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How Much Coverage is Enough?

Article Featured in World Aircraft Sales Magazine

When it comes to insurance, one detail that can be tough to determine, but is fundamental to your overall protection program is coverage limits. In short, how much coverage is enough?

Aviation Insurance Coverage Best Practices

Aviation Insurance Coverage Best Practices

The best way to approach this question is by exploring three key areas: Hull, liability, and ancillary coverage.

Unlike many other property policies, aircraft policies are usually written on an “agreed-value” basis. That means once you and the insurance company have mutually agreed on a hull value, the amount stated in the policy represents how much will be paid in the event of a total loss, less any applicable deductible. Fortunately, most turbine aircraft policies have a $0 deductible. You can, however, over-insure and under-insure to your detriment.

If you over-insure, the insurance company will typically elect to repair the aircraft even when there is major damage – leaving you to deal with significant damage history, and no compensation for diminution of value. For example, if an aircraft is insured for $5,000,000 but is really only worth $3,000,000 then the insurance company has the right to fix the plane rather than pay the entire $5,000,000.

If you under-insure, the insurance company may elect to pay you for the total loss and sell the salvage – in which case you would lose your equity. Again citing the example above, if the aircraft is actually worth $7,500,000, the insured receives $5,000,000 but will have to assign the aircraft title to the insurance company.

The proper insured value to carry is the amount of money it would take to purchase another aircraft exactly like yours (i.e. similar year, equipment, condition, etc.). An aircraft sales dealer can give you the best estimate of its current value. In addition, your insurance broker may have resources to help give you an idea of the value. This coverage limit should be reviewed annually on renewal and adjusted accordingly, especially since aircraft prices have fluctuated greatly in the current economy.

How do I determine the proper liability limit?

Unfortunately, you never know exactly how much liability is enough until the loss. Since there is no single and definitive method available to determine the appropriate liability coverage limit, your response to the following questions can help guide you in selecting a reasonable limit based on your exposure:

  • Number of passenger seats in the aircraft? An aircraft with ten seats presents a greater potential passenger liability exposure and will typically require a higher per occurrence coverage limit than one with six seats.
  • Do you always fly alone; how many passengers do you routinely carry? If your average passenger load per flight is five, you would need to consider a higher coverage limit than if it was two.
  • Composition of passengers [employee vs. guests]? If the majority of passengers carried on the aircraft are employees, you may be able to justify a lower liability limit since a properly structured workers compensation program should be the sole remedy for injuries to employees. Conversely, if the majority of passengers are guests, you would need to select a higher liability limit. Don’t forget to account for the possibility of bodily injury and property damage outside the aircraft (mid-air collisions, bystanders, buildings, etc).
  • What assets need to be protected? Don’t let a holding company give you a false sense of security. Savvy plaintiff attorneys will attempt to pierce shell companies and corporate veils in an effort to get at the “real money” whether it is a larger corporation or an individual’s net worth. And remember, since aircraft operations may take you all over the world, you never know what legal jurisdiction may apply. If you have an umbrella policy that covers the aviation exposure, you will need to make sure your aviation liability limit meets the minimum required umbrella limit.
  • What do other operators of similar aircraft carry? Benchmarking can be another useful tool to help you pick the appropriate limit. Generally speaking, since it is impossible to determine the exact liability limit you need, it is best to buy as much as you can reasonably afford. Obtain quotes for alternative limits at each renewal, as rating of this coverage can vary greatly year-to-year.

What other coverage should I consider?

There is a long list of ancillary coverage available to turbine aircraft owners – some more important than others. This is where a good aviation insurance broker comes in handy as he or she can help you navigate the sixty (or more) extra options that can be included in the aircraft insurance policy.

Insurance companies often include template “broad coverage endorsements” that help round out the policy but even these may have some limitations or conditions that are unacceptable. While many of these particular coverage choices do not necessarily increase the premium, it is important that the limits are adequate for your type aircraft.

Make sure to include a discussion of key ancillary coverage with your broker at the next renewal.

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