This is the second of the two-article series on purchasing aircraft insurance. The goal of this series is to provide you a better understanding of the basics of aircraft insurance, saving you time, money and hassle when it comes time to purchase or renew your aircraft insurance policy. After our discussion in the last article, we know that half of the battle to purchasing aircraft insurance is working with the right agent or broker. Now that we better understand how the aviation insurance market works and we have selected the right agency to work with, we must consider how to value our aircraft and determine what liability limits are available to us for our situation and any additional coverages we may need.
Many wonder if they are insuring their aircraft at the correct value. Are you insuring it for too much and thus paying additional premium or are you underinsuring it to the point that you will not be properly insured in the event an accident totals your aircraft? It is critical that you are aware of what your make and model aircraft is doing in the market. Check the Blue Book value and factor in your add-ons (i.e. avionics, de-ice, etc.) and modifications, as well as airframe and engine hours. If you do not have access to a Blue Book, you may be able to use various online sources or your insurance agent may be able to help you. It’s also possible to read aircraft classifieds to see what other aircraft similar to yours are selling for. Use these tools to consider what it might cost you to reasonably replace your aircraft with one of the same kind and quality.
Why go to so much trouble considering the value of an aircraft? There are many reasons. In regards to valuation, there are three types of insurance policies written: replacement cost (homes), actual cash value (auto) and agreed value (aircraft). It is important to know the differences. Many homeowner policies are written on a “replacement cost” basis. To generalize, they will pay the cost to replace your house in the event of a loss at what it would cost with materials and labor today. So if the cost to replace your house is higher than the actual value, you will still be covered. Most auto policies are written as “actual cash value,” meaning they will cover you to what the actual cash value of your vehicle is worth at that particular time. In contrast to those two, nearly all aircraft policies are written on an “agreed value” (stated amount) basis. With an “agreed value” policy, the company will pay an agreed upon amount in the event of a total loss minus any applicable deductible. They will not pay the full cost to replace the aircraft, they will pay the agreed value. Usually the company will not insure an aircraft that is 10-25 percent above or below book value with out sufficient substantiation, but you can still encounter problems either way.
One of the biggest issues that I often see with hull valuation is when an insured calls and wants to dramatically lower their hull value. I often ask, “Does this happen to be the amount of the note you still owe to the bank?” The answer is usually “yes.” In an effort to save premium, many insureds will try to lower the hull value just to what they are required to carry, so that in the rare event of a catastrophic total loss, they will still receive that value. Unfortunately, it does not take a catastrophic total loss for an insurance company to total an aircraft. A loss that is more minor in damage could possibly cause the company to total the aircraft.
Here is how it works: when a loss occurs, an adjuster will seek out bids to repair the aircraft. At the same time, he also seeks out a bid for salvage. He then adds the sum of those two bids together and if the sum of the two bids is higher than the insured amount, he will total the aircraft. Let’s look at an example of this:
A client, Jim, has a $50,000 book-valued aircraft that he has insured for $50,000 agreed value. Jim would like to cut his insurance costs, so he looks at his loan and sees that he still owes $35,000 and that he must carry that much insurance to satisfy the loan agreement. Jim lowers his agreed value hull amount and his aircraft is now insured for $35,000. He feels good about the change, thinking that in the very rare case of a total loss he would get $35,000 for the aircraft, and that if any accident did happen it would be probably be non-catastrophic. He would then receive $35,000 to cover that loss. Sure enough Jim has a non-catastrophic loss—he landed too hard, causing the gear to collapse, resulting in a prop-strike and engine damage. He turns this in to his insurance company and the adjuster comes up with several repair bids. The lowest is $30,000. Jim is relieved because he carries $35,000 hull coverage and thinks he is fine. Unfortunately, he didn’t consider the salvage value. The adjuster also obtained the salvage bid that came in at $15,000. As we learned above, the adjuster takes the $30,000 repair bid and adds it to the $15,000 salvage bid, coming up with $45,000. Since that figure is higher than the insured amount, it is more cost effective for the company to total the aircraft and cut Jim a check for $35,000, minus any applicable deductible. This is the insurance company’s sole decision. The insurer retains the right to the salvage if a total loss is paid. Due to a minor loss, Jim is out $15,000 in equity and must come up with that much additional money in the event he wants to replace the aircraft. Had he insured the aircraft for $50,000 the aircraft would have been repaired, avoiding any of the unfortunate results mentioned above. This scenario is called a “constructive total loss.”
