Consentia on Law - VOl - II

Aviation Insurance: Issues and Challenges

Introduction:

Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the risks involved in aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.[1]

Aviation insurance has come to acquire an increasingly broad scope, and is sometimes referred to in modern times by the wider term ‘Aerospace insurance’.[2] This is because of the presence of insurance policies that cover a wide range, from privately-owned ultra lights to entire airline jet fleets, from maintenance shops to airframe and engine manufacturers, from small general aviation airfields to major airports, and from micro-satellites to commercial space launchers. [3]

The History of Aviation

Aviation insurance was first introduced in the early years of the 20th Century.[4] The first aviation insurance policy was written by Lloyd’s of London in 1911. [5]The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies. The first aviation polices were underwritten by the marine insurance underwriting community. The first specialist aviation insurers emerged in 1924.[6]

In 1929 the Warsaw Convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today[7].  In 1931, Captain Lamplugh, the British Aviation Insurance Company’s chief underwriter and principal surveyor, said of the new industry:[8] “Aviation in itself is not inherently dangerous. But to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect.”[9]

Realizing that there should be a specialist industry sector, the International Union of Marine Insurance (IUMI) first set up an aviation committee and later in 1933 created the International Union of Aviation Insurers (IUAI), made up of eight European aviation insurance companies and pools.[10]

The London insurance market is still the largest single Centre for aviation insurance. [11]The market is made up of the traditional Lloyd’s of London syndicates and numerous other traditional insurance markets. Throughout the rest of the world there are national markets established in various countries, this is dependent on the aviation activity within each country, the US has a large percentage of the world’s general aviation fleet and has a large established market.[12]

No single insurer has the resources to retain a risk the size of a major airline, or even a substantial proportion of such a risk. [13]The catastrophic nature of aviation insurance can be measured in the number of losses that have cost insurers hundreds of millions of dollars. Most airlines arrange “fleet policies” to cover all aircraft they own or operate.[14]

Types of Aviation Insurance[15]

Aviation insurance normally covers physical damage to the aircraft and legal liability arising out of its ownership and operation.[16] Specific policies are also available to cover the legal liability of airport owners arising out of the operation of hangars or from the sale of various aviation products. These latter policies are similar to other types of liability contracts. Aviation insurance is divided into several types of insurance coverage available. [17]

Public Liability Insurance

This coverage, often referred to as third party liability covers aircraft owners for damage that their aircraft does to third party property, such as houses, cars, crops, airport facilities and other aircraft struck in a collision. It does not provide coverage for damage to the insured aircraft itself or coverage for passengers injured on the insured aircraft.[18] After an accident an insurance company will compensate victims for their losses, but if a settlement can not be reached then the case is usually taken to court to decide liability and the amount of damages. Public liability insurance is mandatory in most countries and is usually purchased in specified total amounts per incident, such as $1,000,000 or $5,000,000. [19]

Passenger Liability Insurance

Passenger liability protects passengers riding in the accident aircraft who are injured or killed.

 In many countries this coverage is mandatory only for commercial or large aircraft. Coverage is often sold on a “per-seat” basis, with a specified limit for each passenger seat.[20]

Combined Single Limit (CSL)

CSL coverage combines public liability and passenger liability coverage into a single coverage with a single overall limit per accident. This type of coverage provides more flexibility in paying claims for liability, especially if passengers are injured, but little damage is done to third party property on the ground. Combined Single Limit Liability cover for a total amount covering carrier’s entire liability which includes: [21]

  • General Legal Liability
  • Third Party Legal Liability
  • Passenger Legal Liability
  • Registered Baggage or
  • Unregistered Baggage in the charge of the passenger
  • Cargo Legal Liability
  • Mail Legal Liability [22]

These liabilities result from the operations the operator is set up to perform and are normally are the subject of a contract of carriage like a ticket or airway bill.[23]

Ground risk hull insurance not in motion

This provides coverage for the insured aircraft against damage when it is on the ground and not in motion. This would provide protection for the aircraft for such events as fire, theft, vandalism, flood, mudslides, animal damage, wind or hailstorms, hangar collapse or for uninsured vehicles or aircraft striking the aircraft. The amount of coverage may be a blue book value or an agreed value that was set when the policy was purchased. [24]

The use of the insurance term “hull” to refer to the insured aircraft belies the origins of aviation insurance in marine insurance. Most hull insurance includes a deductible to discourage small or nuisance claims.[25]

Ground risk hull insurance in motion (Taxing)

This coverage is similar to ground risk hull insurance not in motion, but provides coverage while the aircraft is taxiing, but not while taking off or landing. Normally coverage ceases at the start of the take-off roll and is in force only once the aircraft has completed its subsequent landing. Due to disputes between aircraft owners and insurance companies about whether the accident aircraft was in fact taxiing or attempting to take-off this coverage has been discontinued by many insurance companies. [26]

In-flight insurance

In-flight coverage protects an insured aircraft against damage during all phases of flight and ground operation, including while parked or stored. Naturally it is more expensive than non-in-motion coverage since most aircraft are damaged while in motion. [27]

Hull “ALL Risks”

The hull “All Risks” policy usually pertains to chances of physical loss or damage to the aircraft. These policies are subjected to a standard level of deductible (uninsured amount borne by the Insured) applicable in case of partial loss. This deductible presently ranges from US $ 50,000 (in case of Twin Otter) to US $ 1,000,000 (in case of Boeing 747). The term “all risks” can be misguiding and it should be cleared that the term is not subjected to any kind of consequential loss, or loss of use and delay. The term addresses to the restoration of the aircraft to its previous condition before the loss. Presently the bulk of airline hull “all risks” policies are formed on the basis of agreement between the insurers and the insured covering the policy period, the value of the aircraft and in any case of total loss the agreed value should be payable in full. There is no option for replacement under such an agreement. [28]

Liability Insurance[29]

Liability is basically categorized in two aspects. With regard to passengers, it is limited to baggage and cargoes carried on the aircraft. [30] The second aspect is Aircraft Third Party Liability, which is the liability for any sort of property damage or to the people outside the aircraft.[31] This is similar to the third party insurance that is required under the Indian Motor Vehicles Act, 1989.[32]

Hull Total Loss Only Cover[33]

Hull total loss only cover is subjected solely to total loss of the aircraft and is particularly formed for the old aircrafts as the condition of such are very poor and are insured for low amount the premium of which would also be very low. The proportion of partial losses to total losses in case of such aircraft is very inadequate.

