European Union member states may become de facto insurers as a result of new rules due to come into force next year, writes Anthony Fitzsimmons, partner at Ince & Co law firm in London.
From May next year, all air carriers and aircraft operators flying in, or over, the European Community (EC) will have to meet specified minimum levels of insurance cover in respect of passengers, baggage, cargo and third party liabilities. Penalties for failure to comply include withdrawal of licences and landing rights.
The regime appears to require European carriers to have in place comprehensive liability insurance regardless of whether it is actually available in the marketplace. This applies not only to war and terrorism insurance, for which coverage could easily disappear, but also to risks (such as nuclear) excluded from typical aviation insurance policies.
Uninsurable risk
As a result, the governments of European member states may have taken on the potentially huge liability in respect of uninsured and uninsurable passenger liability risks.
What seems to have happened is that the European Union (EU) has gold-plated a reasonable Montreal Convention requirement (that air carriers should have "adequate insurance") into one for insurance up to a level "that is adequate to ensure that all persons entitled to compensation receive the full amount to which they are entitled" regardless of whether the insurance is actually available.
It is a nonsense that the law should require an air operator to buy insurance that is not available. The EU needs to reconnect this legislation with reality. The requirement, to insure what is not in fact insurable in commercial insurance markets, should be removed.
The regulation stems from the US terrorist attacks of 11 September 2001 and the happier ratification by the EC and its member states of the Montreal Convention on the Unification of Certain Rules for International Air Carriage.
The basic principle of the new EU regulation is that air carriers shall have in place liability insurance cover in respect of passengers, baggage, cargo and third parties, to cover all aviation-specific liabilities including "acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion".
No provision is made for exceptions to insurance coverage. There are rules requiring the demonstration of compliance and there are to be sanctions for non-compliance.
The regulation says that air carriers and air operators are to have specified minimum levels of insurance in respect of each and every flight, regardless of whether the airline actually owns the aircraft,or whether there is any form of lease, franchise, code-sharing or other agreement.
Compliance is the responsibility of the member state granting the operating licence as regards EU-based carriers, and evidence of compliance can be demanded by any member state, regardless of whether the aircraft is landing, departing or in overflight.
Blind eye
Curiously, the provisions on compliance appear to provide that, while obligations to insure remain even in the event of market failure (eg of the market for insurance of "acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion"), the EC may develop rules for the official turning of a blind eye to checking on compliance in such circumstances.
What this will mean in practice is unclear but it is very unsatisfactory that, in circumstances in which insurance has become unavailable due to market failure, air operators are still obliged to have the insurance.
Sanctions are to be imposed for infringement. These are to be "effective, proportional and dissuasive". This, and the question of how compliance is to be monitored, leave considerable scope for differences in approach between different EC member states.
There is, therefore, the entertaining possibility that a member state that has failed to ensure compliance with this requirement may have a corresponding liability to passengers whose failure to receive compensation is caused by inadequate insurance being available.
Such a shortfall currently seems fairly unlikely to occur in practice as regards non-war and other claims within the policy.
But since there is no relaxation of the requirement for insurance in the case of market failure affecting passenger insurance of the risks of "acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion", an insurance market failure in this area could arguably present member states with a choice between grounding all European Community air carriers that they license or taking the risk of becoming the economic equivalent of de facto insurers as regards their newly uninsurable risks.
There is a similar potential liability as regards existing gaps in coverage of passenger liability that arise from conditions and exclusions (eg of nuclear risks) within aviation insurance policies.
For third party liabilities, the requirement is that liability insurance is to be in place for each and every aircraft overflying, landing on or taking off from EC territory.
Source: Airline Business
