Aviation Insurance: Acts Of Terrorism

Article by Nicholas Hughes and Fernando Albino

More than a year after the terrorist attacks on 11 September 2001 and in the face of heightened security worries and some examples of further terrorist acts, a number of jurisdictions have developed and are introducing mechanisms to tackle the perceived lack of adequate commercial insurance cover for losses arising out of acts of terrorism. When these schemes are applied to the property, and liabilities incurred by an industry such as aviation with existing, sometimes mandatory, schemes of insurance and integrated global operations, considerable complexity results.

US TERRORISM RISK INSURANCE ACT 2002

On 26 November 2002, President George W Bush signed into law this Act, often referred to as TRIA, which immediately became effective. It is an Act administrated and implemented by the US Treasury who meantime have issued guidance on aspects of its implementation no doubt in the face of a barrage of enquiries.

The Act is said to establish a temporary federal programme of shared public and private compensation for insured commercial property and casualty losses resulting from an act of terrorism. It is 'temporary' in the sense that it is intended to cease on 31 December 2005. It is 'shared' in the sense that, provided applicable insurers comply with the notification requirements in the Act, losses intended to be covered by the programme, after application of a deductible, are (it would seem) co-insured with the commercial insurer bearing 10% and the US Treasury 90% of the loss concerned. The Act is of general application and applies to aviation insurance contracts underwritten by certain insurers but not to reinsurance contracts.

In very practical terms the Act makes it mandatory for those insurers covering US risks to make available coverage for an act of terrorism (as defined in the Act) by nullifying any existing or proposed terrorism exclusion clauses (only) with respect to the risks covered by a policy issued to any insured(s).

Initially any insured need not take any action unless and until its insurer (as he must do if he is to benefit from the coinsurance by US Treasury) sends him a notice drawing attention to the Act and offering, for a stipulated premium, to nullify the terrorism exclusion clause under the Act. The insured then has to decide whether or not it is to his advantage that the risk of loss by an act of terrorism is covered in this way or as to whether there are alternative...