The
BankAssure Guide The Banker’s & Lessor’s Guide to
Insurance Aspects of Aircraft Financing
2000 Second Edition
THE
BANKER’S
&
LESSOR’S
GUIDE T O
I N S U R A N C E
A S P E C T S
of
A I R C R A F T F I N A N C I N G
S E C O N D
E D I T I O N
P U BL I SH E D
BY
BANKASSURE INSURANCE SERVICES LIMITED
© 2 0 0 0 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means whatsoever, without the prior written permission of the copyright holder.
F I S H E R M E N ’S TA L E S
The crew of a Japanese fishing boat were rescued from the Sea of Japan and then arrested.They were accused of scuttling their boat in an insurance fraud.The fishermens’ story was that a large cow had struck their vessel amidships.After the hapless fisherman had spent 48 hours in prison, their story was proved correct.
The crew of a Russian cargo aircraft had stolen a small herd of cows from a remote airfield in Asia.During the flight the stolen animals ran riot and were destabilising the aircraft. The crew lowered the cargo ramp and jettisoned the stolen cargo.
This Guide is intended to serve as a ready reference for bankers, lessors and lawyers involved in aircraft finance.
Table of contents INTRODUCTION Principles of Insurance Versus Principles of Aircraft Finance
SECTION ONE AVIATION INSURANCE ....................................................................................1 Standard aircraft operator insurances i)
Aviation Hull ‘All Risks’Insurance....................................................................2
ii)
Aviation Hull ‘War & Allied Perils’Insurance ...................................................3
iii) Spares ‘All Risks’Insurance...............................................................................4 iv) Aviation Legal Liability Insurance....................................................................4 v)
General Legal Liability Insurance.....................................................................6
Aviation insurance wordings...................................................................................7
Other insurance covers described i)
Hull Deductible Insurance.............................................................................10
ii)
Unearned Premium Insurance.......................................................................11
iii) Mechanical Breakdown Insurance.................................................................11 iv) Loss of Use/Aircraft Unavailability Insurance................................................11 v)
Total Loss Only Insurance..............................................................................12
vi) Search and Rescue Expenses.........................................................................12
Important coverage issues on the Operators’ various insurances...........15 i)
Agreed Values ................................................................................................15
ii)
Level of liability limit ....................................................................................15
iii) Leased engines ..............................................................................................17 iv) Aggregate limit restrictions ...........................................................................17 v)
50/50 clause ..................................................................................................18
vi) War cancellation clauses ...............................................................................18 vii) ‘Breach’of Geographical Limits ....................................................................19 viii) Inadequacy of Confiscation/Deprivation coverage ......................................20 ix) Confiscation due to illegal acts and ‘Innocent Operators’ ............................21 x)
Ongoing products liability insurance/‘Continuing Indemnity’ .....................22
xi) Insurance of Indemnities – a warning!..........................................................22 xii) Cancellation for non payment of premium ..................................................23
Endorsement and Acknowledgement of the Bank’s/Lessor’s Interests...27 i)
Additional Insured .........................................................................................27
ii)
Loss Payable Clause .......................................................................................27
iii) Breach of Warranty Endorsement .................................................................27 iv) Broker’s Letter of Undertaking .....................................................................29 v)
Cut Through Clause ......................................................................................29
vi) Liability for premiums unpaid by the Lessee ...............................................29
Underwriting Security ..................................................................................31 Local Domestic Insurers and ‘Cut Through Clauses’.................................32 Loss Payable Clauses.....................................................................................37
Airworthiness and Aircraft Regulation.......................................................39 Maintenance of Technical Records........................................................................39 Chart of typical maintenance and certification programme.................................41
Insurance Claims ..........................................................................................42 i)
ii)
Hull Claims ....................................................................................................42 a)
Total Losses ...........................................................................................42
b)
Partial Losses ..........................................................................................44
Liability Claims...............................................................................................45
Lessor Liability ..............................................................................................46 Aviation Lease/Finance Clause – AVN67B ...................................................51 i)
Background to ANV67B ................................................................................51
ii)
‘Operational Interest’ ....................................................................................52
iii) Amendments to standard text .......................................................................52 iv) AVN67B applicability on reinsurance contracts ...........................................53 v)
Engine leases .................................................................................................53
vi) AVN67B ‘War’Clause .....................................................................................53 vii) Text of AVN67B and explanatory notes.........................................................54
Aircraft Financial Interest Endorsement – AVN28B...................................65 Insurance Documentation Checklist ..........................................................71 The Role of Independent Insurance Consultants ......................................73
SECTION TWO INSURANCES AND GUARANTEES FOR AIRCRAFT FINANCIERS Aircraft Repossession Insurance.................................................................79 i)
‘Perils’covered ..............................................................................................80
ii)
Applicable law and legal opinions ................................................................81
iii) Security .........................................................................................................81 iv) Underwriting criterion...................................................................................81 v)
Deficiencies of the operator’s confiscation insurance .................................82
vi) Repossession Insurance wordings ................................................................83 vii) Schematic diagram of Repossession Insurance ............................................84
Repossession Delay Insurance.....................................................................85 Bank’s/Lessor’s Hull and Liability Insurance.............................................89 i)
Contingent hull and liability insurance .........................................................89 Examples of scenarios exposing a financier to unrecoverable claims
ii)
Care Custody and Control Insurance ............................................................93
Contingent Hull War Insurance...................................................................95 Examples of scenarios exposing a financier to unrecoverable claims..................95 War Aggregate Extension Insurance......................................................................98
Total Loss Only Insurance .........................................................................101
Repossession Expenses and Technical Records Insurance ....................102 Repossession expenses covered..........................................................................102 Loss or damage of Technical Records..................................................................103
Residual Value Insurance............................................................................106 Example of RVI structure ....................................................................................107 Benefits of RVI.....................................................................................................108 Charts demonstrating the benefits of RVI...........................................................108
Revenue Stream Protection........................................................................111 Risks that can be covered Benefits
SUMMARY OF KEY PROTECTIONS FOR AIRCRAFT FINANCIERS ............113
APPENDIX Appendix A Specimen Insurance Article.................................................................................119
Appendix B Sample Certificates..............................................................................................133 i) Certificate of Insurance....................................................................................133 ii) Certificate of Reinsurance...............................................................................142
Appendix C Sample ‘Broker’s Letter of Undertaking’..............................................................151
Appendix D Selected Aviation Insurance Clauses and Wordings ............................................154 Clauses Premium Payment Clause – AVN6A ............................................................154 Deferred Premium Clause – AVN5A ............................................................156 Personal Injury Extension – AVN60 ............................................................157 AV57A (USA) ...............................................................................................159 50/50 Provisional Claims Settlement Clause – AVS103 ...............................161 Sample ‘Orphan Engine’Clause ..................................................................162 Noise and Pollution and Other Perils Exclusion Clause – AVN46B ............163 Nuclear Risks Exclusion Clause – AVN38B .................................................165 War, Hi-jacking and Other Perils Exclusion Clause – AVN48B ....................168 Extended Coverage Endorsement (Aviation Liabilities) – AVN52C ............169
Aircraft Financial Interest Endorsement – AVN28B ....................................171 Airline Finance/Lease Contract Endorsement – AVN67B ...........................174 Airline Finance/Lease Contract – AVN67B (HULL WAR) ............................178 Wordings Aviation Hull “War And Allied Perils” Policy – LSW 555B.............................182
Appendix E Specimen Policy Wordings for Specialist Bank/Lessor Insurances Contingent Aircraft Hull and Liability Insurance Policy – LSW610A ..........189 Repossession of Leased Aircraft Insuring Conditions – LSW147 ................207 Contingent War Insurance (sample wording) .............................................216
Introduction Air travel has grown at an amazing rate over the past 30 years. In order to satisfy this growth in demand,airlines have greatly expanded their fleets.Notwithstanding the growth in demand,airlines continue to operate in a very challenging commercial environment. Many airlines have weak balance sheets but are operating in a highly capital intensive industry. Profit margins are typically thin and the regulatory environment uncertain. Owing to noise and pollution restrictions,airlines are being forced to renew their fleets;the replacement aircraft being of far higher values. Also,in order to take advantage of the lower direct operating costs of new generation aircraft,huge capital expenditure is required. The financing and leasing of such aircraft is a major business for banks and leasing companies and is crucial to airlines in upgrading and modernising their fleets. With the demise of many of the tax concessions afforded to ‘finance leases’ (for example the ‘German Leveraged Lease’),the ‘operating lease’is now the dominant structure for new aircraft finance.This is driven by the desire for ‘off balance sheet’ finance which is often dictated by weak balance sheets and the pressure of operating costs. If an airline were to amortise a Boeing 747-400 worth 150 million dollars over a period of ten years, the revenue (in isolation) would be unlikely to justify the transaction. However, a leasing company may be able to amortise the aircraft utilising a residual value of ‘say’50 million dollars.This will effectively mean that the asset being financed has a ‘cost’of 100 million dollars, which the revenue stream may be able to sustain.
Another factor that has supported the high leverages of aircraft finance has been the relatively stable, and predictable, values of western airline equipment. Historically, values have been far more stable than in shipping finance or for other transportation assets. Notwithstanding the preponderance of ‘operating leases’, ‘finance leases’, where the operator retains effective ownership of the aircraft, are still common but are normally reserved for the major carriers with strong balance sheets,or central government backing. Owing to high leverage in aircraft financing and the fact that the bank/lessor often remains the legal owner of the asset,it is vital that the financier protect themselves against loss of their asset and potential liability exposures. Substantial losses and catastrophic liabilities may occur. Though banks/leasing companies are nonoperational owners, there is a risk, under some jurisdictions, of liability ‘in the last resort’ for compensation claims should the liability insurances on the aircraft be inadequate or fail.Insurance, therefore, will be a major consideration for those contemplating aircraft financing. Insurance can be divided into two categories. Firstly, the essential Hull and Liability coverages maintained by the operator, and endorsed to protect the financier’s interests.And secondly, specialist insurances that financiers can arrange to protect themselves against losses not covered by the operators’policies. Concern about sovereign debt exposure has, moreover, forced financiers to re-assess their lending to some national airlines. The solution for mortgaged and leased aircraft is to purchase a 'political risks' type insurance covering the risks of deprivation or the inability
to repossess and repatriate aircraft following a default. These insurances are placed by specialist brokers,acting for the financier. A thorough understanding of insurance, and the comfort derived from correct protections,is of the utmost importance when making lend commitments. Banks/lessors are highly exposed to unexpected variations in future residual values.In many lease structures there is a high probability, or certainty, that the asset will be returned.Also,due to the long working life of aircraft,the residual value represents a significant percentage of the total amount financed. Financiers may be exposed to large numbers of similar aircraft with similar lease expiry dates (or aircraft return dates) that could result in large loss accumulations if residual values are seriously degraded.Residual value risk can be mitigated by taking out Residual Value Insurance (RVI), which is also known as Asset Value Guarantees. In the last three years ‘Alternative Risk Transfer’and financial insurance products have become more widely available. Sophisticated programmes can be designed to protect long term projected revenue streams derived from a portfolio of leases.The perils protected might include such risks as ‘credit’ and ‘contractual default’ (including risk that are ‘in country’- for example a UK lessor leasing an aircraft to a UK operator) that insurance markets have traditionally been precluded from underwriting. These revenue stream protection products are highly bespoke and can be arranged in conjunction with asset value guarantees and/or political risk insurance protecting the financier against loss or deprivation of selected collateral/assets.
