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2002
THE PARLIAMENT OF THE COMMONWEALTH OF
AUSTRALIA
HOUSE OF REPRESENTATIVES
INSURANCE
AND AVIATION LIABILITY LEGISLATION
AMENDMENT BILL
2002
EXPLANATORY MEMORANDUM
(Circulated by
authority of the Minister for Transport and Regional Services,
the
Honourable John Anderson, MP)
INSURANCE AND AVIATION LIABILITY LEGISLATION AMENDMENT BILL
2002
This Bill proposes minor amendments to the:
• Civil
Aviation (Carriers’ Liability) Act 1959 ('Carriers' Liability Act') -
to correct a minor technical error in relation to the application of the
definitions of Australian citizen and Australian person to charter
operators;
• Damage by Aircraft Act 1999 - to exempt passive
owners from liability for damage to third parties on the ground; and
• Insurance Contracts Act 1984 ('Insurance Contracts Act') - to
allow for the exemption, by regulation, of third party aviation war risk
insurance from the cancellation and variation provisions of the Act.
1. Civil Aviation (Carriers’ Liability) Act
1959
The Bill amends the Civil Aviation (Carriers' Liability) Act
1959 to correct a minor technical error, clarifying the definition of
Australian citizen and Australian person. A definition of Australian citizen
and Australian person, consistent with the Air Navigation Act 1920, is
inserted into the Act. Subsections 11A(2) and 21A(2) of the Carriers' Liability
Act will then specify that charter operators are only Australian international
carriers if they are Australian persons. This will correct an error that
imposes an unintended liability under the Act on foreign charter operators which
is inconsistent with Australia’s international obligations. The
correction will apply retrospectively to when the Aviation Legislation
Amendment Act (No. 1) 1998 commenced. This amendment formed part of the
lapsed Aviation Legislation Amendment Bill (No1) 2001.
2. Damage by
Aircraft Act 1999
The Bill amends the Damage by Aircraft Act 1999 to exclude passive
owners (such as financiers and lessors) from liability for damage to third
parties on the ground. Following the terrorist attacks in the United States on
11 September 2001, the insurance and finance industry raised concerns about the
liability of passive owners for damage on the ground, noting that the Australian
practice of having owners and operators jointly and severally liable was not
common international practice. The amendment removes the liability of an owner
who does not have an active role in the operation of the aircraft immediately
before the impact happened, and where another person has the exclusive right to
use the aircraft and finance or other arrangements are in place.
3. Insurance Contracts Act 1984
Following the
events of 11 September aviation war risk insurance for damage on the ground was
withdrawn from the global market. Since then some war risk insurance has become
available commercially. However, major Australian airports and other
Australian-based aviation service providers have been unable to purchase
sufficient war risk (including terrorism and hi-jacking) insurance. This is due
to the provisions of section 53, on non-variation, and section 63, on
non-cancellation, of the Insurance Contracts Act 1984 which prevent
insurance contracts being varied or cancelled mid-stream. Normal international
industry practice is to have a seven-day or thirty-day cancellation clause in
the insurance contract in case there is some unforeseen catastrophic event. The
protection offered by the Insurance Contracts Act against cancellation of
insurance policies has resulted in Australian-based airlines, airports and other
aviation services providers that obtain their insurance from the international
market being unable to obtain cover once their existing contracts come up for
renewal.
The Bill provides for the exemption, by regulation, of war and
terrorism risk insurance from the cancellation and variation provisions of the
Insurance Contracts Act. Exempting war and terrorism cover from the
cancellation and variation provisions of the Act will place this class of
insurance in the same position as the rest of the world, and will enable
Australian operators to access global markets for insurance.
The
Government is pursuing, along with many similar-minded countries, a global
coordinated solution to terrorism insurance. In the meantime, the Government is
offering war risk indemnities to those aviation industry participants that have
been unable to obtain adequate war risk cover.
FINANCIAL IMPACT
STATEMENT
There is no financial impact from these
amendments.
Note – an earlier version of the Regulation Impact Statement,
covering also the introduction of a charging regime for the provision of
Commonwealth third party war risk indemnities provided to the aviation sector,
can be found at http://www.dotars.gov.au/avnapt/ipb/ipb.htm
This Regulation Impact Statement has been prepared by the Department of
Transport and Regional Services (DOTARS) with the assistance of the
Treasury.
