Physical Damage Insurance -  How Much is Enough?

By: John Gostinger, Account Executive, LL Johns & Associates.

When you purchase physical damage coverage on your aircraft, how do you decide how much you should buy?  If you don?t buy enough, you could end up losing if the aircraft is seriously damaged, and the insurance company declares it a total loss.  If you have purchased too much coverage, the insurance company may want to repair the aircraft rather than declare it a total loss.  You may never want to fly that aircraft again, but if the insurance company can get it repaired for less than you have it insured for, they will, and you will have to take it back?damage history and all.

Let?s look at how aircraft insured values are established.  The aircraft insurance policy is an agreed value policy form.  You tell your agent that you want to insure your 1976 Lear 35 for $1,000,000.  The agent submits your request to the underwriter at the insurance company and if he then provides a quotation for this amount of coverage, the insured value has been established.  In the event of a total loss to your aircraft, the company must pay you the insured value.  Whenever an insurance company pays the insured value, under the terms of most policies, the company then owns the aircraft.  Unlike other lines of insurance such as automobile coverage, with aircraft insurance there is no depreciation factored in to a loss settlement.  You insured your Lear 35 for $1,000,000.  If a windstorm or some other peril turns your beautiful bird into raw material for beer cans, the insurance company must pay you $1,000,000 minus the deductible.  This sounds simple enough, but this is another case of ?the devil is in the details?.

What determines if the loss that your aircraft suffered is a ?total loss??  Most companies define ?total loss? as any physical damage loss for which the cost to repair when added to the salvage value equals or exceeds the insured value of the aircraft. 

Consider the following example:  Let?s assume that your $1,000,000 Lear 35 is really worth $1,000,000.  You decide that one way to save money on your insurance premium is to insure it for only $600,000.  You do this because you believe that $600,000 should be enough to repair any damage that you might suffer, and your insurance premium is about $5,000 less than it would be at the $1,000,000 insured value.  Your airplane is parked on the ramp at a quiet Texas airport when baseball size hail converts it from an airplane into a useless assembly of aluminum.  Wings, tail section, fuselage skin, and windscreen all must be replaced or repaired at a total cost of $500,000.  No problem you say, it is insured for $600,000. You are $100,000 under the wire. 

Wrong!  Remember if the cost of repair plus the salvage value is equal to or more than the insured value, it is considered a total loss.  The value of the engines, avionics, instruments, and other parts would all be a part of the salvage value, which in this case is much more than $100,000. Let?s say that the salvage value is $450,000.  Adding $450,000 to the $500,000 damage repair estimate brings a total of $950,000, which is much more than the $600,000 that the aircraft is insured for. The company will pay you the $600,000 and they will own the salvage. They will then sell off the salvage to recover a part of their loss.  Your airplane was worth $1,000,000 and now you must settle for $600,000.  You might negotiate a deal with the company that allows you to buy back the salvage, but that would take most of the $600,000 claim payment, and you would be left with an airplane that you can?t fly and not enough money left from the settlement to make it airworthy again.

That is the problem with under insuring. Let?s take a closer look at the opposite situation.  On the used airplane market your bird is worth $1,000,000, which is about the amount that you have invested in it.  You insure it for $1,250,000, because the rates are low this year, and with a higher insured value you will be able to move into a newer or better aircraft if a major loss occurs.  That same Texas hailstorm is followed by a tornado which sends your airplane on a solo flight of its own.  Now the cost to repair is $800,000. The salvage value is much less. Let?s say it is $300,000.  Remember, if the cost to repair plus the salvage value is equal to or greater than the insured value, the company will declare it a total loss.  In this case $800,000 plus $300,000 is less than the insured value of $1,250,000.  Rather than paying you the $1,250,000, the insurance company may opt to fix your airplane at a cost of $800,000.  Now you have an airplane that you may never want to fly again and you?re probably going to have a long wait before your machine is restored to service.

When deciding on an insured value for your aircraft, first ask yourself a few basic questions. How much did you pay for it?  How much have you paid for improvements?   How much could you sell it for?  You should purchase enough coverage so that if you have a serious loss and the insurance company offers you the insured value, you can accept that amount, let them keep the pieces, and walk away with a smile on your face and the feeling that you have been properly compensated. 

By: John Gostinger, Account Executive, LL Johns & Associates.