The world of aviation, whether commercial, business or leisure, is based on sophisticated technology and complex operations. But behind the roar of jet engines and the logistics of flights lies an inescapable reality: risk. From minor incidents to major disasters, the financial consequences can be considerable. This is where aviation insurance comes in, an essential mechanism that enables players in the sector to protect themselves against the hazards inherent in their business. Understanding its foundations - the specific hazards it covers, the peculiarities of its market and the regulatory environment in which it operates - is essential for any company or individual involved in aeronautics.
What risks are covered by aviation insurance?
The need for insurance in the aviation sector stems from the multitude of potential dangers. There are two main categories of risk to which insurance policies attempt to respond.
Ordinary" risks associated with aeronautics
These risks, although common in nature, take on a particular dimension in the aviation context. The first is damage to the aircraft itself. An aircraft on the ground is not immune to fire, explosion or even theft. These events, similar to those that can affect any valuable asset, require specific cover given the high cost of aircraft.
Apart from material damage to the aircraft, the main concern is civil liability. Many players may be held liable following an event linked to aviation activity. The aircraft operator, the pilot, the carrier, but also aerodrome managers or aeronautical associations may be liable for damages caused to third parties. This damage can result from a wide variety of events: an accident on the ground or in flight, a piloting error with tragic consequences, falling spare parts, a mechanical breakdown or even unforeseen weather conditions.
The liability of air carriers is governed by international conventions, in particular the Warsaw Convention of 1929 and, more recently, the Montreal Convention of 1999, which considerably strengthened passengers' rights. French law is in line with these conventions, as set out in article L. 321-3 of the French Civil Aviation Code. These conventions often establish liability as of right, i.e. without the need to prove fault, but with compensation ceilings, even if the trend is to increase these ceilings and to virtually unlimited liability for personal injury. Carrier liability insurance must therefore take account of this specific legal framework.
Finally, as in other sectors, personal insurance, such as death or disability insurance, naturally has its place in covering the human consequences of an air accident, whether for passengers or crew.
Taking account of exceptional risks
Aviation insurance also has to deal with risks of a more exceptional nature, often linked to the geopolitical context or malicious acts. Historically, insurers have been able to offer cover, often for a significant premium surcharge, for events that are normally excluded, such as damage resulting from war (civil or foreign), insurrection, riots, violent strikes, acts of sabotage or hijacking.
Terrorist risk cover has become a major concern, particularly since the attacks of 11 September 2001. This event had a considerable impact on the aviation insurance market. Initially, faced with the potential scale of the losses, many insurers abruptly cancelled their terrorism cover. Subsequently, this cover was gradually reinstated, but at much higher rates and with clauses making it easier for insurers to withdraw in the event of another major crisis.
These events have led to a debate, particularly within the International Civil Aviation Organization (ICAO), on the appropriateness of having this systemic risk borne solely by the private insurance market. The idea that governments should assume a significant share of the terrorist risk, which is considered to be more a matter of national security than traditional insurance, has gained ground, but has not yet led to a global solution. This issue illustrates the close link between the risks to be covered and the very structure of the insurance market.
How does the aviation insurance market work?
The aviation insurance sector has characteristics that clearly distinguish it from other insurance sectors.
An international, concentrated market
By its very nature, aviation insurance is a globalised market. Risks are often transnational and the amounts involved, particularly for insure the fleets of major airlines or cover their liability in the event of a disaster, are colossal. No national insurance company, not even the largest, could meet these commitments alone.
As a result, reinsurance is used systematically and on a massive scale. Direct insurers (those who issue the policy to the airline or operator) retain only a limited share of the risk and cede the remainder to reinsurers spread around the world. This risk-sharing mechanism is essential to the viability of the system.
This need for large-scale pooling has led to a high degree of market concentration. Relatively few players are truly "aviation insurers" approved to cover all specific risks (aircraft body, transported goods, aviation civil liability). Although most of the major French insurance groups are present in this segment, the historical and operational centre of gravity is very largely in the United Kingdom, around the Lloyd's of London market and the International Underwriting Association (IUA). This British predominance gives the London market a leading role in setting conditions and rates.
Market organisation and regulation
This concentration and the strong interdependence between insurers and reinsurers encourage close collaboration. Committees of insurers, often based in London, play an important role in drawing up the standard clauses that form the basis of most aviation insurance policies worldwide.
However, this proximity can border on anti-competitive practices. The crisis that followed the 2001 terrorist attacks highlighted this risk. The almost simultaneous decision by all the major insurers to suspend terrorism cover, then reinstate it at very similar rates, raised suspicions of a cartel. User associations referred the matter to the European Commission, which opened an investigation into potential breaches of the competition rules of the EC Treaty (now Article 101 of the TFEU).
The case was finally settled out of court. The insurers agreed to reforms aimed at introducing greater transparency and ensuring more competitive operation. The creation of the Aviation Insurance Clauses Group (AICG) now allows policyholders to participate officially in the drafting of standard clauses. In addition, a new Aviation Liaison Forum has replaced the former Joint Executive Committee, with a narrower remit to avoid excessive coordination between the main insurers' associations. A crisis management protocol has also been put in place to try to maintain a minimum of competition even in periods of strong market tension.
What is the applicable legal framework?
Airline insurance does not operate in a legal vacuum. On the contrary, it is subject to a complex set of rules drawn from a variety of sources, including providing a framework for contractual freedom despite the fact that it claims to deal with "major risks".
