War Risk Insurance Misunderstood and Underappreciated
The aftermath of September 11 will affect all of us, sometimes in ways that we might not expect. One of the ramifications that is sure to be felt throughout the aviation community is the restricted availability of insurance coverage for losses resulting from terrorist acts. Commonly referred to as "War Risk Insurance," the coverage was once available at little or no additional cost. Times have changed. Tom Chappell of CS&A Aviation Insurance discusses the nature of these risks, the availability of applicable insurance, and the prudence of purchasing such coverage in today's insurance market.
Until the September 11th terrorist attacks on the United States, war risk insurance was the most understated and misunderstood insurance coverage written for the aviation industry. Some insurance underwriters did not offer this coverage while others included it as an endorsement to the general aviation policy at little or no additional premium. You must admit this is inconsistent, but what industry isn't. For most clients, such protection was considered a nice frill, but not worth a premium charge, and the underwriting community agreed.
Many insurance agents recommended war risk insurance for those clients who operated their aircraft outside the United States or its possessions. War coverage is especially important when flying into the third-world countries of Central or South America. The major exposure is thought to be the perils of confiscation and seizure. There are numerous examples of small puppet regimes confiscating general aviation aircraft and converting them to their own use.
You have heard it said that our lives changed forever on September 11, 2001. Well, I don't know if they changed permanently but the attack on the United States did cause us to reevaluate many things. The underwriting community became very paranoid about the safety of U.S.-based aviation risks and their vulnerability to terrorist attacks. The government, the airlines and their insurance underwriters began to assess their liability for the occurrences of September 11. The result was and is total confusion and panic. The underwriters in their panic hit the only relief valve they had and exercised the seven-day cancellation provision that was contained in every aviation war risk "write back" endorsement throughout the domestic aviation insurance market. They did not know what to do, but plainly they perceived hazards had changed and it was evident that war coverage could no longer be extended at "give-away" rates. The early loss assessments indicated that, although financially sound now, the entire aviation insurance industry could be devastated by another tragedy of the magnitude of the September 11 attack, forcing some of the underwriters into bankruptcy.
You rarely appreciate that which costs you nothing. It has no value until it's taken away. Most aviation insurance buyers did not realize that oftentimes their agents were able to include the coverage in their policies at little or no additional premium. (Obviously this was not possible in every case because some underwriters did not offer the coverage.) When policyholders received the notifications of cancellation of war risk coverages from the insurance companies, agents' phones began to light up. For weeks, we were asked to explain the coverage. We were questioned about the underwriters' decision to cancel the war coverage and whether they could legally cancel a part of a policy mid-term. We were asked to give examples of how a war peril's loss could affect a general aviation operation. In short, the entire industry was awakened to a group of insurance coverages that were virtually unknown prior to September 11.
Do You Need War Risk insurance?
First, let's state that the correct title to the exclusion. The exclusionary portion of every policy tracks the Lloyd's policy exclusion form (AVN 48B) entitled "War, Hi-Jacking, and Other Perils Exclusion Clause." This exclusion was adopted in 1968 and has been a part of most aviation insurance policies ever since (as a requirement of reinsurers). The injustice was the drafters' assumption that the consumer reads his insurance policy and then comprehends how policy coverage parts apply to everyday exposures. The fact is, in one half of a typewritten page, AVN 48B, now a part of the standard aviation policy, excludes coverage for approximately 28 perils. This exclusion reads as follows:
This policy is amended as follows:
This policy does not cover claims caused by:
a) War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power;
b) Any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter;
c) Strikes, riots, civil commotions or labor disturbances;
d) Any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional;
e) Any malicious act or act of sabotage;
f) Confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government, (whether civil, military or de facto) or public or local authority;
g) Hi-jacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including any attempt at such seizure or control) made by any person or persons on board the aircraft acting without the consent of the Insured.
Furthermore, this policy does not cover claims arising whilst the aircraft is outside the control of the Insured by reason of any of the above perils.
The aircraft shall be deemed to have been restored to the control of the Insured on the safe return of the aircraft to the Insured at an airfield not excluded by the geographical limits of this policy, and entirely suitable for the operation of the aircraft (such safe return shall require that the aircraft be parked with engines shut down and under no duress).
Obviously, the exclusion of some of these perils is of little interest to most policyholders. However, examples of losses attributable to other perils encompassed by AVN 48B can be easily described. Such things as malicious acts or strikes, riots and civil commotion, or labor disturbances could be a problem. We now know that the U.S. domestic aviation community, both commercial and general aviation, could become a target of terrorists. And, of course, the traditional exposure of confiscation and seizure remains a threat to those operating outside the United States.
Is there a need for war risk insurance? As the world has evolved, I think any prudent risk manager must say yes. However, we are not at war officially. The exclusion quoted above must be read closely and dissected word for word. The exclusion is not limited to war. In fact, coverage for almost any hostile act is excluded by the AVN 48B wording whether war is declared or not. You must read it for yourself, however, and make your own assessment of your exposures.
Can You Buy Back The Coverage?
Yes and No! A few aviation insurance companies are not yet offering the "write-back" endorsement at any price. Other companies are not only offering war coverage but are aggressively recommending that it be added. Most of these companies have adopted the basic Lloyd's write-back wording found in AVN 51 (war risk hull) and AVN 52D (war risk liability) endorsements. Not all war coverages (atomic or nuclear detonation) are available. In addition, the amount of war risk liability available under the write-back endorsement may be limited. To know exactly what is included, I suggest you request a copy of the wording that your company uses.
How Much Do War Risk Write-back Endorsements Cost?
The pricing on the war coverage endorsement is consistent throughout the industry. There seems to be no difference in price, whether offered by ACE, Ltd., AIG, USAIG, AAU, or any other company. My opinion is that there are only a few war risk underwriters in London offering reinsurance for this segment of coverages. If all companies go to the same place for their reinsurance, the price will be the same no matter which company you are written through.
So, how much is it? The current rule of thumb is a .15% hull rate and a 20% surcharge on your liability premium. A better example is a hull premium of $1,500 per $1,000,000 of hull value for the AVN 51 (war hull) endorsement and a 20% increase in your liability premium for the AVN52D (war liability) endorsement.
Can You Buy War Hull Without War Liability?
Yes. In fact, many of my clients have done just that. Keep in mind that, for any liability policy to pay, you must be negligent. Most of my clients, after reviewing the perils in AVN 48B (outlined above), have difficulty finding an example where they could be held negligent as a general aviation aircraft operator. Examples of exposures for a war perils loss to the hull are obvious.
Can You Buy War Risk Coverage On Specific Aircraft In Your Fleet?
Yes on the war hull and no on the war liability. War liability must be purchased for all aircraft on your policy.
Can You Buy War Risk Coverages Mid-term?
Yes, you can purchase both war hull and war liability on a pro-rata basis for the remainder of the policy period. In fact, many of my clients are adding the war coverages now until expiration. This is with the thought that everyone is in somewhat of a panic now and that we will be better able to assess our true long-term exposures to terrorism by policy end. In the interim, the cost is small to provide protection until we are better able to evaluate the exposure.
What Is Ahead?
I expect to see war risk coverages become a part of every aviation insurance renewal discussion in the future. Internationally, terrorist attacks and other war risk perils have been a way of life for many years. British and European based aircraft leasing companies require that war risk insurance be included in all lessee insurance policies. We may see the same requirements in the U.S. from aircraft lending and leasing companies in the future.
What Do You Do Next?
Call your agent, if you have not already done so, and discuss your need for war risk coverage. We cannot advise you to buy or not to buy, but you owe it to yourself to make an educated decision.