This article was written for the National Business Aviation Association by Stuart C. Hope, CPCU and Eric W. Barfield of Hope Aviation Insurance, Inc. It is available for download from the NBAA web site in PDF format, if desired. Click here to download (Note: To access the file you must be an NBAA member.)
 Insurance as a means of risk transfer provides many benefits to a modern society. Benefits like peace of mind, support of lending credit for business growth, and the efficient use of capital resources, to name a few. However, insurance as a mechanism for risk transfer was never intended to cover fundamental risks. Examples of fundamental risks include nuclear detonation, unemployment, drought, earthquakes and floods. The losses from these types of exposures are so great the federal government often accepts the burden of the loss through social insurance programs and subsidization.
The Acts of War exclusion in all insurance policies exists for this reason. War is not an insurable risk under the traditional role of insurance. As we have all witnessed, war and warlike acts are unpredictable, intentionally inflicted, and have the propensity to cause multiple widespread losses over a short period of time that, if insured, would jeopardize the viability of insurance as an effective means of risk transfer. In other words, if insurance companies agreed to accept broad coverage for warlike acts, it could be considered closer to gambling the family farm instead of insuring a quantifiable risk by shifting and spreading that risk from a smaller exposed group to a larger, more resilient group.
Insurance companies are not unlike other businesses that exist to make a profit and must of course make sound strategic decisions in order to survive. It is their fundamental responsibility to be able to underwrite risks at a fair price. The insurance industry, although regulated, operates in the free market. At moments in history when insurance premiums trend higher, market forces tend to be self-correcting. This is because new companies with additional capital will enter the marketplace to take advantage of increased premiums. As the availability of insurance increases and insurance companies quantify the new reality of domestic terrorism, premiums should begin to stabilize.
Because of the catastrophic nature of war and related perils, most standard insurance policies explicitly exclude all war perils. In those instances where the war perils coverage is needed, the insurance company purchases a separate and distinct coverage form through a war underwriter to cover this risk. In the past, a war risk endorsement supported the financing and leasing areas of the economy. Through the availability of this coverage, lenders did not need to maintain costly loss reserves and were able to pass the savings along to the consumer. The loss frequency was low and coverage could be provided for a relatively modest additional premium.
American courts traditionally allow a standard insurance policy war exclusion to be applied only in situations involving damage arising from a genuine warlike act between sovereign entities. For instance, in the 1974 case Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, the court ruled the hijacking and subsequent destruction of an aircraft by a political activist group did not constitute an act of war. The reasoning was a radical guerilla group not operating on behalf of any state does not constitute a sovereign entity and therefore does not constitute war.
With such a narrow practical application of the standard war exclusion, aviation insurers now rely on more definitive policy wording that typically excludes the following:
- 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.
- 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 (this coverage is simply not available at any premium).
- Strikes, riots, civil commotions or labor disturbances.
- 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 there from is accidental or intentional.
- Any malicious act or act of sabotage.
- 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.
- Hi-jacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew (including any attempt at such seizure or control) made by any person or persons on board the aircraft acting without your consent.
Aviation insurance prices in recent years have been relatively stable with companies competing for premium dollars to invest during a robust economy. Aviation insurance companies were compelled to offer attractive policies bundled with broad coverage that included many of the above war perils in order to attract policyholders. Since there had never been a significant warlike loss within the United States, underwriters felt little need to charge a premium for an exposure they perceived as minimal.
Reinsurance companies – companies that agree to accept a large part of the aviation insurers’ claims in exchange for a portion of the premium - primarily cover this aviation war risk exposure. These companies work to spread risk over an even larger group, enabling the insurance company binding the policy to control their overall exposure. In the wake of the attacks on the World Trade Center and Pentagon, these same insurance carriers had to re-examine this coverage and reassess their potential exposure. On September 17, 2001, the London insurance market (where most of the reinsurers are represented) rescinded this war risk coverage on virtually all aviation insurance contracts. Once the insurance companies had a chance to review the new exposure and threat scenarios, war coverage was again offered.
 Why does the wording of the write-back endorsements seem to allow the insurance company so much latitude? Even these write-back endorsements have exclusions and they can cancel the coverage all over again on only 7 days notice. Why?
Due to the volatility of war and warlike acts, the only way insurance companies can extend coverage without jeopardizing all of their assets is with a provision allowing them to stop their losses should events warrant. Seven days notice is standard. Automatic termination can occur upon the hostile detonation of a nuclear device or if permanent members of the United Nations Security Council go to war with each other.
Why does it cost so much to buy this coverage back?