The predominant influence of air law
The aviation industry itself is one of the most regulated in the world. Safety is the number one concern. The 1944 Chicago Convention lays the foundations for international regulations, which are set out at national level in texts such as the French Civil Aviation Code. These texts impose very strict requirements on the design, construction, maintenance and airworthiness of aircraft, as well as on crew training and licences. Scrupulous compliance with these standards, monitored by authorities such as the French Civil Aviation Authority (DGAC), forms the technical basis on which insurers assess risks and grant cover. Failure to comply with these rules may result in a refusal of cover in the event of a claim.
In addition to technical safety, air law also governs commercial relations, in particular the contract of carriage. Passenger rights have been significantly strengthened, for example by European regulation n∘261/2004, which imposes compensation and assistance obligations in the event of denied boarding, cancellation or long delay.
As mentioned above, developments in air carrier civil liability, driven by international conventions (gradual transition from Warsaw to Montreal), have a direct impact on insurance needs. The increase in compensation limits and the widening of the range of losses covered are forcing airlines to take out higher levels of civil liability cover.
The role of insurance law
Paradoxically, the French Insurance Code is relatively silent on aviation insurance. Article L. 111-1 specifies that the general rules governing insurance contracts (Titles I, II and III of Book I) only apply to land-based insurance, with some exceptions. Marine and river insurance have their own rules (Title VII). Air insurance is only mentioned incidentally, for example to exclude it from the natural catastrophe compensation scheme for damage to aircraft (article L. 125-5).
This silence has long fuelled legal debate. In practice, however, the French supervisory authorities have historically required that aviation insurance policies marketed in France refer to the Insurance Code. This practice, which has become something of a custom, has led to most policies mentioning that they are governed by the Insurance Code.
This reference, although pragmatic in origin, is not without consequences. It subjects de facto aviation insurance contracts to the numerous public policy provisions of the French Insurance Code, initially designed to protect policyholders in the context of "mass" land-based insurance. For example, the rule whereby the insurer may raise against the third party victim the defences that it could raise against its insured (article L. 112-6) has been applied by the Cour de cassation to aviation insurance. This undermines the idea of total contractual freedom in this area, which is nevertheless classed as a "major risk" where the parties are supposed to be more balanced (article L. 111-6).
A partial clarification came with Ordinance n∘ 2011-839 of 15 July 2011 and its implementing decree n∘ 2012-850 of 4 July 2012. These texts created specific chapters in the Insurance Code for air and aviation risks. In particular, they specify that the general rules of the terrestrial insurance contract (Titles I to III of Book I) apply compulsorily to contracts underwritten by aeronautical associations (aeroclubs) and, optionally, to those underwritten by professionals exclusively using certain types of light aircraft (less than 5700 kg for aircraft excluding turbojets, less than 2700 kg for others). For other aviation insurance policies, particularly those taken out by the major airlines, the applicable law remains unclear, although reference to the Insurance Code remains the dominant practice.
The insurance obligation: a growing requirement
Finally, as in many other high-risk areas, the obligation to take out insurance has developed in the aviation sector. French law has long imposed a civil liability insurance for a wide range of players: airfield operators, flying clubs, air show organisers, etc. This insurance is often a condition for obtaining administrative authorisation to operate the business.
The European Union has also strengthened these requirements, notably with Regulation n∘785/2004 of 21 April 2004, which came into force in 2005. This text, directly applicable in the Member States, imposes minimum insurance requirements on air carriers and aircraft operators operating in European airspace (intra-EU flights, to or from the EU). The aim is to bring cover into line with the levels of liability set out in the Montreal Convention.
The regulation requires minimum cover for liability in respect of passengers, baggage, cargo and third parties on the ground. It also explicitly requires the policy to cover risks related to acts of war, terrorism, air piracy, sabotage, unlawful seizure of aircraft and civil disturbance. Minimum amounts of insurance are set, varying in particular according to the weight of the aircraft for liability towards third parties.
The regulation provides for exclusions for certain types of aircraft (state aircraft, scale models, certain microlights and light gliders for non-commercial use). However, the wording remains ambiguous as to whether this exclusion is aimed solely at the obligation to insure against the risks of war/terrorism for these aircraft, or whether it exempts them completely from the obligation to insure under the regulation. The most likely interpretation, confirmed by the recitals of the text, is a total exemption, but the text needs to be clarified.
Operators must prove that they are complying with these obligations by filing a certificate of insurance with the competent authorities of the Member State. Non-compliance may result in "effective, proportionate and dissuasive" penalties, up to and including withdrawal of the operating licence for a European carrier or refusal to land for a non-European carrier. It should be noted, however, that no mechanism of the "central pricing office" type, as exists for motor insurance, is provided for to force an insurer to cover a risk that the market would refuse.
The complexity of the risks and legal framework of aviation insurance requires expert analysis. To check the compliance of your cover or assess your needs, our practice is at your disposal.
Sources
- Insurance Code (in particular art. L. 111-1, L. 111-6, L. 112-6, L. 125-5, L. 171-5 et seq.)
- Civil Aviation Code (in particular art. L. 321-3)
- Regulation (EC) No 785/2004 of the European Parliament and of the Council of 21 April 2004 on insurance requirements for air carriers and aircraft operators
- Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights
- Convention for the Unification of Certain Rules for International Carriage by Air (Montreal Convention) of 28 May 1999
- Convention for the Unification of Certain Rules Relating to International Carriage by Air (Warsaw Convention) of 12 October 1929
- Convention on International Civil Aviation (Chicago Convention) of 7 December 1944
- Order no. 2011-839 of 15 July 2011 on transport insurance
- Decree no. 2012-850 of 4 July 2012 specifying the aviation and aeronautical insurance contracts subject to certain provisions of the Insurance Code
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