The Consequences of Over or Under Insuring Your Aircraft
Aircraft insurance is unique. 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 (insurer has the option to declare a damaged aircraft a constructive total loss), the insurance company is obligated to pay the agreed or stated value shown on the policy.
Many aircraft owners purchase an aircraft, insure for the amount they paid for it, and then make the crucial mistake of leaving the value the same at each year.At each policy renewal, adjust the insured value of the aircraft to the current market value.
What is the current market value?
If you were to offer your aircraft for sale, what would a reasonable buyer pay for it? Consult your aviation insurance broker who will give you the most recent bluebook value. Your best source, however, is an aircraft salesperson who specializes in selling your type aircraft. Keep in mind if you have an outstanding loan on the aircraft, you would have to insure it for the current market value or outstanding loan amount – whichever is greater.
Perils of Over or Under Insuring
The best way to explain why over- or under-insuring an aircraft is a bad idea is by example:
- Aircraft purchased and insured for $1M, 4 years ago.
- Current market value of $700K, but you’ve never changed the insured value.
- A storm collapses the hangar on your aircraft causing significant damage. The repair estimate is $300K.
- The insurer receives a salvage bid of $400K for the aircraft as-is.
Insurance Company has 2 options:
- Declare the aircraft a constructive total loss, pay you the agreed value ($1M), then sell the salvage ($400K), putting their net loss at $600K.
- Repair the aircraft for $300K (even though you may not want it back) with net loss is $300K. They will be forced to repair it.
Now substitute the proper insured value of $700K and run the numbers again. Since the amount they will pay is the same, they will normally let it be your choice whether to total or repair.
Usually over-insuring is the forces the insurance company to repair the aircraft, in most instances except when the aircraft is totally destroyed. Keep in mind that over-insuring also results in a higher hull premium. Conversely, under-insuring an aircraft has the reverse effect. Run the example with an insured value in the that is significantly lower than the market value. The insurance company will pay a total loss and take title to the aircraft, rather than incur the higher repair costs. You can inadvertently create an under-insurance situation if you add a new avionics package, new or overhauled engine, or any significant value addition to your aircraft and fail to increase the insured value when complete.
For more information or assistance, contact the AssuredPartners Aerospace insurance specialists.
