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Basics of Risk Management in Aviation Insurance

September 4, 2018 Posted by Aircraft Insurance 0 thoughts on “Basics of Risk Management in Aviation Insurance”

The process of risk management is utilized to control and limit loss. That process includes identifying, analyzing, and mitigating risk. In general, there are four primary ways, or a combination thereof, that are used to treat and control a risk:

To Avoid the risk (stop doing the risky activity or dispose of the asset)

To Reduce the risk (limit risky activity and/or take proactive actions to limit risk)

To Transfer the risk (via Insurance or Contractual Agreement)

To Retain the risk (in-whole or in-part)

In the process of risk analysis, most risks can be assigned into one of four categories based on the frequency of losses and the potential severity of potential losses. For each category, there is a standard risk management treatment typically utilized to mitigate the risk:

Low Risk + Low Severity = Retain the risk

Low Risk + High Severity = Transfer the risk (to an insurance company)

High Risk + Low Severity = Reduce the risk (or transfer)

High Risk + High Severity = Avoid the risk

Most aviation exposures fall into the Low Risk, High Severity category, so aircraft owners typically address their aviation risks by transferring the bulk of the potential (pure) financial loss to an insurance company by purchasing an insurance policy. The insurance policy is a legal contract set to indemnify you in the event of a direct loss. To indemnify (indemnification) is to restore the insured to the condition they were in prior to the loss. That means that an insured is not meant to benefit from a loss, but to be brought to the status they would have been had the loss not occurred.

Risk management is a simple process in nature but can be much more involved and treated in more complex ways as operations get larger and more complex. However, the majority of aircraft owners and operators will find this concise information will provide a general understanding for their benefit.

 

This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.

What are Medical Payments on an Aircraft Insurance Policy?

July 31, 2018 Posted by Uncategorized 0 thoughts on “What are Medical Payments on an Aircraft Insurance Policy?”

The Insuring Agreements of an aircraft insurance policy specify that the insurance company shall pay all reasonable medical expenses incurred within one year from the date of injury, to or for each passenger (including or excluding crew depending on which is specified in the policy) who sustains bodily injury, provided the occurrence is covered under the policy.  This is meant as a no-fault quick settlement method for small cuts and bruises, ambulatory expenses, etc. In appropriate situations, it could also pay some funeral expenses. Limits for medical expenses are often $1,000-$10,000 Each Passenger on most light aircraft, so it will really only cover minor expenses. Again, fault doesn’t have to be determined, or a potential lawsuit imminent, for this coverage to respond. The Named Insured may even be eligible for Medical Payment expenses. Potential claims over and above the medical expense limit would be subject to the aircraft legal liability coverage.

This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.

Aircraft Liability – Legal Defense

July 16, 2018 Posted by Aircraft Insurance, Liability 0 thoughts on “Aircraft Liability – Legal Defense”

Legal Defense

The Insuring Agreements section of the insurance policy specifies that the insurance company has a duty and a right to defend any suit against the insured seeking damages for bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent. When liability coverage is purchased, the liability limit isn’t the only coverage you purchase. In most aircraft insurance policies, the legal defense expenses are paid outside of the policy limits, meaning the cost to defend the claim is not deducted from the policy limits available for judgments and settlements. The legal defense costs will likely pay for expert witnesses and some bail bonds, if necessary. The insurance company’s duty to defend ends when they’ve exhausted the limits of the policy with judgments and settlements. This is one of the key reasons to carry adequate liability limits.

The Severability of Interest clause provides a separate legal defense for each insured. Keep in mind, however, that the company’s duty to defend ends when the policy limits have been exhausted by the payment of judgments and settlements. When there are multiple insureds, the first insured case to settle could exhaust the policy limits ending the companies duty to defend the remainder of the insureds. The total number of insureds must be kept in mind when selecting a liability limit to ensure that there are plenty of liability limits in place to allow for the continued legal defense of all applicable insureds.

 

This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.

The Importance of Insuring Aircraft to Proper Value

June 8, 2017 Posted by Aircraft Insurance 1 thought on “The Importance of Insuring Aircraft to Proper Value”

Aircraft change in value on a regular basis. There are numerous factors involved in determining an aircraft’s value at any time, including airframe and engine times, equipment, and the resale market. This is why, each year before your policy renews, your aviation insurance broker will ask you to confirm the desired hull value you would like for the policy’s renewal. The key in this process is to understand how to value your aircraft and what would happen in the event the aircraft had a partial or total loss.

Most aircraft policies are written on an “Agreed Amount” (Stated Value) basis. That means, in the event of a total loss, the amount listed in the policy under hull coverage (physical damage) will be the amount the insurance carrier will pay in the event of a covered total loss. This is different from the manner your other assets’ insurance policies are written.  Cars and trucks are generally written on an “Actual Cash Value” basis, which pays the vehicle’s replacement value minus depreciation. Houses, hangars, and office buildings are usually written on a “replacement cost” basis, which essentially means that these policies pay the cost to replace the property at the time of the loss. As a result, there are usually requirements to carry the proper insurance to value.

