How Much Should I Insure My Aircraft For?
One of the most common questions I get from my clients when I ask how much they want to insure their aircraft for is, “I don’t know. How much should I insure it for?” I often hear comments such as “Well, I only owe the bank this much, so let’s just go with that” or “I only paid this much for it, so let’s just go with that.” My response is always that you want to insure your aircraft for its true replacement cost or “market value”. If you had to go out to the market today and buy the exact same year make and model in the same condition with the same equipment, how much would it cost you? That’s the value you should use as your Insured Value. Your aircraft, unlike your car, is insured on an “Agreed Value” basis. This means you choose how much you would like to insure it for as long as the underwriter agrees. Unlike auto policies, an adjuster is not going to look up a blue book value and decide how much they’re going to pay you. Instead, they will use the insured value on your policy to adjust the claim. A couple of factors to consider in calculating your aircraft value are depreciation and any upgrades you have installed.
Aircraft values creep up with improvements:
One of the most common improvements in jet aircraft are new or overhauled engines. Let’s say you suffer some FOD damage in one of your engines. During the tear down, you decide you might as well overhaul it because it was getting close to TBO. Overhauling that high-time engine may have added $100,000 of value to your aircraft. Therefore, it’s always best to discuss any new improvements with your agent right away. If you have a total loss, you may only receive a settlement in the amount of the current insured value on the policy.
Understanding aircraft physical damage rates:
Aircraft physical damage rates are specified in percentages and this rate is multiplied by every $100 of your aircraft value to equal the physical damage premium. “My aircraft is worth $2,000,000 and I see that my physical damage premium is being calculated with a rate of .5%, which equals a total of $10,000. But, that’s too expensive, so let’s insure it for $1,000,000. That way my premium will be $5,000.” BAD IDEA! In fact, if you get too crazy with the numbers, the insurance company will notice and decline those terms. Most insurance companies have a minimum and maximum value they will insure each aircraft. If you want to insure your aircraft outside of that range, you will need to explain why and “I want to save $5,000” is not an acceptable answer. Another problem with this is that underwriters charge higher hull rates for lower value aircraft than they do for higher value aircraft. This is referred to as rate banding, which means as the value decreases, the rate per $100 of value increases. In our example above, you were being charged a .5% rate for $2,000,000 of insured value. If you drop the value down to $1,000,000, your rate could increase to .8% or more. This reduction in insured value could result in little or no savings.
Under-insuring your aircraft:
One concern in under-insuring your aircraft is having a total loss. A typical aircraft policy definition states “Total loss means any physical damage loss for which the ‘cost to repair’ when added to the ‘salvage value’ (the value of the aircraft after physical damage and prior to repairs) equals or exceeds the Insured Value of the aircraft as set forth in Item 4 of the Declarations. Disappearance or theft of the entire aircraft shall be considered as a total loss.” “So, what happens when I have a total loss and my aircraft is worth $2,000,000, but I only insured it for $1,000,000?” The insurance company will write you a check for the insured value of $1,000,000 minus the deductible and the salvage belongs to the insurance company. Now, your aircraft is gone and you’re out $1,000,000. Was that $5,000 you saved in premium worth it?
The other concern in under-insuring is a partial loss. Most aircraft accidents are partial losses. In this case, the adjuster establishes a cost to repair and obtains salvage bids. If your insured value is $1,000,000 and the cost to repair your partial loss is $750,000, but the adjuster obtained a $500,000 salvage bid, do you think the adjuster is going to choose to repair the aircraft? They’ll most likely declare it a constructive total loss, take title to the salvage and pay you the insured value on the policy.
Over-insuring your aircraft:
The flip side is over-insuring your aircraft. You bought your aircraft for $3,000,000, but that was 5 years ago. The market value of your aircraft could have depreciated $1,000,000 since then. Now, it’s only worth $2,000,000. If you had a partial loss of $1,500,000 and the insured value on the policy is still at $3,000,000, the insurance company may not total your aircraft. Instead, they may choose to repair it. Now you have two issues. The first issue is the loss of use of your aircraft. If it is a working aircraft, you may experience a loss of revenue. If the aircraft is used in your business for corporate transportation, it is back to flying commercial or using the company vehicle. The second issue is that you are left with an aircraft with a damage history. To say that no one wants to buy a previously damaged aircraft is an understatement. You’ll likely have to list the aircraft for much less than you normally would have to attract a buyer. Had you adjusted your insured value to the true value of $2,000,000, they might have declared it a total loss and you could be flying around in a new aircraft you bought with the settlement.
In short, be careful when calculating your aircraft value, so that you are not drastically over or under insuring your aircraft. The best advice is to fully insure your aircraft at its true replacement value. This and the factors we discussed could save you money and problematic claims, as well as increase your insurability in the aviation insurance marketplace.
Contact us today and one of our highly experienced agents will be happy to listen to your needs and act on your behalf to help you get the right coverage at the right price.
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