The September 2001 terrorist attacks remain unprecedented events causing tremendous economic loss never truly contemplated by governments or the insurance industry, provoking a sudden market reaction. As a result, the hard market in aviation insurance coincided with a hard reinsurance and global specialty market. Today, however, some 14 years later, the aviation insurance world is still experiencing a long-term “soft market.” While insurance market capacity was high, legal actions and litigation did not see any type of notable activity. With the significant aviation losses experienced in 2014, the insurance market has been compelled to react, and it would be logical to see increased legal activities as a result. With the political theater and, most notably, the players in the Middle East evolving and morphing to extraordinary degrees, that may cause the insurance and legal terms included in war risk insurance to be reassessed as well.
War risk insurance is typically a special risk policy that may be purchased for an additional charge on the London insurance market. See AVN 48B: War, Hi-Jacking and Other Perils Exclusion Clause (Aviation) (issued Nov. 12, 1969). Most aviation insurance contracts avoid “war risks” by using AVN48B—the “War, Hijacking and Other Perils Exclusion Clause.” Bart Elias et al., Cong. Research Serv., R43715, Aviation War Risk Insurance: Background and Options for Congress 1 n.2 (2014). The AVN48B clause excludes coverage for a variety of causes, including “a wide range of military and terrorist actions, hijacking, strikes, riots, labor disturbances, and any ‘malicious act or act of sabotage’ or hostile use of atomic or radioactive device.” Id. If an air carrier pays an extra premium, AVN52 allows many excluded risks “to be covered under separate extension clauses.” Id. “Per AVN38B, the only universal exclusion for which no coverage is available is nuclear risks, when purchasing third-party war and allied perils liability coverage. Air carriers currently operate without insurance coverage for these risks.” Id. Finally, AVN52 coverage ends “if war breaks out between any of the five major powers, whether or not there is a declaration of war.” Id. In the United States, claims could be filed by airlines under the Federal Aviation Administration (FAA) Aviation War Risk Insurance Program. See 49 U.S.C. §§ 44301–44310 (2012); see also Fed. Aviation Admin., Premium War Risk Insurance (last modified Feb. 9, 2015) (“The Homeland Security Act of 2002 (HSA), Public Law 112-7 and subsequent legislation mandated the expansion of war risk insurance coverage to include hull loss and passenger liability and required continued provision of this insurance.”). This program was applicable for fiscal year 2014 but ended December 15, 2014.
The overarching question remains how to appropriately define a “war risk.” For example, does “war risk” require two warring countries, or does it include terrorist acts by nongovernmental organizations, for instance, Hamas (Islamic Resistance Movement), Al Qaeda (Ansar al-Islam), or Islamic State of Iraq and Syria (ISIS)? See, e.g., Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989 (2d Cir. 1974). One can consider a recent event like Malaysia Airlines Flight 17, where the Ukrainian ambassador stated that communications “prove that Russia is responsible for this tragedy” and “Russia created a warzone in Ukraine. Russia sends militants, sends heavy weapons, sends anti-aircraft weapons to Ukraine . . . and that’s why Russia is responsible together with those terrorists who [shot] down the airplane.” Lee Ferran & Brian Ross, “Who Are Pro-Russian Rebels Implicated in Missile Strike on Airliner in Ukraine?,” ABC News (July 18, 2014). On July 17, 2014, Malaysia Airlines Flight 17 (Boeing 777-200ER), a scheduled international passenger flight from Amsterdam to Kuala Lumpur, was shot down near Torez in Donetsk Oblast, Ukraine, by Russian-armed Ukrainian rebel forces, killing all 283 passengers and 15 crew on board. However, is this enough to trigger or maintain possible coverage via war risk insurance?