Essential Principles Of Insurance Versus Principles Of Aircraft Finance Insurance and banking are at the opposite poles of the financial services spectrum.Whereas the prudent banker underpins a credit risk with securitisation,cross collateralisation and assignment of insurances in endeavouring to achieve a zero risk position, the insurer's business is to accept and underwrite fortuitous risks.The prudent insurer strives to achieve an excess of premium income over claims, by minimising the consequences of any one catastrophic claim by going for “spread”; achieved by taking only a proportional share of any one risk and buying various reinsurance protections.Insurance exists on the principle that 'the fortunes of the many pay for the misfortunes of the few'. An Insurance Policy is a contract of indemnity for loss arising from the accidental happening of any of the specific risks detailed within the Policy; such risks are known as insured perils. The Policy will invariably include specific exclusions (perils insurers have declined to insure e.g. Radioactive Contamination and war between the ‘Five Major Powers’) and they will also contain terms conditions and warranties reflecting that the Insured will operate to recognised industry standards and within worldwide regulations. An Insurance Policy is also subject to the legal term 'uberrima fides' (the utmost good faith). This imposes a duty on the Insured to disclose all the material facts at the time the insurance is arranged, hence 'every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk'.
An insurance policy is emphatically not as simple as a ‘Bank Guarantee’or a ‘Letter of Credit’.When a banker wishes to rely on an insurance policy to secure outstanding debt, he will need to satisfy himself that the terms and conditions,net of exclusions,are as wide as possible and the warranties reasonable. Furthermore, that the insured value is sufficient for loan purposes and, finally, be satisfied on the ‘claims paying ability’of insurers on the policy. Each insurer is only liable to the extent of his proportionate share,or line. Volumes of technical books on all types of insurance exist. As a consequence most prime banks have general ‘in-house’ insurance expertise and, in addition, often use specialist external insurance consultants for their asset-based lending business.This is particularly the case for aircraft financing owing to high operational risks and associated liabilities. Financiers’criteria for asset based financing are essentially as follows: i) The estimated net earnings from operational use of the asset comfortably exceed the debt servicing obligations of the borrower (interest and principal repayment),at a level sufficient to match the depreciation of the asset. ii) The pessimistic (forced) resale value of the asset will, at any time, exceed the debt outstanding in the currency of that debt. iii) The asset is fully insured at all times against total and partial loss under which insurers are fully liable to the bank/lessor and able to pay claims due in the currency of the debt.
iv) The potential liabilities that may arise from the operational use of the asset are insured for sufficient amounts to ensure against catastrophic circumstances that might occur, and that the bank/lessor is itself covered as Mortgagee/Lessor. v) Through legal charges on the bor rower and security titles on the asset,the bank/lessor is always able to repossess the asset and realise a resale value,sufficient to clear the debt,should a default by the borrower at any time jeopardise the security of the underlying loan; Insurance plays a key role in the above criteria and understanding the essential principles is paramount.
“ IT F EL L OFF T HE BA CK O F AN AI RPL ANE , OFF ICE R”
A
group of Boeing employees smuggled a life raft out of the factory in Seattle.The following weekend they took the inflata ble craft out for a little rafting trip.
Their relaxing afternoon was ruined by a noisy coastguard helicopter, strangely far inland,that persisted in hovering low over their heads.
The emergency locator beacon had been activated by contact with the water. Their ‘former’employer, Boeing,and the US coastguard were not amused.
SECTION ONE AV I AT I O N I N S U R A N C E
S E C T I O N
O N E
Aviation Insurance The aviation insurances referred to below are the unive rs a l ly recognised insurances for aircraft with standard conditions accepted by underwriters. These insurances are purchased by an airline or aircraft operator. Often the insurance is bought through one or more local domestic insurer, who will then reinsure into the worldwide aviation insurance market using an internationally recognised insurance broker. In the past three years domestic insurers have greatly increased their ability to retain insurance.This has resulted in some smaller risks being retained 100% by local insure rs , often without the services of a recognised international insurance broker. The following is a list of the policies that are available, with a brief summary of the conditions for each, and may be included within the terms of a financing commitment:-
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Standard Aircraft Operator Insurances i) AVIATION HULL ‘ALL RISKS’ INSURANCE – Covers ‘All Risks’ of physical loss or damage to an aircraft from any cause (unless it is excluded it is covered!).Cover includes pilot error, theft, all natural causes,damage during maintenance, ground fires/taxiing accidents etc. Coverage does not include groundings due to FAA or manufacturer directives, or consequential loss of revenues.
Principal Exclusions are:- Radioactive Contamination/Nuclear causes - War and Allied Perils (strikes/riots,hi-jacking,sabotage,
terrorism,confiscation etc.). - Wear and Tear and Mechanical Breakdown (however
accidents consequent upon mechanical breakdown or wear and tear are covered. For example,a crash following engine failure). - Damage of a progressive nature,not attributable to one
incident. Hull ‘All Risks’ policies are also subject to a standard level of deductible applicable in the event of a partial loss of the aircraft. The standard deductibles for airline jet equipment are US$1,000,000 for ‘wide-bodied’ aircraft, US$500,000 for ‘narrow bodied’and US$750,000 for ‘hybrid’types.
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ii) AVIATION HULL WAR AND ALLIED PERILS INSURANCE – Covers loss or damage to an aircraft resulting from war and associated perils including confiscation, terrorist acts, strikes, riots, sabotage and hijacking,as excluded from the hull ‘All Risks’policy.
Principal exclusions are:- Losses arising from nuclear war. - War between the Five Major Powers (defined as United Kingdom,
United States of America, France,the Russian Federation and the People’s Republic of China). - Confiscation/seizure due to debt, failure to provide bond,or other
financial causes. - The repossession or attempted repossession of an aircraft by any
title holder, or arising out of any contractual agreement to which any insured protected under the policy may be party. In addition, geographical exclusions are sometimes imposed.This may be as a result of sanctions (including United Nations sanctions) or perceived instability of the area excluded. War policies for large fleets are usually subject to an overall annual Aggregate Limit; claims will be paid up to this point, but thereafter no cover is given.At the time of writing,the normal maximum limit given on large airlines is US$1,750,000,000 in any one policy year. War policies are not normally subject to a deductible.
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The standard wording is called LSW555B.Refer Appendix D (page 182) for sample policy wording. iii) SPARES ‘ALL RISKS’ INSURANCE – Covers ‘All Risks’ of physical loss or damage to spares,including spare engines when not fitted to an aircraft whilst on the ground and in transit for a limit ‘any one occurrence’or a limit ‘any one item and/or any one sending and/or any one location’. Cover can be extended to include strikes, riots and civil commotions and limited war perils. Aircraft leases do not normally include finance for spares or extra engines. However, it is normal to require Spares Insurance. If an engine is removed for essential maintenance and replaced by another separately leased or borrowed engine,the ‘off wing’engine will need to be covered. Spares policies are subject to a deductible.This is normally US$10,000 each and every loss but the normal aircraft deductible (for example US$1,000,000 for a Boeing 747 engine) will apply for any engine ingestion loss whilst running on a test bed. War coverage for spares can be effected either under the Hull War policy, or by extending the Spares ‘All Risks’ policy. Owing to market agreements, war coverage excludes war and civil war in respect of storage risks. This was highlighted by the Gulf War where Kuwait Airlines had their spares inventory plundered by Iraq. Whereas the cover was in force for the aircraft seized, the spares claim was disputed. iv) AVIATION LEGAL LIABILITY INSURANCE – Covers the operator’s liabilities to passengers, passengers baggage, cargo and mail and legal
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liability to third parties. The policy also covers legal expenses/costs incurred in defending a claim; these costs are covered in addition to the overall sum insured and can be claimed even if no legal liability claim is paid. For airlines, coverage is normally extended to cover ‘Personal Injury’ claims for an annual aggregate limit of US$25,000,000 (within the overall limit). Personal injury is defined as false arrest, malicious prosecution, invasion of privacy, discrimination, slander/false advertising and medical malpractice (refer AVN60 clause Appendix D, page 157). In addition, coverage is normally extended to include liability arising out of war perils, other than nuclear/major powers war, by inclusion of AVN52C – the war ‘writeback’endorsement (refer Appendix D, page 169). Deductibles are normally only applied in respect of baggage and cargo liability claims.The prevailing levels being US$1,250 for baggage claims and US$10,000 for cargo claims. Liability limits are expressed on a ‘Combined Single Limit’ basis for bodily injury/property damage. Ideally limits should be on a ‘smooth’ basis with no ‘sub limits’ for passenger legal liability.
Principal exclusions are:- Liability arising out of noise,or seepage and pollution (unless
caused by an aviation accident or in flight emergency). Cover for noise and pollution can normally be given in respect of the passengers; this would cover food poisoning (from contamination) and noise injuries etc. - Fines and certain contractual liability (for example flight delays)
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- Liability to pilots/crew and payments made under any Workmens’
Compensation Act/Employers Liability law - Liability to property of the Insured - Radioactive contamination and nuclear risks - ‘Major powers’and nuclear war
v) GENERAL LEGAL LIABILITY INSURANCE – This comprises a) Premises Liability Insurance, b) Hangarkeepers Liability Insurance and c) Products Liability Insurance.This coverage is normally included on the Third Party and Passenger Legal Liability insurance and is subject to the same general conditions and exclusions. a) Premises Liability Insurance indemnifies the operator for general claims for property damage and bodily injury at premises (ramps, terminals, hangars etc) located at airports. It includes vehicle liability whilst such vehicles are operated ‘airside’. Motor Liability insurance policies typically exclude damage to aircraft (which can be very expensive) or damage occurring ‘airside’. b) Hangarkeepers Liability Insurance indemnifies the operator for damages to ‘third party’aircraft whilst in the Insured’s care custody and control.This would include ‘third party’aircraft hangared and aircraft being worked upon at the operator’s premises.
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c) Products Liability Insurance indemnifies aviation manufacturers, suppliers and repairers from liability arising from accidents due to faulty equipment/product failure.Many operators provide maintenance services to third parties on an ‘ad hoc’, or contracted basis.The coverage would also apply to claims arising out of aircraft disposed of, where the faulty work had occurred during the period of the operator’s control and such work is a contributory cause of an accident.
Hull and Liability Wordings Hull, Spares and Liability insurances are normally combined on a single placement. Airline wordings are usually ‘manuscript’ forms. These manuscript wordings provide much broader coverage than the standard wordings, as listed below, from which they evolved:AVN1C
Worldwide Hull and Liability wording
AVN16
North American Hull wording
AVN20
North American Liability wording
Ariel Form Sections 1, 2 and 3
Premises,Hangarkeepers and Products Liability wording
General aviation risks are usually insured on standard wordings without the benefit of a manuscript form. North American insurers use their own wordings and other international insurers (France, Italy and Germany are examples) use local wordings in their own language. The coverage afforded under these wordings is essentially the same as under the standard Lloyd’s forms.
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Hull ‘War’insurance is usually placed on a separate form with different insurers. Wordings are based upon the LSW555B form (refer Appendix D, page 182)
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Other insurance covers described i) DEDUCTIBLE INSURANCE – is designed to reduce the standard level of deductible imposed under the main hull ‘All Risks’ insurance. It is normally a separate policy and is subject to an aggregate limit for all claims.The policy is primarily intended to cover damage to aero engines caused by ingestion of ‘foreign objects’, but will cover other damage such as landing gear or damage to the fuselage .N ew generation jet engines are valued at over US$15,000,000 and minor incidents can easily result in claims of over US$1,000,000.Aircraft financiers often require that smaller, or less well capitalised airlines, purchase this insurance. The standard deductibles for airline jet aircraft are:‘Wide bodied’aircraft
US$1,000,000
‘Narrow bodied’aircraft
US$ 500,000
‘Hybrid’aircraft (MD-90,A320 etc)
US$ 750,000
It is common for financiers to insist that this deductible is reduced to US$100,000 or US$50,000 each loss. Deductible policies ‘follow’ the overlying hull ‘All Risks’ policy in most respects,and are subject to the same general conditions and exclusions.However, deductible wordings tend to include tighter definitions of ‘wear and tear’ and what constitutes an ‘ingestion’loss. Most Deductible policies are subject to an aggregate limit (for example 3 x the ‘Any One Occurrence’limit).Insurers will pay all valid claims up to that point and thereafter the cost of repairs will have to be borne by the operator.
