Ensuring comprehensive insurance coverage for airport property and contents is an essential part of corporate governance within the aviation sector.
Buildings, tenant’s improvements, plant, machinery and general contents represent a significant investment for most operators, and protecting these assets is a core responsibility of directors and senior managers.
In this article, we’ll explore the challenges involved in determining accurate declared values for insurance purposes for airports and aviation facilities. These insights aim to help owners and operators mitigate the risks associated with underinsurance and achieve adequate coverage for their complex assets…
1. Airside versus non-airside considerations
When calculating reinstatement costs, a primary distinction exists between airside and non-airside facilities. Airside construction involves specific challenges, including increased security protocols and logistical restrictions, which can lead to significantly higher costs:
- Security-driven access restrictions: Airside zones demand stringent security measures, from detailed background checks on personnel to restricted access protocols. These requirements extend project timelines and add to the cost of labour and equipment transportation, impacting overall reinstatement values.
- Specialised contractor restrictions: Not all contractors have the expertise or clearance to work airside, limiting the pool of potential suppliers and service providers.
- Escalated professional fees: The scarcity of specialised professional firms with airside knowledge can lead to inflated rates in comparison to standard construction projects, with fewer professionals available who possess the niche skill sets required for airside work.
Conversely, when determining declared values for insurance purposes, it’s essential to consider the cost implications of reinstating the entire facility, rather than extrapolating from recent smaller projects.
These smaller projects often include inflated costs because they were completed in active airport environments, with adjustments needed for enhanced security and operational disruptions.
As a result, applying data from recent projects can inadvertently lead to an overestimation of reinstatement costs for insurance purposes.
2. Insurable responsibility
Airports typically accommodate a variety of occupants, including airlines, customs and border force, air traffic control, car hire firms, taxi companies and police as well as a large number of (often third party) maintenance and project contractors.
Not all of these occupiers have the same lease terms and there can be a wide range of insurance responsibilities. For example…
- Diverse tenant agreements: the airport may have leased bare shell space or may have handed it to the occupier as fully fitted out including furniture and equipment. The diversity in agreements necessitates a detailed analysis and breakdown of assets, allowing accurate representation between airport-owned and third-party items.
- Shared and independent assets: It isn’t always clear on the appropriate demarcation between airport owned and third-party assets e.g. air traffic control assets. This often needs investigation to help prevent coverage gaps and ensure that only airport-owned assets are factored into their declared values for insurance.
In summary, it is essential when looking at declared values to investigate leases and occupancy agreements to fully understand where responsibility lies and which assets fall under the airport to insure.
3. Treatment of mobile plant
Airports are a flurry of activity, and it is common to have a large fleet of varied mobile plant and equipment moving across the hardstandings. These might include baggage tugs and trailers, toilet and fuelling trucks, pushback tugs, towbars and maintenance trucks, some of which are road registered, some aren’t.
Mobile plant makes up a significant portion of airport assets. While some of these may be covered under a general fleet policy, we have seen instances where it is only road registered vehicles that are covered under such a policy, leading to the risk of significant underinsurance and operational setbacks during recovery efforts.
Non-road-registered assets that contribute to daily operations, such as tugs or trailers, may need to be included in declared values.
Ultimately, airport operators and owners need to understand the quantum and ownership of the mobile fleet, and under what policies these vehicles and supporting assets are covered.
4. Accurate demarcation in policy terms
Achieving accurate demarcation between civil works, plant, and equipment is crucial to aligning policy terms with real-world assets. Complexities arise when distinguishing coverage boundaries for airport infrastructure:
- Civil works vs. equipment: Assets like runway lighting, blast walls, or transport tunnels can fall into both civil works and equipment categories with insurance sometimes being based on their utility or who the original contractor was. Categorising these items correctly prevents over- or under-insurance, ensures that the correct demarcation is used to match to the insurance policy wording, and provides a realistic scope for potential claims.
