Pilot's Tip of the Week
Aircraft Insurance: Do You Have Enough?
Featuring Jim Lauerman
"How do I know that I'm insuring my aircraft hull for the right amount?"
"You know, Mark, that is a huge question. And it's one that comes up probably more often than just about any other one that we run up against.
First off, I need to point out that aviation insurance policies, unlike your automobile policy, is a stated-value policy. Now let me explain what that insurance jargon means. On your car insurance policy, you'll find out what it's worth when you wreck it. If you total it the insurance company says, It's worth x dollars. And they pay you that. That's not the way it's done with aircraft, because the numbers are relatively small. Instead we agree with you before you insure the aircraft for what it's worth, and we can get into that process. We use Vref and some other tools to help you determine what the value should be, and what is reasonable, and we're able to negotiate within that. But once we state that value - that is what the airplane is worth if it gets totaled. That's what we are legally obligated to pay if the aircraft is a total loss.
Now, one of the keys to this is another insurance term that we refer to as constructive total loss. And this is in all property casualty insurance policies, and basically in our case, we have a specific percentage. If the cost to repair and transport your aircraft exceeds 70% of the insured value we may, at our option, declare it a total loss, pay you what you had it insured for, and then the salvage is ours.
And let me show you how that can get you in trouble. Sometimes people will say, "Well, I know that most losses are not total losses, so I'll underinsure my airplane to save a little bit of premium." And by the way, the amount saved is not as much as the people usually think.
But let me give you a real-world example:
Let's say you have an airplane that's legitimately worth $50,000.00. In other words, you could go out tomorrow and sell your Cessna 172 for $50,000.00. But you say, I'm only going to insure it for $30,000.00, because I don't want to pay the premium for $50,000.00. If we agree to that, at that point if you have a $21,000.00 loss, which is 70% of $30,000.00, which is what you've insured for, we have the option, and are likely to take it, to pay you $30,000.00. And then we get the salvage, and go out and get to sell the salvage. And then of course at that point very often the consumer says, Hey wait a minute, the airplane's worth a lot more than that. So it's very important to insure the airplane for what it's really worth."
[next_tip]Next week's tip: Understanding thermal turbulence[/next_tip]
The preceeding is a general discussion of aviation insurance. It is not intended to address specific requirements or coverages of an individual's policy. These should be discussed directly with a policyholder's agent. In all cases, the terms and conditions of the insurance policy will determine the outcome of a specific situation. This material is intended for educational purposes only and does not imply coverage, terms or conditions of any specific policy as it relates to an individual policyholder.