Airline insurance: covering aircraft and liabilities

An airline is constantly juggling considerable issues. On the one hand, its aircraft represent assets of immense value, exposed to the risk of damage or loss. On the other hand, as a carrier, it is exposed to potentially heavy civil liability towards its passengers, freight forwarders and third parties on the ground. Faced with these challenges, having solid, tailored insurance cover is not an option, but a vital necessity for a company's long-term survival. Let's explore the main types of cover specifically designed for air carriers, whether to protect the aircraft itself ('body' insurance) or to cover the various facets of their civil liability, with particular reference to the structures offered by French insurers (often designated by letters of agreement: A, B, C, etc.). We will also discuss a legislative innovation from 2024 concerning the legal nature of these policies.

Insuring the aircraft itself: hull cover

The first fundamental need of a company is to protect the value of its aircraft. This is the purpose of hull insurance.

Basic cover (standard Annex A agreement)

This fundamental guarantee covers property damage suffered by the insured aircraft, regardless of the cause (accident, collision, fire, etc.), as well as its disappearance or its flight (defined as fraudulent removal). Under certain conditions and within certain limits, cover generally extends to costs incurred in rescuing or repairing the equipment, or removing and disposing of the wreckage after an accident.

Naturally, this cover includes exclusions. Some of these are standard and are designed to delimit the accidental risk from normal wear and tear or intrinsic defects. Typically, this excludes damage caused by progressive wear and tear, structural fatigue (a major issue in aeronautics), obsolescence, erosion or corrosion, unless the latter is the result of a sudden and unforeseeable event. Progressive damage to engines caused by repeated absorption of debris (sand, gravel, ice, etc.) may also be excluded, as it is considered to be wear and tear rather than a genuine accident. Another frequent exclusion concerns damage to the aircraft when it is itself being transported by land, sea or even air (for example, a small aircraft carried in the hold), unless there is a specific agreement to the contrary.

It is important to note that even if hull insurance covers the aircraft, disputes may arise over the circumstances of the accident and the application of cover. Recent case law provides some insight:

• A ruling by the Limoges Court of Appeal on 22 February 2018 (no. 16/01025) held that the damage caused to an aircraft hit on the ground by a runway tractor fell within the scope not of specific aviation law but of the Law of 5 July 1985 on traffic accidents involving a motorised land vehicle (MLV). Although the tractor was on the tarmac (not open to public traffic), it was a VTM by nature, and its involvement was sufficient to trigger the application of this law, which was potentially more favourable to the victim.
• The Court of Cassation (Civ. 2e, 24 Sept. 2020, no. 19-15.375) has upheld a clause limiting cover in a helicopter hull policy. The clause restricted cover to flights carried out by a named list of authorised pilots. As the loss occurred while the aircraft was being flown by a person not named in the endorsement in force, the Court ruled that the clause, which defined the conditions for the performance of the insured's obligation and was not abusive (it did not render the cover meaningless), should be applied and that the insurer therefore did not have to pay compensation. This underlines the importance for airlines of scrupulously checking that the use of their aircraft (in particular the qualifications and authorisations of pilots) complies with the exact terms of their policies.

Possible extensions: war risks and spare parts

Basic cover generally excludes the risks associated with conflicts and major disturbances. To compensate for this, companies can take out specific extensions.

• La Special agreement A1 (in the usual terminology used by insurers) provides cover, subject to specific conditions and limits, for material damage and loss suffered by the aircraft, as well as its loss of possession, resulting from the risks of war, invasion, acts of hostility, civil war, revolution, insurrection, martial law, but also riots, popular movements, acts of malice, sabotage, acts committed for political or terrorist purposes, hijacking or attempted hijacking. This cover has become particularly sensitive and costly since 2001.
• La Special agreement A2 is designed to guarantee reimbursement of the damage suffered by the owners. spare parts (including engines and expensive equipment) belonging to the insured or in his custody, and intended to be fitted to the insured aircraft.

Cover the company's civil liability

Insuring the aircraft is one thing, but covering the civil liability that the company incurs as a result of its operations is just as fundamental. This liability may be incurred towards different categories of people, and insurance policies reflect this diversity. The general framework remains that defined by the Warsaw and, above all, Montreal international conventions, which set out the conditions and limits of the carrier's liability.

General civil liability linked to the accident (standard Annex B agreement)

This is the basic form of liability cover. It covers the financial consequences of bodily injury or property damage caused to third parties as a result of an accident involving the insured aircraft. The concept ofaccident The classic definition is: any sudden, unforeseeable event, external to the victim or the damaged object, which constitutes the cause of the damage.

Visit insured under this policy, not only the airline taking out the policy, but often also the owner of the aircraft (if different) and any person having, with their authorisation, custody or control of the aircraft (pilots, crew, etc.). On the other hand, as this is an insurance for liability towards third partiesHowever, it does not cover damage suffered by the insured person him/herself, nor generally by his/her relatives (spouse, ascendants, descendants), legal representatives or agents (employees) when these persons are carried on board and are victims of the accident. They will have to seek compensation through other channels (social security, individual insurance, etc.).

The police make an important distinction between third party in the strict sense (non-transported persons) and occupants of the aircraft.

