Clear on Top

We’ve all heard the horror stories. There you are, minding you own business when out of the blue – BAM, an aircraft accident. You ran off the runway. You forgot the landing gear. You bent the prop. You hit a fence post with the wingtip. You ran out of fuel. Or maybe you didn’t DO anything at all. Hail storms, wind, flood, the FBO line service, or just plain bad luck can all cause damage to your aircraft requiring you to place the dreaded call to your insurer’s 1-800 claims number.

That initial phone call will put your aircraft hull insurance policy to the test. It will kick off a series of events that will leave you relieved and made whole, or leave you tired, stressed, and angry. While the strength of the policy and the talents of the company claims people have a lot to do with the handling of a claim, there are things that you – the policy holder – can do beforehand to improve your lot after the sheet metal stops grinding.

Cooperate –

Don’t start a war the first day. For the most part, hull claims are a normal part of the aircraft insurance business. While the event is quite significant for the aircraft owner, insurance claims adjusters see them every single day. The insurer is as glad as you are that no one was hurt. The approach of the insurer, in most cases, is to get you paid for the repairs as soon as possible and put the file to bed. The sooner they can write the check and the less they have to talk to you, the better. Time is money.

As a matter of procedure, a claims adjuster will contact you shortly after the report of the loss. Unless the damage is major, or several aircraft are damaged (i.e., a tornado or major hail storm), expect the adjuster to handle everything by phone, fax, and email. The adjuster will want you to retell the story of what happened. He or she will request pictures and an estimate for repairs. He must also document for the insurance company that you met the conditions of the policy at the time of the loss. He will want copies of pages from your pilot’s log and copies of your pilot and medical certificates.

Sometimes we see aircraft owners go instantly on the defensive. “Why is he asking for all this information? I’ll bet they are trying to find a way to deny my claim!” Again – denying or micro-managing hull claims really doesn’t fit their business plan. They don’t want to spend a million dollars in time, effort and legal expense to avoid paying you $50,000. Unless there is something wildly peculiar about your story or the incident, the adjuster really just wants to document his file for the auditors and get you paid ASAP. It doesn’t matter if you violated an FAR. It doesn’t matter if you made a mistake, or if you were a just victim of bad luck. Don’t waste time trying to convince them one way or the other. You will need to save that effort for the FAA. Document the damage, estimate the repair costs, document that you met the conditions of the policy, and you will be fine.

Setting Hull Values –

Aircraft policies are written on an “agreed value” basis. Unlike car insurance, you choose the amount you will be paid in the event of a total loss and it is written on the policy. If the aircraft is totally destroyed, there isn’t much for an adjuster to do. He’ll document that the aircraft is, indeed, destroyed and the company will write you a check, less any applicable deductible.

The problems arise when the aircraft is not totally destroyed, but its ability to be economically repaired is in question. I recently had a client that insured his airplane for what he owned the bank – about $200,000 – while similar airplanes were trading for around $250,000 – $300,000 on the used market. Along came Murphy that left the airplane with a collapsed nose gear, two prop strikes, and forward fuselage damage. The repair estimates came in at around $175,000 for new skins, labor, paint, and prop repair and engine teardown; but the shop added the hedge – “we don’t know what we might find under the skin, or inside the engines, until we get in there.”

What to do? The insurer can’t pay more than $200,000 – and then only if the airplane is declared a total loss (and the insurer gets the salvage rights). Most likely, the insurer will total the aircraft, sell the salvage and be out maybe $50,000. But the aircraft owner will hold a check for $200,000, having lost a $300,000 airplane. Or; the owner can agree to settle for the $50,000, keep the damaged airplane, and be out of pocket for whatever it takes to repair it. Either way, the owner will be upset. But the situation could have been avoided, had the owner insured for the airplane’s true value up front.

What about the other side of the coin? A corporate jet owner buys a nice Gulfstream and then borrows money to install new avionics, repaint the airplane, put in a new interior, and perform hot section inspections on both engines. The aircraft owner now owes his bank $4,000,000 on an airplane that is worth about $2,500,000 on the used market. The bank requires that the asset be protected, so the insurance policy is written with an agreed value of $4,450,000 – about 10% above what is owed the bank. Six months later, the bad news arrives. While towing the airplane from its hangar on an ice covered ramp, the tug jackknifes. The towbar breaks, and the airplane rolls forward, striking the tug. There is major damage to the right wing root, and to the fuselage, including a possible puncture of the pressure vessel. Estimates reveal that the repairs will cost $1,600,000 with as much as a 50% contingency for cost over run, depending on the extent of hidden damage.

Insured to market value, this aircraft is most likely a total loss. Writing the owner a check for $2,500,000 and disposing of the salvage would leave the insurer having paid out maybe $1,000,000. Far better than the $1.6 – $2.4 million that it will cost to repair the airplane.

But, insured for $4,450,000, the aircraft is repairable. If the airplane were declared a total, now, it would cost the insurer nearly $3,000,000. Even under worst case scenarios, the insurer is $600,000 better off to repair. So the aircraft owner gets stuck with an airplane that is to be torn apart for a year – unusable as a business tool, while he continues to service debt and pay hangar rent, insurance, and other fixed costs.

Preparing for Deductibles –

Many corporate aircraft policies are written with “nil” deductibles. Hull coverage applies from the first dollar of damage. But for many commercial operators – especially helicopter operators, flight schools, and other “higher risk” activities, hull deductibles are a policy feature not to be ignored.

In motion deductibles can be quite high for high risk policies. On lower valued aircraft, $2,500 or $5,000 in motion deductibles are not uncommon. Helicopter operators can see deductibles as much as 5-10 percent of the value of the insured aircraft. That’s as much as $75,000 on a $750,000 aircraft. What plans do you have in place to fund this deductible if needed to get your aircraft – possibly your most important business asset – repaired and returned to service?

Are you setting yourself up for failure, should an accident happen? The only reason to buy insurance is to handle the possibilities of unexpected losses. Your insurer will be there to pay claims as agreed by the policy. The aviation insurance market is a very small world with a limited customer base. Insurance companies can not afford to mishandle claims and expect to survive, despite earning bad reputations. But, after the loss, all parties are bound by the contract that was set up beforehand to handle that situation. As an aircraft owner, make sure that your risk management planning considers hull loss scenarios when selecting insurance products. It could make all the difference when the worst happens.