Posted by: Tom Chappell | August 27, 2010

The Dilution Effect

Frequently, we have clients that form partnerships to share in the ownership and usage of individually or corporate owned aircraft.  This is a growing trend in the current economic environment.  In fact, such an arrangement makes a lot of sense by diluting the fixed costs of owning a private aircraft.  Such things as insurance, maintenance expense, hangaring costs, etc. are much more affordable when split two ways.  Economically, this ownership concept makes sense.

Along with any good plan comes issues.  In this example, one problem is the dilution effect on the two partners from a liability insurance standpoint.  If one partner is negligent and someone is injured, both partners could be sued.  To insulate the owners, we often see the formation of a single LLC or a corporation to own the aircraft.  Each party could have a 50% interest in that entity.  I am not suggesting that this corporate veil cannot be pierced but it will, at least, slow the process down.

Another approach is to have the two partners own the aircraft under separate corporate names or to form an LLC for each owner and have those entities own the aircraft.  Either way, both owners are exposed to law suit.  As an example, we have two owners that have a 50% interest in the aircraft.  Assume a lawsuit ensues and both parties are named in the suit.  The liability limit of the insurance policy must be adequate to defend both parties and to pay any judgment that might be handed down.  In other words, both must be protected under the one insurance policy and one liability insurance limit.

If you feel comfortable with a $10M liability limit but you have a partner that also must be defended, you effectively don’t have full use of the $10M you purchased.  The simple solution is to purchase higher limits.  So if you raise your $10M to $20M you will each have the desired $10M limit, right?  Not so fast.  Although this makes sense, it is the courts that will decide how the liability limit will be used.  Certainly $20M is much better than $10M, but things may not play out as simply and easily as you plan.

The real solution is to purchase as much liability insurance as you can reasonably afford or as you can qualify for from underwriters.

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Responses

  1. Great post, I am almost 100% in agreement with you


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