Aviation insurance is insurance coverage geared specifically to the operation of aircraft and the risks involved in aviation. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as terminology, limits and clauses specific to aviation insurance.[34]

Just as with insurance for other types of vehicles, there are a number of levels of coverage in aviation insurance policies, including liability coverage for accidents when the policyholder is at fault, theft and loss coverage, life insurance riders, and insurance for other types of situations, such as loss of cargo. The more services requested on a policy, the more expensive it will be. Coverage also varies depending on the type of craft: helicopters, sport planes, commercial airliners, and so forth are all covered differently.

 Aviation Insurance was first introduced in the early years of the 20th Century. The first aviation insurance policy was written by Lloyd’s of London in 1911. The company stopped writing aviation policies in 1912 after bad weather and the resulting crashes at an air meet caused losses on many of those first policies. The first aviation polices were underwritten by the marine insurance underwriting community.  The first specialist aviation insurers emerged in 1924.[35]

In 1929 the Warsaw convention was signed. The convention was an agreement to establish terms, conditions and limitations of liability for carriage by air, this was the first recognition of the airline industry as we know it today. In 1931, Captain A. G. Lamplugh, the British Aviation Insurance Company’s chief underwriter and principal surveyor, said of the new industry: “Aviation in itself is not inherently dangerous. But to an even greater degree than the sea, it is terribly unforgiving of any carelessness, incapacity or neglect.”  Realizing that there should be a specialist industry sector, the International Union of Marine Insurance (IUMI) first set up an aviation committee and later in 1933 created the International Union of Aviation Insurers (IUAI), made up of eight European aviation insurance companies and pools. [36]

The London insurance market is still the largest single centre for aviation insurance. The market is made up of the traditional Lloyd’s of London syndicates and numerous other traditional insurance markets. [37]Throughout the rest of the world there are national markets established in various countries, this is dependent on the aviation activity within each country, the US has a large percentage of the world’s general aviation fleet and has a large established market.

No single insurer has the resources to retain a risk the size of a major airline, or even a substantial proportion of such a risk. The catastrophic nature of aviation insurance can be measured in the number of losses that have cost insurers hundreds of millions of dollars (Aviation accidents and incidents), most airlines arrange “fleet policies” to cover all aircraft they own or operate.[38]

Exceptions under Aviation Insurance Policies

There are a number of exceptions which apply under an aviation insurance policy. Following is a list of some of the common exceptions. It must, however, be noted that such exceptions vary from policy to policy, and that the following list is only illustrative and not exhaustive.[39]

  • Wear, tear and gradual deterioration, ingestion damage caused by stones, grit, dust, ice etc. which result in progressive engine deterioration (Considered wear and tear), Mechanical Breakdown.  War and Allied Perils are also excluded from the standard policy.  These can be, and indeed are insured by way of a separate policy.
  • Claims arising whilst the aircraft is being used for any illegal purpose.
  • Claims arising whilst the aircraft is outside the agreed geographical limits (unless due to force majeure.)
  • Claims which are payable under any other insurance.
  • The hull “All Risks” policy will pertain to the exclusion of war damages. War here means any kind if civil war, strikes, riots, disturbances, confiscations, hi- jacking or any kind of political or terrorist attacks.
  • Noise and pollution unless resulted from crash, fire or any kind of explosions registered inside the air plane,
  • Any kind of loss incurred by the own property of the insured.[40]

Legal Concerns

In many cases, changes in other areas of our society have a great influence over aviation. This is the case with our court system. The trend towards unreasonable verdicts and ridiculous awards has forced many aircraft owners to create shell corporations to front as the registered owner of their aircraft.[41] Owners today are uncertain as to how much liability insurance is adequate protection, a situation made far worse by the growing reluctance of insurance underwriters to offer higher liability protection at any price. The underwriters explain that it is impossible for any aviation insurance company to predict an adequate liability premium rating structure when the court decisions are so volatile and erratic. All aviation insurance companies are heavily reinsured by companies in London and other foreign markets, and those foreign insurers usually charge passenger liability premiums for aircraft operated in the United States that are three to five times as much as those paid by non-U.S. operators. And so it goes for the owner of general aviation and commercial aviation aircraft in the United States.[42] Aircraft owners seem to be trapped between inadequate coverage limits, high-priced liability insurance premiums, and the perils of the U.S. court system. The recent volcanic ash clouds from the eruption in Iceland have wreaked, and continue to wreak, havoc on air travel for millions of passengers and also disrupted businesses throughout the world. [43]  On April 14, 2010, the Eyjafjoll volcano in Iceland erupted and began sending dust and ash into the atmosphere.  The ash cloud was carried by the wind and soon covered large areas of Europe, resulting in the closure of European and United Kingdom airspace.  An early estimate of the financial impact on airlines by the International Air Transport Association (IATA) was in excess of $200 million per day in lost revenues alone.[44]  In addition to loss of revenue, airlines have incurred costs in connection with legal obligations to stranded passengers under the governing EC Regulation 261/2004 as well as costs and expenses in connection with re-routing aircraft and stranded aircraft at various airports.

As with most high profile events involving significant and wide-ranging financial impact, an important issue is whether there is any available insurance coverage in connection with the expected losses and incurred costs.  Some potential aviation insurance issues are: coverage in connection with the mandatory grounding of aircraft; damage to aircraft and engines in flying through volcanic ash clouds; and defense and liability obligations in connection with claims as a result of stranded passengers and cargo.  While each policy of insurance is an individual contract between parties and subject to its own terms, conditions and exclusions, it can safely be said that virtually no airlines are covered for the financial consequences arising from the mandatory grounding of aircraft due to the volcanic ash cloud, other than possibly through the lay-up provisions of their policies.  A lay-up credit is a return of some portion of aircraft insurance premium if the aircraft is not flying for an extended period of time – usually at least 90 days. In the absence of physical damage to aircraft, there is no coverage trigger under most aviation hull insurance policies.