The Australian aviation industry (airlines, airports and service
providers) is currently facing major difficulties obtaining sufficient third
party aviation war or terrorism risk (ie, for damage caused on the ground). In
most part, this is a result of the insurance industry taking a highly
conservative approach to aviation insurance since the events of 11 September
2001.
The problem is not so much that the Australian insurance industry
is not willing to provide cover – it is that the international market is
no longer prepared, in the changed circumstances post-11 September, to offer
sufficient cover to the market. As the Australian market is not large enough by
itself to provide sufficient amounts of cover, particularly re-insurance which
is essential when cover measured in the 100s of millions of dollars is involved,
we are dependent upon the international market and fully exposed to
international conditions. The problems being faced by the Australian aviation
industry are identical to those being faced by their counterparts in other
countries around the world. The solutions being pursued by the Australian
Government are also mirrored elsewhere.
There are, however, also some
specific issues which are restricting access for the Australian industry to the
limited amount of cover that is available on world markets and this Regulation
Impact Statement outlines the steps – minor amendments to two pieces of
legislation – that are proposed to be taken.
The following
assessment of the problem is divided into two sections. The first outlines the
basic problem and discusses Government actions already taken, while the second
addresses the problems that are affecting the ability of the Australian aviation
industry to access what war risk cover may be available.
In the immediate aftermath of the events of 11 September 2001, the global
insurance industry acted to withdraw aviation war risk insurance. Prior to the
attacks, war, hi-jacking and other perils (including terrorism) were excluded
from the standard aviation policy but airlines, airports and other aviation
service providers could purchase optional war risk write back cover for these
third party claims. Following the attacks, all insurers reduced the cover under
this write back for airlines to passenger liability and a mere US$50 million for
third party ground damage. Most countries have strict liability regimes for
ground damage caused by aircraft, regardless of the circumstances, with many
requiring aircraft operators to hold a minimum level of insurance to fly in
their airspace[1]. Upward of US$60
billion of claims are being considered by insurers as a result of the WTC
attacks. In view of the potential damages, illustrated by these attacks, most
world airlines, including Qantas, were unwilling to continue to operate without
adequate insurance. Cover for airports was initially fully withdrawn, due to
concern over potential negligence claims arising from the security screening at
Boston’s Logan airport, although US$50 million in cover was eventually
restored by primary insurers.
In the wake of these events, the
Government took the decision to provide war risk indemnity cover for third party
damage on the ground to those operators in the aviation sector who had lost
their coverage. This response was made to prevent acts of terrorism undermining
the aviation and tourism sectors as well as to maintain collective confidence in
the aviation sector, and was consistent with approaches adopted through-out the
world. Air carriers, airports and all key service and facility providers
associated with the aviation sector that held third party war risk insurance
cover prior to its cancellation on 24 September 2001 are eligible for the
Commonwealth’s indemnity. A copy of the relevant criteria announced by
the Government at the time is at Attachment A.
The Commonwealth indemnity
is designed as a short term intervention to address one commercial consequence
of the terrorist attacks. It covers the gap between the insurance available in
the market and the level of insurance held prior to the worldwide withdrawal of
war risk insurance. This approach avoids the Commonwealth having to determine
an appropriate upper limit of war risk cover. This should be a commercial
decision for industry participants and the limit is effectively set by reference
to the amount of cover held before 11 September.
Officials have
been monitoring the market regularly and all indemnities were initially rolled
over on a monthly basis, with recipients being required to advise the
Commonwealth regularly on their efforts to obtain commercial cover. Recipients
of a Commonwealth indemnity are also required to take out commercial cover as it
becomes available, as determined by the Commonwealth.
The notional upper
limit of the Government’s contingent liability for these indemnities is
currently A$ 0.6 billion, based on the difference between the amount of
insurance available commercially and the entity’s previous level of cover.
The individual contingent liabilities range from A$100 million to A$2 billion.
It is extremely unlikely that the total liability would be called upon as
facilities are spread across Australia, although a terrorist incident could
involve claims from several indemnified parties.
