Potential Aviation Insurance Issues After Eyjafjoll Volcano Eruption

   By Katherine Posner, Partner, Condon & Forsyth

The recent volcanic ash clouds from the eruption in Iceland have wreaked, and continue to wreak, havoc on air travel for millions of passengers and also disrupted businesses throughout the world.   On April 14, 2010, the Eyjafjoll volcano in Iceland erupted and began sending dust and ash into the atmosphere.  The ash cloud was carried by the wind and soon covered large areas of Europe, resulting in the closure of European and United Kingdom airspace.  An early estimate of the financial impact on airlines by the International Air Transport Association (IATA) was in excess of $200 million per day in lost revenues alone.  In addition to loss of revenue, airlines have incurred costs in connection with legal obligations to stranded passengers under the governing EC Regulation 261/2004 as well as costs and expenses in connection with re-routing aircraft and stranded aircraft at various airports.

As with most high profile events involving significant and wide-ranging financial impact, an important issue is whether there is any available insurance coverage in connection with the expected losses and incurred costs.  Some potential aviation insurance issues are: coverage in connection with the mandatory grounding of aircraft; damage to aircraft and engines in flying through volcanic ash clouds; and defense and liability obligations in connection with claims as a result of stranded passengers and cargo.  While each policy of insurance is an individual contract between parties and subject to its own terms, conditions and exclusions, it can safely be said that virtually no airlines are covered for the financial consequences arising from the mandatory grounding of aircraft due to the volcanic ash cloud, other than possibly through the lay-up provisions of their policies.  A lay-up credit is a return of some portion of aircraft insurance premium if the aircraft is not flying for an extended period of time – usually at least 90 days. In the absence of physical damage to aircraft, there is no coverage trigger under most aviation hull insurance policies.

In my forthcoming chapter Aviation Insurance in New Appleman New York Insurance Law, Second Edition, the different types of aviation insurance available to airlines both for first-party losses and third-party liability exposures is discussed in detail. Aviation insurance covers a broad spectrum of risks, ranging from a single personal or corporate aircraft (known as general aviation) to fleets of aircraft operated by major airlines, as well as airports, aircraft repair stations of all sizes, and aircraft manufacturers.  The chapter focuses on policies covering commercial operations, including airlines, airports and aircraft manufacturers. The chapter also includes an overview of the specialized markets that have been developed to provide aviation insurance; the various types of insurance policies covering commercial aviation risks, including first-party property damage and loss as well as third-party and passenger liability coverages; coverage for acts of terrorism and hijacking; protections offered to aircraft financiers and lessors; conditions and exclusions that relate to regulatory requirements imposed on aircraft operators; and choice of law issues that arise with frequency in aviation insurance coverage matters.

Katherine Posner is a partner in the New York office of Condon & Forsyth LLP where she counsels insurers in a variety of insurance coverage and reinsurance matters. She is the new author of the Aviation Insurance chapter in New Appleman New York Insurance Law, Second Edition.

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