The True Value of Proper Coverage
One of the most common and reoccurring questions we get involves proper valuation when insuring aircraft: Can I just insure my aircraft for the loan amount instead of insuring it for its true value?
The important thing to remember is that almost all aviation insurance policies are “stated” 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. 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 for? There are negatives to both over-insuring and underinsuring your aircraft.
The negative to over-insuring your aircraft is that the insurance company might determine that it makes 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 pay to insure the aircraft for the higher amount. Underinsuring 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 underinsurance issue and will cost you more in the long run if there is ever a claim.