In addition to cover for
US$50 million for any one occurrence over one year from the primary insurers,
layers of war risk insurance are now available up to US$1 billion for both
airlines and other service providers. At present this cover is only available
from a limited number of insurers and at significantly higher premiums. It
appears that additional layers are being developed up to US$2 billion for
airlines, however, details are yet to be confirmed. There are also reports of
other major insurers developing new products for airlines up to US$1 billion.
For passenger aircraft the premium is based on passenger movements per segment,
and for cargo carriers on a tonnage basis. Both Virgin and Qantas are charging
passengers an 'insurance levy' in response to significantly increased insurance
costs. For airports, manufacturers and service providers, premiums are being
quoted on a case-by-case basis.
These developments are encouraging, but
the commercial market for war risk insurance is far from restored. Because of
the nature of the insurance industry, and the way war risk cover has been
provided in the past, third party war risk cover is not a commodity that can be
purchased “off the shelf”. As mentioned above, industry
participants need to take commercial decisions on where to place their primary
insurances, and then seek to obtain war risk cover as a “write-back”
on their primary cover. As there are only a limited number of firms offering
sufficient cover, and then often on restricted terms, many industry participants
worldwide are only able to obtain the basic US$50 million of cover – which
is of little commercial value when international airlines generally require
US$1-2 billion.
Indemnities of one form or another are being provided by
Governments in Europe, North America and Asia along the lines of those provided
by the Australian Government. The state of the international market is kept
under close review by, in particular, the European Union and the US and both
have recently decided that there is not yet sufficient stability in the market
to withdraw indemnity protection for their aviation industry.
One point
needs to be clarified in relation to the availability of commercial war risk
cover. While some administrations in other countries may consider it relevant,
the Australian Government approach has been to ignore the issue of the cost of
commercial war risk cover. It is beyond doubt that the costs of aviation
insurance have risen across the board following the events of 11 September 2001
and the cost of the war risk write back has probably increased out of all
proportion to the cost of primary cover. This is partly because the industry
has realised it had grossly underpriced this cover in the past. There is also
an element of the insurance industry trying to re-build its reserves after a
disastrous period.
Aviation industry recipients of an indemnity from the
Commonwealth are being required to take out available commercial insurance and
are being advised that the cost of this cover cannot be accepted as a reason for
not taking it up.
Various regional and global alternatives to commercial
cover are being explored. The International Civil Aviation Organization (ICAO)
is developing a scheme, in concert with the major insurance brokers, whereby
aviation war risk coverage would be provided by a non-profit company with
multilateral government backing. The company's sole purpose would be to offer
third-party war risk liability cover, up to US$1.5 billion in excess of US$50
million per insured. The amount of commercial cover required would
progressively increase to facilitate a return of the commercial market. The
company's insurance cover would be available to the entire aviation sector of
any ICAO Contracting State that joins the Scheme.
At the same time, the
US and Europe are investigating regional schemes (Equitime and Eurotime
respectively) that have some of the features of the ICAO scheme and, to varying
degrees, are compatible with it.
The Australian Government has
announced (press release of 10 May 2002 by the Hon John Anderson MP, Deputy
Prime Minister and Minister for Transport and Regional Services) strong support
for the ICAO scheme as offering a firm foundation for the aviation industry
until the insurance market is able to recover from the events of 11 September
2001.
At the same time, Mr Anderson announced that the Government had
decided to extend its indemnity scheme by three months at a time until a
suitable long term solution is established. It also decided to charge for the
cover it will be providing, with the details of the charging regime still to be
settled. The imposition of a charge is consistent with the Government’s
prime focus which is to see the return of the market at the earliest possible
time. Continued provision of indemnities for free would have been most inimical
to the re-establishment of a viable commercial market for third party war risk
insurance in Australia. The charge is also intended to provide some recompense
to the Government for the indemnities provided, but it in no way should be seen
as being a “premium”.
Recipients of indemnities were provided
with advance warning, in April, that a charge was likely to be imposed and all
stakeholders, including representatives from insurers, were consulted on the
design of the charging regime which came into effect, along with revised Deeds
of Indemnity providing for a three month period of operation, from 31 August
2002.
