Just as Sun ‘n Fun was opening in April, Icon Aircraft—a company that aims to reset the entire general aviation industry with the flashy light sport A5 amphibian—stunned its position holders with a detailed purchase agreement that would all but absolve the company of any liability exposure of any kind.
The extent of Icon’s contract—it runs to 40 pages—even specified sharp restrictions on the secondary sale of the airplane by the original purchaser. Icon’s agreement was obviously an attempt to protect the company in what many consider to still be a hostile tort environment, despite the enactment of the General Aviation Revitalization Act in 1994 that was supposed to give aircraft manufacturers relief from spurious lawsuits and to reduce their products liability insurance costs. Whether the Icon purchase agreement would do that is an open question, but one thing is clear to us: Icon’s contract drew plenty of comments and opened a discussion in the industry about the state of liability exposure for manufacturers. Before Sun ‘n Fun had closed, Icon acknowledged that it had heard customers “loud and clear” and would consider changes or at least explain the buyer’s agreement.
Icon was launched in 2006 with the stated goal of revolutionizing the general aviation industry with a sexy, two-place sport amphibian marketed not through traditional aviation channels but using methods common to the motorsports market. Icon also promised new business practices and its buyer agreement certainly qualified. The 40-page document is too voluminous to reproduce here, but here are some highlights.
• Buyers agree not to sue Icon or, if they wish that right, they can pay an additional $10,000.
• Icon makes no claim about the aircraft being suitable for any purpose and insists that it’s not responsible for any claims made in sales material or by salespeople, other than what’s in the POH.
• Pilots must be trained by Icon or an Icon-approved program. They must agree to retain a “managing pilot” who assures adherence to strict operating practices.
• The owner agrees to operate a flight recorder and camera at all times and to maintain it at his own expense.
• The airframe is required to be overhauled at 2000 hours or 10 years, whichever is shorter, but no price is given for the overhaul. The airframe is life-limited to 6000 hours.
• The airplane’s higher-weight- than-standard LSA is approved only in the U.S. and Icon says buyers in other countries are on their own with their own regulators. Icon’s contract says it may never publish a schedule on such approvals.
• The contract requires the owner to agree that the contract itself was “negotiated” between the owner and company and therefore, if there is a disagreement, the owner can’t claim the contract was actually take it or leave it.
• Buyers agree that upon selling the airplane, they will assure the new buyer adheres to the original purchase agreement and pay Icon $2000 to process the agreement or $5000 for failing to do so. Icon also reserves the right of first refusal at market prices it sets.
Will This Hold Up?
Lawyers we spoke to said Icon’s contract was so complex that adjudicating it in court might be difficult. Such attempts at all-encompassing waivers may or may not stand against a determined plaintiff. The closest corollary we can think of is the skydiving industry, which requires detailed, multi-page waivers for all participants. These have generally withstood attempts to pierce them, but they relate to services, not products.
Having said that, Icon’s agreement has some clauses we think are problematical, if not downright untenable. For example, the buyer and the “managing pilot” agree to release Icon from liability unless the NTSB finds that “the”—not just “a”—probable cause of an accident was a defect in something that Icon made or in its training.
However, federal law prohibits the NTSB’s probable cause report from being introduced into evidence in a lawsuit over the accident it referenced. That’s to keep NTSB investigators from being pressured, coerced or bribed when doing their aviation safety work. The Icon contract requires the buyer to waive this law. We question if it’s possible to waive a federal statute.
NTSB probable cause findings often find more than one cause—because accidents rarely have a single cause. Therefore, if the NTSB finds a defect for which Icon is responsible and also finds another cause or condition, does that take Icon off the hook?
When it comes to the buyer waiving the protection of laws, the purchase agreement also requires that the buyer waive any right to jury trial and take any disagreement to arbitration in San Francisco. To the extent a buyer may be able to sue Icon, the purchase agreement appears to have the buyer agree to do so only in specific courts in California. However, California law prohibits a release and waiver by a person of legal rights to a claim that person doesn’t yet know exists. The buyer agreement requires the buyer to waive the protections of that law.
The buyer can opt out of the covenant not to sue, by paying Icon $10,000. However, in our view, other sections of the agreement appear to mean that the buyer has already agreed that he’ll automatically lose any lawsuit he brings. In the aircraft operating agreement portion of the contract, the buyer acknowledges that flying is risky and that injuries or death could result from a number of factors—which are then listed. The list includes “defects in the aircraft or components.” The buyer and managing pilot then specifically agree to “…assume these risks on behalf of themselves and their successors in interest.”
