Of insurance and liability in flying

As a passenger, and more so in Africa, you need to be wary of flying airlines that are registered in loosely regulated countries as some governments do not place a premium on insurance. FOTOSEARCH 

By Michael Otieno

In Summary

• As a passenger, and more so in Africa, you need to be wary of flying airlines that are registered in loosely regulated countries as some governments do not place a premium on insurance.

Last week I happened to be have been seating next to a top executive of one of the leading regional banks on a flight to South Africa. As is the norm for business travellers when the mood is right, striking a conversation is instantaneous.

Business class, like private clubs and golf courses are places you can make meaningful contacts.

Going by his reading material — Time magazine and The Economist, my initial expectation was a quiet flight. However, my current read, From Worst to First by retired Continental Airlines CEO Gordon Bethune got the banker’s attention.

We struck a conversation, and as soon as I realised he was a banker from his business card, the natural ice-breaker was the recently enacted Banking Act in Kenya that capped interest rates. The discussion soon turned to aviation, a subject I could tell piqued his interest.

Of the many topics we discussed, he seemed most interested in aviation insurance. The questions came thick and fast: How is compensation determined in the case of loss of life in an air crash? Does compensation follow the same principles that apply to the other sectors of general insurance or motor vehicle insurance?

For instance, Emirates recently had an incident at its hub in Dubai. There was no loss of life yet the media reported that the airline paid out compensation to the tune of $7,000 per passenger. In the case of loss of life, does this figure go up?

I could tell the banker was looking for specifics.

Broadly speaking, aviation insurance is divided into hull insurance and liability insurance. The former covers physical damage to the aircraft while the latter covers the contingency that an aircraft mishap may cause damage to passenger, passenger baggage and personal articles, third party persons or property.

Most aviation authorities or regulators will not allow an airline to operate aircraft without valid insurance cover. However, as a passenger (and more so in Africa), you need to be wary of flying airlines that are registered in loosely regulated countries as some authorities do not place a premium on insurance.

The premium is also dependent on the safety record of an airline. It is a common fact that when an airline attains IOSA certification the cost of insurance covers and premiums significantly go down.

With more companies underwriting aviation insurance, it’s a buyer’s market. Premiums are at historic lows and a wide range of coverage is available. However, some airlines, due to cost/profit considerations, will opt for insurance underwriters in markets where their main drive is increasing their profits and not pay claims, or drag out claim procedures for inordinate amounts of time.

It is also worth noting that the standard aviation insurance covers as offered to airlines include some exclusions specifically geographical/territory, conflict or war areas, and countries in violation of United Nations sanctions.

However, it is the aspect of liability insurance in aviation that got the banker most interested. There are two international conventions that govern liability of carriers and compensation limits; the Warsaw and the Montreal Conventions.

Ratified in 1929, the Warsaw convention set minimum compensation for passenger death or bodily injury at 250,000 francs (approximately $8,300) unless the passenger proves wilful misconduct on the part of the carrier.

On the other hand, the Montreal Convention which came into effect in 1999 intended as a replacement of the Warsaw Convention sets the minimum compensation at approximately $165,000 regardless of fault as long as the airline is based in a country that has ratified the treaty

While most African states have signed the Montreal Convention, it is worth noting that in East Africa only Kenya and Tanzania have ratified it.

What is surprising though is that once the compensation process is underway the nationality of the victims comes into play with some nationalities getting nearly five times what others get, depending on local law where they use to sue for compensation.

It is instructive to note that punitive damages are not awarded under these conventions however where negligence or deliberate action on the airline is established as leading to an incident or accident, the carrier can be found liable over and above the set limits of liability threshold.

One sensitive area of aviation insurance is pilots. It is common practice for insurers to list pilots in the policy document by name, qualification, certification including current medicals, rating and flying hours. In case of an incident or accident, focus always shifts to the crew, their mental and physical state before anything else is considered as a cause.

Michael Otieno is an aviation consultant based in Nairobi. Twitter: @pmykee143, Email: michael@sadimsolutions.com.