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ii) UNEARNED PREMIUM INSURANCE (UPI) – in the event of a total loss,premium instalments normally become payable in full.UPI covers the pro rata premium from the date of total loss to expiry, that would otherwise be deemed ‘earned’ and payable to insurers.This protection can normally be included under the Hull policies. iii) MECHANICAL BREAKDOWN INSURANCE – Covers operating losses resulting from mechanical breakdown to engines as excluded under the main hull ‘All Risks’and spares insurances.As with deductible insurance, aircraft financiers may insist that smaller airlines buy this coverage. New generation high thrust engines can be worth over US$15,000,000 each and hence the loss of just one engine may create a financial problem for a smaller operator. The need for Mechanical Breakdown insurance is mitigated if there is a strong manufacturer’s warranty in force. iv) LOSS OF USE INSURANCE/AIRCRAFT UNAVAILABILITY INSURANCE – Loss of Use covers the loss of income if an aircraft is unable to operate due to an ‘intervening peril’. Coverage is normally restricted to the same perils as covered under hull ‘All Risks’ and ‘War Risks’ policies but can be extended to include such causes as mechanical breakdown, strikes by air traffic control, groundings by a manufacturer or FAA,and United Nations sanctions.Coverage excludes claims due to total loss of the aircraft hull.The policy will pay a fixed daily amount after an excess period (for example 7 days). Sometimes financiers will require that the coverage is purchased by a lessee to ensure that lease payments can be met whilst the aircraft is inoperable.
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v) TOTAL LOSS ONLY INSURANCE (TLO) – Provides an additional insured amount payable in the event of a total loss of the aircraft. Some airlines purchase hull insurance for an Agreed Value and then buy a separate ‘TLO’ amount in addition to the Agreed Value amount. This should satisfy the financier (actually any loss will be adjusted on the Agreed Value and hence a ‘total loss’ will be achieved with a lesser amount of damage) and will typically result in a premium saving for the operator;‘TLO’insurance is normally less expensive than ‘All Risks’.‘TLO’ can also be purchased by the financier in their own name.This type of policy is described in greater detail under Section Two ,p age 101. vi) SEARCH AND RESCUE and Additional Expenses coverage should be endorsed onto the hull ‘All Risks’ or legal liability policies. In the event of an accident, or aircraft disappearance, an operator has a duty to its passengers.In addition,after an accident there may be substantial costs incurred, such as clean up costs, recovery of human remains, wreckage removal and public enquiry/investigation expenses.The costs can be very high and may involve charter of aircraft or even mini submarines. Sometimes the costs may be greater than the value of the aircraft hull and/or liability claims resulting from the initial incident.It is therefore recommended that this coverage is purchased by operators. The standard endorsement is LSW705.
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OK, SO WHO’S RESPONSIBLE?
A
drunken teenager, a member of a party of rugby players, boarded an aircraft in Darwin carrying a freezer box containing a large number of live mud crabs. “I’m sorry, Sir, but you cannot bring that container on board” the stewardess said to the youth.After much discussion and stubbornness by both the teenager
and the stewardess, she eventually agreed for it to be stowed in a cupboard adjacent to the first class cabin. On arrival in Melbourne,and as the passengers were about to disembark, the stewardess made the following announcement to all the passengers, over the aircraft intercom.“Could the young guy who gave me the crabs in Darwin, please make himself known to the cabin crew”.
Important coverage issues on the Operator’s various insurances i) Agreed Values It is normal for aircraft to be insured on an ‘Agreed Value’ basis.This means that the underwriters do not have the option to replace a lost aircraft with another of similar age and condition.Insurers are normally comfortable with Agreed Values of plus or minus 10% of a market value estimate.Hence the financier can require a level of Agreed Value that is greater than the amount outstanding on the loan/lease at the date of any loss. In the event of a loss the insurance proceeds will then clear the debt plus any outstanding interest and expenses. If a further increased sum insured is required, a separate ‘Total Loss Only’policy can be taken out.Refer Section Two,page 101.
ii) Level of liability limit It is easy to envisage catastrophic liability scenarios involving airlines. These may not necessarily involve great loss of life or mid air collisions over big cities.Aircraft are valued at up to US$200,000,000; values over US$150,000,000 are commonplace. Damage to a single ‘third party’ aircraft can result in large claims.Ground accumulations at airports like London Heathrow are vast; aircraft are parked very close to active runways.Consequential loss exposures also need to be considered. In determining the minimum liability limit that the aircraft operator must carry, aircraft financiers should consider the legal environment in
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which the airline is operating, the type and weight of aircraft, the passenger nationality profile, passenger seating numbers and airport destinations. Passenger liability exposures depend upon the nationality of passengers,domestic laws,and a number of international treaties. It is important to consider the implications of the ‘IATA Intercarrier Agreement’ and European Union rulings (EC 2027), the provisions of which are now being adopted by airlines worldwide. These new ‘contracts of carriage’ effectively mean that liability awards to passengers are unlimited. Potential catastrophe exposures have increased significantly. For example, the anticipated average passenger awards arising out of the Swissair MD-11 loss in 1998, with 218 fatalities, is over US$2,500,000 per passenger. Prior to adoption of the IATA/EC 2027 type contracts of carriage, liability awards of this size were only likely for claims involving US or Japanese airlines. Minimum liability limits are often stipulated by domestic law. These minimum limits can be surprisingly low and should not be viewed as recommendations.Some airports require their own minimum limits and insist that the airline carry a certificate to verify the limit is in place. Passenger airlines are normally expected to carry higher limits than cargo airlines. However, the potential liability resulting from a mid-air collision is little different. Liability limits should be worded to apply to each aircraft separately. Therefore a mid air collision between two aircraft,covered on the same fleet,will not restrict the available policy limit for each aircraft.
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iii) Leased engines Some small airlines,which ‘out-source’their maintenance, do not keep a spares inventory. However, when an engine is removed for repair or service it is common for a replacement engine to be leased or borrowed on a short term basis.In such circumstances it is important that the airline has purchased a spares insurance policy and that the aircraft value is increased by the value of the replacement leased engine. In the event of a total loss, insurers will then pay the agreed value of the aircraft plus the value of the replacement engine and take title to the original engine that is off the wing (sometimes known as the ‘Orphan Engine’).A suggested clause is shown in Appendix D, page 162.
iv) Aggregate limit restrictions Insurers,like banks,are keen to monitor their aggregate exposures to a single occur rence, or series of occurrences. Some events can result in coverage being exhausted by aircraft in which the financier has no interest.Hull and spares ‘War Risk’policies for fleets of aircraft typically have policy aggregate limits.Had the Kuwait Airlines fleet been heavily financed,the financiers would have suffered a shortfall.The total value of assets seized by Iraq was around US$800,000,000. The insurance policies were subject to various aggregate limits that restricted the final recoverable amount (after many years of legal wrangling) to US$500,000,000 plus fees. ‘Personal Injury’ coverage, an extension to the liability insurance, is limited to US$25,000,000 per airline (the US$25m sub-limit provision can sometimes be re m oved for ‘ p e rsonal injury ’ l i ability to passengers).
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Hull deductible ‘buy down’ policies are subject to aggregate limits, though the potential for lar ge financial shortfalls is limited. If the financier is uncomfortable with the level of aggregate protection afforded under the operator’s policies,it can purchase separate ‘excess aggregate’policies.This type of policy is taken out in the name of the bank or lessor and covers their interest only.
v) 50/50 clause In the event of a mid-air explosion and catastrophic loss of an aircraft t h e re is always speculation about potential terro rist causes. Sometimes the actual cause of the loss is never determined with any certainty. In other cases it takes many months for the accident investigation to report its conclusions. During this period the airline and/or financiers will want their hull claim paid and will not want to be prejudiced by arguments between the hull ‘All Risks’ and hull ‘War Risks’ insurers. The 50/50 Provisional Claims Settlement Clause (AVS103) states that the respective ‘All Risks’ and ‘War Risk’ insurers will immediately pay half the total loss amount each, and then resolve the final apportionment at a later date. This results in the loss payee receiving claim proceeds quickly.This clause has operated on several occasions, including, after the 1985 Air India loss, where the aircraft exploded over the Atlantic Ocean. For full text of AVS103 clause refer Appendix D, page 161.
vi) War cancellation clauses Long-standing agreements between international insurers dictate that ‘War’insurances are subject to certain cancellation clauses and review
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provisions.Historically this was to protect insurers from unmanageable exposures that would result from wars.War insurers on hull,spares and liability policies monitor wars and regional conflicts very closely. It is very rare for an existing airline to have cover withdrawn completely. Insurers normally offer to cover airlines operating into dangerous areas,albeit at increased charges. Problems may arise for a financier if aircraft are chartered or requisitioned for use, during a war, by a government.The airline’s insurers may decline to continue cover.Also, the airline may be unable, or unwilling to pay the extra premiums levied.There are ‘Contingent War’insurance products that protect the financier’s interests in such situations.This is described fully in Section Two ,p age 95.
vii) ‘Breach’ of Geographical Limits Most insurance policies contain a clause defining the geographical scope of the policy.Most leases require that geographical limits are ‘Worldwide’. However, on occasions this is not possible to negotiate and the insurers require certain exclusions. Excluded areas are typically unstable countries/territories or countries subject to UN sanctions.Sometimes the exclusion may be qualified, for example to include ‘overflying’. Also, diversion due to ‘Force Majeure’ or other emergency would be covered. It should be noted that if a lessee suffers a loss whilst operating outside the geographical limits,the standard ‘Breach of Warranty’coverage may not protect the financier’s interests.
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It is sometimes possible to include a form of words in the Geographical Limits section of the operator’s policy to ensure that such a gap in coverage does not occur. For example: If the Geographical Limits read ‘Worldwide excluding countries subject to United Nations sanctions’, the words ‘or held covered at terms to be agreed by leading insurer, as soon as practicable’, could be added.
viii) Inadequacy of Confiscation/Deprivation coverage Hull ‘War’insurance often excludes ‘confiscation by the government of registry’. This is because insurers are not prepared to cover a government confiscating assets that in many cases may already belong to it (for example on a state owned airline). Also, the potential for aggregation of exposures is perceived to be high. Even where ‘confiscation by government of registry’ is included, it provides very limited protection to the aircraft financiers.The Hull War Risks policy wording (LSW555B) contains the following exclusions:- ‘The repossession or attempted repossession of the Aircraft by
any title holder, or arising out of any contractual agreement to which any Insured protected under this Policy may be party…’ - ‘Any debt, failure to provide bond or security or any other
financial cause under court order or otherwise…’
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If a bank/lessor is unable to repossess and de-register an aircraft following a default under the lease,it will be very hard to convince war risk underwriters that a ‘bona fide’ confiscation has occurred. Only in circumstances where a country descends into general turmoil, with widespread acts of seizure, would the policy be expected to respond. However, in such circumstances (general turmoil or outright war) there is a strong chance that underwriters will have already exercised their rights to cancel or review the conditions of coverage. If an aircraft is parked at an airport, in an undamaged condition, in a country where other trade and air travel continues without problems, it will be hard to convince war underwriters that the asset in question has been confiscated. If financiers are concerned about confiscation or deprivation risks a separate, non-cancellable, ‘Aircraft Repossession Insurance’ policy should be taken out, in the name of the bank/lessor. These long term policies are detailed in Section Two,page 79.
ix) Confiscation due to illegal acts Many countries (particularly USA) show little leniency to aircraft caught carrying illegal cargoes (drugs and arms etc.). Insurance policies are invalidated by illegal acts.Aircraft can be seized, notwithstanding the protestations from the airline that they were unaware of the cargoes being carried. Some airlines have negotiated the inclusion of an ‘Innocent Operators’ endorsement that ensures full coverage remains in force provided the airline concerned have taken all relevant measures to prevent carriage
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of illegal cargoes,notwithstanding that local officials may deem that the airline has acted illegally.