Before 1951, “aviation war risk insurance was commercially available but subject to 48-hour cancellation clauses, which proved particularly worrisome for operators participating in the Korean War airlift.” Elias et al., supra, at 3 (citation omitted). In 1951, Congress amended the Civil Aeronautics Act of 1938. Act of June 14, 1951, Pub. L. No. 82-47, § 1, §§ 1301–1312, 65 Stat. 65, 65–69 (repealed 1994). The 1951 act allowed the secretary of commerce “to provide war risk insurance when doing so was determined necessary in the interest of air commerce.” Elias et al., supra, at 3. Under this war risk insurance program, “[c]overage could be extended to both U.S.- and foreign-flag aircraft deemed to be operating in the interest of the national defense or the national economy of the United States” and “[c]overage could include aircraft, cargo, personal effects and baggage of crew and other employees carried aboard the aircraft, and statutory or contractual obligations or other liabilities.” Id.
The program established in 1951 provided the following features:
Premium insurance and reinsurance rates could be set by the Secretary of Commerce within loosely defined bounds based on analysis of available coverage and rates in the private insurance and reinsurance markets. Under the act, a revolving fund was established within the Treasury, funded through premiums, salvage, and other recoveries from loss. Any returned premiums, losses, settlements, judgments, or other liabilities covered under the insurance program would be disbursed by the Treasury from these funds. The federally provided war risk insurance could be underwritten by any company authorized to offer aviation insurance in any state. Disagreements regarding claims against the aviation war risk insurance fund could be adjudicated in federal district court.
The Federal Aviation Act of 1958, Pub. L. No. 85-726, tit. XIII, 72 Stat. 731, 800–806 (repealed 1994), continued the aviation war risk insurance program within the Department of Commerce. Elias et al., supra, at 3. “In 1966, under the newly created Department of Transportation, responsibility for the program was delegated to the FAA.” Id.
American courts have relied on “the analogous area of marine war risk insurance,” Airlift Int’l, Inc. v. United States, 335 F. Supp. 442, 447 (S.D. Fla. 1971), in order to develop and help interpret aviation war risk insurance law. Typically,
[t]he primary condition for recovery under the war risk policy is that the physical loss or damage must result from a risk excluded from the plaintiffs’ commercial aviation hull policy, the “all risk” policy, by the “war risk exclusion” or “free from capture and seizure” clause . . . ; basically, this means that the damage must be proximately caused by a risk of war or warlike operations.
Airlift Int’l, 335 F. Supp. at 446 (citing Standard Oil Co. of N.J. v. United States, 340 U.S. 54, 58 (1950); Libby, McNeill & Libby v. United States, 340 U.S. 71 (1950)).
In addition, “[t]he burden of proving that the loss falls within the war risk policy coverage—that the loss resulted from a war risk rather than an aviation risk—is on the plaintiffs.” Id. (citing United States v. Standard Oil Co. of N.J., 178 F.2d 488, 495 (2d Cir. 1949), aff’d, 340 U.S. 54 (1950)).
The determinative U.S. Supreme Court case is Standard Oil Co. of New Jersey v. United States, 340 U.S. 54, decided in 1950. “In [Standard Oil], the United States had issued a war risk insurance policy covering a vessel which collided with a United States Navy minesweeper.” Airlift Int’l, 335 F. Supp. at 447. The policy defined war risk, in part, as “‘loss, damage, or expense caused by or resulting from . . . all consequences of hostilities or warlike operations.’” Standard Oil, 178 F.2d at 489–90. The Supreme Court in Standard Oil held in relevant part that
[l]osses from collisions are prima facie perils of the sea covered by standard marine risk policies. To take such a loss out of the marine policy and to bring it within the coverage of the provision insuring against “all consequences of” warlike operations, common sense dictates that there must be some causal relationship between the warlike operation and the collision. . . . In turn, the existence or non-existence of causal connection between the peril insured against and the loss has been determined by looking to the factual situation in each case and applying the concept of “proximate cause.” . . . [Proximate cause] “refers to that cause which is most nearly and essentially connected with the loss as its efficient cause.”
340 U.S. at 57–58 (citations omitted).
“The Court of Appeals in the Standard Oil case was even clearer when it held that ‘not only must the vessel’s mission be one of war, but the warlike character of its operation must be the dominant and effective cause of the resulting catastrophe.’” Airlift Int’l, 335 F. Supp. at 447 (quoting Standard Oil, 178 F.2d at 490).
