Business Aviation & The Boardroom - The Importance Of Physical Damage (Hull) Coverage
Stuart Hope examines why it’s considered best practice for a corporation to select the correct insured value for their aircraft not only at purchase- but to review and adjust that value at least annually.
Stuart Hope is a co-owner of Hope Aviation Insurance. His career as an aviation insurance broker... Read More
The Importance Of Physical Damage (Hull) Coverage Stuart Hope examines why it’s considered best practice for a corporation to select the correct insured value for their aircraft not only at purchase- but to review and adjust that value at least annually.
A common trap for aircraft owners is to set the insured hull value at the original purchase price- and then fail to adjust it over the years - even though the aircraft is typically depreciating in value.
Last winter’s well publicized hangar collapse at Dulles International Airport- just west of Washington- DC brought this issue to the forefront as several unfortunate aircraft owners learned the hard way the perils of being over-insured. Why does this present a problem from an insurance perspective- though?
Unlike many other property policies written on an actual-cash-value basis- aircraft policies are written on an ‘agreed-value’ basis. Simply stated- at the inception of the policy- you and the insurance company mutually agree on a ‘hull value’. This amount- stated in the policy- represents the amount you will be paid in the event of a total loss- less any applicable deductible. It is possible- however- to over-insure or under-insure to your detriment.
If you over-insure- the insurance company is forced into giving more weight to repairing the aircraft- even when there is major damage – leaving you to deal with significant damage history- and no compensation for diminution of value when the aircraft is repaired and returned to service.
EXAMPLES OF OVER/UNDER INSURANCE As an example- let’s imagine that you have the company aircraft insured for an agreed-value of $20m - but in today’s market- it’s only worth $13m. Your aircraft is unfortunately parked in a hangar that collapses during a tornado causing major damage.
The repair estimate is $8m. As part of the claim process- the insurance adjuster solicits- and receives a salvage bid for the aircraft “as is” of $5m and is faced with two choices.
1) He/she can elect to total the aircraft- pay you $20m (the agreed value)- and then sell the salvage ($5m) for a net claim payment of $15m;
2) Repair the aircraft for a net claim payment of $8m.
Unfortunately for the owner- the insurer is left with no real choice! Now let’s take the same example and substitute $13m for the insured value. You’ll see that there is quite a different outcome! There is one- final danger that concerns under-insurance.
Although not as common- if you under-insure your company aircraft- the insurance company may opt to declare the aircraft a total loss in the event of the above example happening. In this case- it would pay you the agreed value and sell the salvage- causing you to lose your equity.
THIS MONTH’S TAKE-AWAY The proper insured value to carry is the amount of money it would take to purchase another aircraft exactly like yours (i.e. similar year- equipment and condition- etc.) in today’s market.
An aircraft sales dealer familiar with your make/model aircraft can give you the best estimate of its current value. In addition- your aviation insurance broker may have resources to assist. Your company’s coverage limit should be reviewed at least annually on renewal and adjusted accordingly.
Don’t forget to consider any loan or lease requirements too. You may be forced into over-insuring if you owe more than the aircraft is worth.