In this article from the September issue of AEROSPACE magazine, GILES KAVANAGH* explains the vital role played by the aviation insurance market to protect aircraft owners, operators and financiers against liabilities in the event of an accident.
In common with other forms of transport, there are mandatory insurance requirements that apply to air carriers. For example, air carriers in the European community are required to be insured to cover liability in case of accidents, in particular in respect of passengers, luggage, cargo, mail and third parties. Aviation insurance can also be taken out by manufacturers of products including airframers or engine manufacturers for liability in respect of their products which may give rise to claims arising from incidents.
Aerospace insurers underpin the whole of the aviation industry which would be unable to operate without them. While aviation insurance comprises a modest proportion of the overall insurance market, the risks borne by aerospace insurers run into $billions in respect of a single incident. Cumulative exposures in the event, e.g. of a terrorist attack on a number of aircraft, such as that at Tripoli Airport in July, are enormous.
Specialist aerospace insurers include Global Aerospace Underwriting Managers (GAUM) while large insurers, such as AIG, Allianz, Amlin, Axa and Catlin, write specialty business, including aviation and aerospace risks, as part of their portfolio. The European Commission recognises the aviation/aerospace market as highly competitive, due in part to the structure of slips and policies in a verticalised, subscription market. Claims in this market are handled by a ‘leading underwriter’ who has the power to bind a ‘following market’ comprising a number of Lloyd’s syndicates or companies. The leader’s authority is subject to buy-in also from a limited number of ‘agreement parties’ — other participants on the insurance slip.
All risks and war risks
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Aircraft insurance will be purchased by airframers to cover damage caused as a result of pre-delivery incidents, e.g. test flights. Following delivery, operators of aircraft will have various types of insurance in place, depending on the nature of their operations.
The insuring clause in the policy will describe the risk in relation to which cover is being provided. Insurers may express their obligations by way of a general undertaking to cover the insured against all risks of loss, subject to exclusions that will appear elsewhere in the policy. Such policies are described as ‘All Risks’ policies, covering the insured property against all losses provided they are accidentally caused. Alternatively, the policy may specify ‘named perils’ in respect of which cover is provided, such as ‘war risks’.
Policies typically provide agreed values in relation to the aircraft covered so that there is no argument in the event of a total loss or constructive total loss. Such policies are also typically subject to deductibles which may also be insured under a separate ‘hull deductible’ policy.
Pay first, ask questions later
Third party liability claims can continue for years after an accident, as has been the case following the crash of Asiana Flight 214 at San Francisco in July 2013 (NTSB).
The importance of these types of cover, in the context of commercial aircraft, has been illustrated by the loss of MH370 and, more recently, MH17. Policy provisions enabled Malaysian Airlines to be paid quickly in respect of the MH370 aircraft hull, without there having to be a final determination as to whether the aircraft had been lost as a result of an accident or whether there had been sabotage. MH370 demonstrates the flexibility of aviation insurance products and the readiness of the aviation insurance market to provide rapid solutions for airlines and their financiers.
The lessor of an aircraft will generally insist on being named as an ‘additional insured’ under an operator’s all risks policy, so that the lessor’s interests and exposures are also covered by the operator’s insurers.
The implications of these insurance arrangements are that the cover afforded to a lessor in the airline’s policy has been used by some lawyers to draw the airline’s insurers into litigation in a jurisdiction (typically the US) where there is no real connection to the accident. So aviation insurers are increasingly conscious of where lessors are domiciled. Average awards in death cases in the US are over $5m, contrasted with more modest awards in other countries.
Plaintiffs lawyers (who in the US will typically be paid 30% or more of any damages recovered by their clients) are therefore incentivised to bring claims in the US, even where the accident has occurred in Africa or Asia and the connections with the US are tenuous.
Regarding the loss of flight MH17 which was shot down while flying over the Ukraine on 17 July, the incident gives rise to exposures on the part of war risks insurers in relation to the aircraft. Claims by passengers’ families are most likely to be made against the airline and its insurers in the first instance, although the airline has a potential defence to claims exceeding $170,000, if it can prove there was no negligence on its part and the carriage by air was governed by the Montreal Convention 1999. There has been talk of passengers’ families bringing proceedings for the full value of their claims against the Russian Government; the recent award in the Yukos arbitration against the Russian Federation may encourage such thoughts, although enforcement against Russian authorities may not be easy.
Value for money
Accident rates for GA aircraft have not declined in line with those in commercial aviation.
The products provided by the aviation insurance market are real value for money. The financial limits attaching to third party liabilities (e.g. injury to or death of passengers) under aviation policies will often exceed $1bn in the case of commercial carriers and may reach $2bn. Premiums paid by airlines and even manufacturers do not currently reflect these levels of exposure, although those premiums are now, sensibly, rising following the recent spate of crashes, including the TransAsia Airways crash on 23 July and the Air Algerie crash on the following day in Mali where 116 people were tragically killed.
Policy cover and exclusions
Are there any circumstances under which an insurer wouldn’t pay out? The insuring clause in an aviation policy will define the scope of cover provided and so for example, losses incurred by airlines due to the closure of European airspace following the eruptions of the Icelandic volcano in 2010, were typically not covered. Aviation policies, like other types of insurance, will provide for exclusions. There may be territorial exclusions, restricting the carrier from flying into or over certain countries. But the scope of cover provided under aviation policies is broad and debates about cover are the exception, not the rule. The aviation insurance market is in the business of paying claims and has a long record of doing so.
Ummanned aviation is likely to be a huge growth sector for specialist insurance.
Aerospace insurance is continuing to evolve, to adapt both to changes in levels of existing risks and to new risks. “If you look at trends for commercial air carriers, safety has improved considerably, accident trends are generally downwards and there have been fewer large claims scenarios. However, claims arising in the past decade from airline losses have been substantial and complicated, involving significant cost to aerospace insurers, including legal costs. In addition, there are segments of the aviation sector where accident trends are less benign, for example for rotorwing operations and the GA sector more broadly. Rotorwing accident trends are currently a major concern for the NTSB in the US.
Aerospace brokers and insurers are innovating, examining not only the ways in which risks are changing but also new forms of cover. The risk of cyber attacks has been much publicised and some aviation brokers and insurers are considering whether policy provisions may be included to provide significant levels of cover for resultant financial losses to airlines ATC etc. Another development is the increased use of unmanned aircraft. The International Union of Aerospace Insurers (IUAI), whose members underwrite approximately 90% of the risks in the aerospace sector, has been looking closely at the insurance implications of the commercial operation of UAVs which involve risks to property, injury and even death to people on the ground. UAV regulation in the UK and the US is in its infancy but this is a huge growth area for aviation.
Yet another interesting development is the advent of space tourist flights. There is a specialist satellite insurance market, but commercial manned spacetravel, for example by Virgin Galactic, is insured in the aerospace insurance market. Issues arising may depend on whether an incident occurs in space or atmosphere, where different legal regimes apply. What is clear is that those who undertake such travel are likely to be high-earning individuals such that any claims arising could be very expensive indeed.
The huge and continuing growth in air travel and man’s technical ingenuity means that the risks for the aerospace sector will grow and diversify. But, the aerospace community can rest easy that there is huge experience and expertise in the aerospace insurance market that will underwrite the risks that innovation presents.
*Giles Kavanagh is Head of the Aerospace practice at Holman Fenwick Willan LLP and Legal Adviser to the International Union of Aerospace Insurers.