2(a) Insurance Contracts Act 1984
The international
insurance market has baulked at the Insurance Contracts Act 1984 (the IC
Act) which prohibits (s.63) the cancellation of a contract of insurance unless
the insured has failed to comply with the duty of utmost good faith;
non-disclosure or misrepresentation; or fraud. The IC Act also voids (s.53) any
provisions which allow the insurer to vary a contract of insurance to the
prejudice of a person other than the insurer.
As mentioned above, the
immediate response of international underwriters to the terrorist attacks was
to, in accord with standard clauses in contracts, give seven days notice of
cancellation of aviation war risk cover. Although Australian firms also were
affected by this global response, contracts subject to the IC Act had to be
re-instated when the provisions of the Act were brought to the attention of
insurers. This, of course, provided only temporary relief for Australian firms
– the international market simply refused to renew such contracts when
they fell due. And all such firms have approached the Government for indemnity
cover.
Commercial cover has started to return as the industry
re-evaluates risks and premiums – and competitive forces begin to
re-assert themselves. However, international underwriters have proven to be not
interested in providing coverage to Australian firms whilst the IC Act prohibits
them from taking action to protect their interests in the event of another major
incident. In other words, the international insurance market is no longer
prepared to provide non-standard cover to Australian
risks.
2(b) Damage by Aircraft Act 1999
The
Australian Equipment Lessors Association (AELA) and several international
aircraft financiers have raised concerns over the application of the Damage
by Aircraft Act 1999 (DA Act) to passive owners (lessors and financiers).
The DA Act imposes absolute liability on owners and operators (who are jointly
and severally liable) of aircraft that cause injury to persons and damage to
property on the ground. The Act was developed over a number of years and
subject to an extensive aviation industry consultation process. At no stage
during that process, nor during its passage through Parliament, did anyone raise
any objections to the rule as formulated. We surmise that it was not an issue
due to the availability of adequate commercial insurance to cover all risks,
including war and terrorism.
However, since 11 September 2001, Australia has been identified as one of four countries (the others being Greece, Norway and Denmark) that impose liability on passive lessor owners. In the immediate aftermath, international aircraft leasing companies were threatening to cease operations by their aircraft in, and over, these countries. Apart from Australian registered aircraft, this threatened operations into Australia by a number of foreign carriers. To date, international lessors have been satisfied by the assurance that the matter is being considered by the Government but a resolution to these concerns needs to be found.
In order to understand the alternatives considered and the final actions
taken, it is necessary to review the underlying objectives of Government policy
in responding to the insurance crisis affecting the aviation industry.
In
the first place, the Australian aviation industry is highly deregulated when
compared to international counterparts. Now that Sydney Airport has been sold,
all major airports have been leased to the private sector and the Commonwealth
has virtually completed a long term programme to transfer ownership and
operation of all airports to the private sector and/or local government (the
other Sydney basin airports remain). There are no regulatory restrictions on
the number of service providers (ground handling, security, etc) at airports.
There is no economic regulation restricting entry to the domestic airline market
and, in fact, Australia is almost unique in permitting foreign airlines to
establish domestic airlines. There are also no economic restrictions on new
Australian international airlines wishing to enter the market and we maintain a
very open access regime providing access to Australia for foreign international
airlines.
The Australian aviation industry is exposed to international
market pressures as much as possible, in the main because aviation is a global
industry and Government has no interest in unsustainable protection mechanisms
that defy market realities.
With that broad background, there are some
specific policy considerations that apply to the areas of concern dealt with by
this Statement.
The Australian Government’s decision to provide war risk indemnity
cover for third party damage on the ground to those operators in the aviation
sector who had lost their coverage was fully in accord with international
practice. There was no practical alternative for Australia – airlines,
airports and service providers would have faced the prospect of ceasing
operations without adequate cover. Any such action would, in the main, have
been a commercial decision for the various enterprises concerned, although some
operators are required by finance providers (or, in the case of major airports
– the Commonwealth as owner) to have such insurance.
From the
beginning, the Government’s objective was to provide necessary support to
the industry until a commercial market was able to be re-established. The very
design of the indemnity regime supported an early return of commercial insurance
in that the Government has only provided cover for the gap between the insurance
available in the market and the level of insurance held by the particular
enterprise prior to the worldwide withdrawal of war risk insurance. In
addition, the Commonwealth has increased the level of insurance to be held in
order to qualify for continued cover as more cover became available on the
market.