In most states, assumption of the risk by the injured party is a defense to a lawsuit brought by that party against the manufacturer. It appears to us that even if a buyer spends the money to retain the right to pursue legal action against Icon, the buyer has handed a perfect defense to the company by admitting assumption of the risk.
We don’t know if insurance companies will start writing policies that cover an Icon A5 owner for his or her obligation to indemnify Icon if someone sues the company after the owner has an accident. We suspect there aren’t enough A5s out there for insurers to estimate a reasonable risk pool.
Is This What’s Coming?
Some in the industry believe that Icon’s purchase agreement is the leading edge of standard buyer contracts of the future. We’re not so sure. But Icon isn’t the first. A few years ago, Avidyne offered a new extended warranty program that required that the aircraft owner sign an agreement not to sue if he or she has an accident unless the NTSB finds that the Avidyne box was defective and caused the accident—and to pay for Avidyne’s defense should someone else sue. We reviewed the warranty terms and Avidyne’s concern over product liability costs in the August 2013 issue of Aviation Consumer. We view such an agreement as problematical.
Defending a manufacturer would probably bankrupt the aircraft owner. We noted that Avidyne did offer a carrot-and-stick approach—if the owner agreed to the clause (which was optional) to indemnify and defend Avidyne, the owner got a better deal on maintenance costs.
At the recent Aero show in Germany, we spoke to a number of aircraft manufacturing executives who were, not surprisingly, warm toward Icon’s attempt at reducing its exposure.
However, none thought it was practical or realistic or perhaps even necessary. Christian Dries of Diamond may have summed it up best: “The product liability insurance for this product is so high, that this is the only way to reduce it…to have some kind of contract. I have considered even much worse things, but I know my customers would never accept it, therefore, we are not talking about it.” Dries points out that Diamond doesn’t have to think about this issue for its business in Europe. “This is completely unique to the United States,” Dries said.
All of the executives we spoke to liked the idea of the flight recorder, as do we, as a means of both promoting safety and providing a manufacturer with data to conduct a defense. In fact, Cirrus already does this and Diamond’s FADEC-controlled diesels and Garmin avionics record data, making them de facto flight data recorders.
“It does make sense to have a recorder that’s survivable. It’s a good idea. But to require it is probably a bridge too far,” says GAMA President Pete Bunce. As for the contract itself, Bunce added, “I agree totally with the concept. It’s very difficult for us to have a system with all of the insurance companies to be able to discourage bad behavior which is, in many cases, caused completely by operator error.” But Bunce also said Icon’s rollout of its agreement was hardly ideal. “How it was deployed, I think from the public relations standpoint, they learned some things and they’ll correct over the next few months,” he added.
Are others exploring the same kind of draconian contract language? If so, none of the executives we spoke to would admit it. “We haven’t spent time exploring that. Our primary approach has been toward training and it’s not just that, it’s what we can do with the aircraft, having a complete safety system,” said Cirrus CEO Pat Waddick. “Whether it’s an airplane that’s easy to use or takes full advantage of the avionics or airplanes that have parachutes on them, we look at how those things are impacting safety,” Waddick says. Daher’s Nicolas Chabbert said the same thing in different words. “The most important thing to do is what are we doing now to make advances and that innovation is going to save lives,” Chabbert said, pointing to the recent introduction of the TBM 930, which has aggressive envelope and hypoxia awareness protection.
Piper CEO Simon Caldecott agreed with Christian Dries on the practicality of hold harmless contracts with buyers. “I would like it, because it would take the onus away from me. But really, I think it would damage our sales significantly. I just don’t think the individual is going to want to take that,” Caldecott said of an Icon-like buyer agreement.
What would he like to see? A run by insurance companies to tackle liability exposure or outright tort reform aimed at aviation, just as the GARA legislation of 1994 attempted to do. Cirrus’ Waddick and Lycoming’s Michael Kraft had the same view. All would like to see the same sort of relatively benign tort environment that European manufacturers live with. And what better time to attempt such a thing than now, with a historically large general aviation caucus in Congress.
“Well, if you’re talking about opening up GARA, that is fraught with peril,” warns GAMA’s Bunce. “We think we’re powerful in our voice, but if you compare that to the trial lawyers, if we open things back up and we make things worse, that would be detrimental,” Bunce says. “If we could do it judicially, without having to do it legislatively, that would be safer,” he adds. And what that means is a court case that would mitigate the plaintiff’s overwhelming advantage in aviation tort cases. Thus far, neither GARA nor individual court cases have provided companies with much relief.