Can small aviation players survive

In the future, some sectors of the aviation community may simply cease to exist as a result of the threat of financial devastation due to lawsuit. We’ve had a glimpse of this already when the escalating cost of products liability insurance practically stopped the production of light aircraft in the mid-1980s. It was only after a change in legislation limiting the time an aircraft manufacturer could be held responsible for products liability that our industry resumed production of new light aircraft. In the future, such sectors of general aviation as the small piston repair shop and the small flight training school may not be able to afford the increasing insurance premiums and in some cases may not be able to buy adequate insurance at any price. This may spell the end for many in these businesses.

 

Claims Scenario in India

Each Insurer will have its own underwriting experience to show and can vary from its peers considerably depending on their participation on the policies that has produced losses. General Aviation claims in 2008 are expected to exceed Rs. 500 million and 2009 has started on a bad note with claims in first five months exceeding Rs.350 million. As against this, past 10 years average general aviation losses are hovering around Rs.400 million. When we compare these claim figures against the total general aviation premium in India, one may come to a conclusion from the insurer’s perspective that general aviation is profitable over the last 10 years period. This may not be true for all insurers, especially considering the fact that 10 years average loss figure consists of two or three major losses in each year. Insurers participating on these losses would have been hit hard. Majority of the losses in the last 10 years are on account of aircraft damages and liability claims forma a very small portion of it. However, by no means does this give any indication into the future considering the catastrophic nature of aviation business. The Airline segment in India over the last 10 years has been relatively stable. However, the claims experience varies from airline to airline and one of the disturbing trends in India is „bird hit‟ losses in the recent past.[45]

Aviation Insurance Industry in India: An Overview

Indian Insurers have come a long way in developing the market capacity for aviation insurance business and as India’s growth story continues, Insurers have kept pace with the growing demand from buyers in India. Today the Indian market is playing a key role in supporting not only buyers in India but also buyers in the sub-continent, including major support to the SAARC region. [46]

As the Indian aviation industry continues to grow, many new buyers have entered the insurance market with requirement for different types of products. Apart from traditional airline and aircraft related insurances, Insurers are now covering different verticals of aviation industry ranging from airports to aircraft manufacturers with bigger risks appetite. [47]The past few years have seen heightened level of competition amongst both Public and Private Sector Insurance Companies in an attempt to retain the current market share and to fulfill an ever increasing desire to participate in the aviation growth story. [48]

This is more so in the General Aviation (generally aircraft with less than 61 seats) segment where the sum insured limits are within the capacities of many Indian Insurers. General Aviation buyers in India have enjoyed substantially lower premium payouts compared to their world and regional peers, as buyers have bargained hard taking advantage of the soft market conditions and excess market capacity. In the process, quite a few buyers have switched their insurers.[49]

On the Airline front, pricing continues to be driven by leading international markets especially in London, as Indian Insurers continue to off load major risks to international companies mainly in the European sub continent, with insurance brokers playing a very important role in the entire process.

Aviation Insurance in India: Laws and Regulations

The Indian Government ratified “Montreal Convention 1999” in March 2009 and currently it applies to international travel. There is nothing on record at this stage to show that the revised liability limits are applicable to domestic sectors. In brief, the Convention has increased compensation levels for international passengers in the event of death or bodily injury and damage and delay to the passenger baggage and cargo. While the compensation for death or bodily injury has increased almost 7 times from the existing levels of approximately USD 20,000 to around USD 140,000, the compensation for damage to the checked baggage has increased from approximately USD 20 per kg to around USD 1,400 per passenger.

The compensation for damage to cargo has increased from USD 20 per kg approximately to USD 24 per kg. The Warsaw System, which is in force in India by way of Carriage by Air Act, 1972(amended in 2009) had allowed four choices of jurisdiction for filing of a claim by the passenger, namely, place of issue of ticket, principle place of business of the carrier, the place of destination of the passenger and the place of domicile of the carrier.

Before the boom in the Indian aviation sector, the airline insurance market was dominated by the four state-owned general insurance companies: New India Assurance Company, Oriental Insurance Company, National Insurance Company and United India. However, with the growth in the Indian aviation story, private players like ICICI Lombard, Bajaj Allianz, Iffco Tokyo General Insurance and Reliance General Insurance Company are also trying to muscle their way into this lucrative sector.

The unprecedented growth in this sector is also seeing private players join hands with each other to bid for accounts. The latest such case is the ICICI Lombard-Bajaj Allianz tie-up where they are jointly bidding for Air India’s Insurance account which includes providing cover for 50 planes valued over $3 billion.

In India, this segment is highly reinsurance-driven. A majority of the players have re-insured the value of risk covered with foreign companies. Take the case of Air India where almost 90% of the risk is insured overseas through reinsurance arrangements, while the remaining cover rests domestically. Indian insurance companies do not have the financial muscle to address claims of airlines and generally go in for reinsurance which means sharing the risk of loss with another insurance company. The role of a reinsurer is important in the Indian context as most of the companies do not have the requisite experience of handling a market of this size.

 Out of the eight private players, Bajaj Allianz General Insurance Company and ICICI Lombard General Insurance Company Limited are most active in this segment. Although there are no official estimates, industry players put a ballpark figure of the Indian aviation insurance market at somewhere around Rs 400 cr to Rs500 cr. With new aircraft being bought by new players entering the sky and the existing one in expansion mode, this segment will only grow. [50]

According to Ernst & Young, a global consultancy firm, Indian skies would have over 700 aircraft – from 235 currently – by 2012, an increase of almost200%. The numbers speak for the potential of this segment in the market, which is one of the fastest growing in the world. The total premium figures for aviation insurance in India for 2006-07 stood at Rs 417.29 cr. typically, the premium depends upon underwriting factors such as age of the aircraft, experiences of the pilot flying the aircraft, make and model and use of the aircraft. It is generally 1% to 3% of the aircraft value.

