Establishing the proper insured (hull) value to carry on your aircraft continues to elude many insureds even though the defense against being badly bitten is just one phone call away- warns Stuart Hope.Back to Articles
Establishing the proper insured (hull) value to carry on your aircraft continues to elude many insureds even though the defense against being badly bitten is just one phone call away- warns Stuart Hope.
What will the insurance company pay if my aircraft is involved in a total loss? Thatâs a question I continue to receive even though it has been addressed in numerous articles over the years. Is it possible my clients prefer to read something other than insurance articles? Maybe itâs confusing because they assume insurance on their aircraft is like insurance on their car. Thus I wish to emphasize that aircraft insurance is unique.
While car insurance is written on an actual cash value basis which tracks the market for the auto as it ages- aircraft coverage is written on a stated or agreed value basis. You and the insurance company agree at the beginning of the policy term to the value of your aircraft. In the event of a total loss (or constructive total loss â more on that later)- the insurance company is obligated to pay the agreed or stated value shown on the policy.
Determining Insured (Hull) ValueÂ
Many aircraft owners purchase an aircraft- insure it the first year for the amount they paid for it- and then make the crucial mistake of leaving the value the same at each policy anniversary. Such a procedure is not the correct way to insure your aircraft. At each policy anniversary- adjust the insured value of the aircraft to the current market value.
What is the current market value? Simply put- if you were to offer your aircraft for sale at that moment- what would a reasonable buyer pay for it? You can get a good idea of the current market value by consulting your aviation insurance broker who will give you the most recent Bluebook or Vref value. Your best source- however- is an aircraft salesperson who specializes in selling your type aircraft. Keep in mind that if you have an outstanding loan on the aircraft you would have to insure it for the current market value or outstanding loan amount â whichever is greater.
Perils of Over - or Under-InsuringÂ
The best way to explain why over- or under-insuring an aircraft is a bad idea is by example. Say that your aircraft- which you purchased four years ago for $11m- has a current market value of $7m but you never changed the insured value. Now imagine that a storm collapses the hangar on top of your aircraft causing significant damage. The repair estimate is $3m.
Subsequently- the insurance company receives a salvage bid of $4m for the aircraft as is- leaving the insurance company two options.
â¢ Option 1 â Declare the aircraft a constructive total loss- paying you the agreed value ($11m)- then selling the salvage ($4m)- putting their net loss at $7m.
â¢ Option 2 â Repair the aircraft for $3m (even though you probably donât want it back) reducing their net loss to $3m.
Guess which option the insurance company will choose. They will be forced to repair it! The usual result of over-insurance is that the insurer is forced to repair the aircraft in almost all instances except when the aircraft is totally destroyed- which is an uncommon event. Keep in mind that over-insuring also results in a higher hull premium.
(Note: In some cases- aircraft owners find themselves âupside downâ in an aircraft and are forced to over-insure the aircraft because they owe more than it is worth. Seek the advice of your aviation insurance broker for different strategies on dealing with this situation.)
Conversely- under-insuring an aircraft has the reverse effect. To illustrate- substitute an insured value in the example above that is significantly lower than the market value. Obviously the insurance company will pay the loss rather than incur the higher cost of repairing the aircraft. Keep in mind that you can inadvertently create an underinsurance situation if you add a new avionics package- new or overhauled engines- or any other value enhancing aspect to your aircraft and you fail to increase the insured value of the aircraft once the upgrade is complete.
Insurance carriers donât like to be put in the position of being the âbad guyâ in a claims situation. Donât set them up by your own failure to give proper attention to the details of your aviation insurance program.
Aircraft arenât cars. Relative to asset value- youâve got a LOT more to lose with an aircraft- and your hull coverage is just one component of many you must get right. Furthermore- answers to your questions regarding the proper insured value of your aircraft are no further away than a call to your insurance broker.
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