War Risk Insurance

Background:

  • States continue to be concerned about how they will compensate victims of a major terrorist attack in the absence of insurance 
  • Traditional War Risk Insurance provided coverage
    • for war, hijacking and related perils
    • a subset covers weapons of mass destruction (WMD)
  • The insurance market has
    • removed WMD protection from hull coverage 
    • but postponed use of a war risk exclusion clause on the liability side
  • The lack of such hull cover has not yet affected financing/leasing agreements or airlines’ ability to operate 
  • But removal of liability coverage 
    • would place airlines out of compliance with minimum insurance levels
    • could force States to ground aircraft
    • or in the event of a terrorist attack, States will not be able to compensate victims on the ground

Impact on Industry:

  • After 9/11 there was a complete withdrawal of coverage for terrorism insurance
  • Since then the market has partially reinstated coverage at a significantly higher cost 
  • Some States, like the US, assist airlines in insuring war risks
    • Airlines in States that do not are at a competitive disadvantage

Possible Solution:

  • Latest efforts by the International Civil Aviation Organization (ICAO) have culminated in proposed revisions to the Rome Convention 
  • Revisions would provide compensation to victims of an aircraft accident caused by terrorist attacks resulting in damage to people on the ground
  • Compensation would be funded through contributions from airline passengers and cargo shippers 
  • Airlines would be subject to strict liability for losses up to:
    • 1. specified amounts of insurance (which airlines are required to purchase in order to operate) and
    • 2. funds in a Special Compensation Mechanism (SCM) collected from a charge of 1 SDR per passenger per international flight, or 1 SDR per ton of cargo per international flight
  • Airlines liable for amounts in excess of those amounts (the cap), but only if senior management deliberately caused the loss, or engaged in reckless conduct with knowledge of loss
  • Airlines have safe harbour - a presumption that they are not at fault if they are certified under regulatory requirements for security (IOSA is example) - but safe harbour is subject to State discretion
  • A separate convention addressing general risks is also being proposed, supported principally by States in Africa and Latin and South America

Next Steps:

  • Solution to be reviewed at Diplomatic Conference scheduled for 20 April to 2 May 2009

 

Updated: October 2008