Clear on Top

Contrary to popular belief, insurance companies actually want to settle claims as fairly and as quickly as possible. They do not typically try to “get out of” paying a claim based on “technicalities”. However, there are situations where even after they go above and beyond to settle a claim fairly, the insured aircraft owner is still not happy. No one wins and no one is at fault.

Let’s use the following example: Your parked airplane cartwheels three times across the ramp as a tornado passes overhead. OUCH! Fortunately, you have coverage and no one was injured. Once you get over the initial heartache of seeing your pride and joy severely damaged, you determine that the aircraft is completely destroyed. It has structural damage to both wings as well as the tail section. Who knows what other hidden damage is there? However, as part of the claims process, you and your insurance company request several bids from reputable repair facilities to validate your belief that the aircraft is totaled. Unfortunately, two weeks later you find out that all of the repair facilities came back with bids that are only half of the insured value of your aircraft. Each company estimates they can completely repair your aircraft with all new parts for $1,000,000. Your aircraft was worth $2,000,000 prior to the loss.

The good news … You purchased insurance and your insurance company is going to stand by its responsibility and pay to repair your airplane with all new parts. But wait, you don’t want the airplane back! You don’t want an airplane that has had major structural damage even if the repairs make your airplane “like new”.

The insurance companies understand your dilemma. I’d even go so far as to say that some claims adjusters would tell you that they would not want their family flying on an airplane that sustained significant structural damage. But this is an emotional response and not an intellectual one. Airplanes with significant damage can and are repaired every day. Unfortunately, the insurance companies cannot just arbitrarily decide to pay $2,000,000 for a $1,000,000 claim.

So how is the decision made by an insurance company to repair or total an airplane? We have to look at the terms of the policy. Policies vary in their definition of Total Loss. For some, “Total Loss means any physical damage loss for which the cost to repair when added to the salvage value equals or exceeds the insured value of the aircraft.” For others, if the cost of repair exceeds, for example 70 percent to 80 percent of the insured value, the insurance company would consider the aircraft a total loss. In the scenario listed above, even with $1,000,000 worth of damage, the aircraft does not meet the definition of Total Loss. It’s repairable.

What makes this situation even worse for the aircraft owner is the “diminution of value” even after the aircraft is completely repaired and airworthy. Diminution of value is a loss of value in an aircraft once it has a damage history. Not many people want to own an aircraft with a significant damage history. There’s no way to determine this loss in value as every buyer is going to have an opinion on how much the aircraft is worth and how much they’re willing to pay for it. This loss of value is not insurable under an aircraft hull policy.

Can you avoid this scenario? No. However, there are a few things you can do to help yourself. You should review your policy’s definition of total loss as well as keep abreast of repair costs and replacement values for your type of aircraft in the current market. Additionally, you may be able to reduce (not eliminate) the chance of this happening by not over insuring your aircraft and by having its insured value as close to replacement cost as possible. Don’t go overboard and under insure your aircraft either. This could result in a total loss where a partial loss and repair would have been in your best interest.

Despite rumors and innuendo, insurance companies do not spend their time trying to get out of paying claims. Their reputations are based on settling claims as quickly and fairly as possible.  Most companies do a good job making things right. However, there are circumstances where even after an insurance company does everything they can to err on the side of the insured, the insured isn’t happy with the end result. No one wins and no one is at fault.