In United States aviation litigation, the seminal case regarding insurance coverage and the definition of war risk is Pan American World Airways, Inc. v. Aetna Casualty & Surety Co., 505 F.2d 989 (2d Cir. 1974). This case arose from events on September 6, 1970, when the Popular Front for the Liberation of Palestine (PFLP) hijacked New York–bound Pan Am Flight 083 from Brussels, which was hijacked over London skies and eventually flown to Cairo, Egypt. Id. at 993. After landing, “the passengers were evacuated” and “the aircraft was totally destroyed” by the PFLP. Id.
Pan American World Airways, Inc., had primary war risk coverage through the London insurance syndicates, which provided coverage for the perils excluded by the all-risk policies covering Pan Am for general property losses. Id. at 994. Pan Am had also purchased excess war risk coverage from the United States government, covering
loss or damage “resulting from the following perils: War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution or insurrection, military or usurped power . . . by any government or public or local authority or by any independent unit or individual engaged in irregular warfare.”
Id. at 995. See also Elias et al., supra, at 4 (citing Robert J. Cole, “Pan Am Hopes Federal Insurance Will Pay $9.6-Million in Destruction of Its 747,” N.Y. Times, Sept. 9, 1970, at 19) (“[The] FAA reportedly assum[ed] about 40 percent of the war risk.”).
The various underwriters insuring the aircraft disputed which one should bear the loss. The coverage for the loss was dependent on whether the hijacking “was proximately caused by an agency fairly described”—for insurance purposes—in the war risk exclusion. Pan Am., 505 F.2d at 993.
The all-risk and war risk policies were mutually exclusive where the risks covered under one policy were excluded under the other, and vice versa. The all-risk insurers contended that there was no coverage because of the war risk exclusion. At trial, the all-risk insurers produced evidence “relating to the history of war and political tension in the Middle East” and focused on the “political unrest in Jordan.” Id. at 996. The all-risk insurers also introduced evidence that the PFLP or other Palestinian Arab groups “operated as paramilitary quasi-governments in parts of Jordan,” independent of then-King Hussein’s authority and, therefore, were a “‘military . . . or usurped power.’” Id. Similar evidence was introduced to establish that the loss of the aircraft “was caused by an ‘insurrection’ in Jordan” because the PFLP intended to overthrow King Hussein. Id. The all-risk insurers claimed that various Fedayeen organizations of Palestinian refugees were “engaged in violent clashes with the Jordanian Army” that culminated in “a 10-day ‘civil war’ following the September 1970 hijacking.” Id. The all-risk insurers also argued that the hijacking constituted a “war” and “warlike operations” because the PFLP engaged in “guerilla warfare.” Id. The all-risk insurers also attempted “to connect the Pan American hijacking with other hijackings committed on the same day” and claimed that, taken together, the hijackings “constituted a single ‘civil commotion.’” Id. The war risk insurers introduced evidence “that the hijacking over London was not proximately caused” by any events in the Middle East. Id. at 997.
The Second Circuit Court of Appeals affirmed the trial court’s ruling that the status and activities of the PFLP did not fall within the war perils enumerated in the war risk policies and that, therefore, the war risk policy was not applicable. Id. at 997–98. The Second Circuit began its analysis on the proximate causation issue with the conclusion that “[r]emote causes of causes are not relevant to the characterization” of the insured loss. Id. at 1006. The proper proximate cause analysis “limit[s] the inquiry to the facts immediately surrounding the loss” and “does not trace events back to their metaphysical beginnings.” Id. (citing Standard Oil, 340 U.S. at 58; Airlift Int’l, 335 F. Supp. at 449).
