Total Loss Only Cover

I will admit upfront that some aspects of “total loss only” insurance cover still mystify me.

Some background (as always, from an aircraft lessor’s perspective): from time to time a lessee would approach me and ask whether it could satisfy the lease requirement for hull coverage on the aircraft at a specified agreed value (say US$50M) with a combination of (1) “normal” hull cover with a lower agreed value (say US$45M) and (2) a total loss only policy for the balance (US$5M). As the lessee would explain, the total loss only policy pays out only (of course) in the event of a total loss.

My first question would always be “why do you want to do that?” and the response would always be “because it’s cheaper.” I would then ask whether the underwriters were the same for both the hull and total loss policies and the answer was usually “yes” (or “I don’t know”). And when the lessee said “yes” I would ask “then why is it cheaper if the underwriters are taking the same risks as with a single hull policy with a higher agreed value?” I never got a clear or satisfactory answer to this question but I didn’t doubt that it was in fact cheaper.

From the lessor’s perspective the problem with using a combination of two policies to cover the risk normally covered by one policy is that the lessor may get whipsawed between the two policies when an accident occurs by, for example:

1. The hull underwriters taking the position the aircraft has suffered a total loss and the total loss underwriters disagreeing and saying the aircraft should be repaired, or

2. Both the hull and total loss underwriters taking the position that the aircraft should be repaired, but when the actual repair cost exceeds the agreed value of the hull policy, the lessor is required to cover the excess cost (and the total loss insurers are let off the hook entirely).

My strong inclination (from the lessor’s perspective) is to decline any such request because (1) of the potential for being whipsawed, (2) in insurance, “it’s cheaper” usually equates to “it offers less protection” and (3) in risk mitigation for lessors (whether insurance, security deposits, letters of credit, maintenance reserves, guarantees, etc.) simplicity of structure should be (IMO) a priority.

If a lessor does want to be cooperative and to consider the lessee’s request then in order to protect against being whipsawed the underwriters should confirm to the lessor (e.g., by way of an insurance certificate from the broker) that:

1. A total loss will be automatically declared under the total loss only policy if a total loss is declared under the hull policy, and

2. A total loss will be declared under the hull policy if the estimated cost of repair to the aircraft exceeds 75% (or a lower or higher percentage depending on the lessor’s comfort level) of the agreed value under the hull policy alone.

I have been successful in getting the underwriters to agree to the above and have been told (not sure I believe it) that the above is in fact how the policies are drafted.

As mentioned at the outset, the use of total loss only insurance cover still mystifies me. So, be careful and ask a lot of questions. And I would be especially wary if the total loss only cover is for more than 10% of the required agreed value.