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.

The first aviation polices were underwritten by the marine insurance underwriting community. The first specialist aviation insurers emerged in 1924.

HISTORY

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.

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 .

WARSAW CONVENTION In 1929 the Warsaw convention was signed. The Warsaw System, which is in force in India by

way of Carriage by Air Act, 1972 The convention was an agreement to establish

terms, conditions and limitations of liability of carrier for carriage by air, this was the first recognition of the airline industry as we know it today.

In 1931, Captain 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."

MONTREAL CONVENTION

The Indian Government ratified “Montreal Convention 1999” in March 2009.

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.

MONTREAL CONVENTION

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 to baggage compensation is Rs.4,000 per passenger for hand baggage and Rs.450 per kg for registered baggage .

MONTREAL CONVENTION

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, place of issue of ticket principle place of business of the carrier the place of destination of the passenger 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.

The crash of a Concorde, Air France Flight 4590, at Charles de Gaulle International Airport near Paris on 25 July 2000 was caused by FOD

US Airways Flight 1549 was written off after ditching into the Hudson River

Flameout of all engines due to blockage by volcanic ash Site Mount Galunggung, West Java, Indonesia of BOEING747 Damage

caused to MIG by crane

TYPES

HULL AVIATION INSURANCE Ground risk hull insurance not in motion Ground risk hull insurance in

motion(taxiing) In –flight insurance LIABILITY AVIATION COVERAGE

Public liability policyPassenger liability policyCombined Single Limit(CSL)

GROUND RISK HULL INSURANCE NOT- IN MOTION(NIM)

The entire aircraft, including all permanently attached modifications, is considered the hull. As an example, if a helicopter has a permanently attached camera pod, the pod can be insured as a part of the hull.

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.

Most hull insurance includes a deductible to discourage small or nuisance claims.

GROUND RISK HULL INSURANCE IN MOTION (TAXIING) In-motion means if the aircraft’s engines are turning

and the aircraft is capable of moving under its own power.

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 .

IN-FLIGHT INSURANCE

In-flight is from the time that the aircraft begins its take-off roll to when it has completed its landing roll.

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.

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(PD), such as houses, cars, crops, airport facilities and other aircraft struck in a collision and Bodily injury(BD).

It does not provide coverage for damage to the insured aircraft itself or coverage for passengers injured on the insured aircraft.

The liability limits are defined on the coverage summary page (the declarations page) of the aircraft policy.

The liability limits state the amount of liability coverage that is provided for bodily injury(BI) and for property damage (PD)

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.

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.

COMBINED SINGLE LIMIT (CSL)

CSL coverage combines public liability and passenger liability coverage into a single coverage with a single overall limit per accident.

An example would be $1million CSL including passengers.

If the passenger liability is written at a lower or restricted limit, you may see $1 million CSL excluding passengers, passenger BI $100,000 per passenger seat.

Some less desirable policies may offer $1 million CSL (BI and PD) restricted to $100,000 per person.

Note the huge difference between a per passenger seat restriction and a per person restriction. The per person restriction could be a passenger or person outside the aircraft.

VALUATION “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.  There is no such thing as "replacement value" coverage in an aircraft policy. For that reason, when you negotiate the terms of your policy (or your renewal) you should insist on a hull value limit that will allow you to replace the aircraft in TODAY'S market”

VALUATION

This differs from the automobile world, where an automobile is usually written on an actual cash value(ACV) policy form.

Following a physical damage claim to an automobile, the claims adjuster and the owner of the automobile debate and often disagree on the value of the damaged auto. The agreed value aircraft policy plainly states the value that will be used in settling the claim; no one is confused and there is no room for disagreement. The stated amount is the value and that is that.

GEOGRAPHICAL LIMITS

Territorial limitations are defined in every policy. This states where your aircraft will be covered geographically. Some policies as a matter of form will limit the territory of operation to the 48 contiguous states, along with Canada and Mexico. Some state the Western Hemisphere and some are so broad they include “anywhere in the world.”

The point here is that you know what your policy says and operate within that geographical boundary. If you have a loss outside your designated territory of operation, your coverage may be void.

OPW

Often referred to as an approved pilot, your policy will either refer to someone whom the underwriter authorizes to fly the insured aircraft by name or named pilot or by open pilot warranty (OPW).

If it is a named pilot, the underwriter will specify by name a pilot who is approved to fly the aircraft. If it is by “open pilot warranty,” the underwriter issues a set of standards or requirements for a pilot. Anyone meeting the open pilot warranty is approved to fly an insured aircraft.

