Buying In

Insurance: A Question of Policy

March 1, 1996

Insuring your new purchase

It's a real cream puff. After years of dreaming, months spent researching the ideal aircraft for your needs, and weeks poring over advertisements (and making telephone calls), you've finally located the perfect airplane — and it was only flown by a little old lady to pancake breakfasts on pretty weekends. It passed the prepurchase inspection and cleared the title search; and the loan has been approved. What about insurance?

Like automobile insurance, aircraft coverage has two parts: liability and physical damage. Unlike cars, however, liability coverage is seldom required on aircraft. In 1995, only six states — California, Maryland, New Hampshire, Minnesota, South Carolina, and Virginia — required liability insurance on non-commercial aircraft.

"The limit of liability an individual carries — or should carry — depends on the assets that individual wants to protect and the kind of flying he does," said Greg Sterling, executive vice president and manager of the AOPA Insurance Agency in Wichita. For example, a young pilot with few financial assets or a pilot who always flies alone may not need to carry as much liability coverage.

Sterling said the most frequently purchased coverage provides $1 million in liability protection, with a maximum payment of $100,000 — referred to as a sub limit — to each passenger in the aircraft. "But liability is certainly not a one-size-fits-all situation," he cautioned.

A combined single limit or smooth policy eliminates the per- passenger cap but will cost more, explained Dean Torgerson, an aviation specialist in AOPA's Aviation Services Division. "I usually recommend the smooth policy when it's economically feasible," he said.

"People typically don't know how much liability coverage they carry," said John Doolittle, owner of Sutton James, Incorporated in Hartford, Connecticut. The aviation insurance brokerage represents 15 underwriters. "I have a Mooney 201; and if I buy a $1 million smooth limit policy, it will pay in any combination until that $1 million is gone. In the case of the sub limits, the biggest check they will write for somebody who's hurt in the airplane is $100,000."

"Some insurance policies restrict liability coverage if the injured party is a member of the policyholder's family," Sterling said. "We get a lot of questions about that."

Physical damage or hull coverage pays for repairs to the aircraft after an accident and will be required by the lender if the craft's purchase is being financed. Hull insurance is split into ground and in-flight coverages.

"Few [events leading to] physical damage claims occur while the aircraft is stationary. They occur on takeoff and landing, which is considered in-flight," Torgerson said. He suggests that even cost- conscious owners of non-hangared aircraft at least carry ground coverage. "It doesn't have to be a tornado — just a severe thunderstorm with hail can cause serious damage" to an aircraft tied down outdoors.

Purchasers of aircraft insurance often share the same questions. The most frequent involves establishing the aircraft's value.

"The single biggest problem, whether you're buying or renewing a policy, is that people don't adequately insure their aircraft," Torgerson said. This may have been done intentionally to save money, he said, or it may have occurred inadvertently because the aircraft's value has appreciated. "If the aircraft is underinsured, there's a much greater chance that it will be declared a total loss after an accident."

An insurance company regards an aircraft totaled when it decides repairs are not economically feasible, Torgerson explained. In that case, the owner receives a check for the aircraft's insured value less the policy's deductible — regardless of the aircraft's market value.

"One of the big questions is, 'Am I covered if I fly someone else's aircraft?'" Sterling said. Most policies include some form of non-owned aircraft liability coverage. If an aircraft owner lends his airplane to another pilot, that pilot must either be named on the owner's policy or meet the requirements of the policy's open pilot clause in order for insurance coverage to be effective. The clause stipulates total flying time, time in type, ratings, and any other conditions that must be met for a pilot not named on the policy to be covered.

"Another thing that comes up a lot is people who are named as pilots and people who are named as insureds," Doolittle said. Adding a pilot to a policy usually adds him to the list of insureds, which means the policy covers him — but this does not apply to professional pilots like CFIs or ferry pilots working for hire.

"One of the other big questions is probably with respect to reimbursement," Sterling said. With the cost of ownership growing, many pilots purchase aircraft through a partnership or want friends to use the airplane — and reimburse them for that use. "Most policies define a use of an aircraft as private business and pleasure. At the AOPA Insurance Agency we've added wording to the policy: 'Your personal and business-related use for which no charges are made intending to result in a financial profit to you or anyone.' You can take reimbursement up to the point at which you're at a break-even status."

One question that should be asked — but usually isn't, Doolittle said — is, how would an aircraft be valued in the event of physical damage? The insurance company owns the salvage, or what remains of an aircraft after it has been totaled. Depending on the insurer, an aircraft will be totaled when the repair costs equal 70 percent of the insured value, when repair costs plus the salvage value equal the insured value, or when repair costs equal the insured value.

Consider a Piper Archer with a book value of $50,000; it's insured only for the loan amount of $30,000. Say the airplane runs off the end of the runway, bending some sheet metal and damaging the engine, prop, and landing gear. "Two things come into play — the cost to fix the airplane and the value of the salvage," Doolittle explained. "[The insurance company] will repair it if it's economically feasible, but it is responsible for providing a return on the investment of its shareholders." In other words, the insurance company could declare the airplane totaled for $30,000 and sell the salvage for more than that.

Doolittle recalled one $50,000 airplane with only $15,000 in damages that was totaled — with the owner's consent — because the craft's salvage value was so high. "If people insure to market value, they are assured of getting enough money to replace their airplane or having enough [equity] in the airplane that the insurance company will repair it."

