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Whether you are purchasing aircraft insurance for the first time or approaching your fifteenth insurance renewal, you face a decision about what is the most appropriate value for your Hull (Physical Damage) insurance. Too high a value and you increase the amount of premium unnecessarily. To low a value and you risk not getting what your aircraft is worth in the event of a total loss. But determining the right value isn't hard, it just takes a little time, research and thought.
There are, traditionally, three valuation types for insured property. Replacement Cost is where the insurance carrier pays to replace the destroyed property with a new like, kind and quality item(s) regardless of amount of age/use of the destroyed item. This is commonly available on home-owners insurance policies. Actual Cash Value is where depreciation is applied to the replacement value and the insurance carrier pays that amount for the destroyed property. This is commonly used in auto insurance policies. The third valuation method, and the one commonly used in aircraft hull insurance, is stated value or agreed value. This valuation method allows the owner of the aircraft to tell the insurance carrier what the aircraft is worth (within reason) and, in the event of a total loss, the insurance carrier agrees to pay that amount to the owner less any applicable deductible.
The stated value method works well for aircraft owners as it allows them to have some input into the value that is used and, therefore, to know exactly what they will get from the insurance carrier if their aircraft is destroyed or damaged beyond repair. However, this flexibility does give rise to the question "How do I determine what my aircraft is really worth?"
The first and most important thing to do is put your subjectivity aside. Most pilots love their aircraft and rightly so. It may be a new purchase with all the latest avionics (the envy of all your hangar-mates) or an old friend that has provided you with many years of faithful, reliable service. However, that does not mean that your aircraft is automatically worth twenty percent more than all other similar make and model ships just because it is yours. Take a step back from your personal feelings try to be as methodical as if you were performing a pre-flight check.
Step one in the process to a good valuation is to establish a baseline reference. There are some excellent industry resources available to you. Aircraft Blue Book and Vref are two highly respected sources that can be used to help establish an initial value. By looking across a wide volume of aircraft, these two entities provide an average value for most makes and models of aircraft and rotorcraft. You can also ask your insurance broker or underwriter as they typically have a good idea of what the current average value of a given make and model aircraft should be.
Now that you have a baseline, look at the variables with your own aircraft and be honest. Some items will reduce the value from the baseline average (like having an engine that is close to overhaul) and some will increase it (like the new avionics suite you just had installed). Certain items, like replacing a prop, may not have an appreciable impact on the value because, although they may be new parts, you cannot operate the aircraft without them. Once you have figured out the pluses and minuses of the variables which may affect your value, make adjustments to your baseline value accordingly.
Next, to test that value against the current market, take a look at some of the aircraft sales listings for similar aircraft to yours. There are lots of internet and print resources out there for you to use. By looking at comparable aircraft and the market pricing for those ships, you may be gain a more realistic idea of what your aircraft is worth at that particular time.
Once you have completed these steps, you should have a realistic and up to date valuation which you can use for your insurance policy. Supply this value to your broker and underwriter to make sure that they agree and are comfortable with this value. If the underwriter feels that the value is too high, he or she may ask for documentation of the equipment upgrades or other factors which have increased the value to that level. If he or she feels that the value is too low, they may not agree to use that value.
Underwriters are very wary of aircraft that dramatically over or under insured. If an aircraft is significantly over-insured (e.g. a $300,000 insured value on an aircraft that is really only worth $200,000), there is, potentially, a financial incentive for the Insured to have a total loss. This is called a moral hazard and goes against one of the fundamental principals of insurance: to make the insured whole after a loss, not to make a profit for the insured.
If an aircraft is dramatically under-insured, the owner faces potential financial loss. For example, let's say an aircraft is actually worth $500,000 but the owner opts to only insure it for $250,000 to save money on premium. Unfortunately, the aircraft is damaged and the cost to repair is $300,000. The insurance company will pay the owner $250,000 (less any deductibles) and take the aircraft. The owner will be stuck with no aircraft and only half of what it was worth to replace it. You can bet the owner will not be happy. In order to avoid this set of circumstances, many insurance carriers will not agree to a value that is more than 10% to 20% below the average value. In some cases, the insurance carrier will agree but will require a signed statement from the aircraft owner stating that they understand and agree to the potential consequences of underinsuring the aircraft.
The best way to avoid these two problems is to follow the three steps outlined above and use the most accurate value you can for your insurance coverage.
There is an alternative to taking the time and making the effort to determining the value of your aircraft for yourself and that is to hire a third party expert to determine the value for you. You can use a certified aircraft appraiser or other professional to do the leg work and save time and effort. They can furnish you with a report which you can supply to the insurance carrier as testimony to the stated value and how that value was determined.
While you may not choose to go through this process every year, it makes sense to do so at regular intervals so that, even if you do not update your insurance coverage level, you, as the aircraft owner, know what your aircraft is actually worth.