Plane & Pilot
Tuesday, May 7, 2013

Dream Big: Buy A Plane

Financing and insurance are the first steps in making your ownership dream come true

You should only carry as much hull coverage as your aircraft is worth. Thinking that they'll be "extra secure," some owners will insure their aircraft for a sum greater than the appraised value. According to Sterling, overinsuring is a mistake.

Under a normal policy, if you have an aircraft accident and the estimated cost to repair that aircraft exceeds 75% to 85% of your hull insurance policy limit, the insurance company will declare the aircraft to be a total loss and pay you the coverage limit (less deductibles). But, if the damage is less than 75%, the insurance company could require you to repair it.

Say you insure a $100,000 airplane for $140,000 and you have an accident that causes extensive damage to the aircraft. If the repair cost is less than $105,000 (75% of $140,000), the insurer could require you to repair it. A $100,000 repair is basically a wrecked airplane. In that scenario, you'd be stuck with an airplane that will take six to 12 months or longer to completely rebuild and will have lousy resale value because of the damage history, not to mention the bad ju-ju of a wreck.

Underinsuring is just as bad. If you underinsure an aircraft to save on monthly premiums, you could lose a potentially valuable aircraft. In that scenario, an owner completely refurbishes a $70,000 aircraft with new paint, interior, the latest advanced glass panel and a slew of avionics, bringing its true value to around $100,000. The owner insures it for $50,000. If the owner experiences a prop-strike or minor collision on the ground, the engine would have to be torn down. That could mean a repair bill of around $40,000. Because that exceeds 85% of the insured value, the insurer could take possession of the aircraft and leave you with a check for $50,000, less deductibles and salvage price. Meanwhile, you lost a perfectly good aircraft with a fortune in upgrades.

The moral here is that you should insure your aircraft for exactly what it's worth in market value. "Neither over- or underinsuring is of any benefit to the owner," added Sterling.

Liability is the second feature of aircraft insurance. It protects you from liability or responsibility to third persons for damages they may suffer resulting from the operation of your aircraft. With liability coverage, the insurance company will pay the third party directly, up to your policy limit.

Liability coverage comes in two forms: "sub-limit" coverage or "smooth" coverage. This pertains to the language in your policy that refers to "per occurrence" and "per passenger." Sub-limit coverage is a policy that provides for $1,000,000 per occurrence and $250,000 per passenger. It means the maximum total amount the insurance company will pay is $1 million dollars, but only in $250,000 increments to each passenger. If you have a two-seat airplane and the passenger is injured, the policy will only pay a maximum of $250,000. The rest must come out of your pocket.


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