While the current indemnity scheme contains a requirement for
participants to seek commercial cover, the fact that it had been provided at no
charge was regarded as a disincentive for recipients and the insurance industry
to support the return of a commercial market. All of the interim schemes
proposed internationally (the ICAO scheme, the US Equitime and the EU Eurotime)
incorporate charges. The current indemnity scheme operated by the US Federal
Aviation Administration involved a US$7.50 charge per movement which has now
been substantially increased.
The IC Act provides protection to Australian business and consumers
alike. However, the Act recognises that certain classes of insurance cannot be
regulated like others and, in particular, s.9(3) excludes from the cancellation
provision (amongst others) contracts of insurance against the risk of the loss
of an aircraft, or damage to the hull of an aircraft, as a result of war. This
provision was made in recognition of the fact that such insurance is only
readily available on global markets and would probably not be available to
Australian carriers if such insurance had to comply with the non-cancellation
regime of the Act. While insurance cover for aircraft was excluded from the
operation of the IC Act, at the time the IC Act was passed, third party cover
for the related on-the-ground war risk was not included in the initial
exemption.
It is probably the case that the international insurance
industry had not been aware of the relevance of the IC Act to their business in
Australia until the effect of ss53 (variation) and 63 (cancellation) were
pointed out. Following the 11 September 2001 terrorist attacks in the United
States, the full impact of these provisions became obvious to the Australian
aviation industry, and they found it increasingly difficult to access what third
party war risk insurance was available on the international market. DOTARS has
been advised by industry and insurance representatives that many underwriters in
the London market, who are happy to offer cover elsewhere, will simply not
provide cover to Australian firms. It would not be desirable for the
legislation in Australia to continue to impose an artificial barrier to
customers seeking the terrorism cover that would otherwise be available to them
in the international insurance market.
The Damage by Aircraft Act was enacted to reform the regime of liability
of aircraft operators for damage caused on the ground. The previous regime, set
out by the Civil Aviation (Damage by Aircraft) Act 1958 and the
Convention on Damage caused by Foreign Aircraft to Third Parties on the
Surface (the Rome Convention 1952), had not kept pace with modern
thinking on liability. The Rome Convention had been developed to provide
internationally harmonious arrangements to ensure adequate compensation for
persons who suffer damage caused on the ground by foreign aircraft, while
limiting the extent of the liabilities incurred for such damage in order not to
hinder the development of international civil air transport. Australia had been
a Party to the Rome Convention since 8 February 1959. However, the Convention
no longer met Australia’s needs as it had failed to meet its objective of
international uniformity in the treatment of claims by third parties on the
ground, as only 43 States were Parties and its limits on liability were too
restrictive, outdated and inappropriate.
The DA Act, which came into
force in 2000, introduced a regime of strict and unlimited liability for injury
and damage caused by aircraft. There is no definition of “owner” in
the Act, and the effect is that financiers or lessors are caught by the joint
and several liability of owners and operators imposed by s. 10(2). The
intention at the time had been to ensure that, no matter what, someone was held
liable without the need for Government to design a system to apportion
responsibility. In short, it was considered that the operation of the
commercial marketplace would ensure that appropriate levels of insurance were
carried to protect the interests of those parties likely to be held liable in
the event of an accident. The DA Act had the full support of all players in the
aviation and insurance industries at the time.
The Commonwealth’s
objective has not changed, but it has become clear after the clarifying events
of 11 September 2001 that financiers and lessors need to have a mechanism to
more effectively manage their liability, particularly in cases where they do not
actively participate in the operation of the aircraft assets
concerned.
2(a) Insurance Contracts Act 1984
Possible options
are:
1. Do nothing.
This would mean that third party war risk
insurance would remain non-cancellable in Australia, thus providing a continued
measure of protection to Australian firms. However, it has become apparent that
international insurance providers will not renew existing contracts as they fall
due, thus depriving Australian aviation firms of access to the little cover that
has returned to the market. In general, this will mean that most firms will not
be able to obtain more than the A$50 million cover that is being offered
locally. Anything in excess of this amount could only be provided by the larger
international pools and is unlikely to be offered.
