War Risk Insurance

  • War Risk Insurance includes coverage for war, hijacking and related perils
  • Insurers have intended to withdraw liability coverage for is Weapons of Mass Destruction (WMD), a subset of War Risk Insurance 
  • WMD includes:
    • Radioactive contamination (dirty bombs)
    • Electromagnetic pulse devices
    • Chemical/biological weapons
  • War risk coverage was withdrawn after 9/11
  • Cover was subsequently provided at full policy limits for passenger liability but limited to a maximum of US $50 million for all third party injury and property damage
  • Additional capacity eventually became available in excess of the US $50 million third party limit to a maximum of US $1 billion for any one occurrence subject to a US $2 billion aggregate

Industry Costs:

  • Some States, like the US, assist airlines in insuring war risks while others do not
  • Airlines in States that don’t are at a competitive disadvantage
  • Under the Federal Aviation Administration programme, insurance coverage for passenger and third party liabilities for US airlines is approximately US$0.70/passenger compared to almost US$ 3.00 outside of the US
  • US cost is US$140 million per year
  • Outside US cost is over US$ 1.5 billion per year
  • US carriers enjoy superior coverage under the FAA Programme that provides
    • twice the pre-9/11 policy limits for passenger and third party liability to a max of US $4 billion for any one occurrence, plus
    • ground up hull coverage
  • The FAA Programme has been extended another year

Lack of WMD Coverage and Consequences:

  • Since mid 2005, airlines have not been able to purchase hull cover for WMDs
  • The absence of such WMD hull cover has not yet resulted in revised lease terms
  • The market has not removed liability coverage as yet but continues to express its intent to do so in the future
  • State regulatory requirements and aircraft lease agreements require an air carrier to maintain adequate liability insurance
  • In the EU, the lack of WMD liability cover may render airlines out of compliance with the EU’s minimum insurance requirement
  • In 2006, in response to IATA, AEA and Marsh, the Aviation Insurance Clauses Group developed an alternative to the market’s proposed WMD exclusion, which provided limited cover, to enable airlines to meet their statutory insurance requirements
  • This alternative has not yet been tested because the market has continued to provide full WMD cover
  • However, if the market does introduce a total WMD exclusion, the alternative should suffice, at least according to the EU, provided certain limits can be purchased
  • In spite of the fact that airlines presently are insured for WMD liability, they still face 3 scenarios:
    • A major disaster which would probably ground aircraft immediately
    • Cancellation of insurance coverage per policy provisions
    • Complete withdrawal of WMD cover from liability insurance market in the future

IATA Policy:

  • In most jurisdictions, including the EU, airlines are required by law to have liability insurance, including coverage for WMDs
  • Aircraft lease agreements also require it
  • On hull side, WMD coverage withdrawn in mid 2005
  • On liability side, withdrawal has not yet occurred, but remains a possibility
  • Because the use of WMDs is directed against States, the ultimate responsibility for security of citizens rests with States
  • Governments must step in to provide a solution to a market failure to provide cover
  • Danger in not providing a solution now is the risk of another major disaster and a likely withdrawal of full WMD liability cover

Industry Action:

  • IATA continues to urge governments to step in to fill the void created by lack of WMD coverage from the market
  • Potential solution via the ICAO Special Group on the Modernisation of the Rome Convention on Damage Caused by Foreign Aircraft to Third Parties on the Surface includes:
    • Cap on operator liability for surface damage to third parties
    • Funding for WMD exposure to be provided via a compensation mechanism for victims:
      • First, through available insurance coverage
      • Next, through a Supplementary Compensation Mechanism  funded  by passenger and shipper tax
      • Third layer:  governments step in at their discretion
  • Status of ICAO solution:  under review by Legal Commission
  • Next steps:  Council action; then diplomatic conference; ratification
  • Unresolved issues:
    • Extent of government participation in third layer
    • Absence of annual limits on the amount of payout by the Fund

Benefit:

  • A revised convention would provide cap on airlines’ liability that currently does not exist, particularly in strict liability and some fault-based jurisdictions

Status of Convention:

  • ICAO Legal Committee presents work product to Council in June 2008
  • Next step is Diplomatic Conference in approximately 6 months
  • Final step is ratification by states

Updated: June 2008