- Shared insurance of transport infrastructure assets: Airport facilities, including public transport tunnels and railway stations, often involve shared insurance responsibilities. Clarifying the demarcation between ownership, the shared assets’ values and coverage terms supports a comprehensive insurance framework.
5. Approach to Specialist Assets
Airports contain various complex facilities and assets, such as fuelling, firefighting and other specialist assets, which contribute significantly to total reinstatement costs. Below are some common examples of considerations when assessing reinstatement costs in the aviation sector:
- High-cost infrastructure: Runways, taxiways, tunnels, bridges, and perimeter structures, like blast walls and security fencing, have high replacement costs. Some airports set “first loss” limits instead of full reinstatement values, covering partial losses while managing premiums for these high-cost assets.
- Environmental and safety systems: Systems like surface water handling, storage and treatment, taxiway and hardstandings de-icer usage, and fire suppression systems also require special consideration because of their operational criticality and replacement expense.
6. Inclusion of assets outside of airport boundary
Essential assets often extend outside the main airport boundary, including residential and commercial property. These assets can impact overall reinstatement values. Here are some examples of what these assets may include:
- Remote operational sites: Remote radar stations, lighting equipment, and other operational facilities beyond the main airport perimeter are vital to day-to-day functions. To ensure comprehensive coverage and mitigate coverage risks after a loss, these assets should be included in declared values.
- Investment properties: Many airports manage substantial investment property portfolios, with a mix of residential and commercial assets. Clear differentiation between tenant improvements, common areas, and owned property within these portfolios ensures accurate insurance valuations.
7. Accounting values vs insurable values
Many firms confuse capital expenditure movements and accounting values with the sums they ought to declare to insurers. Reinstatement insurance policies require insured values to be on a ‘new for old’ basis, having no bearing to current book or market values. Some capex is also replacement or refurbishment by nature that can have little or no impact on actual values at risk.
Businesses often forget to include expensed, or leased and rented, assets in their declared values to insurers. While not appearing in fixed asset registers, a business would need to replace these items following a loss.
For airport locations with large numbers of smaller assets, these amounts can be substantial and a significant proportion of the total value at risk.
For one airport client, we discovered expensed assets in the order of tens of millions of pounds that were not captured in the asset register, and had not been considered when setting declared values.
Other key considerations for assessing reinstatement costs in the aviation sector
- Aviation sector-specific inflation adjustments: Standard inflation indexing, such as consumer price indexes or general building cost changes, may not be appropriate for specialist airport facilities. Certain assets, like advanced security systems or specialised runway equipment, may experience radically different inflation rates due to market demand or technological advancements.
- Policy changes with insurer renewals: If an insurer has changed at the last renewal, the details of an insurance policy may have changed, including changes to inclusions and exclusions, definitions of buildings, and average clauses. These may have impacted how declared values ought to be shown.
- Evolving regulatory requirements: Building codes and regulatory standards for airport facilities continue to evolve, sometimes significantly altering replacement costs for certain assets. For example, enhanced fire safety requirements, environmental standards, or updated zoning laws may require costly adjustments during reinstatement.
- Foreign exchange rate volatility: Many high-value airport assets, such as baggage handling systems or security scanners, are sourced internationally, making their replacement costs vulnerable to currency fluctuations. Declared values should account for changes in foreign exchange rates, which could significantly impact the funds required to replace overseas-sourced equipment in the event of a loss.
- Site-specific valuations: Airports are dynamic environments with assets frequently moved across different buildings and zones. Although the overall sum insured may remain accurate, relocating assets can lead to imbalanced valuations across specific locations. This situation becomes critical if an insurer imposes policy limits on individual buildings, potentially exposing the business to underinsurance risk for certain high-value areas.
In conclusion…
Regular reviews and updates of insurance coverage and declared values are essential in ensuring operational resilience for airports and aviation-related facilities. Staying vigilant against these considerations will better position airport operators to set appropriate reinstatement costs and maintain adequate insurance coverage.
Speak to the aviation team at Charterfields if you would like to discuss any aspect of reinstatement cost assessments for airports and related assets.