War Risk Insurance: The High Cost of Insuring Against the Unimaginable

In this article (Paragraph No. 35,011), the author examines the recent developments in the aviation war risk insurance market and some of the ideas now being developed for the establishment of new mechanisms for insuring against various forms of aviation war risk. According to the author, developments in the international aviation insurance market by late September 2001 had threatened to bring commercial aviation to a virtual standstill. Facing the specter of potentially massive losses, the world's leading aviation insurers took action to limit their potential exposure in the event of future terrorist attacks. They advised carriers that their existing war risk and allied perils liability coverage was being canceled and that future "war risk" liability coverage for third parties (other than passengers) would be limited to $50 million, as compared with the $750 million (or more) of coverage that fairly routinely was available prior to September 11. This presented the carriers with a most unpalatable dilemma: continue operating with limited insurance cover and risk almost certain bankruptcy in the event of a future terrorist attack, or ground their fleets and face near certain financial ruin. The members of the aircraft leasing and financing community faced an equally grim quandary: they could order the airlines to ground their fleets of leased/financed aircraft, or they could allow the airlines to continue to fly without adequate third party insurance protection against a possible future terrorist attack involving one of their aircraft. In the days that followed, prompt action by various governments around the world helped to avert the looming crisis in commercial aviation. In the U.S., Congress enacted legislation that provided a mechanism for the Secretary of Transportation to effectively limit the third party liability of a U.S. carrier that was found to have been the victim of a terrorist act, and to reimburse U.S. carriers for certain increases in the cost of commercial war risk insurance. At the same time, the legislation expanded the Federal Aviation Administration's war risk insurance program. A number of foreign governments adopted similar measures. Many of these initiatives were only temporary in nature, which raises important questions concerning the ability of the world's airlines to obtain adequate third party liability war risk coverage in the future. A number of carriers also received notice of substantial increases in the premiums for their "hull" war risk insurance and substantial reductions in the fleet aggregate limits of their policies. These changes come at a time when the airlines still are struggling to cope with the economic fallout of the September 11 terrorist attacks. Although there has been some indication in recent months that conditions in the international aviation insurance market have begun to stabilize, the author notes a lingering concern that the September 11 terrorist attacks may have given rise to fundamental changes in the international aviation insurance market. These changes are likely to have long lasting and far reaching consequences for the world's airlines and the aircraft leasing and financing industries. The author concludes his article with a review of the efforts underway to devise a lasting solution, citing a number of war risk insurance initiatives under consideration worldwide.

• Corporate Authors:

  International Aviation Law Institute

  DePaul University College of Law, 25 E Jackson Boulevard
  Chicago, IL  United States  60604
• Authors:
  • Callaway Jr, William H
• Publication Date: 2004

Language

• English

Media Info

• Media Type: Print
• Edition: Transfer Binder 1: 2001 to 2004
• Pagination: pp 22011-22027
• Monograph Title: Issues in Aviation Law and Policy

Subject/Index Terms

• TRT Terms: Aviation; Economic impacts; Hull insurance; Insurance industry; Insurance rates; Terrorism
• Identifier Terms: Terrorist attacks of September 11, 2001
• Uncontrolled Terms: War risk insurance
• Subject Areas: Aviation; Law;

Filing Info

• Accession Number: 01150738
• Record Type: Publication
• Files: TRIS
• Created Date: Feb 19 2010 10:59AM