The aviation insurance market is looking up and is currently at Rs 350 crore. But with new aircraft being bought by new players entering the business and the existing one on an expansion mode, the aviation market is set to take off.[51]

Through the Montreal Convention a fifth jurisdiction is added which is the place of domicile of the passenger, provided the airline has a presence there. Therefore an Indian would be able to file claim in India even if the journey was undertaken outside India. Liability Limit for domestic passengers in the event of death or bodily injury continues to be at the old level of Rs.750,000 for passengers above 12 years of age and Rs.350,000 for below 12 years.

 As regards damage and delay to the passenger, baggage compensation is Rs.4,000 per passenger for hand baggage and Rs.450 per kg for registered baggage. So far, Insurers have responded very positively by covering their customers based on the revised limits for international travel and it remains to be seen whether new limits will be applicable for domestic travel as well and its impact on the liability claims scenario.

Western European countries including countries in the Far East namely Hong Kong, Singapore have adopted regulations specifying minimum liability insurance limits for aircraft based on the “maximum takeoff weight of the aircraft” and “passenger seating capacity”, however India is yet to adopt any such regulations. Even neighboring countries like Sri Lanka and Nepal have minimum liability insurance requirements for aircraft and it may not be too long before India adopts such requirements. While Airlines and Corporate Jet owners are buying liability limits in line with the international trend, there is no similar trend when it comes to helicopter operators. Like Airline policies, liability limits on Corporate Jets many times are driven by financing /purchase agreements; however helicopter operators tend to buy low limits.

Aviation Insurance in India: Latest Data and Trends

Aviation direct premium income in India is circa INR 3,750 million and this includes buyers from all segments including airlines, general aviation, aerospace, airports, ground handlers, catering companies etc but excluding satellite. Over 75% of the total premium comes from the airline segment with another 23% from General Aviation.[52] A very small portion of 2% is contributed by airport, ground handlers, catering segment etc. In addition, National Reinsurer, “GIC Re” writes substantial international aviation business (mainly by way of inward reinsurance) coming into the country and gradually other insurers are following suit, but with caution.[53]

 Over the last 10 years GIC Re has emerged as one of the largest aviation reinsurer in the international market and is playing a key role in supporting Indian Insurers. Currently there are over 200 buyers of aviation insurances in the country who need aviation products in one form or other. Many new buyers have entered the market in 2008-09 and the trend is expected to continue in 2010-11 albeit at a slow pace.[54] For the airline sector, customer base and number of aircrafts has increased significantly in the past three years but current economic situation is taking a toll on its future growth. [55]

When one compares the overall aviation premium compared to total non-life premium in India, it forms a very small portion of less than 2% of total Non-Life premium income, however winning or retaining an aviation client has always made big headlines and the glamour attached to aviation industry is keeping Insurers competing stronger day-by-day even at the cost of a shrinking premium base. [56]

Collectively, the Indian market has capacity to insure General Aviation aircraft valued around USD 50m and Liability limit around USD 275m. Capacity for airlines is very similar, but reduced to some extent with limitations of percentage share restrictions when it comes to aircraft with seating capacity in excess of 61 passenger seats.[57]

The situation with regard to claims, however, is more important. Each Insurer will have its own underwriting experience to show and can vary from its peers considerably depending on their participation on the policies that has produced losses. General Aviation claims in 2008-09 are expected to exceed Rs. 500 million and this year has started on a bad note with claims in first five months exceeding Rs.350 million. [58]

As against this, past 10 years average general aviation losses are hovering around Rs.400 million. When we compare these claim figures against the total general aviation premium in India, one may come to a conclusion from the insurers’ perspective that general aviation is profitable over the last 10 years period. This may not be true for all insurers, especially considering the fact that 10 years average loss figure consists of two or three major losses in each year.

 Insurers participating on these losses would have been hit hard. Majority of the losses in the last 10 years are on account of aircraft damages and liability claims forma a very small portion of it. However, by no means does this give any indication into the future considering the catastrophic nature of aviation business. [59]The Airline segment in India over the last 10 years has been relatively stable. However, the claims experience varies from airline to airline and one of the disturbing trends in India is ‘bird hit’ losses in the recent past.

Global Aviation Insurance: What Lies in Store

What, then, is the outlook in the year 2011 and ahead? The short answer is that it very much depends on the level of claims for the rest of the year. Fundamentally the airline insurance market is healthy at this point, capacity is strong and as a result following markets can be used to generate enough competition to ensure that the cost of insurance is fairly closely aligned to the risk being represented.

At the same time, the market is perilously close to suffering a fourth consecutive year without return. There is now very little room for manoeuvre and further losses are likely to confirm 2010 as a loss making year for the airline insurance market. If this is the case, then commitment to the sector may fall in 2011 and prices could rise as a result.

What this means for airlines renewing during the final quarter of the year, as stated earlier, is that negotiations are likely to be tough. Underwriters are going to need to be convinced of the merit of an insurance programme before they commit to supporting it, let alone offering reduced prices. The evidence of 2010 so far is that there are few reductions available for airlines even if they offer a positive risk profile and good loss history. While the market does not appear to be softening, it is at least stabilising after the high rate of increases in 2009.

The beginning of the year saw the discussion of the potential for equilibrium in the airline insurance market, and the point still stands. The market now appears to be reacting far more to what is happening in the industry today rather than responding to past premium trends. Unfortunately with losses relatively high in 2010, it means that conditions are likely to remain challenging for some time.

Conventions and Liability Involved in Air Law[60]

The Chicago Conference called by the United States at the time of World War II. The Conference at Chicago lasted for 37 days from 1st November to 7th December, 1944. Among the major achievements of the Conference were the drafting, adoption and opening for signature of one major convention, three Agreements, a standard form of bilateral for provisional air routes and the text of 12 technical Annexes. The Convention was intended to formulate certain agreed principles and agreements to ensure safe and orderly development of international civil aviation on the basis of equality of opportunity and to ensure that the air transport service might operate “Soundly and economically”. In fact, the Chicago constitution became a viable constitution for post-war global air world.[61]

The Final Act of the Chicago Conference was adopted and signed by 52 States. The Final Act contained 12 Resolutions and the following five appendices.