x) ‘Ongoing’ products liability insurance/’Continuing Indemnity’ It is normal to require that Products Liability insurance is included on an airline liability insurance policy. Aircraft financiers should consider the implications after an aircraft is sold or moved to another lessee. Products Liability could attach to the original lessee arising out of service or repair work performed during the original period of operation. If there is no Products Liability policy remaining in force then there could be an uncovered exposure. This is not a problem where the original lessee continues to operate a fleet of aircraft. Products liability coverage is not ‘aircraft specific’but covers an airline for all its aviation activities,past and present. Financiers may wish to insist upon a certificate confirming that Products Liability insurance remains in force for a stipulated period, subsequent to the lease termination (a period of 2 years, or until next ‘D’Check,is fairly standard).This is especially significant for operators who perform their own ‘heavy maintenance’. Normally, any subsequent disposal of an aircraft will include strong indemnities in the language of the sale or re-lease agreement (waiving recourse for product failure etc.).
xi) Insurance of ‘Indemnities’ – a Warning! Insurance covenants usually contain ‘Indemnity’ provisions.The lessee is typically required to indemnify the bank/lessor in respect of any
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fines, taxes, penalties or contractual liability that may attach to the bank/lessor arising out of the lease.Insurance protections (in respect of perils covered) afforded to the bank/lessor will only be as wide as those enjoyed by the operator. Since many of the ‘indemnity’ provisions are not insurable, banks/lessors should accept that, having signed the agreements,the liability will rest with the operator.
xii) Cancellation for non-payment of premium The safeguards protecting the financier’s interests under the operator’s policy (breach of warranty etc.) provide little comfort if the policy has been cancelled for non-payment of premium.The following steps can be taken by a financier to mitigate the risk of being left without coverage,due to cancellation for non-payment:- Require 30 days notice of cancellation, for any reason,including
cancellation due to non payment of premium. (Financiers should be aware that cancellation provisions in respect of War and Nuclear risks will override the foregoing) - Inclusion of AVN6A,deferred premiums clause,that provides for
lenient cancellation terms (refer Appendix D, page 154) Aircraft financiers should strongly resist the use of AVN5A, Deferred Premiums Clause.The wording of this clause provides for automatic cancellation if an instalment of premium is not received by underwriters on the due date.This could be interpreted as overriding the notice provisions of AVN67B,hence leaving the bank/lessor without coverage.
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AVN5A is more commonly used on general aviation risks.However, for airlines with premium payments problems (or a history thereof) airline underwriters have been known to insist upon AVN5A. If this clause is used, it is essential that the financier fully comprehends the implications and receives clarification as to how coverage under AVN67B (or AVN28A) will be affected,if the cancellation provisions of AVN5A are invoked. A copy of the full text of AVN5A is shown in Appendix D, page 156. However, the Author again advises extreme caution when this clause is applied on an operator’s policies. The surest way to eliminate the risk of coverage being withdrawn,is for the financiers to take out separate Contingent Hull and Liability insurances in the name of the bank/lessor.These products are explored further in Section Two,page 89.
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PL EASE PR OMO TE THI S PI LO T – T O AN OFF IC E J OB!
A
Boeing 747,operated by a large Asian airline,landed at Anchor age Alaska and taxied to the docking area. Unfortunately the pilot was having an off day and parked in the wrong bay. Rather than calmly accepting his error and waiting for a tractor tug to pull the aircraft back out,the pilot attempted a u-turn.As the left hand wing swung around the wing tip struck an Aeroflot aircraft in the next bay. Undeterred,the pilot increased power on the outer engine to full takeoff power in an attempt to complete the u-turn. This caused some consternation among ground staff who alternated
between wild gesticulations to cut the engine and desperate scrambles for cover. The engine was broken off spewing large volumes of fuel and further, more serious damage was sustained b y the hapless Russian jet. In addition, a large cargo container was picked up in the vortex and hurled through the airport terminal window (causing considerable damage and several spilled cups of coffee). Miraculously nobody was hurt,other than, we hope,the career prospects of the pilot.
Endorsement and Acknowledgement of the Bank’s/Lessor’s Interests The primary aviation insurances will have been placed in the name of the airline, or aircraft operator. The financier’s priority interest in the aircraft will need to be included under these insurances.A specimen ‘insurance article’, is found in Appendix A, page 119. The principal requirements are as follows:-
i) Additional Insured The bank/lessor to be named as an additional insured on the airline’s/operator’s insurance policies.When the financing is made by way of a mortgage, then the Mortgagee may, alternatively, require an assignment of the Hull policies. This is addressed in the Airline Finance/Lease Contract Endorsement AVN67B. For full text of AVN67B and explanatory notes refer to page 54.
ii) Loss Payable Clause A Loss Payable Clause in favour of the bank/lessor, as either Mortgagee or Lessor in respect of the hull, spares and hull war insurances.The subject of Loss Payable Clauses is explained more fully on page 37.
iii) Breach of Warranty Endorsement A Breach of Warranty Endorsement in favour of the bank/lessor provides that the bank’s/lessor’s interests under the policy cannot be invalidated by any act, omission or misrepresentation of the operator,
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provided that the bank/lessor has not caused, contributed to or condoned such act,omission or misrepresentation. It is important to note that Breach of Warranty coverage does not extend the scope of coverage beyond that which would have existed, but for the breach of warranty. Examples of a ‘Breach of Warranty’include:- An airline f lying with pilots who have less than the stipulated
qualifications. - The aircraft being operated outside the manufacturer’s limits. For
example,landing at a runway that is too short. - Non-disclosure by the operator of previous adverse loss
experience. - An aircraft that is not ‘airworthy’,or not maintained,and/or
operated within the manufacturer’s stipulations/guidelines.This is an implied warranty of any aviation insurance policy. For airline equipment Breach of Warranty is normally provided by inclusion of the AVN67B Endorsement. For the full text of AVN67B and explanatory notes refer to page 54.
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iv) Letter of Undertaking Financiers should insist upon a ‘Letter of Undertaking’from the placing insurance broker (or direct insurer). The letter should include the following:- Acknowledgement of the interests of the bank/lessor. - An undertaking to maintain the insurance policies throughout the
policy period,and advise promptly of any notice of cancellation from underwriters. - Undertaking to advise of any adverse material change in coverage. - Agreement to answer any enquiry from the bank/lessor in respect
of renewal,or premium payment. Refer to Appendix C, page 151 for sample ‘Broker’s Letter of Undertaking’.
v) Cut Through Clause A ‘Cut Through Clause’ should be included whenever the operator’s policies are issued by the local/domestic insurer (where such insurer is not fully acceptable to the financier) with reinsurance placed in international insurance markets.Refer to page 32 for a detailed analysis of Cut Through Clauses.
vi) Liability for premiums unpaid by the Lessee Responsibility for the payment of premiums rests jointly and severally
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with the named insureds. Therefore, the bank/lessor could be held responsible for such payment unless provision is made in the insurances to the contrary.This is addressed in the text of the AVN67B Endorsement (refer page 51).Insurers will normally agree to waive any liability for premium set off (i.e.deducting outstanding premium from a claim payment) other than in respect of outstanding premium due in respect of the particular aircraft,subject to a claim (AVN67B contains such a provision).
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Underwriting Security An insurance policy is only as strong as the security backing it. Each underwriter is only liable for his proportionate share;there is no joint liability. All recognised international insurance brokers should have internal arrangements to vet and approve security.Although prudent brokers go to considerable lengths to ensure that the underwriters are solvent and will remain so,brokers will not,and cannot,guarantee the claims paying ability of insurers. Interested parties can refer to established rating agencies such as A.M.Best or Standard & Poor.These companies publish ratings of claims paying ability.The ratings take multiple factors into account, including balance sheets, reserving against future claims, trading results and reinsurance arrangements. Lloyd’s Insurance policies are all backed by the Lloyd’s Central Fund.
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Local Domestic Insurers and ‘Cut Through Clauses’ In many countries local law dictates that all insurance is placed with a domestic insurer, who will typically reinsure into international markets. The ratings of such companies are often far lower than would normally be acceptable to major insurance brokers and financial institutions. In the event that the domestic insurer becomes insolvent,not only may his share of claims be unrecoverable, but as the direct insurer, the whole policy may be jeopardised In addition,a problem may occur even if the domestic insurer remains solvent but,due to local currency controls or central bank interference, is unable to settle a claim in hard currency. It is possible that funds could be collected in a timely fashion from reinsurers and then paid to the domestic insurance company, for onward payment to the loss payees.At this point the domestic company may be unable, or unwilling, to remit the funds to the bank/lessor named as Loss Payee. Banks/lessors should therefore:1.Monitor the proportion of a risk retained by the domestic insurer (a minimum percentage of facultative reinsurance into international markets may be stipulated). 2.Require the inclusion of a suitable ‘Cut Through Clause’.
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Cut through clauses can be an emotive issue with local governments and domestic insurers.The inclusion of a clause must be agreed by the domestic policy issuing company (the reinsured) as well as the international reinsurers.In addition,it must not act in contravention of local law. There are certain countries where the clause is currently illegal (including People’s Republic of China) and other countries where its legality is untested (India and South Korea for example). Cut Through Clauses can also be an emotive subject with reinsurers. They are nervous of being made to pay a claim twice.This could occur if the cut through clause was invoked by a loss payee and then the reinsurers were to be presented with a second claim by the domestic company, seeking indemnification for a claim they also have paid. The clause applies to physical damage policies only and should not normally apply to liability claims. The following is an example of a ‘cut through clause’acceptable to most banks/lessors and aviation insurers:-
“The Reinsure rs here by agree (at the request and with the consent of the Reinsured) that in the event of any valid cl a i m a rising hereunder the Reinsure rs shall in lieu of payment to the R e i n s u red its successors in interest and assigns pay to the p e rson(s) named as loss payee(s) under the ori ginal insura n c e e ffected by the Insured that portion of any loss for which the R e i n s u re rs would otherwise be liable to pay the Reinsure d (subject to proof of loss) it being understood and agreed that
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a ny such payment shall fully disch a rge and release Reinsure rs f rom any and all further liability in connection with such cl a i m . The Reinsure rs re s e rve the right to set off against any cl a i m p ayable hereunder in accordance with this clause any outstanding premiums due on this re i n s u ra n c e . Payment shall be made under this re i n s u rance notwithstanding (i) any bankru p t c y, i n s o l ve n c y, liquidation or dissolution of the R e i n s u re d , and/or (ii) that the Reinsured has made no pay m e n t under the ori ginal insurance policies. It is a condition that the provisions of this clause shall not o p e rate in contravention of the law s , statutes or decrees of the G ove rnment of the country of domicile of the Reinsure d .”
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W H Y A R E W E WA I T I N G ?
P assengers boarded an aircraft for a scheduled flight from the Indian subcontinent to Europe.The checked baggage was loaded,the catering arrangements finalised and completed,and with the chief steward confirming the passenger manifest,the cabin doors were closed and sealed. Everything was ready for the scheduled departure time. Thirty minutes elapsed. The aircraft remained on the ground, and not surprisingly, the passengers became
increasingly agitated at the delay. No announcement was made, and none of the aircrew appeared to have any knowledge of the circumstances causing the delay. Suddenly, there was a tapping noise on the cabin door at the front of the airc ra f t . The chief steward released the safety catches and the door was opened. T h e re , standing on the steps, were the captain and co-pilot.