Since aircraft are written on an Agreed Amount basis, it is important to perform proper due diligence when determining the insured value for the aircraft. One process utilized to determine an aircraft’s value is to use an aircraft blue book or another valuation service. A blue book provides a middle-of-the-road measure of an aircraft’s value based on the aircraft year of manufacture and make and model with mid-time components and average equipment. Using the average base value, you then take into account the above or below average airframe, engine, and component hours, as well as other upgrades, to reach a solid determination of the aircraft’s value. Most insurance carriers will not insure an aircraft that is 25% above or below an aircraft’s average blue book value without substantiation or an appraisal.

Another approach to help determine the aircraft’s value is to compare the aircraft on the resale market. This can be done by occasionally looking at what is for sale in the classifieds, as well as by visiting with operators of similar equipment. Doing this will provide a strong gauge of what it would take to replace the aircraft with one of similar kind and quality.

Determining what it would take financially to replace the aircraft with one of similar like and quality is a key determining factor as to the value you should insure your aircraft. Insurance, or indemnification, literally means to restore one to whole when a loss has happened. Insurance exists to restore your aircraft situation to what it would have been had a loss not occurred. It does not exist for one to benefit from a loss.  In the event of a covered physical damage loss, the insurance carrier has an obligation to either: repair the aircraft or pay the agreed value (at least one carrier specific policy condition that they can replace the aircraft with like kind and quality). Legally, it is at the insurance carrier’s discretion as to which option it chooses.

There are three general results when the hull value is selected for insurance: 1) the aircraft is property valued, 2) the aircraft is over-insured, or 3) the aircraft is underinsured.  When an aircraft is over-insured, the policyholder is overpaying their premiums. It also creates a hazard where it might be more affordable for the insurance carrier to repair the aircraft when it would be more desirable to total the aircraft. Conversely, if the aircraft is underinsured, the policyholder may be out a significant amount of equity in the event an aircraft is totaled. It also creates the opportunity for a carrier to total an aircraft when the desired result would be a repair. This could cause a loss of equity for the aircraft owner.

When an adjuster reviews an aircraft hull loss, they look at a couple of issues: 1) the repair bid, and 2) the salvage bid. They add those two amounts together and, if the sum is greater than (or equal to) the insured value, they will usually total the aircraft and pay the agreed amount (insured value) in the policy.

Example: An aircraft owner/operator has an aircraft insured for an agreed amount of $100,000; however, the aircraft was actually worth $130,000. The aircraft has an engine failure, and the forced landing causes $50,000 in damage according to the repair bid. While handling the claim, the adjuster gets a salvage bid of $60,000. In this case, it makes more economic sense for the adjuster to total the aircraft. This is called a constructive total loss.

$60,000 Repair Bid + $50,000 Salvage Bid = $110,000 Net Loss

$110,000 Net Loss > $100,000 Insured Value = Constructive Total Loss

$130,000 Aircraft Value – $100,000 Insured Amount = $30,000 Loss of Equity to Aircraft Owner

In this example, there was enough insured value to cover the repair, but it made more economic sense for the insurance company to total the aircraft, leaving the aircraft owner to come up with $30,000 to replace it. Too many times, aircraft owners have either unintentionally underinsured their aircraft or only carried enough insurance to cover the amount remaining on the aircraft’s loan. They didn’t take into account the potential for a partial loss to lead to the aircraft being totaled under a constructive total loss scenario. This has led to unfortunate financial losses for these policyholders.

On the flip-side, an aircraft can be insured for more than the current market value of the aircraft. In this scenario, the aircraft operator is not only overpaying premium, but it sets up the situation where it is more affordable for the insurance company to repair an aircraft when it would be more desirable to replace the aircraft. When aircraft with significant damages are repaired, there can be a loss of value upon resale, and some passengers may be hesitant to fly in a heavily repaired aircraft.

$60,000 Repair Bid + $70,000 Salvage Bid = $130,000 Net Loss

$130,000 Net Loss < $150,000 Insured Value = Aircraft will be repaired

$130,000 Aircraft Value – $150,000 Insured Amount = $20,000 in value overpaid in premium and causing a repair rather than a replacement.

If the aircraft would have been insured at it’s actual aircraft value ($130,000) the aircraft would have been totaled and the full agreed value paid.

All of this information dictates one possible solution.  Review the aircraft’s value on a regular basis (annually at the insurance renewal at a minimum) and insure the aircraft with the amount it would take you to replace the aircraft with like kind and quality. This can be accomplished by referencing the Aircraft Bluebook or VREF guides. It is also helpful to research current aircraft sales publications and online listings to see what aircraft of like kind and quality are listed for. However, the best way to get an accurate aircraft valuation is to engage the services of an experienced professional aircraft appraiser. Insuring aircraft for its current market value is the only way to avoid the pitfalls that over-insuring and underinsuring bring.

This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.