Aviation

Insurance

History
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
It is believed that the first aviation polices were underwritten by the marine insurance
underwriting community.
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.
By 1933 realising that there should be a specialist industry sector the International Union
of Marine Insurance (IUMI) set up an aviation committee, and by 1934 eight European
aviation insurance companies and pools were formally established and the International
Union of Aviation Insurers (IUAI) was born.
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. 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.
The Risks
Hull "All Risks"
The hull "All Risks" policy will usually refer to something like "all risks of physical loss
or damage to the aircraft from any cause except as hereinafter excluded".
Airline hull "All Risks" policies are subject to a standard level of deductible (that is an
uninsured amount borne by the Insured) applicable in the event of partial (non-total) loss.
Currently, this deductible can range from $50,000 in respect of a Twin Otter to
$1,000,000 in respect of a wide-bodied jet aircraft, such as a Boeing 747.
Deductibles too can be reduced by means of a separate "Deductible Insurance" policy.
The Deductible Insurance Policy is effected to reduce the large "All Risks" policy
deductibles to a more manageable level. For example the US$1,000,000 applicable to a
Boeing 747 can be reduced to say US$100,000.
The term "all risks" can be misleading. "All risks of physical loss or damage" does not
include loss of use, delay, or consequential loss. "Grounding" is a good example of
consequential loss. Some years ago when there had been a couple of accidents involving
DC10 Aircraft, the Civil Aviation Authorities throughout the world imposed a
"grounding order" on that type of aircraft.
That order in effect said that until certain checks had been made to establish the safety of
those aircraft, they could not be flown. The aircraft operators were unable to fly them and
as a consequence they lost money - consequential loss. Such an eventuality would not be
covered by an "all risks" policy because in such circumstances there is no "physical" loss
or damage to the aircraft.
What the policy will cover is the reinstatement of the aircraft to its "pre-loss" condition, if
repairable damage is involved, or some other form of settlement in the event that more
substantial damage is sustained. Exactly what form of settlement will depend on the
policy conditions.
Today, the vast majority of airline hull "all risks" policies are arranged on an "Agreed
Value Basis". This provides that the Insurers agree with the Insured, for the policy period,
the value of the aircraft and as such, in the event of total loss, this Agreed Value is
payable in full. Under an Agreed Value policy the replacement option is deleted.

Exclusions
Wear, tear and gradual deterioration - in common with most non-marine policies
these perils are thought to be a trading expense and not a peril to be insured.
Ingestion damage - caused by stones, grit, dust, sand, ice, etc., which result in
progressive engine deterioration is also regarded as "wear and tear and gradual
 deterioration", and as such is excluded. Ingestion damage caused by a single
recorded incident (such as ingestion of a flock of birds) where the engine or
engines concerned have to shut down is not regarded as wear and tear and is
covered subject to the applicable policy deductible.
Mechanical Breakdown - likewise is thought by aviation insurers to be an operating
expense, but subsequent damage outside the unit concerned is usually covered.
However, it is possible to obtain insurance coverage against mechanical
breakdown of engines by way of a separate policy. This coverage has a high
degree of exposure and as a result is relatively expensive. The majority of airlines
do not purchase it probably viewing such exposure as a part of the "engineering"
budget.

Spares
First of all we must identify what we mean by a "spare" or perhaps - "when is a spare not
a spare" to which a simple answer is "when it is attached". Under most "Hull" policies the
word "Aircraft" means Hulls, machinery, instruments and the entire equipment of the
aircraft (including parts removed but not replaced). Once a part is replaced it is no longer,
from an insurance viewpoint, part of the aircraft. Conversely once a spare part is attached
to an aircraft as a part of that aircraft (not in the hold as cargo or on the wing as an extra
pod) it is no longer a "spare".
If the equipment is insured on the hull "All Risks" policy the automatic transfer of
coverage from "aircraft" to "spare" and vice versa is automatically accomplished.
Having established when a spare is a spare how is it insured as such? Usually in one of
two ways. Either under a "spares" section of a hull policy or by a separate Spares Policy.
In either case the scope of coverage will probably be similar. All Risks whilst on the
Ground and in Transit for a limit of [so much] any one item or sending or any one
location. War Risks can also be covered (in respect of transits), Strikes, Riots, Civil
Commotions can be covered in accordance with standard market clauses. Spares
coverage is usually subject to a small deductible except, however, in respect of ground
running of spare engines when the appropriate Ingestion deductible will be applied.
Spares are normally covered on an agreed value basis - usually their replacement cost (be
it new or reconditioned - as is required).
Spares installed on any aircraft are not covered by the Spares Insurance. They become,
from an insurance standpoint, a part of the aircraft upon which they are installed and a
part of the Agreed Value for which it is insured. This becomes particularly important if
the parts are loaned to another airline.