The Second Circuit found that the “events drawn from the general history of unrest in the Middle East did not proximately cause the destruction” of the aircraft, but that “in some attenuated ‘cause of causes’ sense, the loss may have resulted from the Fedayeen or PFLP pattern of military operations against Israel. . . .” Id. at 1007. The court held that the immediate cause of the loss was the two men taking the aircraft by force and diverting the aircraft from its intended destination. Id. In making such a conclusion, the circuit court held that “the proximate cause of a loss resulting from a taking” of property, which is then destroyed, “is determined by the nature of the taking” and not the events following the taking. Id. at 1008 (emphasis added). The court cited Sunny South Aircraft Service, Inc. v. American Fire & Casualty Co., 140 So. 2d 78 (Fla. Dist. Ct. App. 1962), and summarized the case: “The airplane [in Sunny South] was hijacked in the United States and taken to Cuba where it was damaged by a Cuban military plane. The court found that the loss was proximately caused by theft rather than by warlike activity” and that the loss did not fall within an exclusion that excluded loss “‘due to war . . . rebellion or revolution.’” Pan Am., 505 F.2d at 1008. Similar to Sunny South, Pan American held that the parties to the insurance contract never “intended that the caprice of the hijackers would control the insurance consequences of the loss.” Id. To hold otherwise would mean that a hijacker’s whim would control the outcome in any given case. Pan Am., 505 F.2d at 1008.
In concluding that the loss did not result from destruction by a “military or usurped power” in Jordan, the Second Circuit noted that for the PFLP to be defined as a “military” or “usurped” power, the PFLP would need to “control a substantial territory with trappings of state sufficient to constitute” a “de facto government.” Id. at 1009. Cf. Jaime Fuller, “‘ISIS’ vs. ‘ISIL’ vs. ‘Islamic State’: The Political Importance of a Much-Debated Acronym,” Wash. Post (Sept. 9, 2014). The fact that the PFLP occupied “a narrow strip of land located in a trackless wasteland of desert and lava flows, devoid of life and structure” was not significant. Pan Am., 505 F.2d at 1012. The PFLP did not constitute a “usurped power” because it was not an invading foreign enemy or “an internal armed force in rebellion ‘sufficient to supplant the laws of the land and displace the constituted authorities.’” Id. at 1011 (citation omitted). While King Hussein had negotiated with the PFLP for the release of the hostages on the aircraft, the court held that this was insufficient to “establish that the PFLP was being dealt with as a government.” Id. at 1012.
The Second Circuit noted that, on the date of the hijacking, a ceasefire was being observed and that “there was no ‘war’ in the Middle East.” Id. at 1013.The court cited Shneiderman v. Metropolitan Casualty Co. of New York, 220 N.Y.S.2d 947 (N.Y. App. Div. 1961), summarizing the holding: “[T]he decedent’s death from artillery fire in Egypt was not caused by ‘war’ because it occurred after the 1956 ceasefire.” Pan Am., 505 F.2d at 1013. See also N.Y. Life Ins. Co. v. Durham, 166 F.2d 874, 876 (10th Cir. 1948); Mut. Life Ins. Co. of N.Y. v. Davis, 53 S.E.2d 571, 575 (Ga. Ct. App. 1949). Consequently, the court held that the loss of the aircraft was not “proximately caused by any ‘war’ being waged by or between recognized states.” Pan Am., 505 F.2d at 1015.
In rejecting the all-risk insurers’ contention that the loss was due to a “guerilla war” waged by the PFLP against Israel or the United States or both, the court held that even guerilla groups “must have at least some incidents of sovereignty” before their activity can properly be termed a war. Id. at 1013. The evidence here did not support a claim that the PFLP had sovereignty. In addition, although the evidence suggested that the PFLP had “conducted guerilla warfare against Israel,” this evidence was too attenuated to conclude that any possible guerilla warfare against Israel caused the hijacking. Id. at 1015. The court rejected the use of “self-serving propaganda” as evidence that a guerilla war existed between the PFLP and the United States because “radical rhetoric” could not affect insurance coverage. Id.
