Don't be Penny-Wise and Pound-Foolish with Aircraft Insurance
By Bob Mackey, Vice President, Falcon Insurance Agency, Inc.
You've probably heard the old adage, "penny-wise and pound-foolish." But what the heck does it mean? Is this some kind of quip about buying something by the pound and getting a great price? Or does it have something to do with paying too much when we buy a pound of nuts, bolts, or washers?
Actually the phrase comes from our friends from across the pond. Back in England, where their denomination of currency is the pound, they also use pennies just like we do, so the phrase, penny-wise and pound-foolish referred to someone who made a foolish decision to save a few pennies at the ultimate expense of several pounds. Under-insuring your aircraft is a classic example of being penny-wise and pound-foolish. Here's a real life example.
Several years ago when the Van's RV-6 and 6A was fast becoming a very popular airplane, a friend of mine finished building a beautiful RV-6A. During a phone conversation he said he had just gotten his insurance lined up and the price was pretty good-about $1,000 a year. Little did I know that he only insured the airplane for $30,000, including ground and flight coverage.
"Do you want to sell your airplane to me for $40,000?" I asked. My friend laughed out loud and made some kind of remark about my living in the upper Midwest had frozen a few brain cells. But I was trying to make a point to help my friend understand he was being penny-wise and pound-foolish.
I asked why he was only buying $30,000 in coverage for his airplane when it was surely worth double that amount. By selecting a lower value for his airplane insurance, he said, his insurance premiums were about $400 lower. But he was in fact being penny-wise and pound-foolish; sure, he saved $400, but risked losing $30,000 in the event of a total loss. (I never did talk my friend into selling his airplane to me for $40,000; however I did convince him to increase the insured value of his airplane. That's what friends are for!)
When you buy hull coverage-insurance to cover the value of your airplane-you are making a contract with the insurance company that stipulates that if your airplane is damaged to the point that the cost of repairs exceeds the insured value, the insurance company is only required by the insurance policy to pay you the stated amount in the policy. In the case of my friend, if he damaged his airplane, only a partial loss, the insurance company could simply get a few repairs estimates, which would most likely exceed the insured value and then they would write a check for that amount.
Further, when an airplane is declared a total loss, the insurance company owns the salvage, which they usually sell to offset some of the amount they pay to settle the claim. In some cases an insurance company may be entitled to pay a total loss for the airplane if the cost of repairs and the value of the salvage of the airplane exceed the insured value. You've got to check each insurance policy as this condition varies from insurance company to insurance company.
How do you properly insure the value of your airplane? First, select a value that is equal to the value you expect your airplane would bring on the open market. Actually, insurance companies do not want you to underinsure your airplane, and you shouldn't either. If you insure your airplane at the correct value (market value) you will not have a problem if you have a claim. One of the problems with airplanes, especially homebuilts, is the values can vary widely and insurance underwriters are often times stuck accepting the value the airplane owners ask for when they buy their aircraft insurance. With standard category aircraft this doesn't happen as easily because there are reference tools insurance underwriters can use, such as the Aircraft Blue Book.
I strongly advise people not to underinsure their airplane. Believe me, in the event of a loss (claim), you are going to be very unhappy, especially when you try to buy your own airplane back as salvage. You could be bidding against professional salvage buyers who are willing to pay top dollar for an airplane they know they can either part out or repair for a profit.
The insurance specialists at Falcon Insurance Agency handle the EAA Aircraft Insurance Plan, and they know airplanes-all kinds. They will not allow you to make the mistake of underinsuring your airplane.
Remember, your insurance policy protects you and your airplane. Falcon's insurance specialists consider it their duty to make sure you buy the right insurance at the best price available. Call the EAA Aircraft Insurance Plan at 866-647-4EAA (4322), or go online and request a quote at www.eaainsurance.com.
EAA INSURANCE TIPS is a special EAA Member benefit. If you have an insurance related topic you’d like to see addressed or if you have any comments, please email firstname.lastname@example.org. If you need an insurance quotation call 866-647-4EAA (4322).