In summary, it is always best to insure your aircraft to its fair market value. This will help avoid a constructive total loss scenario and insure that you receive a fair settlement on any covered loss. Now that we have valued our aircraft correctly, we need to think about how to cover our third-party liability exposures.
Determining what limits of liability (third-party liability) to carry is always a big decision when purchasing aircraft insurance. In today’s marketplace, the bigger question seems to be, how much liability am I able to get? On most single and light multi-engine piston aircraft, underwriters do not like to offer any limit above $1,000,000 combined single limit (CSL) for bodily injury and property damage, each occurrence sub-limited to $100,000 per passenger. Meaning, of that $1,000,000 coverage limit, each passenger is limited to $100,000 of the limit. Watch out for some policies from direct writers that have liability sub-limits that say “per person,” meaning each person involved in an accident, whether in the aircraft or on the ground, is limited to $100,000 of the limit carried. This limits your coverage as you can control the number of people in your aircraft, but it is impossible to control how many people on the ground may be effected. Also, watch for so-called “family sub-limits,” where your family members are further limited to the amount of liability coverage for which they are eligible (i.e. limits such as $24,000 or $12,500 for children, parents or spouses).
For more experienced pilots, a limit of $1,000,000 to $2,000,000 CSL may be available, but some companies may require some sort of annual training, such as the FAA Wings Program, to carry that limit. Larger cabin-class single and multi-engine piston aircraft with qualified pilots are often eligible for liability limits up to $5,000,000. As you get past $5,000,000 CSL, the companies begin to require professional pilots and annual ground and flight training. More often than not, the training must be simulator-based. Corporate turbine aircraft with experienced, professional pilots could be eligible to purchase limits of liability anywhere from $25,000,000 to $500,000,000 CSL.
So depending on your aircraft, pilot experience and aircraft use, you can see there are different liability limits available. However, a large majority of insureds carry $1,000,000 each occurrence with the $100,000 per passenger sub-limit. A large reason for this is that this is the limit that the insurance companies feel most comfortable writing and is the most available to insureds. As the limits get higher, so do the restrictions and costs. The best policy in determining what limits to carry is to buy as much as you can obtain and afford. You must make a personal decision about your assets and liabilities, how many family members you have, and how they may be affected in the event something should happen.
Now that we reviewed the two biggest decisions for an aircraft policy, it is time to consider some of our other coverages and issues.
A third coverage usually found on an aircraft policy is medical payments. This is similar to the medical payments coverage on your automobile policy. Regardless of who is at fault in an accident, your policy will pay the set amount (usually between $1,000 and $5,000 per passenger) for medical and/or funeral expenses. This coverage is usually a “throw-in” or available at little cost. It is not one of the major parts of the policy, but you may feel more comfortable with the coverage there and with higher limits to assist you with costs in the event of a loss.
Guest voluntary settlement is a coverage, usually purchased on larger corporate aircraft, that is a tool to an immediate settlement in the event of a loss in exchange for a release of liability. In the event of a claim, this limit will be there to settle with an injured passenger or their estate to avoid lengthy lawsuits. Given the limits involved today, this is used more as a travel and accident policy to augment workers compensation coverage for companies. Limits vary for this coverage; the minimum is usually $100,000 and averages out around $250,000 to $500,000 per passenger. The company will not pay any amount without a signed release of further liability for the claim.
There are two other parts of your aircraft insurance policy to consider. The first being your geographical territory limits. Always check your policy to make sure that you are not flying outside the territorial limits of your policy. Also remember that if you are flying over or in Mexico, you will be required to carry a Mexican liability policy, so always contact your broker if your travel will take you that way. If there is ever any question about a certain place being covered on your policy, please call your broker.
The other issue to consider is the “war-risk” coverages. This is a part of your aircraft policy that has become a serious issue in recent months. Due to the overwhelming complexity of the issue, we have written a separate article.
All this information may seem overwhelming to a new aircraft owner, but fortunately there are good agents and brokers out there to assist you in this process. Hopefully, after reading this two-part article, you have a better understanding and knowledge of how to purchase your aircraft insurance the right way.