Proposed Changes to FAA War Risk Insurance Policy Raises Questions

A little known fact outside the aviation industry itself is that the FAA is in the insurance business, providing, under certain circumstances, war risk insurance coverage to US air carriers.  One of the reasons for the program was the concern that US airlines might have difficulty getting affordable war risk coverage from the commercial insurance market.  Without insurance, flying could be curtailed.

Over the years, the nature of war risks and terrorism has changed, as have the associated losses, particularly since the events of 9/11.  Despite this fact, US airlines have continued flying, oftentimes performing what are essentially military missions which would otherwise be flown by military aircraft.  In recognition of this fact, the coverage provided by FAA issued war risk insurance includes losses which were “directly or indirectly” the result of a war risk.  As anyone who has read insurance contracts knows, the use of the phrase, “directly or indirectly” makes the scope of coverage extremely broad.  Moreover, even if the use of that phrase makes the scope of coverage ambiguous, the principles of contract interpretation mean that the ambiguous phrase will be interpreted against whomever is responsible for writing it, in this case, the United States.  The end result is that the scope of war risk coverage is extremely broad and any argument by the Government to try to limit the scope of the coverage is a loser.

So, why should the US airline industry care about this?  After all, isn’t the scope of the Government’s war risk coverage broad?  Aren’t we covered when we have a Government contract to fly military cargo on a military mission, and have a loss in a hostile part of the world?

The answer is pretty simple . . . . not if the FAA gets its way! In June of this year, the Government proposed a change to one of its war risk insurance programs which would eliminate the phrase “directly or indirectly” and, in effect, cover only those airline losses actually caused by thing like bombs, sabotage, enemy fire, etc.

If you’re an airline with military contracts, this is a pretty big deal.  At first, the airlines with military contracts were told the change was going to be made.  Then the proposed change was deferred, presumably for further consideration.  Neither the FAA, nor the military, have given any reason for the change, what is intended, or why it’s needed.

So what should you do?  Well, we know that A4A and other trade associations are asking questions.  Plane-ly Spoken suggests that the more questions asked of the FAA as to why they’re trying to limit coverage when US airlines operate pursuant to military contracts providing battlefield services, the better.

Our advice is that if you’re an airline, an insurer or a broker, contact the FAA and start asking those questions!

(Originally posted October 15, 2014)

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