EXAMPLE A Cessna 421 while landing had an apparent problem

with the brakes and the aircraft subsequently struck a taxiway sign causing $35,000 worth of damage to the 421. As part of the adjustor’s routine investigation, the pilot was asked to document the incident with a statement , aircraft logbooks and pilot credentials. The conditions included successful completion of approved Cessna 421 training within the preceding 12months. When the pilot could not produce evidence of the training (he stated he forgot it was required), the insurance company prepared to deny the claim. The moral of the story: one of the most common grounds for coverage denials is a pilot not meeting the policy requirements!

PURPOSE OF USE

Purpose of use is a very important term in that it defines what your aircraft can be used for.

On very broad corporate aircraft policies, it is not unusual to see the purpose of use defined as “any use of the named insured.”

Obviously, the underwriter has engineered the risk and is comfortable the use will be within acceptable parameters.

PURPOSE OF USEAviation risks have been classified into five main classes according to

the use of the aircraft. These classes are:

Private Pleasure All planes used for private pleasure and personal business

purposes exclusively.

Industrial Aid(corporate jets) Planes used for transportation of executives and employees and

for sales promotion purposes and owned by a business organization(Corporate jets) not otherwise connected with the aviation business.

Commercial--Flying Services Planes operated for hire in connection with passenger and cargo

carrying, charter flights, photography, sales demonstration, either including or excluding student instruction.

Aircraft and/or Aircraft Engine Manufacturing

Scheduled Air Lines Planes carrying passengers, mail and cargo on a regular

schedule.

DEDUCTIBLES

Deductibles are usually specified on the declarations pages of the policy.

The deductible is that amount of money that the insured contributes toward a loss before the insurance company will pay the balance of the claim.ie loss retained by the insured.

In -flight deductibles Not –in motion deductibles In-motion deductibles Some underwriters require no deductible at

all. These are referred to as “nil” deductibles

COVERAGES

Perils of the Air or Crash--Damage to the aircraft during flight due to collision with the ground, water or other object, including damage by fire or explosion caused by such collision and including damage due to stranding or sinking or water damage arising from flight. An aircraft unreported for 60 days after take-off

is deemed to have been lost by reason of one of the above flying perils.

COVERAGES

Windstorm.--Damage to the aircraft by Tornado, Cyclone or Windstorm except while the aircraft is in flight or taxiing subsequent thereto.

Land Damage--Damage to the aircraft while on land, but not in flight or taxiing, caused by fire, theft, vandalism(wilful destruction by people), flood, mudslides, animal damage, wind or hailstorms, hangar collapse or by being struck by or colliding with another aircraft, vehicle or object (excluding any aircraft, vehicle or object owned or operated by the Assured or his employees).

Bird Aircraft strike hazard

COVERAGES

Theft, Robbery and Pilferage--Theft, robbery and pilferage , except by any person in Assured's household or employee.

Fire damage

COVERAGES

Foreign Object Damage (FOD) is damage caused by Foreign Object Debris (also abbreviated FOD), i.e. a substance, debris or article alien to a vehicle or system that has potential to cause damage. FOD losses cost more than $ 4 billion a year to the

aerospace industry. All aircraft occasionally lose small metal or carbon parts

during takeoff and landing. These parts remain on the runway and can cause damage to tires of other aircraft, hit the windshield, or get sucked up into an engine. Although airport ground crews regularly clean up runways, the crash of Air France Flight 4590 demonstrated that accidents can still occur: in that case, the crash was said to have been caused by debris left by a flight that had departed only four minutes earlier.

EXCLUSIONS

Pilots and Use – There is no coverage unless the aircraft is being operated by approved pilots and is being used as allowed by the policy. include illegal use of an aircraft; using an aircraft for purposes other than that

described in the policy; piloting the aircraft by someone not named in the

policy; operating an aircraft outside stipulated geographical

boundaries

There is no liability coverage for injury to YOU, the Named Insured. Liability coverage protects you against claims from other people in the event that you injure them or damage their property.

EXCLUSIONS

There is no coverage for bodily injury to your employees. If your employees are injured while they are working in their capacity as your employee, Worker’s Compensation Insurance may be the sole remedy for their injury.

There is no coverage for intentional losses. If you decide to destroy your airplane on purpose – no coverage.

There is no coverage for damage caused by aircraft due to noise or pollution generated by the airplane.

EXCLUSIONS War Exclusions War exclusions have been brought to the forefront of

our thinking since the terrorist attacks of September 11, 2001 involving civil aircraft, but war risks have been excluded from insurance policies since the 1960’s

War, martial law, or coup. Hostile detonation of atomic or nuclear weapons. Strikes or riots. Terrorist acts Sabotage. Confiscation or seizure by any government Hi-Jacking Note: War exclusions can be “written back” on most

policies for additional premium .

EXCLUSIONS

Losses caused by mechanical or electrical breakdown or failure, deterioration or freezing are excluded. Also excluded – losses to any part that is designed to wear out (tires, brakes, fading of paint) and losses due to mechanical breakdown of the engine or any of its components.

