Posted by: Jeff Rhodes | December 22, 2009

Insure To Loan Value

The value of my aircraft has fallen significantly during the past three years. My lien at the bank is more than the aircraft is currently worth. It is time to renew my insurance.  I would prefer to insure the aircraft for its true value and save the premium dollars but the bank requires me to insure to the value of the loan. What do I do?

This is one of those strange snap-shots in time where economic pressures have caused some aircraft values to fall faster than loan repayments. There are three conflicts or problems with this situation. The banker wants full protection for the asset collateralizing his loan. This is understandable. The insurance underwriter does not want to significantly over insure the risk. This could cause what the insurance community refers to as a moral hazard. The insured does not want to pay more insurance premium than is necessary.

The only solution is negotiation. The insurance underwriter usually will agree to insure an aircraft for the “Blue Book” (Aircraft Price Digest) published value plus 10% to 20%. This variation could be even higher with documentation of extra or updated equipment or aircraft modification. Sometimes the underwriter will insure for the loan value if he understands the bank’s requirements. The banker may be willing to reduce his demand to insure to the value of the loan if your financial strength is adequate and you guarantee any shortfall in coverage. Some of our clients are simply pledging other assets to secure the loan.

In either case, unless you insure to the pay-off value of the loan or to the market value of the aircraft (Bluebook), you may be purchasing less insurance than it will take to make you whole and pay off the lien. In the event of a total loss, you would have to pay the difference to satisfy the debt to the bank. It then must be pointed out that the small savings in premium may not justify the exposure. “Penny-wise and pound-foolish” is the old saying.

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