Many states require that owners and/or operators of aircraft have insurance covering their aircraft and operations. At a minimum, states usually require third-party liability coverage. This applies to injuries to third-persons that result from operation of your aircraft. Additionally, if your aircraft is pledged as collateral for financing, the lender will require that you have hull coverage and/or replacement value insurance to insure the value of the aircraft collateral.
When you read an aircraft insurance policy, you need to pay special attention to the definitions section. Many of the terms used in the policy have specific definitions that are different from a dictionary definition or common usage for that word.
Examples include the definition of “accident” which is often defined as a “sudden and unexpected event resulting in bodily injury, death or property damage.” This is different than the definition of accident contained in 49 C.F.R. Part 830 (the NTSB rules for reporting accidents and incidents), and it is also more specific than a dictionary or common usage definition of the word.
Another example is the definition of “commercial operations” or “commercial purpose.” An insurance policy’s definition of this type of term is usually different from, and in some cases may be broader than, the FAA’s or IRS’s definition or a dictionary definition.
These are just two examples. Remember, the aircraft insurance policy is a contract between you and the insurance company. Both you and the insurance company agreed to the policy definitions when you paid the premium and the insurance company issued the policy. As a result, both you and the insurance company will be bound by those definitions.