  1. i) The interim agreement on the international Civil Aviation
  2. ii) The convention on the international Civil Aviation

iii) The international air service transit agreement (Two Freedoms Agreement)

  1. iv) The international air transport agreement (Five Freedoms Agreement)
  2. v) Drafts of Technical Annexes
  3. vi) a standard form of Bilateral Agreement

 

The Warsaw Convention, 1929

With the blossoming of commercial air transport in the 1920s, governments and transport industry alike began to inquire into the ramifications of an aviation accident. The French government, in response to this concern, convened the first international conference on private air law, in 1925, primarily to consider the creation of a uniform system of aviation law.

The second international conference on private air law was held in Warsaw from October 4 to 12, 1929. Its main purpose was to unify the rules on the international transport of persons and property by air, fix the damages for loss or injuries sustained and create a presumption of liability against the carrier on the happening of an injury to or death of a passenger, or damage to or loss of property.

The Warsaw Convention of 1929, formally known as the Convention for the “unification of certain rules relating to international carriage by air”, was signed in Warsaw on 12 October  1929 and came into force on 13 February 1933. This convention established the international liability of air carriers and the monetary limits of damage, delay or loss. The legal regime governing the liability of air carriers in the carriage of passengers, baggage and cargo comprised a number of international instruments, collectively known as the Warsaw system.

The Warsaw system consists of the original Warsaw Convention of 1929, a series of protocols amending the Warsaw Convention provisions, as well as one supplementary convention to the Warsaw Convention, commonly known as the Guadalarjara supplementary convention of 1961. In its practical application, the Warsaw Convention has been amended de facto by a private agreement of air carriers operating to, from or via the territory of the US. Some components of the Warsaw system are in force for a considerable number of countries; the other instruments have not yet been enforced, although they were adopted by a diplomatic conference many years ago. Guadalajara Convention 1961 are in force; Guatemala City Protocol, Additional Protocols nos.1-4 are not in force.

The Warsaw Convention of 1929 is a basic document on an air carrier’s liability, although it has been amended by other subsequent treaties too. According to Article 17, an air carrier is liable to death or injury sustained in an accident on board the aircraft unless, under Article 20, the carrier establishes that he has taken all necessary measures to avoid the damage, or that it is impossible for him to do so.

A condition precedent to the carrier’s responsibility to the passengers is that the damage must take place on board the aircraft, or in the course of any of the operations of embarking or disembarking ([Article 17(1)]. Under Article 21, if the carrier proves that the damage has been caused by or contributed to by the negligence of the injured person, Court may, in accordance with the provisions of its own law, exonerate the carrier wholly, or partly, from liability.

The central underpinning of the Warsaw Convention is Article 22, which places a maximum ceiling on the damages recoverable from an air carrier when a passenger has been injured, or killed, in an international air travel. The internationally established rule is that subscribing air carriers are liable to damage sustained by a passenger during the course of international transport up to an amount not exceeding 1,25,000 princare francs (at that time equal to about $ 8,300).

The willful misconduct exception to the liability limitation, under Article 25 of the Warsaw Convention has been a cause of concern and extensive debate since its promulgation. According to the original draft of the treaty written in French, the carrier cannot invoke liability Limitation provisions if the damage has been caused by dol or by such default on the carrier’s part as considered equivalent to dol (or “wilful misconduct” for French). However, even this translation does not seem to conform to the original intent of the treaty draftsmen, who selected the word dol. Even so, the conflict emerging over the years in those Warsaw Convention cases, where “wilful misconduct” is alleged against a carrier, has not focused so much on the question of translation as it did on the case-by-case factual issues of what constitutes a “willful misconduct”.

Special contracts, ticket conditions or other provisions designed to reduce or limit this liability were declared void by Article 23. Under Article 24 all sanctions arising out of the convention, were subject to the terms of the convention.[62]

The Hague Protocol, 1955

The Hague Protocol, 1955, has changed those provisions of the Warsaw Convention which were found incompatible with the changed situation of international air transport, or were unclear or subject to different interpretations.[63] It doubles the original Warsaw limits of liability by amending Article 22, to increase the gold franc limit from 1,25,000 to 2,50,000 (approximately $ 16,000 in 1955).

This was accompanied by a revision of Article 25. Under the original text, a claimant could recover unlimited damages if he established that the accident was the result of “wilful misconduct”. [Dol in the original French text is an admittedly loose term, which has been subject to widely differing interpretations].

The Hague Protocol changed this to a more precise standard, permitting unlimited recovery if the plaintiff could establish that “the damage resulted from an act or omission of the carrier, his servants or agents done with intents to cause damage or recklessly and with knowledge that damage would probably result”. It also simplified documentation, provided for more adequate “notice” to passengers and permitted the attorney’s fees and other costs of litigation to be awarded separately from the limit if permitted by the law of the forum.

 The so-called Montreal Agreement of 1966

The so-called Montreal Agreement of 1966, which is not an intergovernmental agreement but only an arrangement on liability among air carriers operating passenger transport, to, from or with an agreed stopping place in the United States, was adopted on 13 May 1966.[64]

This was necessitated by the withdrawal of the denunciation of the Warsaw Convention by the US which was to take effect on 16 May 1966. By this agreement, the parties have de facto amended the application of the Warsaw Convention as changed by the Hague Protocol, 1955, by providing for a limit of liability for each passenger in the case of death, or bodily injury, of US$ 75,000, inclusive of legal fees and costs and $ 58,000 exclusive of legal fees and costs.[65]

 The Guatemala City Protocol in 1971

The rapidly changing nature of international air transport necessitated the Guatemala City Protocol in 1971, which effected a far-reaching revision of the Warsaw Convention, 1929, as amended by the Hague Protocol, 1955, particularly the provisions on the concept of liability and the limitation of the air carrier’s liability. [66]

The Guatemala City protocol mainly provides for a regime of absolute liability of the air carrier; an unbreakable limit of the carrier’s liability at the maximum amount of 1,50,000 princare francs (US $ 100,000) per person; a domestic system to supplement, subject to specified conditions, the compensation payable to claimants under the convention in respect of the death or personal injury of passengers; a settlement inducement clause, conferences for the purpose of reviewing the passenger limit; and an additional jurisdiction for suits pertaining to passengers and baggage.[67]