Adjust the insured value of an aircraft whenever significant modifications are made, Doolittle added. Even the addition of a radio or a GPS receiver can increase an aircraft's value.

How much should a good policy cost? Not as much as you might think, said Doolittle, who has seen premiums for retractable-gear singles that were no more expensive than his car insurance. "Right now, for most light airplanes, rates are as low as they've been for a very long time. They can't stay where they are for very much longer."

To check on an insurance company, AOPA's Torgerson suggested that pilots obtain the insurer's A.M. Best rating. The A.M. Best Company classifies insurers based on the underwriter's overall performance. Call your state insurance commissioner's office to determine whether an agent, broker, or underwriting company is legitimate and authorized to conduct business in that state.

What can an aircraft owner do to reduce his insurance costs?

"Obtain additional hours in the specific aircraft," Sterling said. "Almost all companies out there base part of their rating on the pilot's hours in the specific make and model. The best thing a pilot can do is fly more hours."

Recurrent training would help to keep both individual and industry insurance costs down, Sterling added. "If everyone would participate in recurrent training, we'd have fewer losses. If insurance companies had fewer losses, they wouldn't have to charge as much. It can simply be making an appointment with your CFI on an annual basis to go out and get some dual and keep your skills sharp."

VFR pilots should obtain an instrument rating, which demonstrates that the pilot has achieved a higher skill level, Sterling continued.

If possible, hangar the airplane. "While there are additional costs associated with that, most companies allow a credit for hangar storage," Sterling said.

Don't add "emotional value" to aircraft value, he added. "Make sure your aircraft is insured for the proper value. Place a value on the aircraft that will allow replacement with a like make and model in today's market."

The risk of underinsuring an aircraft is obvious: If the craft is totaled — which means the cost to repair damage equals the insured value — the policy will not pay enough to replace it. Overinsuring has a more subtle risk, Sterling explained. "Say a $25,000 aircraft is being insured for $40,000. That means that you've got to do $40,000 of damage to that airplane to total it," he said. In such a case, insurance will pay more for repairs than the aircraft's market value — even if the craft should be junked. "What you have when you're done is an aircraft that has a damage history on it and it's undergone extensive repair. You also paid more for that coverage during that time."

Answer all questions on the insurance application truthfully and accurately, Torgerson cautioned — particularly those relating to pilot experience and accident history. Failure to do so can result in the denial of a claim, he said. Flying without a current annual inspection, medical certificate, or biennial flight review is more likely to result in a claim denial, Torgerson added.

Obtaining insurance should be an early step in the purchase process. "If you have a loan on the aircraft, most banks won't release the funds unless you show them proof of insurance on the aircraft," Sterling said. "A lot of people wait until the last minute. We literally have received phone calls from people standing at the FBO, ready to sign papers and close the deal.

"Get all your information together beforehand and start the process early in case you have to provide additional information to your insurer."

Above all, Sterling said, be informed. If you have questions, call your insurance company or AOPA. "Read the policy. Make sure what you're buying. All insurance policies are not created equal. A good price on the surface may hide deficiencies in the policy upon inspection," he said. "Like everywhere else, if you receive a price that seems too good to be true, it probably is."

Buying Experience

Managing the risk

David Ovad of Blairstown, New Jersey, wanted a capable airplane that could carry a reasonable load and cruise at 150 knots. The speed of late-1960s Mooneys appealed to the 200-hour private pilot, but his student-pilot fiancee, Debra Mathein, insisted on more load- carrying ability. Ovad shifted gears and was considering a Cessna 210, when he read the AOPA Air Safety Foundation's Beech Bonanza Safety Review. "I think the safety record of the Bonanza moved me in that direction," he said.

Ovad found a 1970 F33A Bonanza for sale 800 miles away. A distant FAA flight standards district office helped him to select a shop to conduct a prepurchase inspection, which Ovad witnessed. Pleased with the airplane's condition, he bought it.

Insurance presented more of a challenge. Ovad — who at the time had neither an instrument rating nor a high- performance/complex sign-off — sent faxes to all the insurance companies, asking for their rates and requirements. "I received some outlandish requests," he recalled. "One of them actually wanted me to get a designated examiner to sign me off after getting the checkout [in the Bonanza] from a CFI. That was incredibly unreasonable."

Ultimately, his choice of insurer was based on both rates and requirements. "Because of my relative low time — no time — I couldn't get the coverage I wanted," Ovad explained. However, he has logged 180 hours in the Bonanza, including 12 hours of transition training and training for his instrument rating, since he purchased it last May. He will have more than 200 hours' time in type when he renews his policy this year, enough to qualify for the policy limits that he wants.

The airplane's utility was limited until he completed his instrument rating, Ovad said. "A lot of two-day weekends became three- and four-day weekends" because of weather.

Even after his first annual inspection, which uncovered no major surprises, Ovad remains enthusiastic about aircraft ownership. "You just can't compare ownership with rental costs. Until you own an airplane, you can't take the kind of trips that ownership allows. The utility is incredible.

"While going from Skyhawks and Warriors to a Bonanza with 200 hours' total experience is not prudent for everyone, moving up to a Cessna 182 or a [Piper] Dakota still would present additional challenge and much more capability," he continued. "Try to choose an aircraft that will keep you happy further into the future." — MPC