Where were you when the first aircraft hit the World Trade Center on September 11^th? It is almost certain that you have a very clear recollection of not only where you were, but also whom you were with, what you were doing and who said what to whom. The anxiety and fear that we all felt was quickly replaced by the certain knowledge that the world had changed completely and permanently that day, even though we didn’t yet know the “Who?” and “Why?”.

The same feelings were being experienced in the insurance market, particularly the aviation sector. As aviation insurance underwriters started to calculate their likely exposure to claims arising from the events of “9/11”, as it quickly became known, they soon realised that they were facing enormous problems of their own.

Prior to 9/11, it was commonly believed that the greatest likely aviation insurance loss would involve two 747s colliding in midair. However, given the current state of the art in terms of pilot training, technology, air traffic control, anti-collision systems, and so on, the likelihood of this type of accident seemed to be receding year by year, particularly in airspace over the most developed nations.

Whilst the threat was always present, hijacking had rarely resulted in significant loss of life (other than that of the hijackers themselves!) or property damage, at least not since the early 1970s.

Suddenly, horrifically, and in full view of millions glued to their TV sets all over the world, fully-laden commercial passenger jets were hijacked and used as weapons of mass destruction by fanatics for whom, it appeared, there was no more glorious a way to die and to ensure rapid entry into Paradise. Go to Paradise… go straight to Paradise… do not pass Go… do not collect two hundred Dollars.

Airlines get their coverage for losses arising from terrorism in terms of what is generally referred to as “War Risks” insurance. The same goes for owners of general aviation aircraft.

Coverage for damage to aircraft – “Hull War Risks” – is provided either as an extension to a standard “Hull All Risks” policy, or in terms of a separate policy, underwritten by specialist War Risks underwriters, most of who are to be found in the famous “Lloyd’s of London” insurance market.

Legal liability insurance policies are generally extended to include “War Risks” by means of an endorsement known by its reference, AVN52.

Irrespective of the means by which “War Risks” insurance is effected, it is true to say that, for most aircraft owners and operators, the cost of Hull War Risks coverage has been minimal in recent years and, in the case of legal liability coverage, the extension has usually been thrown in for free.

On September 11^th, aviation insurance underwriters realised that the same coverage that they had been happily giving away for nothing, was now to threaten their very existences.

So they did what most of us would do in a similar situation: they panicked!

It was quite clear that, given the changed ground rules, War Risks coverage could no longer be provided as a “freebie”. If the insurance industry was to meet claims arising from the events of 9/11, let alone make provision for any future occurrences of a similar nature, a great deal of additional premium needed to be raised in a hurry, whilst Insurers needed to review their potential exposures and their ability to meet future claims.

So, the first thing that happened was that Insurers invoked the 7-day cancellation notice that was embodied in the War Risks legal liability endorsement, AVN 52.

This notice was issued to every holder of an aviation liability insurance policy, anywhere in the world, regardless of the type of aircraft or nature of the operation.

Even where individual Insurers took the view that there was no increased exposure that thy needed to be concerned with, they themselves received notice of cancellation from their reinsurance carriers and so had no choice but to “pass it on” to their clients.

Having given notice to cancel all war-related legal liability coverage, Insurers then offered terms under which they were prepared to reinstate the coverage. This involved significant additional cost – usually 25-50% of the existing premium – as well as a limitation to the sum insured in respect of claims by third parties. This was restricted to $50m for any one policy, regardless of the number of aircraft insured, applying as an aggregate sum insured for the entire policy period.

Given that most major airlines carried liability coverage for $1bn or more, to limit such an important (in the light of 9/11) aspect of coverage to just $50m in the aggregate was clearly not going to fly. Most aircraft leasing companies require lessees to carry “full” coverage and no aircraft can land at a major international airport without proving they have unrestricted coverage. So the $50m limitation was more than merely an inconvenience! Even if the view was taken that Insurers were acting in bad faith, or were not legally able to invoke cancellation or restriction of coverage under an existing contract, no airline had the resource or money to launch a legal action in the time available.

Most major airlines around the world, having immediately threatened to ground their entire fleets if the insurance industry didn’t reinstate unlimited coverage, entered into negotiations with their respective governments, either directly or through various trade associations, with a view to obtaining government backing to enable them to continue to operate normally. In many cases the governments agreed and provided appropriate indemnity undertakings.

In the meantime, Hull War Risks prices have increased sharply in the light of 9/11 and the much greater financial loss suffered by Hull War Risks insurers in August 2001, when the Tamil Tigers destroyed most of Sri Lanka’ aircraft fleet on an attack aimed at a military installation that spilled over onto Colombo’s international airport.

