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.

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InsuranceUntilthe September 11th terrorist attacks on the United States, war risk insurancewas the most understated and misunderstood insurance coverage written for theaviation industry. Some insurance underwriters did not offer this coverage whileothers included it as an endorsement to the general aviation policy at little orno additional premium. You must admit this is inconsistent, but what industryisn’t. For most clients, such protection was considered a nice frill, but notworth a premium charge, and the underwriting community agreed.

Many insurance agents recommended war risk insurance for those clients whooperated their aircraft outside the United States or its possessions. Warcoverage is especially important when flying into the third-world countries ofCentral or South America. The major exposure is thought to be the perils ofconfiscation and seizure. There are numerous examples of small puppet regimesconfiscating general aviation aircraft and converting them to their own use.

September 11You 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 UnitedStates did cause us to reevaluate many things. The underwriting community becamevery paranoid about the safety of U.S.-based aviation risks and theirvulnerability to terrorist attacks. The government, the airlines and theirinsurance underwriters began to assess their liability for the occurrences ofSeptember 11. The result was and is total confusion and panic. Theunderwriters in their panic hit the only relief valve they had and exercised theseven-day cancellation provision that was contained in every aviation war risk”write back” endorsement throughout the domestic aviation insurancemarket. They did not know what to do, but plainly they perceived hazards hadchanged and it was evident that war coverage could no longer be extended at”give-away” rates. The early loss assessments indicated that, althoughfinancially sound now, the entire aviation insurance industry could be devastatedby another tragedy of the magnitude of the September 11 attack, forcing someof the underwriters into bankruptcy.

You rarely appreciate that which costs you nothing. It has no value untilit’s taken away. Most aviation insurance buyers did not realize that oftentimestheir agents were able to include the coverage in their policies at little or noadditional premium. (Obviously this was not possible in every case because someunderwriters did not offer the coverage.) When policyholders received thenotifications of cancellation of war risk coverages from the insurancecompanies, agents’ phones began to light up. For weeks, we were asked to explainthe coverage. We were questioned about the underwriters’ decision to cancel thewar 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 generalaviation operation. In short, the entire industry was awakened to a group ofinsurance 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. Theexclusionary portion of every policy tracks the Lloyd’s policy exclusion form (AVN48B) entitled “War, Hi-Jacking, and Other Perils Exclusion Clause.” Thisexclusion was adopted in 1968 and has been a part of most aviation insurancepolicies ever since (as a requirement of reinsurers). The injustice was thedrafters’ assumption that the consumer reads his insurance policy and thencomprehends 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 aviationpolicy, excludes coverage for approximately 28 perils. This exclusion reads asfollows:

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 tomost policyholders. However, examples of losses attributable to other perilsencompassed by AVN 48B can be easily described. Such things as malicious acts orstrikes, riots and civil commotion, or labor disturbances could be a problem. Wenow know that the U.S. domestic aviation community, both commercial and generalaviation, could become a target of terrorists. And, of course, the traditionalexposure of confiscation and seizure remains a threat to those operating outsidethe United States.

Is there a need for war risk insurance? As the world has evolved, I think anyprudent risk manager must say yes. However, we are not at war officially. Theexclusion quoted above must be read closely and dissected word for word. Theexclusion is not limited to war. In fact, coverage for almost any hostile act isexcluded by the AVN 48B wording whether war is declared or not. You must read itfor 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 onlyoffering war coverage but are aggressively recommending that it be added. Mostof these companies have adopted the basic Lloyd’s write-back wording found inAVN 51 (war risk hull) and AVN 52D (war risk liability) endorsements. Not allwar coverages (atomic or nuclear detonation) are available. In addition, theamount of war risk liability available under the write-back endorsement may belimited. To know exactly what is included, I suggest you request a copy of thewording that your company uses.

How Much Do War Risk Write-back Endorsements Cost?

The pricing on the war coverage endorsement is consistent throughout theindustry. 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 afew war risk underwriters in London offering reinsurance for this segment ofcoverages. If all companies go to the same place for their reinsurance, theprice 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 a20% 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, forany liability policy to pay, you must be negligent. Most of my clients, afterreviewing the perils in AVN 48B (outlined above), have difficulty finding anexample where they could be held negligent as a general aviation aircraftoperator. Examples of exposures for a war perils loss to the hull are obvious.

Can You Buy War Risk Coverage On Specific Aircraft InYour Fleet?

Yes on the war hull and no on the war liability. War liability must bepurchased 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 forthe remainder of the policy period. In fact, many of my clients are adding thewar coverages now until expiration. This is with the thought that everyone is insomewhat of a panic now and that we will be better able to assess our truelong-term exposures to terrorism by policy end. In the interim, the cost issmall 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 insurancerenewal discussion in the future. Internationally, terrorist attacks and otherwar risk perils have been a way of life for many years. British and Europeanbased aircraft leasing companies require that war risk insurance be included inall lessee insurance policies. We may see the same requirements in the U.S. fromaircraft 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 forwar risk coverage. We cannot advise you to buy or not to buy, but you owe it toyourself to make an educated decision.