August 11th, 2009

Global Terror Update: Aviation

Posted at 1:00 AM ET

global_cover141x141Terrorism coverage impacts aviation insurance around the world. This is particularly prevalent among airlines, which are required to have passenger and third-party liability coverage to receive landing rights and for aircraft leases. The widespread unavailability of aviation insurance because of issues with terrorism coverage could impair the entire industry.

Following the events of September 11, 2001, aviation insurance attracted public attention, as carriers worldwide withdrew cover for acts of war, terrorism, and related perils. Within days, all aviation insurers issued a seven-day notice of cancellation to reduce third-party war risk liability insurance for air carriers and aircraft operators to a maximum of USD50 million annual aggregate cover, down from as much as USD2 billion for any one occurrence. Airports and service providers were not offered third-party cover until weeks later, although even then the majority of insurers declined to write security service provider risks.

With no further losses occurring in the months following September 11, 2001, and third-party war liability prices dropping materially, the majority of governments started to scale back the levels of their involvement, and by the end of 2002, most government schemes had been withdrawn and replaced by commercial cover. The United States government, however, took the opposite approach and continued to offer a state alternative to commercial cover.

Legislation has been passed to extend the duration of this state-based cover and the USD100 million third-party liability terrorism cap, and both are still in force today (until at least December 31, 2014). In 2007, the distinction between foreign and domestic terrorism was removed.

Other governments still providing third-party liability cover in 2008 include Canada, Brazil, China, Jordan, New Zealand, Qatar, and Saudi Arabia.

Market Conditions

Market capacity has grown, and prices have continued to drop. On primary liability covers, it is now possible to purchase USD250 million aggregate cover for air carriers and service providers, and capacity is also available on Excess Third-Party War Liability covers excess of USD1.5 billion aggregate.

WMD Update

Insurers believe that a major weapon of mass destruction (WMD) attack, especially at an airport, could produce an accumulation of losses that would ruin the market. The aviation hull war market started to impose WMD exclusions on renewals in May 2005, but the liability exclusions have yet to be used. This delay is due in part to the terms of a settlement between the European Commission (EC) and London aviation insurers to conclude an EC investigation into the London aviation insurers’ response to September 11, 2001. In light of the continuing buyers’ market conditions for aviation insurance, it is unlikely that carriers will seek to change the current clauses in 2009. If a major terrorist loss occurs, though, it is possible that aviation insurers will withdraw all WMD cover. If this happens, government guarantees will have to be provided until a longer-term solution can be put in place.

Last year we advised that a possible long-term solution is the Draft Convention on Compensation for Damages Caused by Aircraft to Third Parties, in the case of Unlawful Interference. This Convention is designed to ensure compensation to victims as a result of terrorist or other acts of unlawful interference to aircraft in flight. It is also designed to protect aircraft operators and other industry participants (who also would be victims) from the threat of insolvency caused by such acts, which are usually targeted at governments. The text of the Convention, together with its counterpart for damages arising other than through unlawful interference, was adopted at the International Civil Aviation Organization (ICAO) Diplomatic Conference in Montreal (April 20, 2009 to May 2, 2009).

These Conventions are now open for signature by states at ICAO Headquarters in Montreal. Both Conventions require a minimum of 35 Contracting States before they can come into force. Further, the Unlawful Interference Convention requires a minimum declaration of 750 million passengers departing from all Contracting States before it can come into force. At this time, it is not possible to gauge how long it will take for the required number of ratifications to occur. 

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