Regardless of the quality or completeness of repair, an accident history can impact an aircraft's resale value. We present de-valuation coverage for discussion.Back to Articles
Regardless of the quality or completeness of repair- merely having an accident history can impact an aircraftâs resale value- cautions Stuart Hope.
Your aircraft has been involved in a landing accident. The insurance company pays to have it repaired- and it is returned to service. All is wellâ¦ or is itâ¦? Many aircraft owners do not realize that the loss in aircraft value created by the accident history now recorded in the aircraft logs can be substantial and is NOT covered under the ownerâs aircraft policy. There is a type of coverage offered by several aviation insurers that provides protection for this uninsured peril- however.
Although not often purchased- such policies should be examined. It is simply smart business to be aware of the exposure and make a conscious decision whether to self-insure or to consider purchase. Insurers provide this coverage via an endorsement titled De-Valuation or Diminution in Value. The mechanics of how the amount of depreciation is calculated varies slightly depending on the insurer. Letâs examine one such insurerâs endorsement to illustrate (keep in mind this is an expansion of the physical damage hull coverage- not liability protection):
Example Policyâ¦ âDe-Valuation Coverage shall be defined as the amount we will pay for the loss in market value which results from physical damage to your aircraft based on a âpartial lossâ covered under your policy- and requires an âAirframe major repair-â as described in Appendix A to Part 43 of the Federal Aviation Regulations.â
Then the policy stipulates the Limits of the De-Valuation Coverage- which is normally calculated as a percentage of the aircraftâs insured value. For example- based on a business aircraft with an insured value of $10m- the insurer might offer a maximum Indemnity for De-Valuation of 10% of the insured value- or $1m.
If your next question is âwho gets to determine what the actual depreciation in value is?â- it would be a good query. Again the answer varies with the wording of each insurerâs endorsement- but the example policy uses the following criteria: âWe will pay up to the amount shown in the âLimits of Your De-Valuation Coverageâ. (In the example above- that would be $1m maximum.) The actual amount- however- shall be determined by:
1. Mutual agreement; or if necessary
2. An independent aircraft appraiser agreed
3. The majority of three independent aircraft appraisers- one selected by each party and the third selected by the other two appraisers.â
As you can see- itâs not as simple as the insurer paying a fixed amount once the aircraft sustains damage. The amount of recovery remains subjective. Of course there are always exclusions to all coverage- and this endorsement is no exception. In addition to the physical damage exclusions already contained in the policy- the insurer also states it will not cover any claim:
1. That is not reported to the insurer prior to repairs being started; or
2. That has been determined by the insurer to be a âTotal Lossâ. The insurer will consider your aircraft a 'Total Loss' under this endorsement when the cost of repairs plus any amounts payable under the 'Extra Expense' coverage equal or exceed the limits of your 'Aircraft Physical Damage Coverage' for the aircraft covered by this endorsement; or
3. That does not require an 'Airframe major repair-' as defined by Appendix A to Part 43 of the Federal Aviation Regulations at a cost to repair that is less than 10 percent (10%) of your 'Aircraft Physical Damage Coverage' limit.
Note: The trigger for coverage under #3 above requires that the damage must require major airframe repair AND that the cost to repair must exceed 10% of the insured value of the aircraft. For an aircraft with an insured value of $10m- for example- the cost to repair would have to exceed $1m- which is not a small loss. Coverage of this type isnât intended to address small losses.
The premium cost for De-Valuation or Diminution of Value coverage is typically calculated as a percentage of the hull value on the aircraft insured. Using $10m as an insured value- an average premium might run $6-000 annually. Thus this coverage is not inexpensive. Coupled with the complexity of the coverage- itâs no wonder it is not prevalent in the industry. In fact- I would venture that less than 1% of aircraft owners carry it.
Thatâs not to say that De-Valuation or Diminution of Value insurance isnât worthy. Purchasing such protection is a call you need to make in concert with your aviation insurance broker. Diminution of value claims- even when initiated by a third party against your aircraft (and IS covered under the third partyâs property damage liability)- remains one of the most difficult for an adjuster to settle. I trust you see why.