Liable to rise.

A shake-up in aviation liability requirements in the European Union could mean more business for (re)insurers, or a move away from commercial cover, according to Nicholas Hughes and Fernando Albino.

Aircraft operators in the European Union (EU) could soon be forced to
meet more stringent insurance rules as the European Commis-sion (EC)
attempts to introduce some certainty into an area of uncertainty.

The new rules, due to take effect by the end of 2004, would introduce
minimum levels of insurance for air carriers and aircraft operators. Some
of the rules, proposed by the EC on 24 September 2002 and now being
considered by EU transport ministers, are controversial, if not

Current requirements

Insurance requirements for aircraft operators arise under agreements they
have signed, corporate governance standards and laws and regulations.

In many agreements an operator must have hull insurance. That is obviously
the case in aircraft procurement contracts but it extends into other
areas, touching on maintenance and ground-handling contracts. Agreements
may also require passenger/cargo and aviation third-party legal liability

However, the aspect that probably underpins compliance for most operators
is the need for good corporate governance. Risk managers are always keen
to demonstrate that the board has appropriately managed the significant
risks arising out of aircraft operations, if necessary by the transfer of
risk through insurance.

There is then a patchwork of law and regulations applicable on a state by
state basis, with some founded in international convention and some
multilateral application. This is particularly evident in third-party
legal liability cover.

However, most, if not all, states do not require all operators to be
insured for all aircraft operations. In the UK, for example, there is no
mandatory insurance outside the commercial sector. Where insurance is
required definition of the risk it should cover is limited.

Some states, like Spain, apply the limits flowing from the Rome
Conventions in relation to third-party liability arising from surface
damage but these are generally of restricted application.

In Europe, the 41 countries party to the European Civil Aviation
Conference adopted resolution ECAC/25-1 on 13 December 2000 (modified by
DGCA/117 on 27 November 2002 to include damages arising from war and
terrorist activity) on desirable harmonised levels of minimum insurance
for passenger and third-party liability.

Some of those states have already introduced the minimums. Some states'
civil aviation authorities demand higher levels of cover.

Legislation in other jurisdictions dealing with aircraft licensing and
operator liability refer to the need for "adequate or reasonable

This is so in the EU. In terms of carrier liability this is for passengers
and cargo interests and prospectively globally in respect of states
ratifying the Montreal Convention 1999, when it comes into force between

As enforced by the current patchwork, this typically translates into,
albeit variable, minimum passenger legal liability insurance of SDR
100,000-250,000, sometimes expressed as $300,000 per passenger or seat.
Third-party liability is typically related to the aircraft maximum take-
off weight or mass (MTOW or MTOM). The passenger and third-party liability
sums are usually expressed as a combined figure for any one accident.

Increased minimums

The proposed EU regulation (COM(2002)521 final) stipulates mandatory
minimum insurance of SDR 250,000 per passenger, SDR 17 per kg for cargo
and for mail a level in accordance with individual member states'
liability rules. It also introduces mandatory third-party liability
insurance of SDR 80-600m in four categories of aircraft MTOW: under
25,000kg; then up to 50,000kg; then up to 200,000kg; and over 200,000kg.
This raises a number of issues.

The minimum levels, particularly for third-party liability, would require
most operators to buy significantly higher levels of cover than under
existing requirements. This will particularly be the case for the
operators of smaller aircraft. There is probably little change for
airlines, particularly those with large aircraft that already insure well
above the proposals.

The requirements saddle insurers with being the licensors of aircraft
operation and this could constrain freedom of conditions.

Also, the third-party war risk cover would have to be on an each
incident/aircraft basis. This will come in for much discussion because at
the moment the aviation insurance market does not provide the cover in
that way. The cover is subject to a $50m aggregate limit, in accordance
with the policy endorsement AVN52D, which insurers introduced after 11
September 2001 to limit third-party liability.

There is other cover available that would satisfy the proposed

At the moment some states are covering this risk for their commercial
operators by state guarantees and the regulation does allow for compliance
by instruments other than insurance.

The requirements, if enacted, would provide growth for insurers of general
aviation operations. Indeed there must be some changes because, as
proposed, there is an SDR 80m aviation third-party liability for any
aircraft operator other than the few that are exempted.

Dramatic change

It may be thought in the commercial sector to be a good thing that all
aircraft are insured adequately but, in the UK for example, the reality is
that the minimum sum would be a dramatic change from the current

The proposals also envisage application not only to aircraft operating
within and flying to or from the EU but also to aircraft flying through
its air space. One can see the logic but this could change current
bilateral arrangements between EU states and third countries.

The proposed regulation's compliance and verification inspections by civil
aviation authorities would also give authorities enforcement problems when
faced with the more flexible and imaginative legal alternatives to
commercial insurance that are allowed.

Finally, new regulation always comes with a cost and the verification and
enforcement proposals would cost authorities hundreds of thousands of
euro. Unless the cost is borne by the taxpayer one may expect it to be
charged to operators and ultimately the traveller.

Only two exemptions are stated in the proposals: non-powered aircraft and
round-trip flights to and from one airport. Quite apart from the fact that
most operators will need an insurance programme to cover their operations
generally, these exemptions seem rather bizarre and illogical if use of EU
airspace should only be by insured operators, but they are probably very
restricted in application.

The EC's proposal aims high. The difficulties in enforcing its well-
defined, if strict, requirements, particularly those affecting third-
country operators, may lead to changes to their final wording.

The flexibility proposed in the issuance of operating licences by allowing
alternatives to commercial insurance will create more uncertainty and
possibly distort competition.

Also likely to be reviewed are the minimum levels for general

It is not justifiable to impose the same minimum third-party insurance on
the operator of a single-seat aircraft and on an operator of an Antonov
AN38. The EU's decision-making process allows for these concerns to be
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