UK: Aviation Insurance: New War Clauses

In early August 2006, the Aviation Insurance Clauses Group (of which BLG’s Nick Hughes is a member) published a suite of new aviation liability clauses and one aviation hull clause which are noteworthy not only for the importance of the subject matter but also for the process by which they were drafted.

The new aviation liability clauses published by the Aviation Insurance Clauses Group (AICG) essentially address the issue of exclusions and write backs in relation to the use of weapons of mass destruction. They are AVN48C, AVN52H, AVN52J, AVN48D, AVN52K and AVN52L published with guidance notes; the aviation hull clause is AVN51A.

The new liability clauses comprise alternative form exclusions (AVN48C and AVN48D), each of which is a development of the familiar AVN48B clause, and companion clauses designed to write back some of the risks thereby excluded. Each of the write backs is drafted in a form appropriate for use either on the policies of aircraft operators or the policies of aircraft service providers. AVN48C works with AVN52H (aircraft operators) and AVN52J (service providers). AVN48D works with AVN52K (aircraft operators) and AVN52L (service providers). The new compexity is found not only in the new exclusion clauses ( AVN48C and AVN48D both follow the familiar format of AVN48B) but in the alternative form write back clauses. It comes from devising a wording to write back parts of (new) subparagraph (b) of AVN48C/D which introduced particularised exclusions for WMD perils.

All of these clauses form part of the work product of AICG in its inaugural year. As the chairman’s report on AICG activities states, "the year has been dominated by the consideration, consultation and publication of various clauses extending AVN48B to exclude cover for the hostile use of weapons of mass destruction more particularly defined in the clauses and variants providing a limited write back of certain parts of that cover". Accordingly, these clauses are amongst the first products of the new process that is the work of AICG. Clauses have therefore been published in draft form, on a website for public consultation, representations have been received and lengthy drafting and redrafting sessions have taken place in committee and working parties. More particularly, representatives of buyers and of the London Market Brokers Committee (LMBC) have effectively "sponsored" draft clauses for consideration and participated in detailed review with AICG: this is the case with the suite of clauses AVN48D, AVN52K and AVN52L. This has provided a more transparent way for the development of standard form aviation insurance clauses than was previously the case. By the provision of alternative form wordings (variants), as well as by the wording of the individual clauses, AICG has striven, consistent with its terms of reference, to ensure that there is no significant imbalance between the rights and obligations of insurers and of insureds arising from the wordings and clauses.

As a consequence, in addition to pre-existing clauses and aside from the theoretical ability of the parties to negotiate more or less any wording, new exclusion/write-back clauses for aviation war liabilities are now available. AICG is purely a drafting body albeit one composed almost completely of insurance market participants, under independent chairmanship, but the all important use of the new clauses relies on commercial discussions not only between buyers/brokers and their insurers but, perhaps as importantly, between insurers and reinsurers. The renewal season when these new clauses would be expected to be utilised, is fast upon us. Also, the clauses may, in the viewpoint of third parties, represent something of a landing point for buyers and insurers for the purposes of distilling what cover is likely available in the market. The clauses can define the risk in standard form but not the financial limit/sub limit of cover. The clauses, therefore, do not provide for any particular financial limit or sub limit of liability (this being a matter for the parties to negotiate) but clearly the implementation of these clauses may define any requirement for government schemes of insurance or other indemnity and/or for further industry solutions. There will also have to be acceptance, subject to the limits of cover available with these clauses, of the terms of write back by those providing excess third party war cover.

The availability of the wording will ascertain insurers’ appetite for financially limited cover for WMD risks, whether at all or for any of them, and if so whether in a (market) capacity sufficient for buyers. Further, buyers need to know whether the cover provided by these clauses, made subject to particular limits, will ensure compliance with regulations as to mandatory minimum insurance coverage. This is particularly the position for air carriers with regard to EC Regulation 785/2004, under the laws applying with respect to flights to/from Australia, Canada, Switzerland and the USA, and under the Montreal Convention 1999 which requires states to ensure that carriers have adequate insurance covering their liabilities under that Convention.

As to the clauses themselves, the exclusion clauses AVN48C and AVN48D are very much based on the previous form with the amendments being made to sub-paragraph (b); that sub-paragraph, under the preexisting clauses, had not been written back. The amendments introduced a more developed form of this sub-paragraph which, absent any write back, would have had the effect of excluding all cover, broadly speaking, for the hostile use of so called weapons of mass destruction. There is a subtle difference between the two new variants but they substantially cover the same mischief.

The challenge for the AVN52 "write back" clauses has been to determine a means whereby a less than complete exclusion of cover for the hostile use of weapons of mass destruction could be devised. This is where clauses "sponsored" by AEA/IATA and LMBC, now found in ANV52K and AVN52L, come in. There remains no write back of the exclusion of claims caused by the hostile detonation of any device employing atomic or nuclear fission and/or fusion or other like reaction. The other perils excluded by subparagraphs (a) and (c) – (g) inclusive (i.e. the entirety of the perils excluded, save as to sub-paragraph (b) in AVN48D), continue as before to be written back. However, the WMD perils in sub-paragraph (b) may now, by AVN52K and AVN52L, subject to limits (to be negotiated at each placement) be written back for liability arising out of one of the WMD perils occurring on board a single aircraft or occurring otherwise insofar as claims are caused by the crash etc of an aircraft whilst in flight. Finally, it is possible, subject again to financial limitation, to write back all of the risks excluded by AVN48D (save the nuclear risks). The drafting permits of some subtlety in the selection of risks to be written back in this way, and enables the parties to select whether or not to underwrite particular parts of sub-paragraph (b).

In addition to these developments (and somewhat overshadowed), the more prosaic AVN51A will offer a new form of coverage endorsement for aircraft hulls, where separate hull war cover is not obtained. It was drafted prior to consideration of the more developed variants of aviation liability clauses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.