War Risk Insurance

Background:

• States continue to be 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 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 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 US, assist airlines in insuring war risks
• Airlines in states that do not are at a competitive disadvantage

Partial Solution:

• Latest efforts by the International Civil Aviation Organization (ICAO) have 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:
• (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 harbor—a presumption that they are not at fault if they are certified under regulatory requirements for security (IOSA is example)—but safe harbor is subject to state discretion

Status:

• Diplomatic Conference adopted the proposal
• The impact of the final version will likely affect airlines differently, depending on their jurisdiction
• The number of states signing the convention was very low, i.e. six
• Ratification is seen as unlikely because the terms of the convention require 35 countries with sufficient traffic volume to build up a fund

Updated: December 2009