June 15, 2017 - One of the buzzwords in insurance is “naked.” The phrase “flying naked” means going without insurance. Insurance is an intangible bunch of legal mumbo-jumbo fashioned into a contract (insurance policy) that is difficult for most people to understand, which instills a low level of trust for most prospective users of insurance. Given that most people don’t think they will ever need insurance and most insurance companies will do anything and everything they can to avoid paying a claim, it is not hard to see why most people dislike insurance and insurance people.
From time to time I meet aircraft owners who say they do not buy aircraft insurance. I get it. It costs too much and there is a general doubt as to the real value of insurance. However, when deciding to fly without insurance there are a few things to consider. Is insurance required? What is covered and what isn’t covered? What are the costs versus benefits and risks versus rewards?
If you own a vehicle, you are aware the state where you live requires automobile owners to carry some level of liability insurance. All 50 states and the District of Columbia have what is referred to as a financial responsibility law, which requires each auto owner to have a limit level of liability insurance. These minimums are fairly low and these laws do not require the auto owner to carry physical damage insurance. Of course, if the auto is financed, the bank or other lending institution will require physical damage insurance.
What insurance coverage is required to fly an aircraft
Aircraft owners, however, are not universally required to maintain such insurance. For example, only 11 states (California, Connecticut, Hawaii, Indiana, Maryland, Massachusetts, Minnesota, North Dakota, Oregon, Rhode Island, or Virginia) require liability insurance (required limits and penalties for non-compliance vary). Of course, lending institutions that finance aviation loans will require both liability insurance and physical damage insurance. In addition, aircraft owners who have a hangar or tie-down rental agreement or lease will usually have a condition in the contract with the airport and/or hangar owner to maintain liability insurance and extend insurance to the airport and/or hangar owner for any bodily injury and property damage that results from the aircraft owner’s alleged negligence.
Even with such limited requirements, researchers estimate that between 80 percent and 90 percent of aircraft owners in the general aviation community purchase some level of aircraft lability insurance (U.S. Government Accountability Office, 2015). The GAO data also indicates the majority of aircraft owners in the GA community purchase $1,000,000 of liability insurance with $100,000 per passenger at a premium range of $250 to $550.
What insurance coverage is available
The primary two components of an aircraft insurance policy are: liability insurance and physical damage (hull) insurance. Liability insurance provides coverage up to an amount spelled out in the policy for the aircraft owner’s legal obligations for bodily injury and property damage. Hull insurance provides coverage up to an amount spelled out in the policy to repair, replace, or pay for damage or total loss of the insured aircraft. Physical damage insurance can be purchased with varying levels of risks to be covered: all risks; in motion or not in motion; not in flight; not in motion; and none. The more risks you choose to cover, the more the physical damage insurance will cost, and if an aircraft owner decides to only purchase liability insurance, typically, the price of this insurance will increase slightly. There is one other important insurance coverage included in an aircraft insurance policy: supplementary payments.” Supplementary payments is unlimited and separate from liability insurance and physical damage insurance. The most significant expenses that fall under supplementary payments are legal expenses, which can be significant.
Evaluating whether or not to buy insurance
There are two questions aircraft owners should consider when thinking about aircraft insurance: should I buy insurance at all, and if I buy aircraft insurance, what insurance should I buy? This is the value proposition: cost versus benefit and risk versus reward.
To facilitate our evaluation of whether or not to buy insurance, let’s look at a couple of examples for an aircraft insurance policy.
- Aircraft: 2010 Van’s RV-6A ($60,000 value)
- Pilot: age 50, private pilot with single-engine land rating, 500 total hours and 100 hours in RV-6A, no previous losses
- Airport: public, runway 4,000 feet by 50 feet (asphalt)
- Liability insurance ($1,000,000 with $100,000 per passenger): $250 ($325 if only liability insurance is purchased)
- Physical damage insurance ($60,000):
- All risks in motion and not in motion: $900
- All risks not in flight: $550
- All risks not in motion: $450
- None: $0
- Aircraft: 1985 Cessna 172P ($60,000 value)
- Pilot: age 50, private pilot with single-engine land rating, 500 total hours and 100 hours in Cessna 172, no previous losses
- Airport: public, runway 4,000 feet by 50 feet (Asphalt)
- Liability insurance ($1,000,000 with $100,000 per passenger): $175 ($300 if only liability insurance is purchased)
- Physical damage insurance ($60,000):
- All risks in motion and not in motion: $600
- All risks not in flight: $350
- All risks not in motion: $300
- None: $0
The cost and risk are easy to identify but not so easy to quantify. Cost is the money saved if no insurance or some insurance is purchased. Risk is a larger unknown amount of money for the loss of the aircraft and legal obligations for bodily and property damage. Benefit and reward are straightforward: money not spent on insurance.
There are three important steps aircraft owners should take when considering their options when buying aircraft insurance:
- Select one professional aviation insurance broker with an aviation insurance agency who is knowledgeable, reputable, and listens to you!
- Check out all of the insurance coverage options.
- Do your own risk analysis.
Aircraft owners can find professional aviation insurance brokers through the internet, word-of-mouth from other aircraft owners, and through their connections to aviation groups (i.e., EAA, local EAA chapter, aircraft type club, etc.).
Checking out all the options should be easy if you have the right aviation insurance broker working for you. Go back to the examples above!
The risk analysis is also easy:
- Risk identification: What could happen?
- Risk mitigation: How can I reduce the likelihood of something happening or reduce the severity of loss if something does happen?
- Risk financing: Buy insurance with this list in mind:
- Cost of insurance versus money saved
- Risks (cost of uninsured loss) versus money saved
If you want to fly naked, that’s okay, just make sure you know what you are doing and the consequences if you have an incident!
EAA members have a great resource with EAA Insurance Solutions administered by Falcon Insurance Agency, Inc. where you will be able to find the right aircraft insurance at the best price. If you would like to learn more about how EAA Insurance Solutions administered by Falcon Insurance Agency, Inc. can help you get the right insurance at the best price, give us a call at 866-647-4EAA (4322) or go online at www.EAA.org/insurance. One of the aviation insurance experts will be happy to help you with your aviation insurance needs.
Bob Mackey is senior vice president with Falcon Insurance Agency, Inc. the official administrators of EAA Insurance Solutions. Bob has been involved in the aviation insurance industry for over 35 years and he is a commercial pilot with instrument ratings. If you have any comments about this article or if would like to see a specific aviation insurance topic addressed in a future article you may e-mail Bob at firstname.lastname@example.org.