Fact Sheet: War Risk Insurance

Background:

• States have been concerned about how they will compensate victims of a major terrorist attack involving an airline 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 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 Air Transport:

• 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 United States, assist airlines in insuring war risks

Partial Solution:

• Efforts by the International Civil Aviation Organization (ICAO) culminated in revisions to the Rome Convention
• Revisions provide compensation to victims of an aircraft accident caused by terrorist attacks resulting in damage to people and property on the ground
• Compensation under the new convention would be funded through contributions from airline passengers and cargo shippers
• Airlines would be subject to strict liability for losses up to a cap of:
• Specified amounts of insurance (which airlines are required to purchase in order to operate); and
• Funds in a Special Compensation Mechanism (SCM) collected from a charge of 1 Special Drawing Rights per passenger per international flight, or 1 SDR per tonne of cargo per international flight
• Airlines would be 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 harbor—a presumption that they are not at fault if they are certified under regulatory requirements for security (the IATA Operational Safety Audit is an example)—but safe harbor is subject to state discretion

Status:

• ICAO Diplomatic Conference adopted the proposal in 2009
• The impact of the final version affects airlines differently, depending on their jurisdiction
• The number of states signing the convention stands at ten
• Ratification is seen as unlikely because the terms of the convention require 35 countries with sufficient traffic volume to build up a fund

Updated: June 2013