2. Make a regulation
to exempt third party aviation war risk insurance from s.53 of the IC Act
(prohibition against variation of contracts), thus assisting Australian airports
and other affected parties to purchase war risk write back cover from the global
market.
This option is being pursued by the Treasurer as an immediate
and intermediate step as it would allow insurance providers to vary contracts as
a “second best” step to removing the prohibition against
cancellation. Contacts in the global insurance market suggest this may assist
some parts of the Australian industry to gain access to better cover, but is not
seen as the total solution to the problem.
3. Amend the IC Act to exempt
third party aviation war risk insurance from the cancellation and variation
provisions.
This is regarded as the best long term solution as it would
place Australian aviation firms in the same position as the rest of the world,
thus providing no reason why the global insurance market should discriminate
against Australian industry.
The Insurance and Aviation Liability
Legislation Amendment Bill 2002 (clause 6) proposes to amend section 9 of the
Insurance Contracts Act 1984 to provide that ss 53 and 63 do not apply to
prescribed insurance provisions providing cover for war or terrorism risk.
Passage of this provision will be followed by a regulation prescribing aviation
third party war and terrorism risk cover, thus bringing this class of insurance
into line with international practice. The provision is drafted to provide
scope to extend this treatment to other types of war or terrorism cover if
necessary.
2(b) Damage by Aircraft Act 1999
Possible
options are:
1. Do nothing.
As a direct consequence of 11
September 2001, the global aviation insurance and finance industries are now
much more sensitive to liability questions. Leaving passive owners (ie, lessors
or financiers) exposed to third party liability risks would threaten to reduce
the availability of economical aircraft finance to the Australian aviation
sector. It may also affect the Australian operations of some overseas airlines
when financiers fear terrorist action.
2. Amend the DA Act to exclude
passive owners (such as lessors) from liability for damage on the ground.
This is the action decided upon by the Government. The Insurance and
Aviation Liability Legislation Amendment Bill 2002 (clause 5) inserts a
provision to exclude passive owners from liability.
2(a) Insurance Contracts Act 1984
2(b) Damage by
Aircraft Act 1999
The minor amendments proposed to the Damage by
Aircraft and Insurance Contracts Acts will remove impediments to Australian
aviation enterprises gaining full access to the international insurance market
for third party war risk insurance and resolve concerns of the finance industry
about their liability. The amendments will mean that insurers, re-insurers and
financiers will be able to deal with insurance or leasing proposals from the
Australian aviation industry in the same manner as the rest of the world and are
expected to largely resolve the current shortage of war risk cover for most
sectors of the industry.
In the case of the Damage by Aircraft Act,
excluding the liability of passive owners has the effect of leaving the operator
solely liable in the event of damage on the ground. There is no statutory
requirement in the legislation to maintain insurance for damage caused on the
ground – the liability being unlimited would make this is a difficult task
to administer in any case. However, advice from the finance industry is that it
is standard practice for lessors or security holders to require that the
operator of the aircraft maintain adequate insurance for all risks, with the
amount of cover determined by widespread industry practice. While it is not
proposed that the question of mandatory insurance be addressed at this time,
this is a matter that will be covered in the Government’s consideration of
the ratification of the Montreal Convention 1999. A Discussion Paper on the
question of ratification of the Convention, issued by DOTARS in January 2001,
canvassed a number of other liability and insurance issues, including the
question of mandatory insurance cover.
In the case of the IC Act,
Treasury is consulting closely with the industry on the terms of the regulation
on variation of contracts to ensure it is appropriately focussed on war risk and
does not inadvertently remove other desirable protections from the industry.
The amendment to the Act has also been targeted on war and terrorism risk
insurance for the same reason.
While these changes will expose the
aviation industry to the threat of variations and/or cancellation of their
insurances in the event of another major terrorist attack, it is the judgement
of both Government and the industry that these moves are necessary in order for
the Australian industry to have access to the global market.
The
amendments have the strong support of the Australian aviation industry, as well
as Australian-based insurers who expect to be able to access the larger
international market in order to meet the demands of local clients. In fact,
Government is responding to specific requests from insurers and lessors in
pursuing these amendments.