The "soft" aviation insurance marketplace of the last several years led aviation insurers to offer the broadest coverage possible in order to attract policyholders. This included the availability of war and related perils coverage at no charge or at a modest premium. Until September 11, 2001, there had never been a significant, credible war-risk threat actually carried out on domestic aircraft within the United States. Now insurance companies will feel the pain of paying catastrophic losses due to a hazard for which they collected little premium. (Prior to September 11, aircraft flying into war torn or politically unstable areas already had to pay a significant premium for war risk coverage.)
Is there a concise way to analyze the cost-benefit of purchasing the coverage versus retaining the risk (not carrying war coverage)?
Begin by checking to see if the coverage is required by contract with a financing, leasing or other entity. Next consider the nature of your specific operations – is the aircraft always in a secure location, are the identities of passengers always known, where do you fly, etc. Finally, run through some of the threat scenarios to determine the likelihood of a warlike act happening based upon your operations. Insurance is purchased to transfer catastrophic loss exposure. In the worst-case scenario, if your aircraft was destroyed by a terrorist act, could you afford to retain this exposure? Some companies have concluded that while they can quantify and comfortably accept loss to the aircraft due to a warlike act, they cannot accept the great unknown of injury to third parties and have therefore purchased war risk liability coverage.
Why doesn’t the government automatically cover this risk?
In 1951, Congress created a war risk insurance program to serve the foreign policy interests of the United States during difficult times of war. This program provides insurance to commercial airline flights to high-risk areas that are often needed for national security reasons. This program is routinely extended by periodic passage of the appropriate bill. A parallel program for general aviation was simply not needed prior to September 11. With the new perceived threat there is talk of similar legislation for general aviation however it would take considerable time to implement a program.
Why do lien holders and leasing companies – and some foreign governments – often require war coverage to be carried?
Financial institutions want to know they will not be left holding title to an aircraft that has been destroyed. Owner/lessors can be made party to a lawsuit involving an aircraft even when that aircraft is out of their operational control. If there is insurance coverage for a specific known peril, these parties want the coverage secured. It reduces their risk and allows a competitive finance/lease rate. Governments have an obligation to protect their citizens. To assure adequate financial responsibility for reimbursement if a foreign aircraft crashes on their soil, some governments require operators to carry war risk coverage.
Is it possible to self-insure this risk and provide acceptable documentation to entities such as lien holders, or to countries that require this coverage to enter their country?
It may be possible to satisfy a lien holder by having the principal owners of the aircraft provide a letter of credit from an approved lending institution in the amount of the liability and hull coverage normally provided under the policy but practically speaking, this isn’t feasible. From a cost / benefit standpoint, although pricey, the war risk rates are not to the level of jeopardizing liquid assets simply to avoid the pain of the increased war premium. A letter of credit won’t fly with a foreign country. You’ll just have to buy the war and move on in this case.
Are there any other alternatives to effectively transferring this risk other than through insurance companies or self-insurance?
It is unlikely. One method of risk transfer is by contract. As you know, BBA Aviation recently had two of it’s subsidiary companies, Signature Flight Support and Aircraft Services International Group (ASIG), require customers to sign a waiver of liability for acts of war and terrorism before providing service. They were able to purchase War coverage 3 days later and dropped the requirement to sign this contract. Aircraft owners don’t have this option.
In trying to explore ramifications of not carrying war risk insurance, what are some specific examples of how this coverage could be used in general aviation?
Hi-jacking would be the most obvious, but the more likely event would be for a terrorist to simply steal the aircraft, then fly it into a bridge, dam, nuclear power plant, outdoor assembly, or other strategic location. Terrorists have proven to be creative. You might argue this is theft and should be covered as a theft claim but the policy clearly states otherwise (see exclusion 4 and exclusion 7 above). As many of you read, on October 18 of this year, an attempt was made to hijack a King Air in New Mexico operating as an air ambulance for the University of New Mexico. Fortunately for the pilot, the door popped open during taxi creating confusion. The aircraft subsequently veered off the runway and the hijacker fled. Is there a large exposure for losses caused by the war risk perils? Probably not, but who would have believed the September 11 events were a plausible exposure.
Are there any operational changes that can be made to minimize this risk?
Yes, numerous ones. The following resources are posted on the NBAA website:
Why does general aviation have to share the increased costs of insurance claims paid out primarily for commercial airline losses?
Insurance is basically a method of pooling financial resources [premiums] gathered from a large group of related risks, to pay for the losses of the unfortunate few. To make it work, there must be a large enough pool to get a spread of risk. All aviation risks are considered one pool. The worldwide aviation premium is approximately $2 billion. Some years the premium from the airline segment of the industry has helped pay for the losses from the general aviation fleet, other years just the reverse. If either segment of aviation were to be rated simply on their own loss experience and pool of premium, the rates would have to be increased dramatically. |
This article is available for download from the NBAA web site in PDF format.
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