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Aircraft Insurance: How much? |
by John S. Yodice from the March 2002 issue
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Each year at AOPA Expo,
our association's convention, we hold an insurance seminar and invite
representatives of the leading general aviation insurers to respond
to our members questions. I moderate the seminar. This past November
in Fort Lauderdale, Florida, the subject of the seminar was Aircraft Insurance: How Much Do I Really Need?
THE TERRORIST ATTACKS
Before we got to answer that question, there was another burning issue
that needed to be addressed. What effect will the September 11, 2001,
terrorist attacks on this country have on insurance? Members asked,
Will I be able to renew the insurance on my aircraft? and Will it cost
me more? Our panel of experts confessed that it was too soon to make
predictions with any degree of certainty, but said they were sure there
would be an impact.
While those effects would weigh more
heavily on the
airlines and airports that provide airline security, the experts
guessed that general aviation and even auto and homeowners insurance
could be affected.These changes are anticipated because even
before September 11, the insurance industry had been experiencing
significant underwriting losses, losses in excess of the premiums paid
for the insurance.
The terrorist attacks exacerbated the problem.
One of the panelists gave us a sense of the magnitude of the problem.
He said that for the three years prior to September 11, the aviation
insurance industry worldwide suffered roughly $1 billion in losses
beyond the premiums collected.
Add to this the estimates of the
aviation insurance losses from the September 11 terrorist attacks,
which range from two to four years of total worldwide aviation
insurance premiums, and it is easy to see that there will be increased
hardening of the aviation insurance market.
The effect on
general aviation? That remains to be seen. The question posed in the
title of the seminar was then addressed. How much insurance do I really
need?
The answer depends on whether you are talking about hull
coverage, liability coverage, or both.
Hull
Coverage
The easier part of the question has to do with
insuring the hull of the aircraft. Hull insurance covers physical
damage to the aircraft itself. It is similar to a combination of
collision and comprehensive coverage that might be written on an
automobile. According to the panel, most owners know the value of their
aircraft very well, and that is the amount of hull insurance they
should buy. In other words, the insured amount should be the cost of
replacing the aircraft.
Obviously, overvaluing the aircraft (even if an
insurer will allow it) will cost more in premiums than is necessary for
what will be paid in the event of a total loss. Undervaluing the
aircraft (again, if the insurer will allow it) may cost less in
premiums but opens the owner to the risk of getting less than adequate
compensation in the event of a total loss. In connection with hull
insurance, members wanted to know what the industry standard is, how
much of a deductible they could expect to pay. The deductible in hull
coverage frequently differentiates between whether the aircraft is in
motion or not in motion.
As you would expect, the insurance premium
increases for motion coverage compared to the premium for not in
motion. What we learned is that there is no industry standard for
deductibles. One companys standard policy has no deductibles.
Deductibles in other companies policies vary from $50 not in motion to
$250 in motion. But they may be higher, such as $100 and $500,
respectively.
Liability Coverage
More difficult is
determining how much liability coverage to purchase. Thats the coverage
that protects the insured in the event he or she is held responsible
for bodily injury or property damage to another arising from the
ownership or use of an aircraft. As you would expect, the higher the
limits of liability, the more expensive the coverage. The only
responsible guideline our panel could offer was to recommend that you
should buy as much liability coverage as you can reasonably afford to
carry.
To follow the discussion, we need to differentiate between
smooth limits of liability and sub-limits. A smooth limit of liability,
more properly called a combined single limit, means that the limit of
the insurance companys liability is a single number per occurrence.
It doesnt matter whether the claims involve bodily injury to a person
on the ground, property damage, injury to a passenger, or any
combination of these losses; the whole limit is available to cover
these losses as long as they arise out of the same occurrence.
In
contrast, many policies contain sub-limits. The most common form in
which they are found is colloquially referred to as a million sub one
hundred. What this means is that a portion of the liability coverage
has been sub-limited to a number smaller than the $1 million overall
limit. In other words, the most that the insurance company will pay per
occurrence is $1 million. However, the most the insurance company will
pay in liability for any single passenger (or person, if that is the
way the policy is written) is a smaller limit, in this case $100,000.
The higher the sub-limit, the more expensive the coverage.
Most light-aircraft policies in general aviation are sub-limited,
probably more than 90 percent, according to our panel.
Most of them are sub-limited to $100,000, although sub-limits of
$200,000, $250,000, and $300,000 are also available.
Are these limits
adequate in light of the multimillion-dollar verdicts we regularly see
for victims of general aviation air crashes? According to the
representative of one major insurer that issues mostly sub-limited
policies (one who joins the others in advocating buying limits as high
as you can reasonably afford), the reality is that consistently over
the years, 99 percent of liability claims have been settled within
policy limits.
Another representative echoed this experience, with
slightly lower percentages. This insurer said that the vast majority of
the claims involve policies of $1 million overall combined single limit
with $100,000 per passenger sub-limit. Off the top of his head, he
estimated that 80 to 90 percent of those claims settled within the
$100,000-perpassenger policy limits, without litigation and without
problems. These are situations involving claims of family members or
friends that usually preclude a nasty result. However, he cautioned
that there are a fair number of instances where the sub-limits are
insufficient to settle the claim because the claimants are aware that
there are substantial assets available beyond the sub-limited policy.
Other claims cant be settled until the claimants have exhausted other
remedies. In the meantime, the insured, the decedent, and the family
are dragged through years of litigation. Of course, smooth limits
are better, and the higher, the better. But are they available?
Right now it is possible to obtain up to $8 million smooth for some
owner-flown light aircraft. A representative gave as some examples:
Cessna 172s, 210s, Cherokees, Bonanzas, and some light twins such as
Senecas and Barons.
Apparently these higher, and smooth, limits are
available provided that the pilot does annual recurrent training and
flies a number of hours per year that the insurance company is
comfortable with. In a twin that might be 100 hours per year,
in a single it might be 50 hours per year. The insurance companies
are loath to offer high limits to pilots with limited experience.
These multimillion-dollar smooth limits are costly, which is why many
insureds opt for sub-limited policies.
COST OF DEFENSE
Another question raised in the seminar had to do with
the concern that the cost of definding a lawsuit could well exceed
the usual sub-limited coverage.We learned that the cost of defense
is in addition to the limits of liability. It is only after an insurance
company has exhausted the limits of liability, either through payment
or judgment, that the duty to defend ceases. In most states
the insurance company cannot go to the claimant and pay the policy
limits without getting a release for the benefit of the insured.
So, if the claim cannot be settled within policy limits, the insurance
company will defend the insured until there is a settlement within
the policy limits or until there is a settlement or a verdict that
includes money from the insured's assets or personal resources.
If the insured has a lot to protect, he or she has the legal right
to pay to retain a personal attorney to monitor the situation.
The representatives were quick to assert that the defense attorneys
retained by their insurance companies will vigorously defend all
interests, not only those involving insurance money but also those
which potentially involve uninsured exposure. One representative
indicated that his company has spent more than $500,000 in legal
fees defending individual customers against claims involving
a $100,000 sub-limit.
The author is indebted
to the following individuals for their participation in the panel
that provided these insights: Jim Anderson and Mark Breitenbach
of AIG Aviation Inc.; Dave Baines of US Aviation Insurance Group;
Jim Lauerman of the Avemco Insurance Company; and Greg Sterling of
the AOPA Insurance Agency Inc. |
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