In this edition, I want to look at some of the dangers of under-insurance and we’ll look at over-insurance next time. In general terms, Insurers have one of two options when presented with a broken aeroplane. Either they (Insurers) can arrange to have the aircraft repaired at their expense or, alternatively, they can opt to declare a total loss and pay the value specified in the policy.

Provided the aircraft is insured for the correct amount - the reasonable market or replacement value in most cases - the Insured will have few problems whichever way the Insurers decide to jump. Either the Insured will get his aircraft back, fixed, or he will receive sufficient money to replace it.
The problem arises of course, when the value is either way over, or way under, the correct amount.

A 1978 Cessna 210 was insured for R250,000 (the price it was bought for two years previously) and was extensively damaged when it overshot a runway at a camp in the Okavango. The aircraft was retrieved and brought to Johannesburg where the repair costs were assessed at R172,500. The insurer declared a total loss, paid R250,000 and took the aircraft as salvage. The Insurers paid R175,000 to have the aircraft repaired and subsequently sold it for R380,000. Nett cost to Insurers: R46,000.

The Insured, however, had to drop down to a 1976 Cessna 182 which is all his R250,000 would buy.

In another incident, A Bell 206B sustained damage assessed at R85,000 after striking powerlines during flight. The aircraft was insured for R75,000 but was valued after the loss, at R1,120,000. The Insurers threatened to write the aircraft off if the Insured submitted a claim and, consequently, the Insured was left with little option but to pay for the repairs himself.
A rare aircraft, lovingly restored by its enthusiastic Owner, was insured against fire and theft and the value was based on the cost to the owner when he found it rotting in a Mozambican scrapyard and the cost of materials used in the 5 years it took to rebuild.
In a tragic accident, the aircraft was destroyed in a hangar fire. The owner was paid the R125,000 for which he had, on the advice of his brokers, insured the aircraft only to discover that the aircraft, one of the finest examples of its type left - was conservatively worth $375,000 on the world market.
A farmer bought a second-hand Cessna 210 for R130,000 in 1985. He lived in a fairly remote region of the country and rarely came into contact with people in the industry except when arranging MPI’s. Over the years, he increased his sum insured from time to time until, in 1994, the aircraft was insured for R230,000: a full R100,000 more than he had paid for the aircraft when it was 9 years younger.

In October 1994, whilst taxiing to the threshold of a runway, the nosewheel went into a small irrigation channel. The nosewheel collapsed and the prop struck the ground.

The aircraft was duly dragged to the nearest repair facility where, a few days later, a repair quote (including shockload inspection) of R87,480 was presented to the insurance assessor.

The Insurers elected to declare a total loss and offered to settle for R230,000.

In the meanwhile, the owner was becoming acquainted with current aircraft values and had discovered that his aircraft, undamaged, could fetch as much as R400,000 in the current market.

Understandably, he went “ballistic” when he was faced with the prospect of a “forced sale” at R230,000, and tried to insist that the aircraft should be repaired. Unfortunately, the options belong to the Insurer, not the Insured. The Insurer could pay R87,500 to repair the aircraft and effect a quick sale at, say, R350,000 to give a nett profit of R32,500! This particular story had a happy ending as the Insurer ultimately agreed to repair the aircraft in the light of the longstanding relationship between Insured and Insurer over the previous 9 years. However, had the Insurer adopted a harsher attitude, the Insured’s options would have been somewhat bleak:

(i) Withdraw the claim and pay for repairs himself
(ii) Accept the “forced sale” at R220,000 and, in all probability, never buy another aircraft
(iii) Beg the Insurer to apply Average and pay only a proportion of the repair cost.

These are just some of the examples of what happened when insufficient care was taken in establishing the cor-rect value of an aircraft. The moral of the story is: take the time to obtain an accurate valuation regularly or you could be using the roads more often than you would care to.