Loss Payable Clauses Paragraph 1.1 of AVN67B contains the following ‘Loss Payable’ language:“In respect of any claim on E q u i p m e n t that becomes payabl e on the basis of a Total Loss, settlement (net of any re l eva n t Policy Deductible) shall be made to, or to the order of the Contract Party(ies). In respect of any other cl a i m , s e t t l e m e n t (nett of any re l evant Policy Deductible) shall be made with s u ch party(ies) as may be necessary to repair the E q u i p m e n t unless otherwise agreed after consultation between the Insure r s and the Insured and, w h e re necessar y under the terms of the C o n t r a c t ( s ), the Contract Party(ies).”
This is a change from established practice where, generally speaking, insurers have been prepared to agree that all valid losses shall be settled in accordance with the loss payable clause found in the lease.Contract Parties understandably want to name a Loss Payee for all claims payments in order to be able to control the funds relating to their asset. The insurers, however, undertake in the policy that in the event of a partial loss, they will pay for the repair of the aircraft.If the necessary repairs are to be effected without undue delay, the repairers will want an assurance that they will be paid directly by insurers. The repairers may insist on a deposit,as well as stage payments as the aircraft is repaired. Therefore, insurers will not wish to agree, in advance,to pay a partial loss to the named loss payee.Clearly, payment
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to the named loss payee of funds intended to pay for repair, could delay the process of repair or curtail it completely. Insurers obviously cannot pay the same funds to both loss payee and the repairer. Although insurers will generally pay the repairer, the clause does provide for consultation with the Contract Parties in the settlement; thus the bank/lessor will be kept informed of what is happening to their asset.The clause does leave the question of settlement process of a partial loss open. If there is a good reason why the partial loss proceeds should be paid to the Loss Payee then this would be a subject for negotiation. If, for example, the operator was insolvent then the recipient of funds may need to be amended.
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Airworthiness and Aircraft Regulation There is an implied warranty on all aviation policies that aircraft are maintained to the specified standards. The standards and procedures are dictated by the aircraft manufacturers, in conjunction with the FAA and/or the relevant civil aviation authority. The procedures are minutely documented and require very detailed records to be kept. In addition,the aircraft and engine manufacturers specify the parameters for an aircraft’s operation. For example, a minimum runway length for a particular aircraft loading, altitude above sea level and temperature. If an airline breaches any of the above requirements they are in danger of invalidating their insurance coverage.
Maintenance of Technical Records Major airlines file all their service and maintenance records into a computer database. Small operators in the lesser developed countries sometimes rely on a card system for their servicing and aircraft maintenance records.Should these record cards be lost or damaged by fire or otherwise,it could be very expensive satisfying the airworthiness authorities as to the maintenance status and therefore airworthiness of the aircraft. The security of maintenance and aircraft service documents should be checked and insured. It is standard for banks/lessors to include a section in the lease stipulating that correct and up to date records be kept. Many
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banks/lessors require periodic updates of the maintenance/certification programme and may require duplicate records to be filed with them. Reconstitution of technical records is expensive and may necessitate significant additional maintenance and replacement of expensive parts. The subject of Technical Records and Repossession Expenses Insurance, covering the financier’s interest in the aircraft, is explained in greater detail in Section Two,page 102.
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The Vital Checks for Aircraft Safety Step by Step to Safety – the programme that keeps an aircraft in the air
A – CHECK
B – CHECK
C – CHECK
P1 – CHECK
D – CHECK
E V E RY FLIGHT
E V E RY 36 HRS
E V E RY 300 HRS
E V E RY 1,500 HRS
E V E RY 18,000-24,000
Takes 10-20 minutes
Takes 2 hours
Takes half a day
Takes 24 hours in hangar
Takes 3-8 weeks in hangar
C aptain walks aro u n d a i rc r a f t . Checks fo r obvious damage, l e a k a g e, loose panels. Visual check of engine area and of fuel and fluid leve l s . Checks that control surfaces are fre e, emergency equipment and lighting in good o rd e r, that engine fans a re undamaged and turning fre e ly.
As A - C h e c k , but re c o rd t y re pre s s u re s , top up f l u i d s , check braking e f f i c i e n c y, open access panels and doors.
As previous checks, but in more detail. Check and replace hydraulic f i l t e r s , rectify any faults advised by airc rew s .
Open all panels, t a ke engine cowls off. Check critical systems – fire, stall and overheat w a r n i n g s . Check wiring, change fluids, and check all items in A , B and C. Repeat every 1,500 hours until P-5: major strip d ow n ; non destructive testing of airframe using X-rays and dye p e n e t r a t i o n , check for c o rrosion and cracks.
Complete strip dow n to bare metal; eve ry component taken to pieces and replaced or re b u i l t .
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Insurance Claims i) Hull Claims The predominant structure for aircraft financing is the lease.As such the lessor effectively retains title to the asset and is particularly concerned that it is maintained in excellent condition. The condition has a considerable impact on residual values; RVI guarantees do not normally cover loss in value due to the aircraft ‘return condition’ being below stipulated lease standards. Aviation hull claims are far more clear cut and subject to less negotiation than marine hull claims.This is due to several factors including:- Standardisation of aircraft types. - Strict regulation by civil aviation authorities/FAA.This leaves very
little choice as to how the aircraft will be repaired. - Limited choice of approved repairers. - Single source of parts supplier (for example,GE fan blades for GE
engine). a) Total Losses (and contested total losses) If the aircraft is declared a total loss,then the full amount of lien should be paid off and the bank/lessor should not have a problem (other than that a performing lease has been prematurely terminated).It is normal to insist upon an agreed value of 110% to
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120% of the financed amount outstanding,this ensures that bank’s/lessor’s costs and lost revenues are recovered. Some losses are borderline cases between being a total loss or large partial loss. For example,if a Boeing 747-400 insured for US$175,000,000 sustains US$150,000,000 worth of damage,the airline operators and the financiers may not wish for it to be repaired.They will try to negotiate for a total loss,with the underwriters retaining salvage.The long-term desirability of an aircraft that has suffered serious damage is questionable. Underwriters may argue for the damaged aircraft to be repaired.In such cases it is helpful to have an agreed threshold,beyond which the aircraft will be declared a total loss. For example,if repair costs exceed 75% of the agreed value. Engine leases Complications can arise when an aircraft suffering a loss is fitted with a borrowed or replacement engine;the engine not being subject to the aircraft lease in question.In such circumstances the agreed value of the aircraft should be increased to include the value of the replacement engine (i.e.Boeing 747 airframe plus five engines).Then underwriters will pay a total loss, for the increased agreed value,and take the replaced engine as salvage.Such scenarios need to be addressed by a specific policy clause. If the value has not been increased,then the respective owners of the engines may become embroiled in a dispute as to the distribution of claim proceeds.This may result in underpayment,or a lessor being presented with an unwanted ‘Orphan Engine’! Refer Appendix D, page 162 for a suggested ‘Orphan Engine’ clause.
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b) Partial losses Following partial losses, financiers will want to ensure that the repairs are carried out to their satisfaction. For this reason leases contain loss payable clauses that typically require for claim proceeds, over a stipulated amount,to be paid directly to the bank/lessor.This threshold varies depending upon the standing of the airline. For example,the threshold for a ‘start up’airline may be US$500,000,but US$10,000,000 for a large international airline. However, normal practice is that claims are paid directly to the repairer and this is reflected in the language of paragraph 1.1 of AVN67B.It is important that banks/lessors appreciate that,unless specifically addressed with insurers,the provisions of AVN67B may override the ‘Loss Payable’provisions contained in the lease contract.This subject is explored in further detail in Loss Payable Clauses.Refer to page 37. Aircraft financiers should be aware of certain potential problems in dealing with partial loss adjustment and repair:- ‘BETTERMENT’may be applied. For example,if an old engine is
damaged and the replacement parts are new, and of higher value than the old discarded parts,underwriters may deduct a ‘betterment’ factor from the claim payment.The logic being that the repair has enhanced the value of the aircraft.Most aircraft parts have a specified life (usually defined as number of cycles or hours).The part,which has suffered damage,may have been due for replacement in the near future.
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- CHOICE OF REPAIRER.The aircraft financier does not have the
right to insist upon a chosen repairer. Insurers will seek to repair the damage in the most economic way, but will be bound to use an approved repairer.This would typically be an FAA/JAA/CAA or equivalent licenced repair station.Normally insurers will consider the wishes of a bank/lessor and this could be the basis for negotiation.
ii) Liability Claims Liability claims are usually settled directly by insurers with the plaintiffs, without the operator or financier being involved. Banks/lessors are advised to steer clear of liability issues (other than in the unlikely event of them being joined in a suit).The provisions of ‘cut through clauses’should only be applicable to hull claims. Some ‘loss payable’ clauses require that all claims, including liability claims are paid via the bank/lessor.This langua ge is not recommended and is likely to cause added workload, delay in claim payments and, more dangerously, could lead to the bank/lessor becoming needlessly involved in expensive liability suits. If a claim payment, destined for a dependant of a deceased passenger, were to be inadvertently held up within a bank’s/lessor’s accounting process, this could attract unquantifiable liability suits for bad faith etc.
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Lessor Liability One of the primary concerns of a bank/lessor financing transportation assets is to avoid any legal liability exposure arising out of operation of the asset.The essential defences against aviation liability exposures are:- Lease covenants that absolve the bank/lessor of any liability, or
legal expenses,arising from the operation of the aircraft.Hence, even if the relevant insurance fails to respond,the financier will stand behind the assets of the operator. - Requirement that the airline purchases reasonable liability limit. - Ensure that widest possible coverage is purchased. - Ensuring that the financier plays no part in managing or operating
the aircraft (refer ‘Operational Interest’– page 52). - Bank/lessor added as Additional Insured,with Breach of Warranty
coverage in their favour (this is catered for by inclusion of AVN67B endorsement – refer pa ge 54). - Requirement that insurers give reasonable notice of any
cancellation or material change in coverage. In addition, often the ownership/title of the aircraft is vested with an SPC (‘special purpose company’), not directly in the name of the bank or lessor.
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Aviation lawyers consider the possibility of a lawsuit filed directly against an aircraft financier to be remote. In order to bring a suit successfully the plaintiff will need to be able to demonstrate some ‘contribution’ by the bank/lessor. In most jurisdictions it is very unlikely that the act of leasing an aircraft to an operator could satisfy this prerequisite. Furthermore, if a suit is successfully brought against the financier, the operator’s policy should afford protection to the named financier as an Additional Insured. Notwithstanding the safeguards a prudent financier will employ, there are circumstances where third parties may attempt to enjoin a bank/lessor.These could possibly include:- When the operator’s policy limit is exhausted. Potential claims for
passenger legal liability have recently been increased by the adoption of the ‘IATA Intercarrier Agreement’and ‘EC 2027’ unspecified contracts of carriage (refer page 16). - The operator’s policy being invalidated/cancelled.
Notwithstanding the safeguards detailed above,it is possible that adequate coverage may not be in place.* - A ‘scattergun’approach by plaintiffs enjoining multiple parties,
especially those with ‘deep pockets’. In the event that the financier is enjoined in a suit, whilst we believe that the plaintiff’s chances of success are slim, it is possible that significant legal expenses could accrue.
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Any financier who is uncomfortable with the liability exposure assumed when financing aircraft can buy a contingent liability policy. This type of policy is detailed in Section Two of this book – refer page 89. * For airlines operating in USA, Canada, Switzerland and Australia, it is almost impossible for passenger liability coverage to be invalidated, or valid passenger liability claims to be denied by insurers. This is due to specific legislation enacted (in USA being ‘D.o.T 14 CFR Part 205’) to protect the interests of passengers or their dependents. The provisions apply equally to domestic airlines (i.e. based in USA, Canada, Australia and Switzerland) and foreign airlines operating in the airspace. These provisions are incorporated into the liability policy by inclusion of the relevant version of the AVN57 endorsement. Full text of AVN57A (USA) is included in Appendix D page 159. It should be noted that AV57 clauses contain reimbursement provisions that would enable the insurer to seek recovery, from the insured, of claims paid by virtue of the clause.