The court also concluded that the loss of the aircraft was not caused by any act that was “recognized as a warlike act”: The “hijackers did not wear insignia” and “did not openly carry arms,” the hijacking “had criminal rather than military overtones,” and the hijackers “were the agents of a radical political group, rather than a sovereign government.” Id. Also, the aircraft was not part of “a warlike operation” when it was hijacked because it did not carry any cargo from military stores, id. at 1017 (citation omitted), or general “cargo destined for a theater of war,” id. (citation omitted). See Queen Ins. Co. of Am. v. Globe & Rutgers Fire Ins. Co., 282 F. 976, 981 (2d Cir. 1922) (holding that, where a collision occurred between two merchant ships traveling the Atlantic Ocean in World War I, although one of the vessels carried a cargo intended for warlike use, “the character of the cargo” did not make the voyage “a warlike operation” because the “nature of the operation, and not the character of the cargo or the persons in charge,” is material to the issues (emphasis added)). In Queen Insurance Co. v. Globe & Rutgers Fire Insurance Co., 263 U.S. 487, 492 (1924), Justice Holmes wrote:
[T]he common understanding is that in construing these policies we are not to take broad views but generally are to stop our inquiries with the cause nearest to the loss. This is a settled rule of construction, and if it is understood, does not deserve much criticism, since theoretically at least the parties can shape their contract as they like.
In the Pan American case, the owner of the aircraft “was not the national of any Middle Eastern belligerent.” Pan Am., 505 F.2d at 1018. Pan American did not service any routes destined for Middle Eastern belligerents, and “the aircraft was not near or over the territory of any belligerent or any theater of war” when it was hijacked. Id. at 1018–19.
The evidence regarding the PFLP’s intent to overthrow King Hussein was inconclusive. Id. The court noted that the PFLP was fighting for its own survival and hijacked the aircraft “to attract world attention to the Palestinian cause and to accumulate ‘victories’ as an example to other groups,” rather than to overthrow Hussein. Id. Therefore, the hijacking represented “a ‘symbolic blow’ in the PFLP’s fight against the United States,” but it did not result from an insurrection. Id. at 1019.
Finally, the Second Circuit noted that the aircraft was hijacked “while flying over a domestically stable area” and not from the site of a rebellion. Id. Consequently, the Second Circuit concluded that the war risk exclusion did not apply to the terrorist hijacking. Id. at 1022.
The United States and War Risk Insurance
After the September 11, 2001, terrorist attacks, airlines found it virtually impossible to buy insurance coverage for terrorist attacks and war risks from private insurers. Elias et al., supra, at Summary. Congress responded by expanding the FAA Aviation War Risk Insurance Program. Id.; see 49 U.S.C. §§ 44301–44310 (2012); see also Fed. Aviation Admin., supra (“The Homeland Security Act of 2002 (HSA), Public Law 112-7 and subsequent legislation mandated the expansion of war risk insurance coverage to include hull loss and passenger liability and required continued provision of this insurance.”).
The amended statute of 49 U.S.C. §§ 44301–44310 required “that the FAA offer war risk insurance to U.S. airlines with the premiums based on the cost of such coverage prior to the 9/11 terrorist attacks.” Elias et al., supra, at Summary. “The federal coverage under the program” was rather broad, “with coverage provided after the first dollar of losses and with a broad definition of what constitutes a war risk loss.” Id.; see 49 U.S.C. § 44302 (2012). In addition, “[t]he premiums paid for the insurance are deposited in a dedicated fund at the Treasury with the balance . . . invested in U.S. Treasury securities.” Elias et al., supra, at Summary. While prior balances have exceeded $2 billion,
according to FAA, the statutory cap on premiums has resulted in past premium amounts insufficient to cover the full risks assumed by the government. For example, the 9/11 attacks are estimated to have caused approximately $5.6 billion in aviation hull and liability losses, adjusted for inflation. A much smaller event could cause losses large enough to deplete the fund and require general fund revenue to cover claims.
With the FAA War Risk Insurance Program in place, when responding to events such as a Pan American-type hijacking and loss, or a Malaysian Airlines crash caused by military activities, the secretary of transportation would be authorized to provide war risk insurance and reinsurance if required by U.S. policy and if such insurance policies were not commercially available in the private insurance market. See 49 U.S.C. §§ 44301–44310 (2012). Furthermore, the FAA War Risk Insurance Program makes war risk insurance available to U.S. and foreign aircraft, although this availability would require the approval of the U.S. president. 49 U.S.C. § 44302(c) (2012).