The Montreal Protocols of 1975

The 1975 ‘diplomatic conference on air law’ drafted and adopted four protocols to the Warsaw Convention. The protocols did not raise the limit of liability, but changed the Expression from poincare francs to special drawing rights (SDRs) as defined by the International Monetary Fund (IMF).[68] Additional Protocol No. 1 establishes the liability limit at 8,300 SDR, or 1, 25,000 monetary units (MU) per passenger. Additional protocol No. 2 limits the liability at 16,600 SDR, or    2, 50,000 MU, per passenger. Additional Protocol No. 3 establishes 100,000 SDR, or   1, 50,000 MU, per passenger   in the case of injury or death. Additional Protocol No. 4 revises various provisions relating to air cargo regulations. To protect third parties on the ground, the Rome Convention of 1933 and the additional Insurance Protocol of Brussels, 1938, were drafted to establish the absolute but limited liability of an aircraft operator with respect to damage caused to third parties on the surface of the earth. These agreements did not receive sufficient adherence. Today they have been replaced by the Rome Convention of 1952, amended by the Montreal Protocol of 1978 and now amended to Montreal convention 1999. [69]

The difference between the Warsaw system and the Rome Convention is that while the Warsaw Convention relates to the liability of the carrier with a contractual relationship to the passenger, the Rome Convention sets the liability of carrier to persons with whom they have no contractual relationship. The operator of an aircraft is liable to damage claims, on the proof by the injured person that the damage has resulted and is attributable to the aircraft. These are in force, but with a rather limited adherence.[70]

Lockerbie Case:

In application, the Montreal Convention has also been problematic, as demonstrated by contentious litigation before the International Court of Justice (ICJ). This case arose out of a dispute between the United States and Libya in 1971, following the explosion of Pan Am flight 103 over Lockerbie, Scotland, in which two Libyan nationals were suspected of putting a bomb onboard. When the United States sought extradition of the Libyan nationals, Libya refused, reasoning that it would prosecute the alleged perpetrators under its domestic law in accordance with the Montreal Convention. Relying on Article 14 of the Montreal Convention, Libya brought the United States before the ICJ on grounds that the United States had breached the arbitration requirements for disputes arising out of the Montreal Convention.[71]

Indeed, it appeared that Libya had complied with the Montreal Convention and the United States, by refusing to go to arbitration on the issue, had not. But there were suspicions that the Libyan government was complicit in the bombing and would not adequately prosecute the suspects. To further confuse the matter, the United Nations Security Council intervened, issuing two resolutions regarding Libya’s alleged role in the Lockerbie bombing and mobilizing economic sanctions.[72]

When the dispute finally came before the ICJ, the Court ruled that under Article 25 of the United Nations Charter, both states were obliged to follow the decisions of the Security Council, despite any other obligations expressed in international agreements, including the Montreal Convention.[73] Various forms of Security Council sanctions followed, and eventually, Libya surrendered the two suspects to the United Kingdom to be tried and convicted before a Scottish court in the Netherlands.[74] The United States and Libya never went to arbitration on the dispute, despite the explicit provisions of the Montreal Convention.

In sum, the Lockerbie case demonstrates two problems with the Montreal Convention. First is the problem of inconsistent treaty enforcement under certain circumstances.[75] For example, Libya’s apparent complicity in the airline bombing contributed to the United States’ decision to breach the explicit arbitration provision in the Montreal Convention. Second is confusion over the hierarchical nature of various sources of international law. The ICJ decision on the Lockerbie incident provided a controversial determination that the legal authority of the Montreal Convention is diminished when read in light of related United Nations Security Council resolutions.[76]

 

Analysis of the Global Aviation Insurance Market from 1995-2010

         

At the beginning of the year 2009, the aviation and airline industry itself was in disarray, and the depression seemed to be the harbinger of death for the aviation insurance industry. For, without airlines, what would be left to be insured? However, a recent market study has shown that this has not been the case. In terms of airlines ceasing operation, overall the industry appears to have weathered the economic storm relatively well so far, despite the many augurs of doom being delivered 3 years ago. According to the data that was studied from the insurance markets, just over US$16 million has come out of the lead hull and liability premium total so far this year as a result of airlines going out of business, joining group programmes or seeing their AFV drop below US$150 million, the criteria for inclusion in the data set.

The majority of lost premium, US$8 million, comes from four airlines that have gone out of business, although a further US$7 million has been the result of four other airlines going into group programmes. The growth of group programmes is perhaps unsurprising given that the airline insurance market tends to reward economies of scale. At the same time, around US$9 million has come into the sector as a result of five new airlines joining the data set.

Four of these are the result of AFV growth while the fifth is a new airline. The US$7 million difference between airlines leaving and joining the industry so far this year is something of a turnaround on the full year data from 2009, when US$41 million of lead hull and liability premium left the industry and US$91 million joined. The high number of airlines joining the sector in 2009, 26, was the result of fleet growth but also restructuring and airlines taking their insurance policies out of group programmes. It may be that if the economic position is stabilizing and passengers returning, restructuring becomes less urgent and as a result the number of new airlines in 2010 will be lower. There are still a number of airlines that could be described as being distressed, however. If the economic downturn is protracted as some experts are suggesting, it could well be that there will be further airlines leaving the industry.

