MH17: Confusion extends to the insurance industry

Published by Cherry Chan on

On 17 July 2014 Malaysia Airlines Flight MH17 crashed over Ukraine, about 40km from the Ukraine-Russia border.  The Boeing 777 was flying from Amsterdam to Kuala Lumpur, at 33,000 feet, when it is believed to have been shot down by pro-Russian rebels using a Buk surface-to-air missile system.  There were 298 passengers and crew aboard, most of whom were from the Netherlands, and all of whom perished in the disaster.

This tragic incident has shocked the world and everyone at Barnett Waddingham offers their deepest condolences to the families of the crew and passengers on board.

In the aftermath of the initial shock, confusion over what happened and who is responsible has extended to the insurance industry with experts disagreeing on which policy will pay out and who may be liable.

Who will pay for the loss of MH17 and its 298 passengers and crew?

The Montreal convention, a treaty concerning compensation for the victims of air disasters, already states that Malaysia Airlines is under obligation to pay initial payments of up to US$170,000 per passenger, whether it is partially responsible or not.  If negligence can be proved, then the airline could be liable for an unlimited amount on the basis of lost earnings and family support.

Early indications suggest that Etiqa Insurance[i] , a Malaysian based insurer, underwrote 100% of the risk on the hull and liability cover.  The majority of this was then ceded to Allianz SE[ii] , through its speciality lines subsidiary, Allianz Global Corporate & Specialty (AGCS), as the lead reinsurer on aviation hull and liability risks for Malaysian Airlines.  Nearly every insurance policy taken out on expensive, multi-million pound airliners, such as the Boeing 777 involved in the crash, have 'wartime exclusion' clauses included.  These clauses ensure that the insurance companies that underwrite the risk of the aircraft are not liable if the plane is destroyed through either an act of terrorism or war.

The key question here is will the wartime exclusion clause be triggered given there has been no formal declaration of war between Russia and Ukraine?  Expert opinion is split, with some saying that the clause probably will apply, but others are not so sure. Bill Coffin[iii], group editorial director for the insurance industry publication 'National Underwriter' says the wartime clause would probably apply to flight MH17, whereas Rick Roberts[iv] , vice president of the Risk and Insurance Management Society believes that 'in this case, the lack of a war declaration means the exclusion wouldn’t apply'.

Luckily, it seems that Malaysia Airlines also took out additional insurance coverage in case the wartime exclusion clause would ever kick in.  Therefore if the clause does apply, then the cost of the plane, valued by Aon at US$97.3m, will fall to the niche aviation war market.  In a statement released on July 21 2014, Atrium Underwriting Group Chief Executive Richard Harris[v] confirmed Atrium as the lead hull war policy insurer and stated that the 'collection of funds and preparation of settlement documents has been instigated'.

However, it would seem that the passenger liability claims will still be covered by the aviation ‘all risks’ policy and not by the war policy.  The liability per passenger will likely be capped unless the airline is deemed to have been negligent.

Is Malaysia Airlines liable?

At the time of the crash, there was a no fly zone over eastern Ukraine from ground to 32,000 feet.  This raises the question of why MH17 was flying just 1,000 feet above an airspace restricted by the Ukrainian government as a no fly zone.  Since the crash Eurocontrol has stated that “all flight plans that are filed using these routes are now being rejected.”[vi]

The difficulty for Malaysia Airlines is that United States and European air regulators warned in April that airlines should avoid flying over the Crimean peninsula and parts of Ukraine.  However, Malaysia Airlines was just one of many airlines that continued to fly over the area, along with Air India and Lufthansa AG, according to Mark Duell[vii] , vice president of operations at FlightAware.com, a flight-tracking website. “It doesn’t seem anyone’s been avoiding Ukraine” Duell said.  “I don’t see airlines going over Crimea, but I don’t see anyone avoiding the rest of Ukraine.  ”This was the case despite the fact that in the weeks leading up to the MH17 disaster, there were 3 separate instances of Ukrainian military planes being shot down over Ukrainian airspace.