The Effects of Gara
The General Aviation Revitalization Act (GARA) was signed into law in 1994 to reduce the long product liability “tail” or exposure faced by general aviation manufacturers who had been building airplanes for an extended period of time. The exposure was daunting: There were airplanes still flying that had been built as far back as the 1920s (Cessna) or 1930s (Piper and Beechcraft). Most were being flown by amateur pilots and each one represented a potential lawsuit against its manufacturer.
Manufacturers have always been reluctant to disclose the number of lawsuits they are defending at any one time, their costs or the amounts they pay in the process of defending and resolving suits. A knowledgeable source told us that in the 1980s Cessna was facing an average of 500 lawsuits and claims at any given time. The Bureau of Labor Statistics said that by 1985 a manufacturer’s product liability insurance averaged $100,000 per airplane it sold. The price of insurance does not reflect the actual cost of product liability faced by manufacturers because many had deductibles in the millions, had to hire specialized employees to do research necessary to defend suits and faced diversion of the top engineers from productive work as they were called to testify in the cases.
The GARA established a statute of repose—18 years after a general aviation aircraft was sold to the first buyer it was presumed to have demonstrated that it was safe and, with limited exceptions, the manufacturer of the aircraft and its components could no longer be sued if the aircraft crashed.
The notable exceptions were for a medical transport crash and if the manufacturer had misrepresented information to the FAA in the certification process (often called the fraud or the FAA exception). If a new component were installed on the aircraft, the 18-year countdown started again, but just for that component.
The immediate effect of the GARA was that the number of lawsuits filed against aircraft and component manufacturers plummeted.
Lawsuit numbers are not published; however, we observed over the next 10 years that a number of attorneys who had been litigating aviation accident cases full-time on either the plaintiff or defendant side moved into other areas of practice because the number of cases dropped off so radically.
At the same time, many states passed tort reform legislation making it more difficult to prove a product liability case and/or putting limits on what an injured party could recover. One longtime aviation plaintiff attorney we spoke to (who asked that his name not be used) said that for every 10 cases he reviews, he accepts one because he knows it will be expensive to bring the case and the GARA and other tort reform laws have made it tougher to bring suits.
One of the hoped-for effects of the GARA was a reduction in the price of new airplanes. That didn’t happen. Another effect was that when the “deep pocket” of the manufacturer was taken away as a target for older airplane crashes, there was an increased willingness for plaintiffs to go after maintenance shops and the most common cause of the crash, the pilot. In some cases, it turned out that for a pilot who had the financial wherewithal to own an airplane, he or his estate had enough assets to become a target that, pre-GARA, would have been avoided.
Because the GARA does not affect manufacturers until airplanes they have built turn 18, it has no effect on younger aircraft companies—although it does allow the legacy companies with thousands of airplanes in the field to compete on a more level cost basis with those younger companies.
Icon has persistently declined to answer repeated queries from Aviation Consumer and our sister publication, AVweb. One interview was scheduled at Sun ‘n Fun and then cancelled. As Sun ‘n Fun closed, Icon CEO Kirk Hawkins released a single-page statement that said, in part, “We hear you—loud and clear. And I promise, we’re listening carefully. This week at Sun ‘n Fun has been very informative, hearing from both existing Icon customers and members of the aviation community. We are committed to assuring our customers fully understand the decisions we make and the intended benefits for all.” In his statement, Hawkins said there had been “misinformation and misinterpretation” regarding the terms and motivation of the purchase agreement. Although Hawkins said Icon is committed to “open dialog with the Icon community and GA industry at large” its refusal to clarify the most basic questions from the press suggests, in our view, that it’s not much interested in explaining itself.
While our interviews with industry leaders revealed a clear understanding and some support for what Icon is attempting, our interviews with two position holders revealed just the opposite. At Sun ‘n Fun, one Icon customer told us he viewed the purchase agreement as utterly one-sided and was advised by an attorney not to sign it. He cancelled his A5 order and was considering placing an order for a Brazilian-made amphibian called the Super Petrel. “It’s not as flashy, but they’ve actually got them in stock,” he told us. A second position holder said he probably wouldn’t retain his order.
While we agree with GAMA’s Pete Bunce and others that trying to limit a company’s exposure to product liability is laudable, we also agree with the Cirrus and Daher outlook on that: Building a community of trained pilots who are less likely to have accidents may be the best approach, combined with insuring whatever risk remains for the company.
Our advice to anyone holding a position for an Icon order is to have the terms of the agreement carefully reviewed by an attorney before even considering executing it. It should also be reviewed by the company insuring the airplane. It’s one thing to relieve a company of some or all liability for its own mistakes, but quite another for an owner to expose himself (and his wealth) to expensive lawsuits from the company itself or from aggrieved passengers. Unless this purchase agreement can be substantially renegotiated or made more buyer-friendly, our advice is to walk away from it.