The Government does not, however, accept that
exposing the aviation industry to the risk of cancellation or variation of third
party war and terrorism risk insurance solves the problem – it merely
enables our industry to operate on the same terms as the global aviation
industry. In the medium to longer term, a solution must be found to the issue
of war and terrorism insurance that does not unreasonably expose the industry to
the threat of global closure and that is why Australia is a major contributor to
the work initiated by ICAO to develop a global scheme based around a non-profit
company with multilateral government backing. This scheme is seen as the medium
term solution because it is intended to include provisions to deal with another
global crisis in aviation insurance and it is also meant to offer a transition
to a more permanent solution – yet to be worked out between Governments
and the industry.
Affected participants in the aviation industry and the Australian
insurance industry have been closely consulted at all stages of this process.
Industry meetings have been convened regularly to update indemnity holders on
international developments and seek views on the best way forward for the
management of the crisis in Australia.
As mentioned above, the two
legislative amendments have been pursued at the urging of the industry, with
their full support and with their active assistance in finalising the drafting.
An exposure draft of the Bill was circulated to industry participants in
September 2002 for comment and, apart from technical suggestions, all responses
received were supportive. DOTARS worked with the Office of Parliamentary
Counsel to explore all the suggestions made and all have been
resolved.
One issue that concerned two industry participants was the
terms of the proposed regulation under the IC Act. It was pointed out that a
regulation that was drafted too widely, say covering “aviation
insurance”, may permit insurance companies to cancel a variety of aviation
policies, and not just third party war or terrorism. All industry participants
have been advised that they will be consulted over the terms of the regulation
by Treasury and it is proposed to expressly refer to third party aviation war or
terrorism risk, either by direct reference to the standard industry clause,
AVN52, or by listing the war and terrorism risks to be covered. This will
ensure that industry concerns are fully addressed in this instance, while
retaining some degree of flexibility should the need arise in the
future.
A number of suggestions were made that led to improvements in the
drafting of the provision amending the Damage by Aircraft Act so that it is
properly focussed on excluding the liability of passive owners.
2(a) Insurance Contracts Act 1984
2(b) Damage by
Aircraft Act 1999
It had been intended that a regulation to
permit variation of war risk contracts, as an interim measure, be in place by 30
June 2002. This was not possible because of continuing discussions with
industry and insurers over the breadth of the coverage of the regulation and
concerns to avoid too wide an effect. The final draft of the regulation was
circulated for industry comment in September 2002.
As mentioned above,
the industry will be consulted by Treasury over the drafting of a regulation
under the proposed amendment to section 9 of the IC Act and special attention
will be paid to ensure it is appropriately targeted.
No specific plans
have been made for longer term review, but Australia will be fully participating
in work under the auspices of ICAO to review the international law in relation
to damage on the ground, including the question of liability limits and
appropriate insurance. DOTARS will build upon industry contacts established
through the war risk issue to ensure wide stakeholder input to any Australian
position on these matters.
ATTACHMENT A
AVIATION WAR RISK INDEMNITY – CRITERIA
Following the 11 September 2001 terrorist events in the United States, existing aviation war risk insurance (including terrorism and hijacking) was withdrawn from the global marketplace from 24 September or shortly thereafter. To ensure continuity of operations, the Commonwealth agreed to provide third party war, terrorist and hijacking indemnity cover for damage on the ground to airlines, airports, and other service and facilities providers. The current indemnity is provided on a month to month basis.
Is my organisation eligible?
Air carriers, airports and all key service and facility providers associated with the aviation sector that held third party war risk insurance cover prior to its cancellation on 24 September 2001 are eligible for the Commonwealth’s indemnity.
This includes:
• Civil Aviation Safety Authority (CASA) and
Airservices Australia;
• Airport operators, including leased federal
airports and smaller regional airports;
• Security screening companies
operating at Australian airports;
• Freight forwarders and cargo
agents; and
• Ground handling agents.
In addition organisations which have recently been appointed as aviation security screening authorities are also eligible.
Will my organisation need to purchase any war risk insurance from the market?
You are required to purchase commercial war risk insurance cover from the market as it becomes available, as determined by the Commonwealth. In line with the increasing level of coverage offered by the insurance market, the Commonwealth intends to progressively increase the amount of coverage you will be required to purchase commercially in order to remain eligible for its war risk indemnity.
What does my organisation need to do throughout the term of the indemnity?