Aviation Insurance in India: Laws and Regulation

The Indian Government ratified “Montreal Convention 1999” in March 2009 and currently it applies to international travel. There is nothing on record at this stage to show that the revised liability limits are applicable to domestic sectors. In brief, the Convention has increased compensation levels for international passengers in the event of death or bodily injury and damage and delay to the passenger baggage and cargo. While the compensation for death or bodily injury has increased almost 7 times from the existing levels of approximately USD 20,000 to around USD 140,000, the compensation for damage to the checked baggage has increased from approximately USD 20 per kg to around USD 1,400 per passenger. The compensation for damage to cargo has increased from USD 20 per kg approximately to USD 24 per kg. The Warsaw System, which is in force in India by way of Carriage by Air Act, 1972 had allowed four choices of jurisdiction for filing of a claim by the passenger, namely, place of issue of ticket, principle place of business of the carrier, the place of destination of the passenger and the place of domicile of the carrier. Through the Montreal Convention a fifth jurisdiction is added which is the place of domicile of the passenger, provided the airline has a presence there. Therefore an Indian would be able to file claim in India even if the journey was undertaken outside India. Liability Limit for domestic passengers in the event of death or bodily injury continues to be at the old level of Rs.750,000 for passengers above 12 years of age and Rs.350,000 for below 12 years. As regards damage and delay to the passenger, baggage compensation is Rs.4,000 per passenger for hand baggage and Rs.450 per kg for registered baggage. So far, Insurers have responded very positively by covering their customers based on the revised limits for international travel and it remains to be seen whether new limits will be applicable for domestic travel as well and its impact on the liability claims scenario.

Western European countries including countries in the Far East namely Hong Kong, Singapore have adopted regulations specifying minimum liability insurance limits for aircraft based on the “maximum takeoff weight of the aircraft” and “passenger seating capacity”, however India is yet to adopt any such regulations. Even neighboring countries like Sri Lanka and Nepal have minimum liability insurance requirements for aircraft and it may not be too long before India adopts such requirements. While Airlines and Corporate Jet owners are buying liability limits in line with the international trend, there is no similar trend when it comes to helicopter operators. Like Airline policies, liability limits on Corporate Jets many times are driven by financing /purchase agreements; however helicopter operators tend to buy low limits.

Aviation insurance to hit airlines in the pockets

A flurry of plane crashes across the world this year will find its echo in the domestic aviation insurance premium rates in the form of a 25-40 percent hike. The year 2009 has gone down as a bad year for airlines with three major accidents – Air France, Yemenia and Caspian Airlines – killing around 550 people. There were several other minor incidents too. “The Air France and Yemenia losses in June 2009 have set the agenda for the airline insurance market potentially well into 2010 and 2011. Estimates for Air France and Yemen Air loss have been put in the range of $700-800 million and $250-300 million respectively,” Bhargav Dasgupta, managing director and CEO, ICICI Lombard General Insurance Company, told IANS. According to him, the losses incurred by the global aviation insurance market this year excluding minor losses are estimated at $1.32 billion till June 2009, as against a premium income of $416 million.

“Nearly half of the airline placements so far globally have seen their hull and liability premium costs rise by more than 25 percent compared to the previous year. This pattern is likely to continue for the rest of the year. As airlines insurance in India follows global trends, we expect a price rise for Indian carriers as well,” he added. According to Dasgupta, the aviation premium rate is primarily driven by the global trends owing to the large values for the aircraft and liability covers for which international reinsurance capacity is required.

The global aviation premium and claims for 2007-08 are estimated at $1.6 billion and $1.4 billion respectively. Considering the acquisition and operating costs, the insurers have been incurring losses resulting in hardening of premium rates from the last quarter of 2008, he added.

“Typically the premium rate would vary from 0.5 percent to 2.5 percent of the aircraft value. The law of large numbers does not apply to this segment as each aircraft is of high value. An Airbus or Boeing would cost anything from Rs.200 crore to Rs.1, 000 crore. Even minor damage – technically called attrition loss – would amount to Rs.100 crore,” T.A. Ramalingam, head of underwriting at Bajaj Allianz General Insurance Company, told IANS.

According to Dasgupta, during 2008-09 Indian non-life insurers booked a premium of Rs.343 crore under the aviation portfolio, up from Rs.304 crore booked the previous year. “About Rs.200 crore (previous year about Rs 175 crore) pertains to aircraft while the balance pertains to general aviation. Our market share last fiscal was 16 percent with a premium income of Rs.55 crore as against 14 percent and Rs.41 crore in 2007-08.”

Market leader New India earned a premium of around Rs.110 crore under this portfolio in FY08. If one takes into account the inward reinsurance premium, the company’s market share will be more than 50 percent, a company official said. Meanwhile, the aviation insurance segment in India is set to boom with around 450 aircraft valued around Rs.49, 200 crore to be added to existing fleet over the next five years, he added.

“With various airlines going for major expansion and new airlines starting operations, the aviation sector is growing at 15 percent per year and the growth is faster than any other country,” the official said, speaking on condition of anonymity.

It is this potential that is attracting United India to focus in a major way on this segment. Another official said that the company has set up a core group to get a firm foothold in this segment.

Conclusion

With excessive insurance market capacity and heightened level of competition the gap between General Aviation premiums and claims is narrowing very fast and it remains to be seen which direction the market will move in the near future. The Airline market worldwide is witnessing rate hardening and airline buyers in India are expected to follow the international trend and treatment of their peers globally. The unbridled growth in the aviation sector has come as a bonanza for the insurance sector. Thanks to capacity addition and the entry of new aviation players, a host of insurance companies are eyeing this growing market to offer insurance cover to new planes that are being brought to India.

‘‘The aviation insurance market is looking up and is currently at more than Rs 350 crore. But with new aircraft being bought by new players entering the business and the existing one on an expansion mode, the aviation market is set to take off,’’.

Industry trackers believe that with several airlines including East West Airlines and Magic Air set to enter the market in the coming weeks, the airline premium income could be up 50 per cent in the next two years.

General aviation buyers may see another year of hard bargaining, as there are no immediate indications of rates hardening in India but at the same time major loss can always influence the overall dynamics. Though India’s contribution to the total global insurance premium paid by airlines which stands at US $ 5.86 billion is miniscule, the growth in aviation premium payout is highest in China followed by India.

Clients are also demanding cost effective insurance programs with efficiency in service delivery and as the size of individual risks and buyers continues to grow, broker’s intermediaries are expected to play a key role in distributing the risks in India and internationally.

