Aviation Insurance: Acts Of Terrorism

Article by Nicholas Hughes and Fernando Albino

On 26 November 2002, President George W Bush signed into law this Act, often referred to as TRIA, which immediately became effective. It is an Act administrated and implemented by the US Treasury who meantime have issued guidance on aspects of its implementation no doubt in the face of a barrage of enquiries.

The Act is said to establish a temporary federal programme of shared public and private compensation for insured commercial property and casualty losses resulting from an act of terrorism. It is ‘temporary’ in the sense that it is intended to cease on 31 December 2005. It is ‘shared’ in the sense that, provided applicable insurers comply with the notification requirements in the Act, losses intended to be covered by the programme, after application of a deductible, are (it would seem) co-insured with the commercial insurer bearing 10% and the US Treasury 90% of the loss concerned. The Act is of general application and applies to aviation insurance contracts underwritten by certain insurers but not to reinsurance contracts.

In very practical terms the Act makes it mandatory for those insurers covering US risks to make available coverage for an act of terrorism (as defined in the Act) by nullifying any existing or proposed terrorism exclusion clauses (only) with respect to the risks covered by a policy issued to any insured(s).

Initially any insured need not take any action unless and until its insurer (as he must do if he is to benefit from the coinsurance by US Treasury) sends him a notice drawing attention to the Act and offering, for a stipulated premium, to nullify the terrorism exclusion clause under the Act. The insured then has to decide whether or not it is to his advantage that the risk of loss by an act of terrorism is covered in this way or as to whether there are alternative schemes to his advantage. For US aviation risks there are other applicable schemes that may be found to be to the advantage of US insureds, particularly US airlines.

If the insured accepts the Insurer’s terms under the Act then insofar as an act of terrorism gives rise to a loss in excess of US$5m (it is not quite clear whether this is for each insured or any one event) the insurer will be on risk for that part of an insured’s loss in terms of deductible he must bear (based on premium earned) and then as to 10% with the Federal Programme co-insuring for 90% of the insured’s loss, presumably subject to the limits applicable in the policy. There is also a scheme limit of US$100bn to the Federal Programme at which sorry state the US Administration will undoubtedly have some rethinking to do.

The ‘act of terrorism’, to which the Act applies, is an act declared as such, after the event, by the Treasury Secretary in concurrence with the Secretary of State and of the Attorney General of the United States. Generally, the Act must occur within the United States or on board an aircraft registered in the United States and administrative guidance recently issued suggests that if the cause of the loss originated within the United States then the liability of an air carrier, outside of the United States would also be covered within the Federal Programme. It is necessary that the act must have been perpetrated by someone acting on behalf of a foreign person or interest ‘as part of an effort to coerce the foreign population’ or ‘to influence the policy or affect a conduct of the United States Government by coercion’ for it to be declared as an act of terrorism.

With some similarities to the foregoing, a Bill was introduced in the Australian House of Representatives in December 2002 providing for a scheme whereby any exclusion or limitation of liability for ‘eligible terrorism losses’ in an ‘eligible insurance contract’ will be nullified and for the establishment of the Australian Reinsurance Pool Corporation to provide insurance cover for eligible terrorism losses, in a way that remains to be debated. On the proposals, an eligible insurance contract is one providing insurance cover for loss or damage to tangible property (including related business interruption and public liability) located in Australia. This will require clarification in its application to moveable property such as aircraft. An ‘eligible terrorism loss’ is a terrorist act (and in certain cases the threat thereof) as declared by the Federal Government upon the responsible Minister being satisfied that the act is such and not an act of war, happening in Australia on or after 30 June 2003.

There have been schemes in Europe arising out of the withdrawals of certain insurance coverage in existence for some time e.g. in the UK Pool Re was created pursuant to The Reinsurance (Acts of Terrorism) Act 1993 which followed the general exclusion of cover for terrorism affecting commercial property some ten years ago. Maybe because the main terrorist threat at the time was directed at commercial property or perhaps because, traditionally, the aviation insurance market had always provided optional war and terrorism cover, the fact is that Pool Re did not affect aviation insurance contracts.

Since we last reported, the European Schemes of Government guarantees in lieu of commercial aviation war cover, excess of the cover available under AVN52 D, E, F or G (which includes the risk of loss by terrorism), have all but been withdrawn. The European Commission announced on 21 September 2002 that henceforth their scrutiny of these schemes, under State Aid rules, would be conducted by reference to general EC treaty provisions instead of the ‘exceptional circumstances’ provisions that followed the events in the United States of September 2001. As at 31 December 2002 no general State guarantees were in force in the European Union. There may be isolated examples dealing with risks that are still considered not commercially insurable at all. The Commission may technically still be examining, under applicable State Aid criteria, applications made by certain member states for the (temporary) extension of their schemes for some period after 21 September 2002. Accordingly these risks have passed back to the commercial market under the terms of excess liability policies.

Various jurisdictions around the world are still running Government Guarantee Schemes where they consider it appropriate so to do.