Insurance rates skyrocket
With the country in mourning for the tremendous loss of life from the terrorist attacks, the financial loss seemed to pale by comparison. But as Americans began to recover from the initial shock, the economic concerns loomed darker, and the insurance industry was among the first to feel the fiscal effects. It was also one of the first to put measures into effect to minimize losses and recover from the economic blow.
Despite the fact that the four aircraft hijacked were airliners, the business aviation community was included in a rush by insurers to deal with the disaster and its aftermath. Within hours of the attack, London insurers were notifying business aviation clients of the cancellation of the so-called war-risk covenants of their insurance policies. Included among those clients were corporate aviation flight departments, Part 135 on-demand charter operators, individual business aircraft owners, airports and FBOs.
For years, insurers have provided war-risk insurance to business aviation clients as a separate rider to their main liability and hull policies. For the most part, unless the client was involved in operations in a war zone, such coverage was offered at minimal cost. Annual war-risk premiums for both liability and hull insurance were as little as $500, and sometimes were even offered by brokers at no cost as a promotional consideration.
Those days are gone. Now, with aviation insurers paying out $3 for every $1 collected in premiums, it has become clear that war-risk insurance will no longer be taken for granted, and premiums for such coverage will skyrocket.
In the days following the September 11 attacks, insurance companies issued notices to clients with war-risk insurance that these particular covenants were canceled, and that if they wished to retain war-risk coverage, they had a seven-day window in which to buy back coverage. War-risk covenants typically contain an endorsement that allows the insurer to cancel after 10 days (seven days, plus three days for mailing) of issuance of written notice to the insured.
According to an NBAA spokesman, one of its members reported coverage cancellation and said the renewal offer was about 10 times the cost of the old premium.
The cancellations hit ground clients as airports and FBOs received notice from insurers. Signature Flight Support, with 46 FBOs nationwide, was particularly hard hit. The world’s largest FBO chain found its facility at Ronald Reagan Washington National Airport shut down completely and tenants evacuated. The airport has not reopened and there is no indication when it might resume operations. Signature’s operations at Dulles International and New Jersey’s Teterboro Airport also suffered when Part 91 operations were prohibited at both fields.
Signature Takes Interim Measures
In response to notification of cancellation effective on September 24, Signature began notifying its FBO customers that they would be required to sign an “indemnification agreement for acts of war and terrorism.” The agreement would limit Signature’s liability and require that disputes be settled by binding arbitration. Citing its loss of war-risk insurance, the company stated that unless customers signed the agreement, no services would be provided.
There was an immediate outcry by business aircraft operators and NBAA advised its members to “contact their legal counsel before signing such a release.”
Janet Bressler, v-p of AirSure, the nation’s largest insurance broker, said the Golden, Colo.-based company had offered similar advice to its clients. “Our recommendation, from day one,” she said, “was before signing, they should send the agreement to us so that we could forward it to the [insurance] carrier. This way, they could go into contractual relations [with the FBO] and know what is and what isn’t insured.”
Less than 24 hr after notifying customers of the indemnification agreement, Signature reversed the decision and dropped the requirement. “This was an interim measure only while we continue to work with our industry trade groups, insurance carriers and others to vigorously pursue all available legislative and commercial options to obtain protection from the consequences of terrorist- or war-related acts,” said Elizabeth Haskins, president and CEO, in a letter to Signature customers.
While the U.S. government on September 22 enacted the Air Transportation Safety and System Stabilization Act, to provide financial assistance and a government-sponsored insurance program for war-related risks and terrorism, it does not apply to Part 91 operators or to non-U.S. citizens or corporations. It also provides no assistance or insurance for vendors or subcontractors, a group that includes Signature.
Meanwhile, the insurance industry is scrambling to redefine war-risk coverage, limits and premiums. And business aviation is anxiously awaiting answers.
One insurance insider said that when the dust finally settles, a general rule of thumb will likely establish war-risk liability rates at about 20 percent of the standard liability rates. For war-risk hull insurance, based on the value of the aircraft, premiums will probably range from 15 cents to 25 cents per $100. This would set the annual low-end premium for war-risk hull insurance for a $30 million business jet at about $45,000.
Separate or Group Coverage
Business aircraft owners and operators will also have to take into consideration other contractual agreements when renewing or buying war-risk insurance. The decision may not always be their own, especially in the cases of those operators who answer to a lienholder in such matters.
Some aircraft management companies often provide coverage under a group plan for their clients, but others require the aircraft owners to provide coverage separately. It is standard for fractional-ownership programs to include insurance as part of the management fee, but individual owners may, if they wish, secure additional coverage as they see fit. In light of recent events, no small number of these owners are expected to opt for additional coverage.
In the coming months, business aircraft operators will be faced with difficult choices as insurers establish what they feel are reasonable risks and appropriate premiums.