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EAA Insurance Solutions: Does Your Aircraft Insurance Fit?
By Bob Mackey, Senior Vice President, EAA Insurance Solutions administered by Falcon Insurance Agency, Inc.
November 20, 2014 - One of the most important questions an aircraft owner must answer when it comes to their aircraft physical damage insurance is, “Does my insurance fit?” Unlike many other forms of insurance, aircraft physical damage insurance is written on an “agreed value” or “stated value” basis, which means you and the insurance company agree on how much your aircraft is insured for before the insurance policy starts.
If a loss occurs, the agreed or stated value is the maximum amount that the insurance company will pay in the event of a total loss. There is no reduction for depreciation, actual cash value, or other terms you may be familiar with from auto insurance policies. This is a great benefit of aircraft insurance policies, but is not without its potential pitfalls.
Let’s say you decide to lower the insured value of your aircraft to save some premium dollars. First of all, you might not save as much as you think because rates for aircraft physical damage insurance are inversely proportional; the rates per $1,000 of insured value go up as the insured value goes down. For example, you might insure a $50,000 aircraft for $1,000 annual premium, or 2 percent per $1,000. But if you lower the insured value to $40,000 the annual premium may be $900, which is 2.25 percent per $1,000. So you are only saving $100, not $200, which you would if the insurance company used a 2 percent rate.
Second, there’s a real possibility that by undervaluing your aircraft on the insurance policy a partial loss can be declared a total loss by the insurance company. For example, if you lower your $100,000 aircraft value to $60,000 - again to save money on the premium - and you incur a $45,000 loss, the salvage value of your aircraft after the loss is $35,000, so the company pays a total loss of $60,000 to you then sells the salvage to incur a net loss of $25,000.
Another mistake made, although less frequently, is over-insuring your aircraft. If your aircraft is significantly over-insured and is involved is a major accident, it might be more cost-effective for the insurance company to repair the aircraft rather than declare it a total loss. This would leave you with an aircraft with significant damage history, which diminishes its value. Here is an example: Your aircraft’s real market value has fallen to $100,000 but you continue to insure it for $150,000. A substantial loss of $80,000 occurs, and the salvage value of your aircraft after the loss is $10,000. The insurance company will repair your aircraft and their net loss is $80,000 instead of $150,000 and you end up owning an aircraft with a substantial loss history, likely significantly reducing its market value. All because you spent extra money insuring your aircraft for the last several years above the real market value.
You can use a number of sources to evaluate an aircraft’s value, including Aero Trader, Trade-A-Plane, Aviator’s Hotline, Barnstormers, as well as aircraft type clubs or a reliable sales agency. The other widely used source is the Aircraft Bluebook - Price Digest or Bluebook. Published quarterly, the Bluebook is standard for aircraft dealers, financing institutions, and insurance companies and contains a wealth of information including the cost of avionics, conversions, modifications, and overhauls. The Bluebook outlines a formula to assist the user in determining the effect of their particular aircraft with adjustments for value of equipment, and engine and airframe times.
To provide some flexibility, most insurance underwriters will allow a 10 to 50 percent deviation, depending on the aircraft, above the Bluebook average retail value without any supporting documentation. If the desired value is outside these limits, the insurance underwriter very likely will ask for supporting documentation such as an equipment list, appraisal, airframe and engine hours, interior and exterior pictures, etc.
You should evaluate the insured value of your aircraft annually and your insurance policy anniversary is a great time to do this. The aviation insurance professionals with EAA Insurance Solutions administered by Falcon Insurance Agency can assist you in making sure you have the correct insured value.
As an EAA member you have exclusive access to a great resource with EAA Insurance Solutions. Call 866-647-4322 and talk directly to an aviation insurance professional or if you are looking for a free no-obligation quote for aircraft insurance visit www.eaa.org/insurance. Whatever you do, make sure your aircraft insurance fits. With EAA Insurance Solutions you will find the right insurance at the best price!
Bob Mackey is senior vice president with Falcon Insurance Agency, the official administrators of EAA Insurance Solutions. If you have any comments about this article or if would like to see a specific aviation insurance topic addressed in a future article, send him an e-mail.