Hull War Risks

The hull "All Risks" policy will contain the exclusion of "War and Allied Perils".
Generally speaking, throughout the aviation insurance world, "War and Allied Perils"
have a defined meaning. In the London Aviation Insurance Market the standard exclusion
is called the War, Hi-jacking and Other Perils Exclusion Clause (currently known by its
reference - AVN48B for short) this lists and defines these so-called war and allied perils.
War Definition
War - this includes civil war and war where there is no formal declaration.
The detonation of a weapon of war employing nuclear fission or fusion.
Strikes, riots, civil commotions and labour disturbances.
Political or terrorist acts.
Malicious or sabotage acts.
Confiscation, nationalization, requisition and the like by any government.
Hi-jacking or any unlawful seizure or exercise of control of the aircraft or
crew in flight.
The exclusion also applies to any loss or damage occurring whilst the aircraft is outside
the control of the operator by reason of any of these "war" perils.
The majority of the excluded "War and Allied Perils", other than the detonation of a
nuclear weapon and a war between the Great Powers (the aviation insurance world
identifies these as the U.S.A., the Russian Federation, China, France and the UK), can
normally be covered by way of a separate "War and Allied Perils" policy. Aircraft
deductibles are not normally applied in respect of losses arising out of "War and Allied
Perils".
Other exclusions insurers will usually apply are, as follows:-
Confiscation etc. by the "state" of registration (this exclusion can often be deleted in
respect of financial interests - albeit, in some instances at an additional premium
charge)
Any debt, failure to provide bond or security or any other financial cause under court
order or otherwise;
The repossession or attempted repossession of the Aircraft either by any title holder
or arising out of any contractual agreement to which any Insured protected under
the policy may be party;
Delay and loss of use. (Although there is often an extension to the policy for a limited
amount for extra expenses necessarily incurred following confiscation or
hijacking).
The aircraft hull "War and Allied Perils" policy will cover the aircraft on an "Agreed
Value" basis against physical loss or damage to the aircraft occasioned by any of these
perils. This statement is made carefully and deliberately in order to highlight the essential
difference from a "Political Risks" Insurance.
Liability Insurance
Liability can be divided basically into two categories:
Liability in respect of Passengers, Baggage, Cargo and Mail carried on the aircraft.
These liabilities result from the operations the airline is set up to perform and are
normally the subject of a contract of carriage like a ticket or airway bill, which
provides some possibility of limiting the airline's liability.
Aircraft Third Party Liability - the liability for damage done to property or people
outside the aircraft itself.
Every airline will arrange liability insurance for these two categories, normally in a single
liability policy. In many countries there are requirements laid down imposing minimum
limits of liability that are a prerequisite to obtaining an operator's licence. Elsewhere
limits are specified for an aircraft to be allowed to land. The size of limit required is often
related to the size of the aircraft concerned (and its potential for causing damage). A
small aircraft operating only in remote regions and using small airstrips incurs
considerably less potential exposure than an aircraft flying into and out of major airports.

General Liabilities
The other category of liability covers premises, hangarkeepers and products liability and
is called "Airline General Third Party" - being the liability for damage done to property
or people arising from other than the use of aircraft. Many airlines cover their "Airline
General Third Party Liability" within their main liability program.
It is called "Airline General Third Party Liability" these days since the insurers took steps
specifically to exclude all non aviation activities (for example hotel ownership or
management) from "Aviation" Policies a few years ago. Basically for a risk to be
considered as "Airline General Third Party Liability" it must arise from what are
described as "aviation occurrences" being those involving aircraft or parts relating
thereto, or arising at airport locations or arising at other locations in connection with the
airline's business or transporting passengers/cargo or arising out of the sale of goods or
services to others involved in the air transport industry.
This means that there is a definitive language detailing what is considered as "aviation
exposure" such that any other (non-aviation) exposure is excluded.
Most policies are placed on a Combined Single Limit Basis. This means Bodily Injury
and Property Damage combined. In the past, personal injury was included but now this
has been separated. It should be mentioned, however, that these days the term "bodily
injury", in addition to bodily injury, sickness and death resulting at any time, will include
shock and mental anguish. "Personal Injury" on the other hand is defined as "offences
against the person", such as false arrest, malicious prosecution, invasion, libel or slander
and the like.
In respect of Personal Injury the full policy limit, whatever that may be, is not available
and is usually limited to US$25,000,000 any one offence and in the annual aggregate.
What is excluded from a liability insurance are such things as:-
Damage to the Insured's own property. (It is after all a third party liability policy).
War and Allied Risks although these are "written back" by a device called "The
Extended Coverage Endorsement - AVN 52".
Radioactive Contamination.
Noise and Pollution - unless caused by or resulting in a crash, fire, explosion or
recorded "in flight" emergency
Both the Aircraft and General Liability policies usually includes the "war and allied
perils" exposure by way of a "write back" and will probably provide for such things as
search and rescue expenses, first aid and other humanitarian expenses and also defence
costs.

