Insure your aircraft for what it's worth. Not more! Not less!
Updated: Jun 16
Aviation is a high-risk activity. Therefore, insurance of your aircraft is one of the most important steps to take before making your aircraft airborne.
An aircraft carries multiple risks. In the event of an accident, there is a high probability that the hull will get damaged but it may also ruin the airport infrastructure or the nearby buildings, and cause serious injuries to the passengers and crew onboard. Therefore, having an aircraft insurance is must!
Insurance companies offer a wide variety of policies depending upon the types of risks covered. The most common of them all is the “Hull All Risk” policy that compensates the insured for the cost of repair of the hull in case of an accident.
While buying the “Hull All Risk” policy, one of the most important factors to consider is the “stated value” of the aircraft.
The stated value is decided mutually between the insurer and the insured. In case of a mishap, the insurer will pay the cost of repairing the plane up to the stated value minus deductibles. Many aircraft policies specify a CTL (constructive total loss). It comes into action only when the cost of repair of a damaged plane exceeds 75% of the stated value. If this happens, the insurance company declares it a “total loss” and pays the insured total stated value minus deductibles, and the salvage value.
So, the critical part is “how much should the stated value be?
The stated value should be the actual fair market value - the price at which you could realistically sell your aircraft or the price at which you could buy the replacement of your aircraft.
RISK OF UNDER-STATING THE STATED VALUE
Some owners understate the stated value, which is less than the worth of the aircraft
By doing so, they risk losing their aircraft a, “fender-bender”, if the insurance company decides it’s cheaper to write a cheque for the under stated value and sell the aircraft for salvage than to let the owner keep it and pay for the repairs. That cheque is not going to be enough to replace the aircraft.
Some insurers overstate the stated value, which is more than the worth of the aircraft
This has a number of disadvantages:
1) The owner pays a higher premium than what is necessary.
2) The insurance company might opt to repair a severely damaged aircraft rather than totaling it. This might leave the owner stuck without an aircraft for months or even years and then winding up owning an aircraft with extensive damage history and on an impaired resale.
For example, an owner has to buy Hull All Risk insurance of his aircraft, which has fair market value of Rs 15 cr.
Case 1: He under-insures his aircraft at a stated value of Rs 10 cr.
In case of a minor accident, suppose the estimated cost of repair comes to Rs 8 cr. In that case, the insurance company will consider it as CTL as the cost of repair is more than 75% of the stated value of Rs 10 cr and pay the stated value minus deductibles and salvage value of the aircraft. Now, the owner is stuck as the cost of replacement of the aircraft is Rs 15 cr and he ends up bearing the huge difference of Rs 5 cr form his pocket.
Case 2: He over-insures his aircraft at a stated value of Rs 20 cr.
In case of a major accident, suppose the estimated cost of repair comes to Rs 12 cr. In that case, the insurance company will compensate for the cost of repair of Rs 12 cr minus deductibles. If he would have insured his aircraft at a fair market value of Rs 15 cr, the insurance company would have considered this as CTL and would have paid him Rs 15 cr minus deductibles and salvage value. He could have bought a replacement aircraft and gotten back in the air soon. But now, he is stuck for a longer period because the insurance company will get the aircraft repaired and he will end up owning an aircraft with significant damage history and an impaired resale value.
Under insuring is bad if you have a minor accident and over-insuring is bad if you have a major accident.
What we do?
We are a unit of Aequitas Insurance Brokers Private Limited, which is registered with IRDA as an insurance broker. As a registered broker, we represent our clients to the insurance companies and negotiate the best quotes with maximum coverages. We are different than an insurance agent. An agent represents one particular company and therefore is more inclined to sell the policy of his company only. Whereas, as a broker, we are authorized to work with all the insurance companies and therefore can find the best available risk coverage and price from the insurance companies for the client.
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