You are required to actively seek war risk insurance from the market as outlined above AND report to the Commonwealth fortnightly through established mechanisms on your efforts to do so.
What does the indemnity cover?
The Government’s policy decision provides indemnities that are limited to the least amount of the following applicable criteria.
The indemnity covers the gap between the amount of third party war risk insurance available commercially and:
For those who held war risk cover under AVN52 C on 24 September 2001, where the main aviation insurance policy is still current:
the level of war risk cover held by the organisation pre 24
September 2001. The circumstances covered by the indemnities are consistent with
the terms of the pre-existing cover;
For other eligible organisations,
including those that have renewed their aviation insurance cover:
the organisation’s level of cover for all risks as defined by its
main/general aviation insurance policy, subject to the following maximum
caps:
• US$500 million for carriers operating aircraft with 50 seats or
less;
• US$1 billion for firms with operations within Australia only,
operating aircraft with more than 50 seats;
• US$2 billion for firms
with domestic and international operations;
For newly appointed
screening authorities:
the organisation’s level of cover for
all risks as defined by its main/general aviation insurance policy, where an
organisation did not have separate insurance before 11 September.
INSURANCE AND AVIATION LIABILITY LEGISLATION AMENDMENT BILL
2002
Clause 1 - Short title
Clause 1 provides that the Bill,
once enacted, may be cited as the Insurance and Aviation Liability
Legislation Amendment Act 2002.
Clause 2 -
Commencement
This clause provides that sections 1 - 4, and items 5
and 6 of Schedule 1 of the Act will commence on the day the Act receives the
Royal Assent, and items 1 - 4 of Schedule 1 are taken to have commenced at the
same time as Schedule 4 of the Aviation Legislation Amendment Act (No.1)
1998 commenced.
Clause 3 - Schedules
This clause
specifies that each Act specified in a Schedule to the Act is amended or
repealed as set out in the Schedule concerned.
Clause 4 -
Application
This clause provides that the amendment to the
Insurance Contracts Act 1984 by item 6 of Schedule 1 applies to a
contract of insurance entered into after the commencement of the item, including
variations to a contract which was entered into prior to the commencement of the
item.
SCHEDULE 1 - AMENDMENTS
Civil
Aviation (Carriers' Liability) Act 1959
Items 1 and 2 of the
Schedule define 'Australian citizen' and 'Australian person'. The purpose of
these items is to modify the definition of Australian international carrier in
paragraphs 11A(2)(b) and 21A(2)(b) of the Civil Aviation (Carriers'
Liability) Act 1959 (Carriers' Liability Act) by clarifying that charter
operators are only Australian international carriers if they are Australian
persons.
Item 1 - Section 5
This item provides that an
Australian citizen in the Carriers' Liability Act is the same as an Australian
citizen defined in the Australian Citizenship Act
1948.
Item 2 - Section 5
This item defines
an Australian person in the same terms as the Air Navigation Act
1920.
Item 3 - Subsection 11A(2)
This item clarifies
that the provisions of 11A of the Carriers' Liability Act apply to international
charter operators who are an Australian person.
Item 4 - Subsection
21A(2)
This item clarifies that the provisions of 21A of the
Carriers' Liability Act apply to international charter operators who are an
Australian person.
Damage by Aircraft Act
1999
Item 5 - After subsection 10(2)
This item
provides an exemption for the owner of an aircraft who did not have an active
role in the operation of the aircraft immediately before the impact happened.
The intent is to ensure that a passive owner of an aircraft (such as a person
who leased the aircraft, or provided finance or other arrangements with another
person who has the exclusive right to use the aircraft) is not liable for
injury, loss, damage or destruction to third parties on the
ground.
Insurance Contracts Act 1984
Item 6 -
At the end of section 9
This item provides for cover for risks
relating to war and terrorism to be excluded from section 53 (Variation of
contracts of insurance), and section 63 (Cancellations void) of the Insurance
Contracts Act 1984 where prescribed or otherwise identified by
regulation.
[1] Australia does not impose a minimum level
of insurance on airlines, but does require all holders of an International
Airline Licence to provide details of insurance held. A Licence is not issued
unless the airline can demonstrate that its insurance cover is consistent with
global practice – normally all risks of between
US$1 –
2 billion per single incident.