 

BIBLIOGRAPHY

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http://www.iffcotokio.co.in/Aviation_Insurance_Policy.html

[1] http://en.wikipedia.org/wiki/Aviation_insurance (accessed October 10, 2013)

[2] http://www.aviationinsurance.com/( accessed October 2, 2013)

[3]Alexander T. and Bruce D. Chadbourne Wells: Introduction to Aviation Insurance and Risk Management; Third Edition; 2010

[4] http://www.studymode.com/essays/Aviation-Insurance-650974.html (accessed on August 8, 2013)

[5] http://www.greenshield.ae/aviation-insurance.php (accessed October 3, 2013)

[6]  Alexander T. and Bruce D. Chadbourne Wells: Introduction to Aviation Insurance and Risk Management; Third Edition; 2006.

[7] ibid

[8] ibid

[9] Ibid

[10] ibid

[11] http://www.jimgardneraviationinsurance.com/insurance_articles.php?id=32 ( accessed August 5, 2013)

[12] Wells, A. T. and Chadbourne, B. D. Introduction to Aviation Insurance and Risk Management (3rd). pp4. (2007)

[13] http://en.wikipedia.org/wiki/Aviation_insurance (accessed October 10, 2013)

[14] Ibid

[15] http://www.planeinsurance.com/Insurance/AircraftInsurance.aspx( accessed October 1,2013)

[16] http://www.ghazalins.com/marine_aviation.html ( accessed July 30, 2013)

[17]  “International Union of Aerospace Insurers (IUAI)”. December 2010.

[18] http://www.ghazalins.com/marine_aviation.html ( accessed August 10, 2013)

[19]  “History of Global Aerospace”. December 2010.

[20]  “Airline Insurance Market Indicators 2010/11 report by Aon Risk Solutions”. 23 September 2010.

[21] http://www.eaa.org/insurance/ (accessed October 7, 2013)

[22] ibid

[23]  Cunningham, Herb: Understanding Aviation Insurance, The COPA Guide to Buying an Aircraft, 34th Edition, pages 74-77. Canadian Owners and Pilots Association, May 2009.

[24] http://www.planeinsurance.com/Insurance/AircraftInsurance.aspx( accessed October 1, 2013)

[25] http://www.qbeeurope.com/aviation/glossary.asp (accessed August 16, 2013)

[26] http://en.ceair.com/guide2/lxxzwtjd/t201349_10321.html (accessed August 16,2013)

[27] Ibid

[28] http://www.qbe.com.au/Business/Aviation/Insurance.html( accessed on August 10, 2013)

[29] http://eaa.org/insurance/articles/2006-08-17_insurance.asp (accessed on August 10, 2013)

[30] http://www.iata.org/training/courses/Pages/aviation-insurance-law-tall07.aspx( accessed October 9, 2013)

[31] ibid

[32] ibid

[33] http://newindia.co.in/Content.aspx?pageid=6( accessed October 9,2013)

[34] http://newindia.co.in/Content.aspx?pageid=6( accessed October 9,2013)

[35] ibid

[36] Ibid

[37] ibid

[38]   http://eaa.org/insurance/articles/2006-08-17_insurance.asp (accessed on August 10, 2013)

[39] http://www.agcs.allianz.com/services/aviation/ (accessed October 1, 2013)

[40] http://insurance.aopa.org/aviation (accessed October 4,2013)

[41] http://www.aig.com/Corporate-Aircraft_3171_417668.html( accessed October 3,2013)

[42] ibid

[43] ibid

[44] ibid

[45] http://www.planeinsurance.com/Insurance/AircraftInsurance.aspx (accessed On October 6,2013)

[46] http://www.bimabazaar.com/learn-insurance-concepts/67-insurance-concepts-general-insurance/1691-various-policies-issued-in-aviation-insurance-in-india (accessed October 6, 2013)

[47] ibid

[48] ibid

[49] http://marsh.co.in/sector/aviationAndAerospace/index.php (accessed August 10, 2013)

[50] Ibid

[51] ibid

[52] http://www.lloyds.com/the-market/tools-and-resources/tools-e-services/risk-locator/risk-locator-class-of-business/aviation ( accessed August 11, 2013)

[53] ibid

[54] ibid

[55]https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&ved=0CEkQFjAC&url=http%3A%2F%2Fwww.researchandmarkets.com%2Freports%2F2190150%2Fmarine_aviation_and_transit_insurance_in_india.pdf&ei=K_hWUq2uHsf9kAXQroCQAw&usg=AFQjCNGdV2g5IwAEh5yxWaOqMM3t46wDaA (accessed October 7,2013)

[56] ibid

[57] ibid

[58] ibid

[59]https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CDUQFjAA&url=http%3A%2F%2Fpgdalatm.nalsar.ac.in%2Fprojects%2FAviation%2520Insurance%2520(1).docx&ei=K_hWUq2uHsf9kAXQroCQAw&usg=AFQjCNEzHv1TMe7OLGzTnHHyHnQY-6H0Qg (accessed August 28, 2013)

[60] http://www.qbe.com.au/Business/Aviation/Insurance.html (accessed August 10, 2013)

[61] ibid

[62] ibid

[63] http://www.jus.uio.no/lm/air.carriage.warsaw.convention.hague.protocol.1955/doc.html (accessed October 6, 2013)

[64] http://definitions.uslegal.com/m/montreal-agreement/ (accessed October 10, 2013)

[65] http://www.cargolaw.com/presentations_montreal_cli.html (accessed October 10, 2013)

[66] http://www.jus.uio.no/lm/air.carriage.warsaw.convention.guatemala.city.protocol.1971/doc.html (accessed August 13, 2013)

[67] http://www.jus.uio.no/lm/air.carriage.warsaw.convention.guatemala.city.protocol.1971/doc.html (accessed August 13, 20130

[68] http://www.jus.uio.no/lm/air.carriage.warsaw.convention.montreal.protocol.1.1975/doc.html (accessed July 23, 2013)

[69] ibid

[70] http://dgca.nic.in/int_conv/Chap_XII.pdf (accessed August 1, 2013)

[71] http://lockerbiecase.blogspot.in/ ( accessed October 7, 2013)

[72] ibid

[73] ibid

[74] ibid

[75] ibid

[76] http://www.telegraph.co.uk/news/worldnews/africaandindianocean/libya/9903976/Lockerbie-case-is-still-open-Britain-says.html (accessed August 30, 2013)

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