• The occupants (mainly passengers) compensation is subject to the rules of the transport contract and international conventions. In order for cover to apply, policies often require a regular ticket to have been issued (a ticket or, more recently, an electronic itinerary receipt). Cover mainly relates to personal injury suffered on board, or during embarkation and disembarkation operations. An extension is sometimes provided for certain ancillary material damage: clothing worn by passengers, and possibly baggage and goods carried in the cabin or hold, but often only in the event of "fire". major accident "of the aircraft. This notion of a "significant" accident is rather vague and open to interpretation; it is probably intended to exclude minor incidents that are not serious for the aircraft itself. In all cases, cover is limited by ceilings set out in the policy terms and conditions, per person and/or per event.

Accepted" civil liability (standard Annex B1 agreement)

This agreement offers a special mechanism designed to facilitate and speed up compensation for passengers who are victims of personal injury accidents, by avoiding the risks and delays of liability proceedings. The principle is as follows: theinsurer waives to avail itself of the means of defence that the law or international conventions might offer the airline to decline its liability (cases of exoneration, need for the victim to prove fault, etc.). In essence, the insurer "admits" the liability of its insured.

The quid pro quo is essential: victims (or their heirs) who accept this compensation definitively waive any right of recourse legal action against the company, its agents or its insurers. Any legal action on their part will result in the loss of the benefit of the "admitted" cover.

In principle, this cover applies to all persons on board (whether carried for payment or free of charge), even those who would normally be excluded from classic B cover (such as company employees), with the notable exception of crew members on duty.

The legal nature of this insurance is hybrid. It is inspired by third-party liability insurance, because the compensation paid is intended to make good the actual loss suffered by the victim (and benefits from social security bodies are deducted). But it is also inspired by personal injury insurance because the compensation is contractually capped per passenger, regardless of the actual total loss, which could be higher. There is generally a short limitation period (often two years from the date of the accident) for claiming this cover.

Civil liability for goods and baggage (standard Annex C Convention)

Symmetrical to the B guarantee for individuals, the C agreement covers the contractual liability of the air carrier specifically for damage to goods and checked baggage entrusted to it. It is essential not to confuse it with "cargo" insurance (which we will look at in a later article), which is taken out by the sender or recipient to cover the value of the goods themselves. Agreement C only covers what the carrier is legally obliged to pay its customers as compensation for damage to their goods, within the limits of its legal or contractual liability.

For cover to apply, a number of conditions are often required: existence of an appropriate transport document (air waybill, baggage claim form), compliance with packaging rules, and possibly payment of an additional tax if a 'declared value' higher than the standard liability limits has been taken out by the customer.

Many exclusions Specific exclusions exist: damage resulting from poor packaging or wrapping by the sender, inherent vice of the goods, loss of transit (loss of weight or volume normal for certain products), consequences of smuggling or illicit trade, etc. Some exclusions are redeemable (transport of valuables such as jewellery). Damage due to temperature (break in the cold chain) is often excluded, except in the case of a "major accident" involving the aircraft.

La warranty period corresponds to the period during which the carrier has custody of the goods, from the time they are picked up until they are delivered, often including a limited period of storage (e.g. 48 hours) before or after the theft.

A key point concerns the guarantee ceiling the insurer only covers the carrier's liability up to the liability limits provided for by international conventions (Warsaw/Montreal) or applicable law. Even if, for one reason or another (gross negligence, for example), the carrier were required to pay compensation in excess of these ceilings, the insurer would only pay up to the standard legal/conventional limit. It is sometimes envisaged that the insurer will advance the total compensation due by the insured (up to the policy limit) but may then take recourse against its own insured to recover the portion in excess of the legal/consensual limit.

New for 2024: insurance policies as transferable securities

A recent development is worth noting. Law no. 2024-537 of 13 June 2024 aimed at increasing the financing of businesses and the attractiveness of France introduced a new category of financial securities: "transferable securities". Interestingly, Article 17 of this law amends Article L. 112-5 of the Insurance Code to specify that marine insurance policies, aviation and aeronauticsand inland waterway liability policies, cargo liability policies, and space liability policies can now be covered by to order or in bearer form.

This means that the right to indemnity under these policies can be more easily transferred from one person to another, by simple endorsement (if to order) or tradition (if to bearer), rather like a cheque or promissory note. The law also explicitly states that these policies may be drawn up, signed, transferred and kept in electronic form. This measure is intended to facilitate certain commercial and financial transactions in which insurance plays a guarantee role. Its practical impact on airlines has yet to be assessed, but it opens up new possibilities for managing their cover.

Airline insurance is a complex mix of vital cover, the terms of which must be precisely negotiated and understood. For a precise assessment of your policies and to ensure that they correspond to the real risks of your operation, contact our practice.

Sources

• Standard policies and related agreements (A, A1, A2, B, B1, C) of French insurers (implicit reference based on practices described in the AFSAT/FFSA source document)
• Insurance Code (general principles, in particular L. 112-5 as amended, L. 112-6, L. 113-9, L. 113-11, L. 121-12, L. 124-3)
• 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
• Law no. 2024-537 of 13 June 2024 aimed at increasing business financing and the attractiveness of France (Article 17)
• Case law cited (e.g. CA Limoges, 22 Feb. 2018, no. 16/01025; Civ. 2e, 24 Sept. 2020, no. 19-15.375)