When purchasing aircraft hull insurance, it is important to verify you have sufficient limits of coverage. If you have not had your aircraft’s hull value accurately appraised, you risk being over- or underinsured.
Taking the time to understand the ins and outs of aircraft hull insurance and how to correctly price your aircraft can help you make informed decisions and mitigate associated risks. By doing so, you can help safeguard your investment and secure adequate protection.
What does "agreed value" mean?
MWhile not the only contributing factor, the cost of your hull coverage policy will hinge on the value for which you choose to insure your aircraft. Insurers generally provide aircraft hull coverage on an “agreed value” basis, rather than actual cash value, as is common on automobile policies. This valuation method means that when you apply for hull coverage, you select the dollar value for which your aircraft is insured.
Differing from actual cash value insurance, in the event of a total loss, the agreed value clause on your policy means the insurer will not be able to deduct any amount for depreciation. Regardless of the aircraft’s current market value, they will pay the agreed value of your aircraft, less any deductible, and keep your aircraft salvage.
How can my agreed value influence underwriting decisions?
The agreed value for which you choose to insure your aircraft can also affect whether your insurer will pay for repairs following an accident. These partial losses can prove to be a challenge if you have not insured your aircraft for its fair market value. Many policies have a “constructive total loss” clause that allows insurers to write off an aircraft if the costs of repairs exceed a certain percentage of the agreed value, often between 75% to 90%. Just like in the case of a total loss, you will receive the agreed value of your aircraft less any deductible, and the insurer keeps your aircraft.
In the event of a partial loss where the insurer elects to pay for repairs, you will likely see the insurer apply depreciation for time-limited components such as engines and propellers. Under most aircraft hull protection policies, if a part which has a specified overhaul life needs to be replaced following an insured loss or damage to the aircraft, the amount payable under the claim is normally reduced to reflect the proportion of the overhaul life which has elapsed. For example, if a CA$10,000 propeller which has an overhaul lifespan of 10,000 hours is damaged, and it is 70% through its life, then the claim settlement may be CA$3,000, with you, the owner, having to pay the difference. While this initially may seem unfair, it speaks to one of the main principles of insurance — the principle of indemnity — which is to put the policyholder back in the same financial position they were in just prior to the loss, without providing any financial gain. To protect yourself from these deductions in the event of a claim, you may be able to add betterment coverage to your policy, which is insurance designed to cover the pro-rata reduction in value that insurers can apply to time-limited parts and components.
While awaiting repair, the agreed value of the aircraft will be reduced by the amount of the loss. The reduced value will then be increased by the amount of the completed repairs until the agreed value is fully reinstated or the insurance has expired, whichever is sooner.
What are the risks of being over or underinsured?
It is crucial to insure your aircraft for an amount that would cover the cost to replace it with a similar model and quality. If you have underinsured your aircraft and suffer a total loss or your insurer decides to invoke the constructive total loss clause and write it off, it could in effect mean you have sold your aircraft to your insurer at a rock-bottom price. If you have overinsured your aircraft, you will likely pay unnecessarily high premium costs. You could also find yourself in a position where, based on the extent of the damage, you were expecting the insurer to write it off as a total loss, but because the value was inflated, it was more advantageous for them to repair it than write you a cheque for the agreed value.
How do I know the right value for my aircraft?
Determining an appropriate aircraft value can be challenging. In addition to taking into consideration the age of the aircraft, its condition, any modifications or enhancements, and its maintenance and loss history, values fluctuate depending on a variety of factors. These may include prevailing market conditions, exchange rates, the relative cost of new aircraft, as well the current costs of fuel, maintenance, and parts. Values may also be dictated by a lessor or bank if the aircraft must be insured to the minimum required by the bank/lessor under the loan/lease agreement. It is important to remember that the “correct” insured value is an amount you could realistically sell it for, and not what you have spent on it.
The best method of valuing your aircraft is to enlist help from a formal appraisal service. You may also be able to get useful information from other sources. For instance, you can speak to your aircraft sales broker, aircraft dealer, or an approved maintenance organization (AMO)— all may have insight on the right value for your aircraft. Online portals can also provide a guide of current asking prices, but remember these only show the seller’s asking price, not what the aircraft actually sold for.
When is the right time to update my hull value?
Each time you renew your policy, you will be required to state the value you need insured. This is a great time to review your aircraft’s hull value and make sure it aligns with its fair-market value. However, if you have made any upgrades or modifications to your aircraft, mid-term changes to hull values can and should be done.
Typically, aircraft owners can simply inform their insurer of their desired hull value, as the insurer will do their own cross-checks with third-party bluebooks and other resources. If there is a major difference in the value you give and what the insurer expects, they may request evidence to support your number, such as maintenance logs, or receipts for upgrades in avionics, interior, and equipment. You may also be asked to acquire a formal appraisal from an accredited aircraft appraiser. If the value you provide is too low, they may request that the value be increased before they consider providing a quote.
Insuring your aircraft for the correct value can help provide peace of mind that you have adequately protected your assets and you will be back in the skies soon following an accident. It can also help you avoid out of pocket payments and excess premiums.