This exclusion does not apply to “downstream damage” from these failures or breakdowns. The following are a few examples to help illustrate this point

EXAMPLES

Situation # 1 Let’s assume that you are in cruise flight in your Piper Cherokee. Due to some latent defect, the engine loses oil pressure, begins to overheat and then seizes and stops operating. You are within gliding distance of the nearest airport and you make an emergency landing without further damage to the aircraft. In this situation, there is nothing for the insurance company to pay. The only damage is due to a mechanical failure of the engine - and that damage is excluded by the wear and tear exclusion .

EXAMPLES

Situation # 2 Let’s change the circumstances a little. Your Piper Cherokee begins to lose oil pressure, then parts within the engine suddenly break and fly free of the engine compartment. Metal engine parts tear holes in the cowling and impact the leading edge of the wing. You make an emergency landing at a nearby airport. Now you have a covered loss. The mechanical breakdown and damage to the engine is still not covered, but the “downstream damage” to the cowling and the wing is covered.

EXAMPLES

Situation # 3 Rather than a safe landing at an airport, let’s assume that you crash-land the Cherokee off airport after the engine fails. The landing results in significant damage to the airplane and perhaps someone is hurt. Again, the wear and tear exclusion precludes payment for the mechanical breakdown of the engine itself. But, the damage to the aircraft incurred after the engine failure or any injuries that result from the accident are covered.

In all of these situations, the actual damage to the wear and tear item (engine) is not covered. The company will not pay to restore your engine to working order when the aircraft is repaired .

EXCLUSIONS

Radiation – If the aircraft is contaminated by radiation for any reason, there is no coverage.

Y2K Date Changes – Introduced in the late 1990’s, this exclusion appeared by endorsement to exclude coverage for losses arising from the failure of any aircraft system to recognize the rollover of the date to 2000. Although probably not much of a risk as of this writing, the exclusion still appears on most policies.

Embezzlement– This is similar to theft, which is covered, but differs in that it involves the taking or misuse of the aircraft by an authorized user of the airplane.

CURRENT SCENARIO All of the companies (United States Aviation

Insurance GroupUSAIG, Global-Aerospace, AIG Aviation, W.Brown and Assoc., Phoenix Aviation Managers and USSIC)are the biggest Insurers on aviation growth path.

Indian Insurers have come a long way in developing the market capacity for aviation insurance business

Insurers have kept pace with the growing demand from buyers in India.

Newer risks 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 .

Market Potential For 2008, Aviations direct premium income in India is circa INR 3,750 million

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

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.

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.

Fig: FOD

FOD

Aircraft parts, rocks, broken pavement, ramp equipment, and vehicle parts

Parts from ground vehicles Garbage, maintenance tools, etc. mistakenly

or purposely deposited on tarmac and/or runway surfaces.

Hail: can break windshields and damage or stop engines.

Ice on the wings, propellers, or engine intakes Dust or ash clogging the air intakes (as in

sandstorms in desert operating conditions or ash clouds in volcanic eruptions).

INSURING AIRCRAFT – UNDERWRITING CONSIDERATIONS

Is the aircraft safe to operate? Fortunately, FAA requirements and pilots’ self-preservation instincts mean that the answer to this question is usually “yes.” But, unseen deterioration and unknown maintenance issues become more likely as an airplane ages.

In the event of damage, can the aircraft be repaired within a reasonable timeframe and at a reasonable cost?

Is pilot training available? Does the low purchase price(old aircraft) invite

owners to get in over their heads.

INSURED'S RESPONSIBILITIES

1. Promptly notify the insurance company's claim department. This requirement can be facilitated by contacting your insurance agent.

2. Cooperate with the insurance company and upon request, assist them in making settlements and in enforcing any of their rights of recovery or indemnity against any person or organization who may be liable to you with respect to the insurance afforded in your policy.

INSURED'S RESPONSIBILITIES

3. Do not, except at your own cost, voluntarily make any payment, assume any obligation or incur any expenses other than first aid to others at the time of the accident.

4. Allow the insurance company to view the damage before repair or disposition.

5. Give the company a proof of loss statement within 60 days of the loss.

6. Make your records available to the adjuster proving the amount of the loss, pilot qualifications, etc.

7. Protect the aircraft from any further loss or damage. 8. Do all things necessary to transfer title to any salvage,

including your aircraft if it is a total loss to the insurance company.

9. In the event of theft or robbery, you must promptly notify the police.

WHAT IF I DON'T AGREE WITH THE AMOUNT THE INSURANCE COMPANY IS WILLING TO PAY?

If an agreement cannot be reached on the amount of loss, both you and the insurance company have the right to settle the dispute through arbitration. In general, either party must notify the other in writing that the dispute will be submitted for arbitration.