On June 6 and June 16 2014, rebels shot down Ukrainian military planes using small, shoulder mounted, missile launchers called MANPADS, with a maximum effective altitude of 11,500 feet.  Therefore it could be argued that Malaysia Airlines had no reason to believe that the rebels had the capability to shoot down high-altitude planes.  However, on July 14 2014, a Ukrainian military transport plane was hit by a missile while flying over eastern Ukraine at an altitude of 21,000 feet – far beyond the range of a system like MANPADS. This indication of the capability of the rebels to target planes at high altitudes occurred three days before the shooting down of MH17. It could be argued that this should have served as a warning to airlines to avoid Ukrainian airspace, as although restricted airspace is not for airlines to decide, additional consideration should be given in situations such as this. As Brent Spencer of Embry-Riddle Aeronautical University said; “The fact that the airspace is not restricted doesn’t mean you don’t need to give extra consideration whether you want to fly there or not.”

If not Malaysian Airlines, then whom?

On the other hand, RMIT aerospace and aviation safety expert Dr Reece Clothier[viii] stated that "ultimately the decision to keep the airspace above Ukraine open was the responsibility of the Ukrainian (aviation) authority", rather than Malaysia Airlines itself. It is also possible that the aviation authorities of Malaysia and the Netherlands may be liable for permitting a flight over a known war zone.

The Buk surface-to-air missile system is sophisticated military technology, and it is thought by senior US intelligence officials that the rebels were trained and equipped by the Russian military. If the complicity of the Russian government can be proven then the Malaysian government, which owns Malaysia Airlines, could seek damages and compensation, and take them to international court. This would be reminiscent of the incident on July 2 1998, where an Iran Air 655 Airbus was hit by US navy ship, Vincennes, at an altitude of 14,000 feet after it was mistaken for an Iranian fighter plane. In that case, the US did not admit legal liability, but agreed to pay US$213,000 per passenger, in compensation to the families of the Iranian victims.

Consequences of this disaster

Malaysia Airlines was already having problems as a result of the loss of MH370, and these problems are only compounded by the destruction of MH17, calling in to question the viability of the company, having not turned a profit since 2010.

The recent events are expected to have an impact on the premiums for the aviation market. According to Barclays bank, “the aviation war market has recently been pummelled by a series of losses,” including fighting at the Tripoli Airport in Libya that cost the market between US$200 million and US$400 million in damages to aircraft. There is concern that the premium for the war market is not nearly enough to cover the claims that it is facing. This may lead to a major increase in premiums payable by airlines for specialist aviation war cover.

Our thoughts

With hindsight it is easy to say what parties could have done better.  Even if Malaysian Airlines had imagined this scenario, arguably it may be outside of what they considered to be in the realms of possibility because it has never happened before to a civilian aircraft at that altitude – one of the behavioural economics theories!

Despite the uncertainty and confusion surrounding the disaster, we must not forget the family and friends of the passengers and crew on board, and our thoughts are with them in this difficult time.

[i] http://www.thesundaily.my/news/1119996

[ii] http://www.asiainsurancereview.com/News/View-NewsLetter-Article/id/30732/Type/eDaily

[iii] http://mashable.com/2014/07/17/who-will-pay-insurance-for-malaysia-airlines/

[iv] http://mashable.com/2014/07/17/who-will-pay-insurance-for-malaysia-airlines/

[v] http://www.postonline.co.uk/post/news/2356422/atrium-agrees-to-settle-mh17-hull-war-loss

[vi] https://uk.news.yahoo.com/eastern-ukraine-airspace-closed-europe-195715584.html#3qxmIHt

[vii] http://uk.reuters.com/article/2014/07/18/ukraine-crisis-airplane-insurance-idUKL2N0PT06X20140718

[viii] http://www.abc.net.au/news/2014-07-23/mh17-who-decides-if-planes-can-fly-over-war-zones/5616684