The last extension was in the Consolidated Appropriations Act, 2014, Pub. L. No. 113-76, 128 Stat. 5, 5–643. However, this requirement expired as of December 15, 2014. Fed. Aviation Admin., supra.
The decisions of the district court and Second Circuit in Pan American reduced “[t]he need for a long-term federal role in providing” hijacking and terrorism aviation insurance. Elias et al., supra, at 4–5; see Pan Am., 505 F.2d 989; Pan Am. World Airways, Inc. v. Aetna Cas. & Ins. Co., 368 F. Supp. 1098 (S.D.N.Y. 1973). The district court held that Pan Am’s “all risk” policy, and not the war risk policy, covered the loss in that case, and the Second Circuit affirmed that holding. Elias et al., supra, at 4–5; see Pan Am., 505 F.2d 989; Pan Am., 368 F. Supp. 1098. The district court further “defined ‘act of war’ as an operation intended to gain a military advantage.” Elias et al., supra, at 4 (citing Pan Am., 368 F. Supp. 1098). The circuit court “narrowed the district court’s definition of war to specify that combatants must have significant attributes of sovereignty” and “conceded that while certain large terrorist organizations might attain some degree of sovereignty and political power, this was not characteristic of the small group that had perpetrated the hijackings in the Middle East.” Id. at 5 (citing Pan Am., 505 F.2d 989). “The court ruling meant that insurers offering ‘all risk’ policies were liable for the claim on the destroyed aircraft.” Id. (citing Daniel James Everett, Commentary, “The “War” on Terrorism: Do War Exclusions Prevent Insurance Coverage for Losses Due to Acts of Terrorism?,” 54 Ala. L. Rev. 175 (2002)).
It is readily apparent that terrorist attacks are increasing in the world and that aviation security is on high alert. The series of airliner losses in 2014 may lead to increases in aviation insurance premiums. These losses include the disappearance of Malaysia Airlines Flight 370 with 239 people on board over the Indian Ocean in March, followed by the shooting down of Malaysia Airlines Flight 17 over eastern Ukraine in July, killing 298 people on board. Further disturbing the aviation risk environment is damage to aircraft in recent attacks on airports, including Taliban attacks on Karachi airport in Pakistan in June 2014 and fighting at Tripoli airport in Libya. While the insurance markets debate the effect of these events on their premiums and capacity, litigation has not developed to such a point where a paradigm or dynamic shift can be measured.
Enhanced scrutiny by insurers will be applied when operators and airlines make risky decisions regarding flights over conflict zones. “Airlines routinely fly over conflict zones to minimize fuel costs and time unless expressly restricted, a practice that has been questioned in the aftermath of the Malaysia Airlines crash.” Elias et al., supra, at 12 (citing Harry Bruinius, “Malaysia Jet Tragedy: How Do Airlines Traverse War Zones?,” Christian Sci. Monitor (July 18, 2014). Following Malaysia Airlines Flight 17, it can be anticipated that insurance underwriters are considering “whether to provide continued coverage for aircraft operated in certain conflict zones” and will probably require “more details regarding flight routes.” Id.; see also Alistair Gray & Andrew Parker, “Underwriter Reviews War Zone Cover for Aircraft,” Fin. Times (Aug. 8, 2014). Coverage for flights over international “hot” zones in “certain areas in the Middle East and Africa” may be withdrawn. Elias et al., supra, at 12 (citing Alistair Gray, “Airline Insurers Face Biggest Bill since 9/11,” Fin. Times (July 27, 2014). Will these insurer considerations propel game-changing litigation regarding insurer disputes and declaratory judgments?
Armed insurgency groups like ISIS, or ISIL, whose very names and designations are being contested by the United States’ executive administration and agencies, are redrawing the map in the Middle East and achieving actual conquest of territory at an alarming rate. What will happen if ISIS or similar groups orchestrate future aviation hijackings or terrorist events? Will war risk insurance definitions hold up and neatly apply, or will the Pan American case continue to reliably provide the guiding beacon?
Keywords: mass torts litigation, war risk insurance, aviation, hijacking, Pan American World Airways, Inc. v. Aetna Casualty & Surety Co.