircraft who may be injured
Coverage #3 applies a restriction of $100,000 for any person injured, passenger or not

Each of these liability coverages would result in different premiums. Rather than put out several differing and confusing quotes on a risk, underwriters prefer to invoke the "exclusive" quoting basis.

The Broker-Of-Record Letter (BOR)

A BOR is a written authorisation from the insured to an insurer designating a specific broker as the one who is to deal with that insurer on the risk. It is not required of the first broker who contacts the insurer - only subsequent ones. If an insured is dealing with only one broker, the subject may never come up.

When the insurer receives the letter, the first broker is advised that the second broker is now the "exclusive" broker and that no more discussions can be had with the first broker. In fact, if the insurer has quoted the risk to the first broker, the quote is withdrawn and the same quote is then given, exclusively, to the second broker.

The first broker is usually given a few days before the second broker is recognised at the broker of record. This gives the first broker an opportunity to persuade the insured to change his mind. When a rescinding letter is written, it usually indicates that the insured didn't fully understand the effects of the BOR in the first place. Insurers don't like to get caught in the crossfire between two brokers competing on an account and tend to lose interest in it, if there seems to be confusion as to who is to represent the risk. Most underwriters are reluctant to honour a BOR mid-term.

Not a Legal Requirement

There is no legal requirement for the traditional position taken by insurers regarding a BOR. Ethically, they are bound to follow the desires of the insured as to who will represent the risk. Even if an underwriter prefers one broker to another, he will follow insured's instructions to deal with the designated broker. The underwriter is also ethically bound to make the same premiums available to the designated broker, if the risk has already been quoted. This assumes, of course, the same terms and coverages and underwriting information.

There are times when a broker may ask for a BOR from an insured, even though no other broker has become involved in the account. This is especially true of larger, more complex accounts. The proper handling of such an account can require a good amount of the broker's time and effort. The signing of the letter by an insured usually indicates that he has confidence in the broker. The broker's time and effort won't go unrewarded, since he will ultimately place the insurance. The letter indicates to the insurer that they are dealing with the broker who has the insured's authority to represent him.

There are cases where an unauthorised broker will contact a company on behalf of the insured. This kind of contact results in sketchy or assumed underwriting information since the broker hasn't even spoken with the insured. This may occur when a broker learns of a pending aircraft sale and wants to write the business. Although blocking markets without the insureds authority may not be illegal, it certainly is unethical. Because of the unauthorised contact, a BOR would be required in such cases if the insured wanted to choose his own broker.

Limited Number of Markets

There are only about four sources for aviation insurance in Australia today and all are not candidates for every risk. Most risks would be presented to only about half of these markets and, with larger and more complex risks, even fewer than that. When an insured asks two or more brokers to get aviation insurance quotes, most often the same insurers will be contacted by each broker. The first one making contact would become that insurers "exclusive" broker.

Appointment Not Irrevocable

A BOR should be treated by an insured as a serious commitment to a broker. He is hiring a new broker. An insured should also realise that the first broker will be advised by the insurer of the change. However, it is not an irrevocable arrangement. In the aviation insurance marketplace, the insured has the final say as to who his broker will be. If he chooses to change his mind, he has the right to do so.

If asked to sign a BOR, an insured should consider the reasons for the request. The requesting broker may be "blocked" from an insurer because another broker contacted them first. The insured can then decide who he wants to represent him to that insurer and make his decision accordingly.

Examples of a typical "Broker-Of-Record Letter"

This one is used by Aviation Insurance Brokers of Australia Pty Ltd:

Mr I M Tait (May be addressed directly to the Insurer)
Aviation Insurance Brokers of Australia Pty Ltd
PO Box 616
ARCHERFIELD QLD 4108

This is to confirm, effective immediately, the appointment of Aviation Insurance Brokers of Australia as the exclusive Broker of Record and the authorised representative for purposes developing coverage proposals and placing aviation insurance coverages on my behalf.

I understand that aviation insurance companies will release a coverage quotation and proposal for insurance to only one broker. By signing this letter, I am terminating the ability of any other broker (including any currently involved) to obtain a quotation or to bind aviation insurance on my behalf.

A copy of this letter including my signature below, will authorise any aviation insurance market to provide with all of the pertinent information or documents required.

This appointment supersedes any previous such appointment and shall remain valid unless superseded in writing by me.

Yours faithfully

signed:

Print Name:

Date Signed: