I don’t really want to buy hull insurance, but my bank is requiring it. Therefore, I’m only going to buy enough hull insurance to satisfy my loan requirement. Is that OK?
One of the most common questions I am asked involves finding a proper value to insure an aircraft. The important thing to remember is that almost all aviation insurance policies are “agreed value” policies. In other words, if you decide to insure your aircraft for $100,000 and you experience a total loss, the insurance company will pay you $100,000 (minus any deductible, of course). Therefore, it is extremely important to insure your aircraft for its replacement cost. Ask yourself, if I had a total loss tomorrow, could I replace my aircraft for what I have it insured? There are negatives to both over-insuring and under-insuring your aircraft. The negative to over-insuring your aircraft is that the insurance company might be in a position where it would make more sense financially to fix your aircraft than to total it. Consequently, you are left with an aircraft with major damage history.
The other negative is the opportunity cost of the additional premium you have been paying to insure the aircraft for the higher amount. Under-insuring your aircraft is probably more dangerous. It puts the insurance company in a position to total an aircraft when it should be fixed. This is critical, because when an insurance company pays a total loss on an aircraft, they own the salvage. This would leave you without an aircraft and not enough money to replace it.
In some cases, owners will only buy enough hull coverage to satisfy the bank or loan requirements. Often this is an amount far below what the aircraft is actually worth. This doesn’t mean you only insure it for the loan value! Doing so will lead to a gross under-insurance issue and will cost you more in the long run if there is ever a claim.