In Brief: Insurance Considerations for Aircraft Financing and Leasing in Canada
Insurance and reinsurance
Summarize any captive insurance regime in your jurisdiction as applicable to aviation.
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) regulates insurance at the federal and provincial levels under the Insurance Companies Act of 1991.
To operate an aircraft, every owner must take out civil liability insurance covering civil liability and the risk of injury or death to passengers. The Air Transport Regulations 1996 set minimum amounts of cover, which may be provided by a single policy or a combination of primary and excess policies. However, owners must meet the minimum coverage amount. Licensees must file, on an annual basis, a certificate of insurance and the accompanying endorsement.
There is no obligation to obtain insurance from national insurance companies. However, all Canadian airlines must obtain their insurance from insurers licensed or registered in Canada, or licensed or approved by a foreign government to issue aircraft insurance policies.
Are curtailment clauses in insurance and reinsurance documentation legally effective?
There is no Canadian case law on the legal effectiveness of transition clauses. However, OSFI has issued guidelines to ensure that the terms of insurance and reinsurance contracts are clear. He stated that such clauses should not be used to frustrate the system of priorities provided by the Winding-up and Restructuring Act. Nevertheless, OSFI also recognizes that there are situations where the interests of insurers and their policyholders may be better served by the use of such clauses. It does not intend to restrict its use in such situations where they do not give preferential treatment over other claims under the Winding-up and Restructuring Act.
Are reinsurance cessions (by domestic or captive insurers) legally effective? Are reinsurance cessions generally provided on aircraft leasing and financing transactions?
Ceded reinsurance is generally not provided for aircraft lease and finance transactions in Canada.
Can an owner, lessor or financier be responsible for the operation of the aircraft or the activities of the operator?
The Air Transport Regulations 1996 require a licensed air carrier operating the aircraft and crew of another air carrier (operating carrier) to carry liability insurance through its own policy insurance or be named as an additional insured under the operating carrier’s policy. This must include a written agreement that the operating carrier will indemnify or hold harmless the contracting carrier for passenger liability and third party liability. In addition, this applies to all wet lease, bulk space and codeshare agreements entered into by both parties. The only exception is when the Licensee causes damage through willful misconduct or gross negligence.
Unless negligence is established on the part of a lessor or financier, they cannot be held liable to an injured third party under Canadian law. It is therefore advisable to have these lessors or financiers added as additional insureds under the applicable insurance policies. The truth is that while indemnification provisions may redirect liability to the operator, lessee or insured air carrier, their coverage may in fact be void. It is important to note that interest severance clauses are particularly useful in these cases, as the named insureds may have invalidated their coverage under the policy.
Does the jurisdiction adopt a strict liability regime for owners, lessors, financiers or others with no operational interest in the aircraft?
No, a fault liability regime applies when ordinary activities can cause accidents. Neither the owner, nor the lessor, nor the financier are strictly responsible for the acts of an operator. Indeed, the operator must indemnify and hold harmless the owner, the lessor or the financier under its insurance policy, except in the case of willful misconduct or gross negligence. However, there have been instances where there was such a close connection between the lessor and the lessee enforcing the applicable regulations that such a lessor was found complicit and therefore liable for the violations.
Are there any minimum requirements regarding the amount of liability cover that must be in place?
Section 7 of the Air Transport Regulations 1996 sets the minimum amount of liability cover for peril or death of passengers at CA$300,000 per passenger seated on board the aircraft and the cover for third party liability at :
- $1.985 million Canadian if the aircraft engaged in the service weighs less than 7,500 pounds;
- 3.97 million Canadian dollars if the service is between 7,500 and 18,000 pounds; and
- $3.97 million CAD for services over 18,000 pounds and an additional $300 CAD per number of books over 18,000 pounds.
Coverage requirements exclude employees of the air carrier. These requirements exist for all commercial air operators.