Aircraft change in value on a regular basis. There are numerous factors involved in determining an aircraft’s value at any time including: airframe and engine times, equipment, and the resale market. This is why at each year before your policy renews your aviation insurance agent will ask you to confirm the desired hull value you would like for the policy’s renewal. The key in this process is to understand how to value your aircraft and what would happen in the event the aircraft had a partial or total loss.
Most aircraft policies are written on an “Agreed Amount” (Stated Value) basis. That means in the event of a total loss, the amount listed in the policy under hull coverage (physical damage) will be the amount the insurance carrier will pay in the event of a covered total loss. This is different from the manner your other assets’ insurance policies are written. Cars and trucks are generally written on an “Actual Cash Value” basis, which pays the vehicle’s replacement value minus depreciation. Houses, hangars, and office buildings are usually written on a “replacement cost” basis, which essentially means that these policies pay the cost to replace the property at the time of the loss. As a result there are usually requirements to carry the proper insurance to value.
Since aircraft are written on an “Agreed Amount” basis it is important to perform proper due diligence when determining the insured value for the aircraft. One process utilized to determine an aircraft’s value is to use an aircraft blue book or other valuation service. A blue book provides a middle-of-the road measure of an aircraft’s value based on the aircraft year of manufacture, and make and model with mid-time components and average equipment. Using the average the base value you then take into account the above or below average airframe, engine, and component hours, as well as other upgrades to reach a solid determination of the aircraft’s value. Most insurance carriers will not insure an aircraft that is 25% above or below an aircraft’s average blue book value without substantiation or an appraisal.
Another approach to help determine the aircraft’s value is to compare aircraft on the resale market. This can be done by occasionally looking at what is for sale in the classifieds as well as by visiting with operators of similar equipment. Doing this will provide a strong gauge of what it would take to replace the aircraft with one of similar kind and quality. Determining what it would take financially to replace the aircraft with one of similar like and quality is a key determining factor as to the value you should insure your aircraft. Insurance, or indemnification, literally means to restore one to whole when a loss has happened. Insurance exists to restore your aircraft situation to what it would have been had a loss not occurred. It does not exist for one to benefit from a loss. In the event of a covered physical damage loss the insurance carrier has an obligation to either: repair the aircraft, replace it with like kind and quality, or pay the agreed value. Legally it is at the insurance carrier’s discretion as to which option it chooses.
There are three general results when the hull value is selected for insurance:
1) the aircraft is property valued, 2) the aircraft is over-insured, or 3) the aircraft is under-insured. When an aircraft is over-insured the policyholder is over paying their premiums. It also creates a hazard where it might be more affordable for the insurance carrier to repair the aircraft when it would be more desirable to total the aircraft. Conversely, if the aircraft is underinsured the policyholder may be out a significant amount of equity in the event an aircraft is totaled. It also creates the opportunity for a carrier to total an aircraft when the desired result would be a repair. This could cause a loss of equity for the aircraft owner.
When an adjuster reviews an aircraft hull loss, they look at a couple of issues:
1) the repair bid, and 2) the salvage bid. They add those two amounts together and if the sum is greater than the insured value they will usually total the aircraft and pay the agreed amount (insured value) in the policy. Example: An aircraft owner/operator has an aircraft insured for an agreed amount of $100,000, however the aircraft was actually worth $130,000. The aircraft has an engine failure and the forced landing causes $50,000 in damage according to the repair bid. While handling the claim the adjustor gets a salvage bid of $60,000. In this case it makes more economical sense for the adjustor to total the aircraft. This is called a constructive total loss.
In this example there was enough insured value to cover the repair, but it made more economic sense for the carrier to total the aircraft. Too many times, aircraft owners have either unintentionally underinsured their aircraft or only carried enough insurance to cover the amount remaining on the aircraft’s loan. They didn’t take into account the potential for a partial loss to lead to the aircraft being total under a constructive total loss scenario. This has led to unfortunate financial losses for these policyholders.
All of this information dictates one possible answer. Review the aircraft’s value on a regular basis (annually at the insurance renewal at a minimum) and insure your aircraft with the amount it would take you to replace the aircraft with like kind and quality. That is the only way to avoid the pitfalls that over-insuring and under-insuring bring. As always be sure to check with your insurance agent to make sure you are adequately covered.