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02 June 2020 | 5-minute read
The current situation surrounding COVID-19 has helped to highlight a area of concern for many aviation insurance practitioners as the varying levels of information provided by Insureds and brokers have, on examination, led to a lack of clarity surrounding the coverage afforded by the excess non-aviation extension included within many aviation policies.
Non-aviation extensions were developed for justifiable reasons, for example, covering an airline for non-aviation risks related to operating aircraft, such as liabilities arising from liquor licencing laws. However, depending on how they are drafted and underwritten, these extensions can capture a wide range of non-aviation risks, including airport business interruption, holiday cancellation coverage, tour operator liability, sickness, disease or injury.
Excess non-aviation liability extensions provide a defined limit (typically up to $25m with examples seen of up to $100m, particularly in General Aviation market) of cover in excess of underlying non-aviation policies, such as commercial general liability, auto or workers compensation. The cover can be on an occurrence basis or in the aggregate, depending on the underlying policy. A broadening of terms and conditions in the competitive aviation insurance market over the years has led to these extensions of cover being used to leverage the deal.
One example that illustrates the problem is employers’ liability policies (workers’ compensation in the US). Excess non-aviation liability extensions could provide excess cover on underlying workers compensation policies where underlying limits are often low. In addition, the policy language and extent of exclusions used in domestic policies may differ, while following underwriters may be advised of the Schedule of Underlying Policies, details of the policy language or coverage are often obscure.
The current COVID-19 pandemic is a case in point. Broad excess non-aviation liability extensions potentially expose aviation insurers to losses they never intended to cover, such as business interruption, cancellation or employer’s liability claims related to infectious diseases.
Market practices in this area have important implications for insurers’ risk and exposure management, as well as Lloyd’s and regulatory compliance. Where non-aviation cover is offered, underwriters will need to give consideration to best practice and Lloyd’s requirements. Underwriters will also need to be able to demonstrate to regulators that they understand the risks they are accepting, and apply appropriate exclusions and limitations on cover where necessary.
Aspects for consideration:
- What is the extent of cover provided under non-aviation extensions?
- What underwriting information is necessary to be provided by the insured and the broker to allow underwriters to fully assess exposures?
• Is the cover correctly coded and premium allocated, as per market best practice?
- Is the coverage afforded by an extension available in the local specialist market?
- Will non-aviation losses benefit from an insurer’s reinsurance arrangements?
- To what extent do the typical aviation policy exclusions and policy terms apply?
• Should non-aviation cover be restricted to physical damage and bodily injury?
• Are following markets aware of the Schedule of Underlying limits?
- What is the claims history of the underlying policy(ies)?
- Are additional excess policies placed above the excess non-aviation limits?
• Where the underlying aggregate is greater than the per occurrence / employee / accident limit, does the non-aviation cover similarly scale?
- What if the underlying policy is either fully self insured or excess of a captive? Are additional measures taken to ensure the underlying policy is commercially available?
- How is the underlying limit assessed for suitability? Are attachment points at the correct level (statutory requirements, risk appetite, etc.)?
- How is the underlying coverage assessed for suitability? Does the coverage meet statutory requirements where cover is being afforded?
- Does the provision of this cover create any concerns regarding the calculation of aggregate limits?
- When applying exclusions and/or aggregate limits on this cover are underwriters satisfying themselves that such limitations are lawful/enforceable in that territory?
- Are communicable disease exclusions applied to non-aviation coverage?
The LMA Aviation Committee would welcome any comments and additional questions you may have. Please contact the secretary, James Straker-Nesbit (James.Straker-Nesbit@LMALloyds.com).
LMA Aviation Committee