Hull Total Loss Only Cover

This is similar to Hull All Risks cover given above but will respond only to total losses of
aircraft, whether actual, constructive or arranged. This is particularly given for old
aircraft since the old aircraft are heavily depreciated and insured for low sums and
premium on such low sums would result in low premium, which would be inadequate for
the partial losses. The ratio of partial losses to total losses in such old aircraft is distorted.

What Everyone Should Know

About Aviation Insurance

There are unique characteristics of aviation

insurance. Aircraft liability limits are placed on
an occurrence basis and very large liability
limits are readily available. There isn't an
aggregate limit applied with the exception of
product liability and personal injury liability.
Hull coverage is placed on an "Agreed Value"
basis. The amount stated as the agreed value at
the time of policy issuance is the amount paid in
the event of a total loss. The loss payment is not
reduced by depreciation.
Aviation policies are extremely broad. They can
cover war perils and there aren't any exclusions
for flood or earthquake. The policies are
considered "All Risk" and it truly provides
coverage on an all risk basis.
There are four major sectors of aviation
insurance; airline, aircraft product liability,
general aviation and space. In the universe of
aviation insurance, the airline industry makes up
approximately $1.3 billion of the total premium
dollars spent. Aircraft product liability makes
up approximately $925 million, general aviation
makes up approximately $1.3 billion and the
space sector makes up approximately $800
million.
In today's aviation market, there are about
twelve major players. They are:
• Global Aerospace
• United States Aviation
Underwriters
• Chartis Aerospace (formerly AIG
Aviation)
• Allianz Aviation
• Starr Aviation
• XL Aerospace
• Berkley Aviation
• Phoenix Aviation
• W. Brown & Associates
• International Aerospace
Insurance Services
• Houston Casualty Company
• Lloyds of London and other
 European Underwriters
Of these, there are only five that are able to
provide liability limits in excess of $300
million. They are:
• Global Aerospace
• United States Aviation
Underwriters
• Chartis Aerospace (formerly AIG
Aviation)
• Allianz Aviation
• Starr Aviation
An explosion of growth in aviation insurance
underwriters brought new entrants to the market
over the last four years. International Aerospace
Insurance Services, Berkley Aviation, Allianz
Aviation (US), Starr Aviation and an expansion
of Lloyds are some of the newer players.
What drove this growth? Various factors drove
the growth in aviation insurance. Massive
increases in capital to insurance markets and
huge increases in rates and premiums following
the World Trade Center attacks of September
11, 2001 and historic safe run by the airline
industry (most notably the U.S. airline industry)
were major factors. In addition, competitive
reinsurance became more available and major
insurers began to see that aviation risks had
significant growth opportunity.
Although the events of September 11, 2001,
brought great market growth and opportunity, it
also impacted the aviation insurance market in
many other ways. It is estimated that losses to
the insurance industry including business
interruption will be $40 billion. About $400
million in hull losses for the four airline aircraft
was paid out. These unprecedented losses
caused insurers to seek ways to ensure their
survival.
Underwriters invoked war risk cancellation
provisions, massive rate and premium increases
followed, hull war rates increased by 1000% or
more, third party war risk liability limited to
$50 million annual aggregate and insurer
capacity became very tight. Even the
government stepped in with the Air
Transportation Safety System Stabilization Act
and Terrorism Risk Insurance Act of 2002, and
the FAA began providing war risk insurance for
the U.S. airline industry at a fraction of the cost
of the commercial marketplace.
Many experts agree that many claims from
September 11, 2001, are still getting underway
and that there is a massive aviation insurer
exposure, which is reserved for but still hanging
over the heads of the entire market, including
reinsurers.
Today's aviation insurance market has become
highly competitive, thanks to the growth in
insurers. Extremely broad coverage is being
offered at historically low premiums. As a
buyer of aviation insurance, you need to:
• Invest in quality training and
maintenance. Manufacturers
recommended ground and flight
school for pilots and copilots, as
well as, school for mechanic
personnel on an annual basis.
• Invest in SMS (Safety
Management System). Described
as a safety program on steroids, it
will soon be mandated in the U.S.
 It is already mandated in Europe,
Canada, and Australia.
Underwriters see this as the gold
standard.
• Invest in technology that
contributes to safety.
• Invest in full-time, dedicated
pilots who are employees of the
firm. Full-time employees
enjoying such "employee" benefits
are considered most desirable to
underwriters.
• Subscribe to outside auditing
services, such as Wyvern or
ARG/US.
• Create a safety culture with
regular management meetings
and designate managerial safety
positions.
• Meet with underwriters
periodically incumbent and
competitive.
• Take advantage of safety and loss
control services provided by
leading underwriters.
• Most importantly pick an
insurance broker who knows how
to disseminate all of this to the
aviation insurance underwriting
community.
There are a lot more choices today for the buyer
of aviation insurance. Underwriting longevity
does matter. Think about how litigation has to
be managed for the long run and how
complicated this can be. Be proactive in
operating your business to benefit your aviation
insurance investment and build solid
relationships with your broker.