Insurance is a tricky subject and yet one that all aircraft owners have to deal with. It's something that no one wants to pay for, and yet you pay for it hoping you never have to use it. And unfortunately, when it does come time to use it, you may discover that it's not what you thought it was.

There are different types of insurance an aircraft owner needs in the event of an accident-liability coverage to pay the people you might hit with your airplane, and hull coverage to pay to repair damage to your airplane.

Most of us have heard the adage that we need to purchase as much liability coverage as we can afford, the reason being that in the event of an aircraft accident, the standard liability policy won't adequately protect someone who has enough financial means to be able to own an airplane.

“Three quarters of the pilot population are flying with limits of $1 million per occurrence and $100,000 per passenger,” says Greg Sterling, executive vice president and general manager of AOPA’s insurance agency. “Pilots are very, very aware of what their aircraft is worth in the marketplace, but they don’t spend a lot of time considering their liability coverage.”

One popular upgrade to the typical insurance is what’s commonly referred to in the industry as $1 million “smooth.” What that means is that the limit of your coverage is $1 million, with no per-passenger sub-limits. This is better protection, but may not be enough. Unfortunately, “limits in excess of $2 million are very difficult to obtain,” Greg says.

He notes that for additional coverage, owners can purchase a second layer of coverage in the form of excess insurance up to as much as $5 million. With excess insurance, your primary carrier will cover the first $1 million, and the excess policy will kick in for any amount above that up to the excess limit.

Greg says that while this insurance is available, “the percentage of aircraft owners who opt for it are very small.”

Spencer Horn, an aviation attorney with McBreen & Kopko, an aviation law firm in Long Island, New York, says you should also make sure that your policy allows you to hire your own lawyers in the event of a lawsuit.

Remember that if you are subject to a lawsuit, the liability coverage will pay for your defense. Horn says it is important to make sure you have a say in who will represent you. He says most policies will allow owners to be represented by the attorney of their choice, but some do limit your choices in the event that you are faced with a lawsuit.

That’s not the only insurance “gotchas” owners should be aware of. Greg notes that there are a number of provisions in the standard insurance policy that owners might not be aware of until an accident happens and it’s time to collect.

For example, say your airplane is bumped by another on the ramp and it requires extensive repair to fix the damage. Most owner’s policies will pay to repair the aircraft to its prior condition, but few if any policies for piston aircraft cover the loss of value that comes with having a damaged aircraft.

That's what’s known as diminution of value insurance, or DVI, and it’s more common in jet aircraft. Piston policies generally don't cover the loss of value. “It’s going to cover you for getting that piece of property back to the condition it was in before the damage occurred,” Greg says.

And getting the airplane back to the condition it was in prior to the accident isn’t always what owners want or expect. Say for example you have a gear-up landing in an airplane with a 2,000-hour TBO engine that has 1,900 hours already on it.

That sounds better than the lottery right?

The insurance company is going to spring for a new engine, right? Not exactly. The insurance company is going to pay to put your aircraft back in the condition it was in prior to the accident.

“It’s almost impossible to put another 1,900 hour engine in that aircraft,” Greg says.

So what will happen is that you will get a new engine, but the insurance company will pro-rate the cost of that engine based on the number of hours left on it. “We’re going to repair that engine and bring it back up to speed, but not 100 percent of the repair bill will be covered by the insurance.

“Almost all the time, when there is a prop strike or a gear up, there is a significant portion of the repair bill that winds up being the responsibility of the owner,” he says.

Both Greg and Spencer note that it's important for owners to know what’s in the insurance policy before an accident to avoid any nasty surprises.

Take the value of your aircraft, for example. There is no magic book that tells the insurance company how much to insure a particular airplane for, so each insurance policy is an agreement between the insurance company and the owner as to the total cost of the aircraft.

Greg notes that the value should be a realistic value, because picking too high or low a value for your airplane can have disastrous consequences.

Say for example you have an aircraft worth $200,000. If you insure the aircraft for too much money, say $250,000, then if you get into an accident and have $200,000-worth of damage, the insurance company will repair that damage up to $200,000, which may not be what you want. If there’s $200,000-worth of damage to the plane, you may prefer to just scrap it and get a new airplane.

Or let's assume the reverse, that you’ve insured the airplane for too little, a mere $150,000. Again, you have an accident and there's $150,000-worth of damage, but this time the insurance company totals the airplane and writes you a check for $150,000, which may not be what you want.

“Your agent works for you and he’s there to answer your questions and he can always go to your insurance company to get other questions answered,” Greg says. “Your agent wants to answer these questions for you before the loss happens so that if and when the loss occurs, you can get the dollar value out of it that you expected.”

The key phrase here is “what you expected.” You need to work with your agent to be sure you know how the value of your airplane is calculated, and what you can expect in the event of an accident.

For example, most people assume that adding new radios to an airplane or fixing up the paint and interior will bring a dollarfor-dollar raise in the aircraft’s value as far as the insurance is concerned. Not so, because prior to the upgrade, the aircraft did have paint, it did have an interior, they just weren’t as nice.

The insurance policy will only cover the difference in the value between the old paint and the new paint, not the total cost of the improvement. As a result, a $20,000 paint job will never realize a $20,000 increase in the value of the aircraft.

—Sean Fulton