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SO MU CH BE TT E R THA N T HE F IL M ?
A
B o e i n g jet was cruising overnight on route to Lagos. The aircraft was on autopilot and the majority of the passengers had settled down to sleep. For one reason or another, first the flight engineer and then the captain departed the flight deck leaving the co-pilot in sole charge.
The co-pilot needed to attend to a call of nature and likewise took his leave allowing the flight deck door to close behind him. On the return of the crew it was suddenly appreciated that the door was fitted with an anti-hijacking security lock which would not allow re-entry from the first class passenger cabin. After
many minutes of panic the captain decided that the only way to regain access was to physically break it down. A fire axe was brought from the rear of the a i rc raft and, under the full glare and to the consternation of the passengers, the crew started to hack away madly at the door. After apprehensive minutes of frantic exertion it finally gave way and the embarrassed crew were able to regain control of the aircraft. For many of those passengers of a strong nervous disposition this incident was so much better than the film!
Aviation Lease/Finance Clause AVN67B Unlike Marine Insurance where financiers are normally obliged to take out separate ‘Mortgagee’s Interest Insurance’ policies, AVN67B is endorsed onto the operator’s own policy with the same insurers. On occasions insurers may deny a claim to the airline/operator but pay a valid claim in respect of the bank’s/lessor’s interests. AVN67B effectively acts as a separate ‘policy within a policy’,protecting the interests of the financiers.
i) Background to AVN67B The AVN67 clause was introduced by insurers in an attempt to standardise the method and language used in giving effect to the insurance requirements of financiers.Previously, insurers felt that they were frequently being asked to agree the ‘Insurance Article’ of a lease agreement with little time to review the often complex language and being told that the transaction might fall through if they did not agree without question. Insurers also felt that rather than perhaps reacting negatively to a set of words constructed by others, it was appropriate that they should state the coverage they were prepared to give for the benefit of financiers. The development of a standard clause was intended to enable insurers to react immediately and confidently when presented with contracts in respect of financed aircraft. The original AVN67 clause has been refined and improved in stages – the cur rent clause is designated AVN67B.Whilst its incorporation into airlines insurance programmes was initially haphazard, it is now included automatically (though there is some lingering resistance in US
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insurance markets). When drawing up insurance provisions for new leases,the requirements of AVN67B must therefore be considered. It is normal for old leases, negotiated prior to the advent of AVN67/AVN67B,to continue to be endorsed on the basis negotiated at the date the lease incepted.
ii) ‘Operational Interest’ The cover afforded to ‘Contract Parties’ under AVN67B is broader than that enjoyed by the operator. This is granted on the assumption that the financier have exercised due diligence in requiring that the operator is complying with laws, aviation regulations, policy conditions and the like .I t is prudent for the bank/lessor to distance itself from the day to day activities of an operator. Otherwise, insurers may argue that the actions of the Contract Party have contributed to a claim under AVN67B (non-disclosure, breach etc.) and as such invalidate coverage to the Contract Party. Avoiding an ‘operational interest’is not normally a problem for financiers. However, for aircraft manufacturers, or airlines involved in aircraft leases great care needs to be taken to ensure that the full protection afforded under AVN67B is not prejudiced. This can be assisted by setting up a separate dedicated finance company. Many large airlines and manufacturers have done this. The implications of paragraph 2.3 of AVN67B may also need to be addressed with a special endorsement.
iii) Amendments to standard text AVN67B is generally regarded as a good means of protecting the bank’s/lessor’s interests.The current form has evolved taking the views and
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needs of financiers into account. In view of this, insurers are reluctant to amend the provisions of AVN67B and will only do so with good reason.
iv) AVN67B applicability on reinsurance contracts It is important to ensure that the clause has also been agreed by the domestic/local insurer, as well as the reinsurers.Unlike the cut through clause, that is only applicable on the reinsurance contract, AVN67B applies to the direct policy. Notwithstanding which, the technical agreement is usually negotiated with the leading reinsurer.
v) Engine Leases AVN67B is designed so that it can be applied to engine leases as well as complete aircraft.
vi) AVN67B War For endorsement to Hull War policies there is an amended clause (omitting reference to Liability etc.) that can be used. This mirrors AVN67B.Refer to Appendix D, page 178 for full text of AVN67B War.
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vii) Text of AVN67B and explanatory notes
AIRLINE FINANCE/LEASE CONTRAC T ENDORSEMENT AVN67B
E X P L A N ATO RY NOT E S
It is noted that the C o n t r a c t
The pre a m ble ack n ow l e d ge s that th e Contract Pa r ties have an insurable intere s t .
Party(ies) h ave an interest in re s p e c t of the E q u i p m e n t under the C o n t r a c t ( s ). A c c o rd i n g ly, with re s p e c t to losses occurring during the peri o d f rom the E ffective Date until the ex p i ry of the insurance or until the ex p i ry or agreed termination of the Contract(s) or until the obl i g a t i o n s under the Contract(s) a re term i n a t e d by any action of the Insured or the Contract Party(ies), w h i ch ever shall fi rst occur, in respect of the said i n t e rest of the Contract Party(ies) and in consideration of A d d i t i o n a l P remium it is confi rmed that the I n s u rance affo rded by the Policy is in full fo rce and effect and it is furt h e r agreed that the fo l l owing prov i s i o n s a re specifi c a l ly endorsed to the Po l i c y : -
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A n ominal additional pre m i u m is ch a rged to ensure that the c o n t ract cannot be voided fo r l a ck of ‘ c o n s i d e ra t i o n ’ . E s s e n t i a l ly AVN67B opera t e s as a separate contrac t for the b e n e fit of the Contra c t Pa rt i e s , and as such ne eds a s e p a rate ch a r ge .N o rm a l ly the amount is ‘US$100 receipt of w h i ch is ack n ow l e d ge d ’ by u n d e r w ri t e rs . In practice this p remium is never invo i c e d . The pre a m ble also states that c ove ra ge is in ‘full fo rce and e ffe c t ’ . This gi ves comfo rt to C o n t ra ct Pa rties that cove rage is in fo rce notwithstanding that a bre a ch , or nond i s cl o s u re ,m ay have alre a dy o c c u rred – on the part of the o p e ra t o r.
1. Under the Hull and Airc r a f t S p a res Insurances 1.1 In respect of any claim on equipment that becomes payable on the basis of a Total Loss, settlement (net of any relevant policy deductible) shall be made to, or to the order of the Contract Party(ies). In respect of any other claim, settlement (net of any relevant policy deductible) shall be made with such party(ies) as may be necessary to repair the Equipment unless
otherwise
agreed
This section relates to the Loss Payable clause contained in the lease. If the terms of the lease differ from section 1.1, then the provisions of AVN67B override the lease provisions (unless s p e c i fi c a l ly agreed by insurers to the contra ry ) .I n s u re rs are reluctant to pay amounts in respect of partial losses direct to a bank/lessor. In order to make good damage in a timely manner (insure rs ’p ri m a ry duty under the policy), i n s u re rs will n o rm a l ly make payments d i re c t ly to the repairer, but are happy to consult with the Contract Party prior to doing so.
after
consultation between the Insure rs and the Insured and, where necessary
‘Equipment’ can mean a single spare engine or a complete aircraft (comprising airframe and non-specified engines).
under the terms of the Contract(s), the
Contract
Party(ies).
S u ch
payments shall only be made provided t h ey are in compliance with all applicable laws and regulations 1 . 2 I n s u re rs shall be entitled to the b e n e fit of salvage in respect of any p ro p e r ty
for
which
a
settlement has been made.
cl a i m s
This is a simple statement in line with the principles of indemnity under an insurance policy. Complications can arise when borrowed or leased engines are fitted to a lost aircraft. Refer to Appendix D page 162 for a recommended clause to address this issue.
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2. Under the Legal Liability Insurance 2 . 1 Subject to the provisions of this E n d o rs e m e n t , the Insurance shall o p e rate in all respects as if a s e p a rate Policy had been issued c ove ring each party insure d h e re u n d e r, but this provision shall not operate to include any cl a i m h ow s o ever arising in respect of loss or damage to the E q u i p m e n t i n s u red under the Hull or Spare s
This is the ‘severability of interest cl a u s e ’ .E a ch insured receives separate cover, but this is subject to the overall policy limit for each occurrence. The reason for the statement to exclude hull damage to the i n s u re d ’s aircraft is as fo l l ow s . In the event of two aircraft from the same f leet having a collision this clause might otherwise result in a hull claim, or claim for hull deductible amount, in respect of an aircraft in which the Contract Party has no interest.
I n s u rance of the Insure d . Notwithstanding the fo re going the total liability of Insure rs in re s p e c t of any and all Insureds shall not exceed the limits of liability stated in the Po l i c y. 2 . 2 The Insurance provided here u n d e r shall be pri m a r y and without ri g h t of contribution from any other i n s u rance which may be ava i l abl e to the Contract Party(ies).
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This statement confirms that the insurers will pay fi rs t , on a ‘ p ri m a ry ’b a s i s , without seeking contribution or recovery from other policies purchased by the Contract Pa rt y, or from which they have benefit. This includes any Contingent Hull or Liability policies that may be in force in the name of a Contract Pa rt y.
2 . 3 This Endorsement does not p rovide cove rage for the C o n t r a c t Party(ies) with respect to cl a i m s a rising out of their legal liab i l i t y as manu fa c t u re r, re p a i re r, o r s e rvicing agent of the E q u i p m e n t.
I n s u re rs are retaining their rights to proceed against m a nu fa c t u re rs , re p a i re rs ,o r servicing agents. Since contract parties are added as ‘additional i n s u re d s ’ this could pre cl u d e insurers from subrogating against such parties if they contributed to a loss. Most banks/lessors have no operational interest in the aircraft they fi n a n c e .H owever, many manufacturers lease a i rc ra f t , either directly or through their own finance company. The provisions of this clause may need to be specifically addressed in such cases. In addition, this wo rd i n g cl a ri fies that no coverage is in force for liability suits enjoining an insured, in his capacity as m a nu fa c t u re r. Following a major accident, with loss of life, it is commonplace for suits to be filed against manufacturers d i re c t ly. For further comments re g a rd i n g ‘Operational Interest’, refer to page 52.
3. Under ALL Insurances 3 . 1 The Contract Party(ies) a re
Contract Parties have the benefit of protection under the airline’s policy and the right to initiate a claim.
i n cluded as Additional Insure d ( s ) .
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3.2 The cover afforded to each Contract
This provides the ‘Breach of Warra n t y ’c overage.
Party by the Policy in accordance with this Endorsement shall not be invalidated by any act or omission (including misrepresentation and
As discussed elsewhere in this report (refer ‘ O p e ra t i o n a l I n t e re s t ’ – page 52) it is important that the bank/lessor distances itself from the operation of the aircraft.
non-disclosure) of any other person or party which results in a breach of any term, condition or warranty of the Policy PROVIDED THAT the Contract Party so protected has not c a u s e d ,c o n t ributed to or knowingly condoned the said act or omission. 3.3 The provisions of this Endorsement apply to the Contract Party(ies)
This language was included to satisfy lessors who were also m a nu fa c t u re rs (Airbus for example).
solely in their capacity as financier(s)/lessor(s) in the identified Contract(s) and not in any other capacity. K n ow l e d ge that any Contract Party may have or acquire or actions that it may take or fail to take in that other capacity (pursuant to any other contract or otherwise) shall not be considered as invalidating the cover afforded by this Endorsement.
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For example. If one division of the manufacturer has k n ow l e d ge of a breach by the airline, and another division is involved in leasing an aircraft to the same airline, then the coverage remains in full force for the benefit of the lessor.
3.4 The Contract Party(ies) shall have no responsibility for premium and Insurers shall waive any right of set-off or counterclaim against the Contract Party(ies) except in respect of outstanding premium in respect of the E q u i p m e n t.