Of course, merely increasing the War Risks premium costs will not be enough. After all, the estimated cost to the aviation insurance industry, arising from 9/11, is put at $4-6bn out of a total estimated cost, to the global insurance community, of $40bn-$70bn. And this at a time when annual losses from all types of aviation insurance claims run at anywhere between $1-2bn. Hence, in one afternoon, the aviation insurance industry suffered 3 to 4 years’-worth of losses.

So even non-War-related premiums have been increasingly sharply in the months since 9/11. It’s true to say that the premiums had been increasing, slowly but steadily, for some time before September as well: at least the previous 12-18 months.. However, 9/11 became the catalyst that dramatically accelerated the rate of increase.

Added to this, Insurers now have the threat of war between India and Pakistan to worry about, let alone the possibility of that conflict becoming nuclear.

All in all, the world is suddenly a very different place.

Graham Speller

What’s All the Fuss About Paperwork?

In the aftermath of 9/11, aviation Insurers worldwide have been pushing premiums up in a desperate attempt to scrape together enough to pay the claims that have yet to come in, as well as trying to balance their insurance “book” on a day-to-day basis.

Of course, increasing premiums is not the only way that Insurers can balance their books. It is, however, the more difficult option as there is always the chance they’ll push too far and then see the business go elsewhere.

However, once a policy is “on the books”, the only other means of cost containment available to Insurers is in their claims settlements. So Insurers are now looking far more closely at claims that are presented, to ensure that losses fall squarely within the coverage parameters, and are less likely than ever before to view “grey” losses sympathetically.

So what is the message for aircraft owners and operators in the aviation insurance market of 2002? There are several:

• Don’t be tempted to reduce costs by eliminating coverage. That’s like stopping a clock to save time.

• However, take a very careful look at the insurance you do have. Pay attention to sums insured, for example. Assess your aircraft value accurately. Consider having a formal appraisal carried out (you need it for Capital Gains Tax purposes anyway). Don’t declare a value that is patently too high. You’ll be wasting premium and a total loss claim may become unnecessarily difficult, if Insurers perceive they are being abused.

• Make sure that you clearly understand every aspect of your coverage and that any person operating your aircraft is equally aware of, and accepts, any limitations.

• If any other person operates your aircraft – even if you’ve loaned it to a friend – insist on a written agreement being drawn up and signed by both parties. Agreements are vital as, if properly drafted, they clearly set out the relationship between the parties and ensure there is no misunderstanding as to the extent of insurance coverage and, for example, who is responsible for uninsured losses. Far better to have an argument up front than when the aircraft is broken and Insurers have pointed out a breach of policy conditions!

Most insurance policies covering general aviation aircraft contain what is known as an “unauthorised use” clause. This will provide continued protection for the owner of an aircraft, even where another person has operated the aircraft outside the parameters of the coverage, PROVIDED that the owner was unaware of, had not condoned, and had taken all reasonable steps to avoid, the “unauthorised use”. To prove that such steps had been taken in the absence of a written agreement, setting out the “rules”, can be extremely difficult, if not downright impossible.

You toss the keys of your aircraft to a friend, believing his assertion that he is spending the weekend in Namibia<. On the following Wednesday, you hear that he’s been arrested on a charge of spying in Angola, a country which is specifically excluded from your coverage. You may have some difficult convincing your Insurer that you’re entitled to be paid for your confiscated aircraft, unless you can prove that you had a clear, specific, agreement with your friend setting out what he could, and could not do, with your ‘plane.

Furthermore, even if your Insurer agreed to pay (in the absence of a written agreement), there’s a good chance that they would exercise rights of recourse against the pilot responsible for the “unauthorised use”. The pilot, in order to defend himself, would probably argue strongly that, on the contrary, he had your full knowledge, consent, condonation, etc….and any evidence produced in order to prove that allegation may lead Insurers to reconsider your claim in its entirety!

Agreements are very powerful tools and owners and operators/pilots of aircraft should both insist upon them.

There is no doubt that the world IS a very different place to what it was just a year ago. The same goes for the commercial world and, more particularly, the aviation insurance industry. Be aware of the changed environment, make allowances for it, take more care in what you do, make sure you’re getting what you pay for and, above all, DON’T be a victim of the natural human tendency to ignore the paperwork. As the saying goes:

“…the job ain’t finished ‘til the paperwork’s done!”.