Insuring Aircraft

February 19, 2015

There are numerous factors involved in determining an aircraft's value at any time, including: airframe and engine times, equipment, and the resale market. 

Bruce Ison, Pinnacle Aviation’s Director of Insurance, suggests jet owners determine the value of their aircraft annually to make sure it is close to what amount is listed in their insurance policy. The key in this process is to understand how to value an aircraft and what would happen in the event the aircraft had a partial or total loss.

Most aircraft policies are written on a stated value basis. That means in the event of a total loss, the amount listed in the policy under hull coverage will be the amount the insurance carrier will pay in the event of a covered total loss. This is different from how auto insurance is written. Cars and trucks are generally written on an “Actual Cash Value" basis, which pays the vehicle's replacement value minus depreciation.

Since aircraft are written on a stated value 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 of 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.  If an aircraft is over insured, the policyholder is over paying their premiums and it creates a situation 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 and the carrier may total an aircraft when the desired result would be a repair. This could cause a loss of equity for the aircraft owner.

All of this information dictates one possible answer. Review the aircraft’s value on a regular basis 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. Contact Bruce Ison at bi@pinnacleaviation.com  or 480-998-2793