Take A Second Look

I was a teenager and had been expressing one opinion after another with the absolute confidence that adolescents often have. After a few minutes, the wise old man said to me, "You know, Jim, it's not what we don't know that gets us in trouble, but what we're absolutely sure of that simply isn't true."

As I grew into adulthood (and now beyond), I've found that gentleman's advice to be invaluable. I often very carefully evaluate ideas that are commonly held to be true to see whether or not perhaps they are, in fact, wrong---and all because of him.

That approach has served me particularly well in the field of aviation insurance. There are many commonly held ideas about our business that are sadly mistaken, and I've seen many instances in which those false ideas have cost people dearly, both in money and in frustration. What follows is a list of what I consider some of the most prevalent misconceptions about aviation insurance that surprise people every year.

"Bad stuff only happens to bad pilots. (Corollary: I would never do that!)" When I first entered this business, I'd attend the weekly claims meeting where we'd discuss the claims that had occurred since the last meeting. Obviously, we focused on the really bad ones, i.e., deaths, serious bodily injury and expensive aircraft. It seemed that almost without exception, a senior underwriter would comment, "Why, I'd write that guy all day long." It struck me early on that the easy assumption that only inexperienced pilots have bad losses is simply not true. Experienced pilots are not immune from either serious accidents or poor judgment. In fact, their very experience can lead to an overconfidence and complacency that can be fatal.

"I haven't had any claims, so I've gotten nothing for my premium." Even before a claim is paid, insurance is a promise to pay. And that promise has real value. How well could you sleep with the potential consequences of losing the value of your aircraft hanging over your head? How likely would the bank provide you with a loan for the aircraft unless it had some assurance of being paid in case the aircraft is destroyed? Most importantly, do you really want the responsibility of choosing and paying for an aviation-litigation-savvy attorney if you have a loss? All of these are benefits of insurance whether or not you ever have a claim.

"If someone else damages my aircraft, he or she will pay me for the damages. So I don't need hull insurance." While usually true, there are instances in which the person responsible for the damage is carrying no insurance or has violated the terms of their policy and therefore has no coverage. In that case, you'll have to hire a lawyer to collect what you're owed, assuming that the offending person has the financial wherewithal to pay.

Another problem with this point of view arises when the liability isn't clear. The other person's insurance company isn't going to pay for damage to your aircraft unless their client's liability is clear. It's much better to have your own insurance company pay you for your loss and then you can let the insurance companies fight over who is responsible.

"Hull insurance is too expensive; I'll just buy liability coverage. After all, what can happen to the aircraft when it's on the ground?" A lot of people get burned on this one every year. In 2003, 48% of Avemco's claims occurred while the aircraft was "safely" on the ground. More than one dollar in every four that we paid out was for these losses.

The vast majority of these were losses that occurred when the owner wasn't even near the aircraft. Wind damage caused 10% of the claims, and hail another 7%. There was even an aircraft destroyed by a hangar that collapsed as a result of the weight of snow on it. The total weather-related ground claims were 19% of the total claim count, with the average cost to repair being almost $19,000. Keep in mind that these numbers don't include losses to customers who had elected not to buy any hull coverage and therefore bore the loss themselves.

Theft and vandalism constituted another 4% of all claims, at an average cost of more than $11,500. Carelessness while moving the aircraft in and out of the hangar and while taxiing was the cause of another 8% of the claims, at an average cost of more than $7,000.

It's often wise to buy ground coverage even if you decide not to buy full hull coverage. Doing so can save you a lot in premium dollars but still protect you for these all-too-frequent ground losses.

If you decide to buy limited hull coverage, however, be sure to note the difference between "not-in-motion" ground coverage and "not-in-flight" ground coverage. The latter provides hull coverage for taxi operations, which create a lot of the ground losses.

"The insurance company wants too much premium to add my low-time friend to my policy, so I'll just get him or her to buy a non-owner policy." This old myth bites people every year, including FBOs that don't buy hull coverage or accept large deductibles with the idea that the renter policy will make up the difference.

If the loss is actually caused by the liability of the renter or borrower, this approach may work (assuming the negligent pilot purchased adequate aircraft damage liability). If the loss isn't the fault of the pilot, however (such as in a mechanical failure), the renter policy will not pay. It's designed to pay for the negligence of the pilot, not the aircraft owner or other responsible party. In this case, the owner is likely to have no coverage at all, since he or she has violated his or her own policy by allowing an unapproved pilot to operate the aircraft. This leads us to another widespread myth.

"Just like my car insurance, I have coverage no matter who flies my aircraft." This one is historically the most common cause of claim denials. Personal and business aircraft insurance policies are on a "named operator" basis. Some also have an "open pilot warranty" that makes anyone who meets certain specific requirements an approved pilot on the policy. If the person flying the aircraft is not named in one of these two ways, coverage is most likely not in place.

"A good way to save on premiums is to underinsure the aircraft. After all, I've heard that most losses are not total losses." This one is a classic case of being penny-wise and dollar-foolish. All standard aircraft insurance polices have a "constructive total loss" clause. Avemco's, for instance, is quite specific:

"When the estimated costs to transport and to repair or replace parts of your insured aircraft exceed 70% of the ’insured value,' we (the insurance company) may, at our option, pay our limit of liability."

To illustrate how an insured might "shoot themselves in the foot" with this clause, let's assume that an aircraft has a market value of $50,000, but the owner only insures it for $30,000. If there is a loss that will cost the insurance company more than $21,000 (including transportation), the company can pay the customer the $30,000 insured value and what's left of the airplane becomes the property of insurance company.

The best solution to this problem is to insure the aircraft for what you could get for it on the open market. Then, if there's a constructive total loss, you'll be satisfied with the payment (other than emotional value).

"I just bought a non-owner policy with property damage coverage. So I'm now covered for damage to the rented or borrowed aircraft." Unfortunately, this myth is sometimes even perpetrated by people who sell aviation insurance. A non-owned aircraft policy has two major coverage classifications. Liability for bodily injury and property damage protects the policyholder from bodily injury or property damage for which they are liable, except for the rented or borrowed aircraft itself. To obtain this coverage, the policyholder needs to purchase the second (and optional) Aircraft Damage Liability (ADL) coverage. Any serious study of non-owner insurance claims shows that this exposure is the most common, and to purchase a non-owned aircraft policy without ADL coverage can lead to what some people may refer to as a "rude awakening."

"There's a ’grace period' on my aircraft insurance policy, so I'll just pay my premium later." There is no grace period in aircraft insurance. The renewal premium is due on the expiration date. It's called an expiration date because the insurance policy (and the coverage) expires on that day.

So, that wise old man that I told you about in the very beginning was right. Fervently believing something that is simply not true can get us into a lot of trouble. This is as true in the field of aviation insurance as it is in the rest of life.