3.5 Upon payment of any loss or claim to or on behalf of any Contract Party(ies), I n s u re rs shall to the extent and in respect of such payment be thereupon subrogated to all legal and equitable rights of the Contract Party(ies) indemnified hereby (but not against any Contract Party) .I n s u re rs shall
Even if the airline has paid no premium the policy is still valid as far as the Contract Party’s interests are concerned (provided notice of cancellation has not expired or automatic termination occurred). The only premium that can be offset by the underwriters is the premium due in respect of the equipment (i.e. the aircraft or engine subject to a claim – not the whole fleet) subject to a claim.This would be deducted from the final settlement. Since aviation rates are low, this will typically be a very small percentage of the claim proceeds.
Having paid a claim to a Contract Party, I n s u re rs may wish to pursue a claim against another party. For example, against the insured, a m a nu fa c t u re r, a i r p o rt , or third party airline. In certain circumstances this may be a sensitive issue with the bank/lessor (if, for example, the underwriters intend to sue the insured, a government or major client of the bank/lessor) and as such the contract party will be asked for consent.
not exercise such rights without the consent of those indemnified, such consent not to be unreasonably withheld. At the expense of Insurers such Contract Party(ies) shall do all things reasonably necessary to assist the Insurers to exercise said rights.
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3.6 Except in respect of any prov i s i o n for Cancellation or Au t o m a t i c Te rmination specified in the Policy or any endors e m e n t t h e re o f, c over provided by this E n d o rsement may only be cancelled or materi a l ly altered in a manner adve rse to the Contra c t Pa rty(ies) by the giving of not less than T h i rty (30) days notice in w riting to the appointed bro ke r. Notice shall be deemed to commence from the date such
Aviation policies contain automatic cancellation/ termination clauses fo l l ow i n g hostile nuclear detonation and outbreak of war between the five major powers (refer AV38B, AV48B and AV52C clauses in Appendix D). ‘ B ro ke rs Letters of U n d e rt a k i n g ’ cannot override these clauses. Other than in respect of these prov i s i o n s ,i n s u re rs are re q u i re d to give 30 days notice to the appointed broker (or lesser customary period in respect of War risks – usually 7 days but may be reduced in times of major conflict). In practice the Contract Party may have less time to resolve the fo rt h c o m i n g lapse in cover – unless the broker can notify them immediately.
notice is gi ven by the Insure rs . S u ch notice will NOT, h oweve r, b e gi ven at normal ex p i ry date of the Policy or any endors e m e n t .
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There is no requirement to advise of cover lapsing at expiry – this can be addressed in ‘ B ro ker Letters of U n d e rt a k i n g ’( re fer Appendix C ,p age 151).
EXCEPT AS SPECIFICALLY VARIED OR P ROVIDED BY THE TERMS OF T H I S E N D O R S E M E N T: 1.
THE CONTRACT PA RTY(IES) A R E C OVERED BY THE POLICY
The AVN67B endorsement does not broaden the scope of coverage, other than as s p e c i fi c a l ly addressed in the e n d o rs e m e n t .N o t w i t h s t a n d i n g the Insurance Requirements detailed in the lease covenants, coverage is only as broad as that which would have been in place, but for the bre a ch ,n o n d i s cl o s u re or misrepresentation.
SUBJECT TO ALL T E R M S , C O N D I T I O N S , L I M I TAT I O N S , WA R R A N T I E S , EXCLUSIONS A N D C A N C E L L ATION PROV I S I O N S T H E R E O F. 2.
THE POLICY SHALL NOT BE VARIED BY ANY PROV I S I O N S C O N TAINED IN T H E C O N T R ACT(S) WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR AMENDMENT TO THE POLICY.
AVN67B does not incorporate the lease provisions into the insurance coverage. For example, the lease contract may include indemnity provisions for fines and contractual disputes. The insurance will not provide cover for such indemnities, either under the o p e ra t o r ’s coverage or under the cover afforded by AVN67B.
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SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT
1.
Equipment (Specify details of any a i rc ra f t , e n gines or spares to be c ove re d ) :
2.
Policy Deductible(s) applicable to p hysical damage to the Equipment [ i n s e rt all applicable Po l i c y d e d u c t i bl e ( s ) ] .
3.
(a) Contract Party(ies): AND (b), in addition, in respect of Legal Liability Insura n c e s :
4.
C o n t ra c t ( s ) :
5.
E ffe c t i ve date (being the date that the Equipment attaches to the Policy or a specific date t h e re a f t e r ) :
6.
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Additional Pre m i u m :
N o rm a l ly shown as ‘US$100 the receipt of which a ck n ow l e d ge d ’ . This satisfies the need for ‘consideration’, but in practice will not be s e p a ra t e ly invoiced.
A QU EST IO N OF P RIO R IT IES
A Boeing 747 was approaching Kai Tak Airport, Hong Kong on a flight originating from Sydney,Australia. As the aircraft was making its landing approach the co–pilot switched on the intercom to inform the passengers of the sights and landmarks they could see through the windows.On completing his geographical narrative he failed to switch off the intercom. When he had landed the aircraft the captain handed over the controls to the co-pilot, leant back in his seat
and proclaimed, “Jeez, you know what I fancy? Firstly, an iced cold beer, and then a really buxom blonde!” On realising the the pilot had failed to sw i t ch off the i n t e rc o m , a blonde air hostess immediately ru s h e d t h rough the passenger cabin towa rds the f l i g h t d e ck .A little old lady noticing her frantic dash called to her, s ay i n g “ D e a r, t h e re re a l ly is no ru s h . I d i s t i n c t ly heard him say that he wanted the iced cold beer fi rs t ! ”
Aircraft Financial Interest Endorsement – AVN28B Whilst AVN67B is now the standard method of endorsing a bank’s/lessor’s interests in airline equipment,the AVN28B clause is still used for general aviation and helicopter finance.The scope of AVN28B is not as broad as AVN67B and, where possible, it is recommended to use AVN67B. AVN28B, evolved from AVN28, and is essentially a hull ‘breach of warranty’ endorsement. As such, when using AVN28B it is normally necessary to include the following additional clauses:- A Loss Payable Clause - Additional Insured Clause in respect of liabilities
Text of AVN28B and explanatory notes
AIRCRAFT FINANCIAL INTEREST ENDORSEMENT
It is noted that the P a r t y named in the S chedule hereto has a financial intere s t in the A i rc r a f t under the A g re e m e n t. A c c o rd i n g ly, with respect to losses o c c u rring during the period from the
The preamble ack n ow l e d ge s that the Party has an insurable i n t e re s t . The additional premium is usually waived although this raises the question of whether a cynical insurer may try to void the contract for ‘lack of consideration’.
65
E f fective Date of this Endorsement until the ex p i ry of the Insurance or until the satisfaction of the obl i g a t i o n s under the A g re e m e n t, w h i ch ever shall fi rst occur, in respect of the interest of the P a r t y and in consideration of an Additional Pre m i u m IT IS U N D E R S TOOD AND AGREED T H AT: 1.
The insurance affo rded by this
This provides the ‘ B re a ch of Warra n t y ’c overage.
Policy for loss of or phy s i c a l d a m age to the insure d A i rc r a f t shall not be invalidated as re g a rd s the interest of the P a r t y by any act or omission by the Insure d w h i ch results in a bre a ch of any t e rm , condition or wa rranty of the Policy PROVIDED T H AT the P a r t y has not caused, c o n t ributed to or k n ow i n g ly condoned the said act or omission. N eve rtheless any ch a n ge in title or ow n e rship of the A i rc r a f t, c o nve rs i o n , embezzlement or secretion by the I n s u red in possession of the A i rc r a f t is not cove red here u n d e r.
66
As discussed elsewhere in this report (refer ‘ O p e ra t i o n a l I n t e re s t ’ – Section page 52) it is important that the bank/lessor distances itself from the operation of the aircraft.
2.
The protection affo rded to the P a r t y by the terms of this E n d o rsement shall be limited to
Coverage is limited to hull physical damage (which will be defined in the relevant wo rd i n g ) . The amount insured should be specified in the s ch e d u l e .
loss of or physical damage to the i n s u red A i r craft and shall not exceed the Original Amount under the A greement less any re l evant Policy Deductible a n d l e s s all m a t u re d I n s t a l m e n t s p a i d or due prior to the accident gi v i n g
Some deductibles (normally on helicopters) apply in respect of total losses.This clause establishes that even if 100% finance is in place, the deductible will still apply. In such cases the financier may require that the Agreed Value is increased to take this into account.
rise to a loss here u n d e r. 3.
The P a r t y shall notify the Insure rs of any increase in hazard which
This clause is more onerous than that contained in AVN67B. Banks/lessors should be aware of the implications.
comes to the P a r t y ’ s a t t e n t i o n and if agreed by the Insure rs it shall be endorsed on the Po l i c y, the Party agreeing to pay any additional re q u i red premium if the I n s u red fails to do so on demand of the Insure rs . 4.
If the Insured fails to notify the
AVN67B stipulates no such re q u i re m e n t .
I n s u re rs as specified in the Po l i c y Conditions of any event like ly to gi ve rise to a claim under the Po l i c y, the P a r t y shall do so
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i m m e d i a t e ly he becomes awa re of the event in fo rm and manner as p re s c ribed by the Po l i c y. 5.
Upon payment of any loss or cl a i m to the P a r t y, I n s u re rs shall to the extent and in respect of such
This clause is far stronger than the equivalent in AV N 6 7 B ,t h a t requires insurers to seek the consent of the Pa rt y, before exercising the rights of subrogation/recovery.
p ayment be subrogated to all legal and equitable rights of the P a r t y. At the expense of Insure rs the P a r t y shall do whatever is n e c e s s a ry to assist the Insure r s to exe rcise such ri g h t s . 6.
Except in respect of any prov i s i o n for Cancellation or Au t o m a t i c Te rmination specified in the Policy or any endors e m e n t t h e re o f, c over provided by this E n d o rsement may only be cancelled by Insure rs giving not less than T h i rty (30) days notice in w riting to the A p p o i n t e d B ro k e r. Notice shall be deemed to commence from the date such notice is gi ven b y the Insure rs . In the event of cancellation fo r
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This notice of cancellation is similar to that contained in AVN67B. There is no requirement for the Party to pay outstanding p re m i u m .
n o n - p ayment of pre m i u m , t h e Party shall have the option to pay all outstanding premiums in respect of the A i rc r a f t within the notice peri o d . EXCEPT AS SPECIFICALLY VARIED OR P ROVIDED BY THE TERMS OF T H I S ENDORSEMENT THE FINA N C I A L INTEREST OF THE PA RT Y IS COV E R E D BY THE POLICY FOR LOSS OF OR
The AVN28B endorsement does not broaden the scope of coverage, other than as s p e c i fi c a l ly addressed. Notwithstanding the Insurance Requirements detailed in the Agre e m e n t ,c overage is only as broad as that which would have been in place, but for the b re a ch , or omission.
PHYSICAL DA M AGE TO THE INSURED A I R C R A F T O N LY SUBJECT TO A L L T E R M S , C O N D I T I O N S , L I M I TAT I O N S ,
For example, if an aircraft is operated outside the geographical scope of the policy, all claims may be denied.
WA R R A N T I E S , EXCLUSIONS A N D C A N C E L L ATION PROV I S I O N S T H E R E O F.
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SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT 1.
A i rc ra f t : R e gi s t ra t i o n :
2.
Pa rty (enter the name of the Pa rt y h aving a financial intere s t ) :
3.
A greement (enter identifying details and date):
4.
The Ori ginal Amount under the A gre e m e n t : Payable in
Instalments of
the last Instalment being due The amount outstanding at the E ffe c t i ve Date of this E n d o rs e m e n t : 5.
Policy Deductibl e :
6.
Additional Pre m i u m :
7.
