If I leave here tomorrow
Would you still remember me?
For I must be traveling on now
‘Cause there’s too many places I’ve got to see
Free Bird, Lynyrd Skynyrd
Most business aircraft owners understand that their aircraft has dramatically increased in value in the last two years. Those who follow aircraft sales have seen it in the news; others have learned when someone has wandered into their hangar and offered to buy for a ridiculous sum. Some aircraft owners have decided to sell opportunistically, while others have decided to stick with what they have because it suits their needs.
What many are not thinking about, however, is whether their asset is now at risk because it is suddenly underinsured.
While the increase in aircraft values is generally good news for owners, the bad news is that many aircraft are no longer adequately insured under their aircraft hull insurance policies. If a casualty event occurs with respect to your aircraft, are you covered for the replacement cost of another aircraft?
For those not overly familiar with the topic, aircraft hull insurance is akin to auto collision insurance for your aircraft. Like auto collision insurance, aircraft hull insurance provides coverage for physical damage to an aircraft, whether from the dreaded hangar rash (e.g., wingtip smashes into the side of a hangar while being moved) to a complete hull loss event (e.g., a hangar collapses in a storm, crushing the aircraft inside). If a claim under the hull policy becomes necessary due to an accident or incident, the aircraft owner could be faced with significant out-of-pocket costs if underinsured. If your aircraft is financed, your lender has certainly insisted that your aircraft be financed adequately to pay off your loan. If this is not the case and your aircraft is insurable, it is your decision as to how much hull insurance coverage is enough to make sure you can sustain the possible loss.
Other considerations: While aircraft operators should also consider their aircraft liability insurance coverage, liability coverage is beyond the scope of this article. Consider speaking with your insurance broker to address it.
This decision of how to insure your aircraft is considerably more complicated in a market where the supply of pre-owned jets for sale is at a record low and the prices for those available are at record highs. And many owners are not thinking about the pitfalls of trying to right-size their insurance in this market.
Here are a few pitfalls and factors owners should be considering in 2022:
Pitfall #1: Is Your Aircraft Underinsured?
Underinsuring your aircraft can have significant financial repercussions. Let’s say Owner purchased a used King Air three years ago for $2 million. In today’s market the same aircraft – even with hundreds of hours and cycles more – could be worth $2.5 million or better. If Owner is not working with their insurance broker to keep pace with the increased hull value, Owner could find him or herself with out-of-pocket costs of potentially hundreds of thousands of dollars if Owner needs to make a claim under the hull insurance in a total hull loss scenario. These situations are not limited to catastrophic inflight accidents but also to a fire or storm or any other casualty event that results in a total loss beyond economic repair.
Further, being underinsured can result in a significant financial hit when there is not a total loss. For instance, most hull insurance also provides for reimbursement of other expenses when an aircraft is down for repairs, such as the cost to dry lease or charter a replacement aircraft. In today’s high-demand aircraft market if a replacement aircraft is available to dry lease or charter it will certainly be at higher rates than a year or two ago. Downtime for repairs is also frequently longer in today’s market because of supply chain problems in obtaining parts. To plan for contingencies like these, an owner should be speaking with their brokers to see what insurance is desirable and available, as well as what is feasible at today’s rates.
Pitfall #2: Over-Insuring Your Aircraft Has Its Own Significant Risks
In a market like the one we see in 2022, some owners may be considering whether they should over-insure their aircraft to get ahead of prices as they continue to rise. Is it possible to carry too much hull insurance?
Most definitely.
Imagine a scenario like when a tornado hit a reliever airport outside Nashville in March 2020, tossing multimillion-dollar aircraft around like toys. As explained by Craig Birch, Vice President of Aviation Insurance at Brown & Brown, Inc. in Minneapolis at least one aircraft owner had significantly over-insured their aircraft to the point where the insurers balked at paying the replacement cost. “Instead of the insurance company writing it off and paying the owner the policy limits, the insurance company paid to have the aircraft repaired since it was less expensive than paying out the policy limits – leaving the owner owning an aircraft with significant damage history which is a difficult, if not impossible, sell to a prospective purchaser.” Business jet insurance generally does not cover diminution in value, so as long as the aircraft can be made airworthy again, the insurance company will choose to take the least expensive route to settle the claim, leaving the owner with a significantly lower value aircraft and a significant loss.
Tips To Avoid Hull Insurance Pitfalls
According to Alison Wynne, Vice President and Aviation Practice Leader at Brown & Brown, “Aircraft insurance policies have the hull value stated in the policy on an agreed value basis, meaning the owner and insurer have agreed on the replacement value of the aircraft . . . you want to make sure you are going to get a check for the replacement value of the aircraft, no more and no less.” This means providing the insurance company, in coordination with your broker, an accurate value of the aircraft and reviewing it every year or any time the aircraft is significantly improved (e.g., new engines, new interior, etc.). “An owner can generally prove the actual aircraft value by providing the insurance company with a recent appraisal or even documentation such as maintenance records showing major upgrades and the like,” says Craig Birch. Both Alison and Craig agree: “Your best bet in making sure your aircraft is appropriately insured under the hull policy is to work with an experienced aviation insurance broker to provide value documentation to your insurance carrier.”
If you have any insurance questions on the issues above, Alison can be reached at alison.wynne@bbrown.com or (612) 347-8300 or Craig at craig.birch@bbrown.com or (386) 847-6963.
If you have any questions related to any aviation-related law and transactions, please contact Kevin Johnson at kevin.johnson@fmjlaw.com.
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