Within 24 hours of the attacks in New York and Washington that transfixed a horrified world on 11 September 2001, insurance analysts were rushing to get their predictions out for the total cost to the worldwide insurance industry.

The first predictions were in the $15bn region – similar to the overall cost of the havoc wreaked by Hurricane Andrew – but each new prediction pushed the total cost higher and higher.Currently, around $30bn seems to be attracting the most support, but two recent predictions of $60bn and $100bn have received significant publicity in the financial press.

One thing is certain: the effect on the aviation insurance industry worldwide will be as dramatic as it is permanent.

One of the questions that has not yet been fully considered or answered is this:  Ultimately, who will be left to pay the bills?  Will the Federal Government provide the necessary funding up front and then recover from the insurance industry to the extent that the insurance industry is able to pay?  And what of the insurance industry itself.  Will losses be allowed to remain where they fall or will Insurers seek to recover their own direct losses from other parties, using the principle of subrogation (see box)?

Whilst few actual insurance claims have yet been settled following the events of 11 September, most major Insurers worldwide have made public statements regarding their estimated overall losses, based upon an assessment of their exposure in terms of insurance policies which may become involved. These statements also started to appear within hours of the attacks and, in many cases, have been increased in the weeks since 11 September, as the Insurers concerned were able to carry out more detailed analyses of their potential exposures.

However, much will depend upon where the losses are ultimately allowed to fall.

Interestingly, most Insurers have based their estimated exposure upon their “nett position” after reinsurance recoveries and tax allowances.  Whilst this is understandable, it does make one very important assumption, which is that there will be no difficulties encountered in collecting losses from Reinsurers and that, in a worst-case scenario, no Reinsurers will be unable to respond and go to the wall themselves.

To consider the effect of 11 September on the aviation insurance industry, one needs to consider how losses may find their way to this sector of the insurance market.

Firstly, the direct loss arising from the physical destruction of the 4 aircraft concerned. Since the aircraft had been hijacked and destroyed deliberately, these losses fall for coverage under the airlines’ “Hull War Risks” coverage. With a total insured value of just $129m, this will not rank as a massive loss by any means. However, coming soon after the Tamil Tiger attack on Colombo’s international airport - which left several Air Lanka aircraft destroyed or seriously damaged and giving rise to a total claim cost of around $475m – this means that the Hull War Risks market has taken losses of around $604m in a 2 month period…at a time when the estimated global Hull War Risks premium from all sources is in the region of $30-$50m. Clearly not a happy situation for any Hull War Risks Insurer.

Secondly, the tragic loss of 200 innocent passengers and the not-tragic-at-all loss of 19 hijackers. Claims for compensation will, in the first instance, likely be directed at the airlines themselves on the basis of a contractual liability (the contract of carriage). It is difficult to put an estimate to this but, assuming an average settlement of $2m per passenger, an overall figure of around $400m would not be unrealistic. Whilst significant, a loss of this magnitude is entirely foreseeable and the airlines’ Insurers will have no difficulty in responding.

However, the third aspect is the most worrying. This is the question of the loss of life and property damage – not to mention the consequential losses – caused by the actual impact of the aircraft with the two towers of the World Trade Center and the Pentagon.From an aviation insurers viewpoint, this is worse than the worst nightmare.

For years, the aviation insurance industry has spoken about the likely effect of the unimaginable loss: two fully laden Boeing 747-400s colliding over ManhattanHowever, no sooner is that awful scene imagined than it is dismissed as so improbable as to be capable of being ignored altogether.

Well, 11 September, with two aircraft, fully laden with fuel, being deliberately flown at high speed into two of the largest office buildings in the world, not to mention the third aircraft being flown into the Pentagon, easily exceeded the most pessimistic version of the worst imaginable aviation loss.

Quite apart from the massive property damage, the loss of 6,400 lives is simply beyond belief or comprehension. Certainly, from an Insurers perspective, it is not something that would have been contemplated in any MPL (maximum probable loss) modelling.

The Chicago Convention imposes a strict, or “absolute”, liability on the registered owner of an aircraft in respect of any surface (land or water) damage caused by the aircraft or any object or person falling from it. All signatory countries (the and SA included) have incorporated the provisions of the Chicago Convention into their own domestic law. In South Africa, the application legislation is found in Section 11 of the Aviation Act.

Whilst the registered owner of the aircraft concerned is permitted to recover from a responsible third party, this depends upon the airline’s ability to identify the third party and upon the third party having the means (insurance or assets) to respond.

Strictly speaking, therefore, the airlines could find themselves in the unenviable position of being the defendant of first choice, with claims being made directly by affected parties as well as a multitude of Insurers intent on exercising their rights of subrogation.

In keeping with most major airlines, both United Airlines and American Airlines carried comprehensive legal liability insurance to provide protection against a variety of legal liability claims. That coverage would include liability arising from losses sustained as a consequence of the hijack of any of their aircraft.

Typically, a major airline will carry a sum insured of around $2bn any one aircraft, any one occurrence. One of the first questions that will arise for consideration is whether the events of 11 September constituted 4 separate occurrences or one occurrence (in two parts) for each airline.