Damaged Goods

If your aircraft requires repair after an accident, your insurance should cover the bill. What it won’t cover is the diminution of value that results from a history of damage.

What’s the worst thing that can happen to your business jet? You might think the answer is an accident resulting in total loss, but it’s not. If a hangar roof collapses and destroys your aircraft, your insurance should enable you to replace it. On the other hand, if the airplane is only damaged in the incident, the insurer may opt to repair it, leaving you with a jet that operates just fine but has (gasp) damage history.

Everybody in business aviation has a favorite damage-history story. There’s the Hawker 800 that was carrying the president of Rwanda when a missile hit it, blowing one of the engines off the pylon. There’s the GV that was parked on a ramp on a hot day and sank a foot into the tarmac. My favorite is the Falcon 900 that, while landing near a golf course, was hit by a golf ball that lodged in the fuselage. 

All three of those airplanes—even the Hawker—returned to service, but to varying extents, the incidents affected their value, and it’s not hard to see why. If two identical airplanes are priced the same and one of them had the vertical stabilizer shaved off and repaired while the other has no damage history, which would you buy?

Aircraft owners sometimes assume that their insurance protects against diminution in value as a result of damage, but the truth is that hull insurance seldom covers this. You can buy diminution-of-value coverage, but according to Stuart Hope of Hope Aviation Insurance, aircraft owners rarely purchase it due to its high cost relative to the limited perceived risk. As noted earlier, hull insurance should cover the repair of damage, and that cost is readily identifiable by getting quotes from repair stations. Loss in value, on the other hand, is difficult to pin down and can be hidden or even extinguished by external circumstances. If an aircraft was damaged in late 2008, when business jet values plummeted across the board, it would be hard to say how much of the loss in value resulted from the damage incident rather than market forces.

“The first question is whether the aircraft was ‘passive’ or ‘operating’ at the time of the incident,” says veteran business jet appraiser Bob Zuskin, when asked how he determines diminution of value caused by damage. All other things being equal, an incident that occurs in flight or on landing, for example, is more serious than something that occurs while the aircraft is parked in a hangar. Zuskin, the founder of Virginia-based Jet Perspectives, notes that market conditions make a big difference in valuing damage history. In today’s environment, “every incident has some ramification,” he says.

Even if your insurance doesn’t cover diminution in value, it doesn’t mean you can’t recover from somebody. If the aircraft is damaged in the hangar, you may be able to hold multiple parties responsible in court, but if the damage results from natural causes, like a bird or lightning strike, you’re basically out of luck unless you have the insurance.

Because $25 million of hull coverage doesn’t cost that much more that $20 million, many jet owners are tempted to insure their aircraft for a good deal more than they’re worth. You should resist this temptation. It is better to over-insure a bit rather than purchase too little hull coverage, but if you get greedy, your insurer will have a strong incentive to repair a seriously damaged aircraft rather than write you a check for 100 percent of the hull coverage. Given the impact on value, checking for damage history is one of the most important parts of the due diligence you should perform when buying an aircraft. But even if it has no history of damage, the airplane can be damaged between the time you agree to buy it and when you close the deal. A purchase contract normally gives the buyer the right to terminate the transaction if the aircraft suffers damage or if previously undisclosed damage is uncovered. The problem is, how do you define “damage”? Does the buyer really get to walk away from the deal if someone accidentally scratches the wood veneer during the prebuy inspection? To answer this question, aviation lawyers frequently turn to the definition of “major repairs” in Appendix A to Part 43 of the Federal Aviation Regulations, the criterion for issuing the dreaded FAA Form 337, which details major repairs and alterations.

Damage history is particularly tragic when it occurs prior to delivery of a beautiful, brand-new business jet. Every manufacturer can share horror stories on that subject, like the one about the aircraft that was pelted by a hailstorm while flying to the closing location. Here again, the contract should allow the buyer to terminate, perhaps with the right to acquire the next available aircraft from the manufacturer on comparable terms. But many new-jet contracts also give the buyer the opportunity to acquire the damaged aircraft (after it has been repaired, of course) and be reimbursed for the diminution in value caused by the damage. Buyers should be careful, though, if the repairs require burdensome recurring inspections or if warranty protection may be inadequate to cover potential future issues.

Damage incidents are more common than you might think. On average, business jets get hit by lightning every seven to eight years, and “hangar rash” occurs all the time. Even when damage is significant, how it is repaired and by whom has a big impact on how it is perceived. 

One thing everyone agrees on: diminution in value as a result of damage diminishes over time. What seems like a major problem today will be less of an issue after the aircraft flies around for a few years. 

Important Criteria in Evaluating Aircraft Damage:

Did the damage occur in flight?

Did it occur while the aircraft was in motion (e.g. taxiing)

Who repaired the damage?

How was it repaired? Was a part simply replaced with a new part?

Was an FAA Form 337 issued?

What does the logbook entry say?

Are any non-standard recurring inspections required as a result?

How long ago did the damage occur?

Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.