Lately, it seems there is always “something” happening in the world that derails the stability of the aviation ecosystem. In 2020, it was COVID. The pandemic brought the aviation industry to a screeching halt, causing all of us to look at each other asking questions that nobody knew the answers to. COVID sparked serious concerns within the aviation insurance community (see “Aircraft Insurance and Pandemics,” King Air magazine, May 2020). The disruption gave grounded aircraft owners time to comb through their operating budgets to find potential savings. Many looked to their insurance policy for premium credits while their aircraft were hangared. It wasn’t just the general aviation market looking for refunds; the airline industry received major premium credits as well because their premiums are based on passenger miles flown.
Now the pendulum has rapidly swung the other way and we are back to aircraft shortages and high demand across the board. From pilots and aircraft to hangars and jet fuel, everything is in short supply and resulting in higher costs. During the fourth quarter of 2021 and the beginning of 2022, the King Air owner had cautious optimism that this year could potentially bring a more stable insurance renewal experience. However, aviation insurance may get added to the list of higher prices, once again. Signs are now pointing to a potential inflationary hard market, combined with re-insurance price hikes on the horizon.
As we are finally moving past COVID, the newest “something” that is likely to affect aviation is the outbreak of war and sanctions in Eastern Europe. This was not on the radar screen as 2021 came to an end. The ramifications of the ongoing war has caused inflationary values to fuel, as jet and 100LL prices have jumped considerably. During the Aircraft Electronics Association convention in New Orleans in late March, an FBO owner was standing next to me when he received a message from his general manager notifying him that the fresh delivery of jet fuel was $1.00 per gallon higher than their last load. This, of course, is an immediate hit to the King Air owner’s operating budget. The $1.00/gallon increase would cause the typical King Air 200 driver an additional $90 per flight hour; at 300 hours per year, it would be an extra $27,000. The international energy disruption is not the only ramification of the crisis in Eastern Europe felt by the aviation community.
The aviation insurance industry could face the largest losses in history, surpassing even those from 9/11. Billions of dollars in aircraft and aircraft parts in Russia may be considered seized or confiscated triggering “occurrences” within aviation policies. If this occurs, we’ll see the aviation re-insurance market pricing go up, which will be felt by all N-registered aircraft owners too. We generally think about accidents or incidents creating insurance payouts. However, there are provisions in the aircraft insurance policy called “war hull” that can be triggered and render a total loss of the aircraft even if it hasn’t suffered physical damage.
The policy covering your King Air is an “all risk policy,” meaning it’s covered, unless it is specifically excluded. Specific language from your policy may read:
“The Company will pay (minus any applicable deductible) for Physical Damage to a Scheduled Aircraft including ingestion and also including disappearance or theft thereof that happens during the policy period and results in no recovery of the Scheduled Aircraft for thirty (30) days.”
The policy directly states that “theft” is covered. However, in the “exclusions” section it may state that there is no coverage if the loss is a result of claims caused by “confiscation, nationalization, seizure, restraint, detention, appropriation, or requisition for title or use by or under the order of any government (whether civil, military or de facto) or public or local authority.”
The exclusionary wording is why lienholders typically require aircraft owners to buyout this exclusion through purchase of “war hull” coverage. If your King Air is seized or confiscated, you might be so inclined to not make the next payment to the bank. The bank or leasing company is going to have a very difficult time talking the third party that seized the aircraft into continuing to make those payments on your behalf or give them back the collateral. War hull allows for the aircraft owner and the lienholder to be made “whole” through the insurance proceeds.
The added cost to buy back the war exclusions is much closer to pre 9/11 rates and has come down drastically since spiking around 2006. A recent example: A
$3 million King Air 350 was charged an extra $900 to buy the war hull coverage. This equates to a 3 cents war hull rate. To put it into perspective, before 9/11 this would have been a 2 cents rate.
When the “war, hijacking, extortion and other perils physical damage write-back” endorsement is purchased, it is added to the end of your policy and specifically adds back coverage for:
War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power;
Strikes, riots, civil commotions or labor disturbances;
Any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional;
Any malicious act or act of sabotage;
Confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any Government, (whether civil, military or de facto) or public or local authority;
Hijacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including any attempt at such seizure or control) made by any person or persons on board the aircraft acting without the consent of the Insured.
Many people don’t feel they have a real exposure to a situation that would be covered by this endorsement. While rare, there have been instances that pertain to segment “e.” In the early 2000s there was a community bank that had a lien on a Learjet that was seized while in South America. The bank did not require the borrower to have war hull coverage. This resulted in lawsuits between the borrower and the bank. Eventually the bank was forced to make a significant write-off and a settlement with the borrower that was not covered by insurance. Another example occurred in 2008, when a Hawker 4000 that was delivered was seized by the U.S. government. For a brief period of time, the insurance carrier was preparing for a potential $21 million loss. Fortunately for the insurance carrier, when the aircraft owner was able to resolve the misunderstanding with the government, the aircraft was returned and the claim was dropped. Both scenarios could have been an opportunity for the insurance companies to pay out under the war hull endorsement.
It is important to understand the war hull coverage can be triggered anywhere in the world, including the United States. If you review your policy and read through the war exclusions and write backs, you may have questions around “what ifs.” What if the war in Ukraine grows to include the United Kingdom, United States of America, France and/or the People’s Republic of China? What if there is a detonation of “any weapon of war employing atomic or nuclear fission”? Either of these two events will once again have further effect on what is and isn’t covered under your policy.
The following is a policy example of additional wording you may come across where the insurance company will pullback or eliminate the coverage within the “war hull” endorsement:
Amendment of Terms
The Company may give notice effective on the expiry of seven days from midnight G.M.T. on the day on which notice is issued, to review the rate of premium and/or geographical limits.
Suspension by Notice
This insurance may be suspended by the Company or the Insured giving notice not less than seven days prior to the end of each period of three months from inception.
PROVIDED THAT if the aircraft is in the air when such outbreak of war occurs then this insurance, subject to its terms and conditions and provided not otherwise canceled, terminated or suspended, will be continued in respect of such aircraft until the said aircraft has completed its first landing thereafter.
Upon the hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force of matter wherever or whenever such detonation may occur and whether or not the insured aircraft may be involved.
Automatic Suspension
Whether or not such notice of suspension has been given, this insurance shall SUSPEND AUTOMATICALLY upon the outbreak of war (whether there be a declaration of war or not) between any one of the following countries, namely, the United Kingdom, United States of America, France, the Russian Federation or the People’s Republic of China.
As an insurance buyer, it is important you are informed about the coverages available to you for your King Air. The global aviation insurance community is closely monitoring the war in Eastern Europe. International sanctions, contractual language and insurance coverage carried by lienholders and leasing companies are additional factors as we consider the airline equipment that is currently in Russia. If the assets remain in peril, the carriers will have no choice but to make massive payouts, which will have ramifications on all aviation premiums.