Appointed Bro ke r :
AVN 28B 17.10.1996
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Insurance Documentation Checklist The insurance requirements are detailed in full in the Specimen Insurance Article (refer to Appendix A,page 119).The following serves as a brief checklist of the documentation that the bank/lessor should receive prior to ‘drawdown’and/or delivery, and annually thereafter.
1. Certificates of Insurance for each leased or mortgaged aircraft for : i)
Aviation Hull ‘All Risks’.
ii)
Aviation Hull ‘War and Allied Perils’.
iii)
Aviation Third Party (Bodily Injury and Property Damage), Passenger, Baggage,Cargo and Mail and Airline General Third Party (including Products) Legal Liability.
iv)
‘All Risks’in respect of Engines and Spares,if any.
v)
Hull Deductible (if required by the bank/lessor).
2. Certificates of Insurance should contain the following :i)
Name of the Insured and Additional Insureds.
ii)
Brief description of coverage.
iii)
Identification of the Aircraft by serial number or registration marks.
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iv)
Limits of coverage.Being the insured value of the aircraft,on an Agreed Value basis,and for the liability insurances,the Limit of Liability insured.
v)
Inception and expiry time and dates.
vi)
Geographical Limits for each coverage;which should be ‘Worldwide’with any exclusions specifically agreed by the bank/lessor.
vii) The Amount Insured or Reinsured.This is usually expressed as a percentage of the Maximum Agreed Value/Liability Limit. viii) The Deductibles (Hull,Spares and Liability) to be borne by the Insured in the event of any claims together with details of any sub limits,or aggregate limits,that apply. ix) Details of the Lease Finance endorsement (typically AVN67B or AVN28B) included in respect of the financier’s interest, including details of any ‘Notice of Cancellation’provisions. x)
In respect of the Hull ‘All Risks’and Hull ‘War Risks’,the inclusion of a 50/50 clause.
3. If Reinsurance is involved:-
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i)
Certificates of Reinsurance with details as per 1. and 2. above.
ii)
Confirmation that a ‘Cut Through Clause’is included.
4. Broker’s Letter of Undertaking in respect of insurance and reinsurance arrangements. Verification by independent consultant In addition to checking the above,many aircraft financiers employ the services of an independent consultant to check that all the insurance requirements have been complied with.Certain London firms specialise in this work and can provide written opinions upon request.
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W H AT V E G E T A R I A N M E A L S D O Y O U H AV E ?
The following is a transcript of genuine control tower traffic Control Tower
“Delta 702, cleared for takeoff, contact Departure on 124.7.”
Delta 702
“Tower, Delta 702 switching to Departure… by the way, as we lifted off, we saw some kind of dead animal on the far end of the runway.”
Control Tower
“Continental 635, cleared for takeoff, contact Departure on 124.7… did you copy the report from Delta?”
Continental 635
“Continental 635, cleared for takeoff… and yes, we copied Delta and we’ve already notified our caterers.”
SECTIONTWO I N S U R A N C E S a n d G UA R A N T E E S F O R A I R C R A F T F I N A N C I E R S
S E C T I O N
T WO
Aircraft Repossession Insurance These policies are designed to protect aircraft financiers in the event of them being unable to enforce their legal title and rights to repossess or repatriate their collateral, the aircraft, following a default under a loan/lease a greement.These policies have been variously described as Aircraft Repossession Insurance, Political Risks, Collateral Deprivation Insurance or Repatriation Insurance. Banks/lessors and their lawyers have been particularly concerned when financing aircraft for foreign airlines when the aircraft is registered in a foreign country and is therefore subject to the laws,government orders or decrees of that country.This is especially true should the borrower be the national airline of a developing nation where political,economic or jurisdiction uncertainties are perceived,and,where there is existing sovereign debt exposure. Subsequent laws or court orders (or unfair interpretation of existing laws), could have the effect of limiting or even prohibiting the bank/lessor from repossessing, repatriating and reselling aircraft registered in the foreign jurisdiction.This can all occur regardless of the terms of the lease contract, or loan agreement, signed between bank/lessor and airline.In addition,the policy protects against outright confiscation or appropriation by the foreign government that may, or may not,be derived from a default under the lease/loan.
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i) ‘Perils’ covered:1) Confiscation,seizure,appropriation, expropriation, nationalisation, restraint or detention by the Foreign Government (the meaning of Foreign Government is clearly defined under the policy wording) of the aircraft. 2) Refusal or failure of the Foreign Government to allow the Bank/Lessor to exercise its rights to repossess the aircraft. 3) Refusal or failure of the Foreign Government to allow the Bank/Lessor to remove the aircraft from the Foreign Country. 4) Refusal or failure of the Foreign Government to de-register the aircraft from the aviation register of the Foreign Country. 5) Refusal or failure of the Foreign Government, following a compulsory sale of the aircraft,to forward the proceeds of such a sale in hard currency following an occurrence as set out in 1,2,or 3 above. 6) Refusal or failure of the Foreign Government or the United Nations to allow the Bank/Lessor to exercise its rights to repossess and or remove the aircraft as a result of sanctions being imposed by the United Nations. In addition to loss of the aircraft,the policy is extended to cover loss of the aircraft technical records, notwithstanding that the aircraft may have been returned undamaged.The policy will pay for re-constituting the technical records and for any maintenance, checks, repairs or replacement of timed
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components necessary to reinstate the aircraft and records to FAA standard,or equivalent.
ii) Applicable Law, Jurisdiction and the necessity for Legal Opinions Underwriters are insuring against any adverse changes in government decrees,local laws and foreign exchange controls.Since jurisdiction and foreign exchange controls vary from country to country, underwriters require a written legal opinion from independent lawyers expert in the Foreign Country. This legal opinion should detail the regulations in force,at inception of the policy, that relate to the titleholder’s rights within the Foreign Country’s jurisdiction. It should also confirm that the bank’s interests and title have been fully registered. The legal opinion should then express an opinion as to the enforceability of the relevant provisions of the lease.
iii) Security Aircraft Repossession policies are insured with underwriters at Lloyd’s of London and with certain leading insurance companies.
iv) Criterion for rating/underwriting Repossession Insurance In order to quote and arrange coverage, full information and documentation (lease and legal opinion etc.) is required.The premium charged will largely depend upon the following factors:- The political and economic stability of the ‘Foreign Country’.
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- The applicable laws in force and the perception of the local
judicial system - The type of aircraft. For example – ‘wide-bodied’aircraft are often
of little use for operating internally.As such they are viewed as a better risk than regional aircraft. - Routes operated.An aircraft operating internally may be much
harder to physically repossess. - The hard currency earnings,credit rating and standing of the
operator. - Past experience of the financier, operator and ‘Foreign Country’.
(v) Why is ‘Confiscation’ coverage afforded by the operator’s hull ‘War’ policy deficient? Insurance covenants of a lease will normally require that coverage for confiscation, requisition etc. is included in the operators hull ‘war and allied perils’insurance.However, it is not advisable for a financier to rely on this policy to protect its asset. The confiscation coverage included under an airline’s Hull ‘War’ policy (LSW555B) has the following deficiencies:- The operator’s hull ‘War’coverage can be amended by underwriters
giving ‘7 days notice to review’.Underwriters have the right to review premium and geographical limits.The review may leave the operator and the bank/lessor with no effective coverage.
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- The operator’s hull ‘War’coverage is available for only a 12 month
period - The operator’s hull ‘War’coverage may exclude ‘Confiscation by
Government of Registry’. - The operator’s hull ‘War’coverage specifically excludes “the
repossession or attempted repossession of the Aircraft by any titleholder or arising out of any contractual agreement to which any Insured protected under this Policy may be a party…” The operator’s policy will probably respond to an overt and hostile act of confiscation by a government undertaking widespread seizure of assets or nationalisation. If the aircraft confiscation is an isolated act, it will be very hard to persuade hull ‘War’ underwriters that this is a ‘bona fide’ political act,as opposed to a contractual dispute.As one hull ‘war’underwriter was quoted as saying, “governments do not declare war on a single asset”.
vi) Repossession Insurance policy wording Aircraft Repossession Insurance is based on the LSW147 wording.It is our view that the standard LSW147 wording is deficient in certain aspects. The wording is normally tailored according to the specific needs of each client. For reasons of confidentiality, a BankAssure tailored wording is not published here.A copy of the standard market wording,upon which the BankAssure Repossession Wording is based, is shown in Appendix E, page 207.
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The BankAssure Repossession Insurance policy will respond in the following manner: The occurrence of Peril 1 Confiscation
or
The occurrence of a Default under the Lease Agreement,leading to: Aircraft The triggering of the Yes Yes Deregistration returned and Waiting Period under the of Aircraft no claim Insurance Policy, leading to required Yes The Lessor exercising their rights to recover the Aircraft,leading to
No No Peril 2 + 3 Non Repossession or Non Removal
Peril 5 Proceeds of sale
Peril 6 Sanctions
Claim paid under repossession policy after occurrence of an Insured Peril and the expiry of the Waiting Period
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Peril 4 Non De-registration
Lease Payment Delay Insurance (single transaction) Aircraft Repossession Insurance, as described above, protects the bank/lessor against the loss of the asset. It is also possible to increase the sum insured to include provision for a limited amount of unpaid lease payments and ‘default interest’.However, if no claim is recoverable under the Repossession Insurance,and/or the asset is returned prior to the maturation of the relevant ‘Waiting Period’, the bank/lessor will suffer a significant unrecoverable loss. There is no standard insurance product to cover this payment risk,but the products available can be broadly divided into two types. i) Firstly, cover can be arranged that is based upon the ‘perils’as covered under the Aircraft Repossession Insurance policy. However, the policy will pay on a ‘franchise’basis once lease payments have been delayed beyond a certain number of days.This means that once the Waiting Period has expired,the policy will retroactively pay for lease rentals unpaid during the Waiting Period and thereafter. BankAssure have developed a favourable wording to cover this risk. ii) The second form of insurance is basically specialist credit insurance.This can be arranged for better rated lessees.Credit insurance can work well,but the proposed cost is often greater than the margin (in basis points) in the original financing.Also,the ‘Catch 22’is that credit insurance is more widely available for
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countries and lessees where the financier is prepared to accept the risk and vice versa for lower rated countries and lessees. The level of due diligence and underwriting information required for both the above products can be high,especially for ii) Credit Insurance. Revenue protection products that protect the income derived from a portfolio of leases,as opposed to single transactions,are detailed later in this section (refer to page 111).
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A NEAR MISS!
Bank’s/Lessor’s Hull and Liability Insurance This can be divided into i) Contingent Hull and Liability Insurance and, ii) insurance arranged for Aircraft in the Care Custody and Control of the Bank/Lessor.
i) Contingent Hull and Liability Insurance When financing an aircraft, a bank/lessor will require that their asset and potential liability exposures are fully insured by the operator, with the financier’s interests correctly endorsed on to the operator’s policy. The normal safeguards include:- Stipulated minimum policy limits - Breach of warranty coverage - Loss payable clauses - Bank/lessor named as Additional Insured - Cut though clauses on reinsurance - Minimum notices of cancellation - Broker’s letters of undertaking
These requirements are fully explained in Section One of this book.
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Notwithstanding the requirements of the insurance covenants of a lease, some financiers insure against the remote risk of an operator’s insurance failing to respond,or proving inadequate. Contingent Hull and Liability Insurance provides coverage in respect of the bank’s/lessor’s interests, on broadly the same conditions as the primary (operator’s) insurances, that would have existed but for the primary policy failing to respond, or proving inadequate. Examples of scenarios exposing a financier to unprotected losses:a) Non payment of premium A bank/lessor should be given advance notice of any non renewal or cancellation for non payment of premium,in accordance with the minimum notice periods contained in the insurance covenants. The bank/lessor will normally have the option (but not obligation) to pay the outstanding premium and keep coverage in force.If this option is not taken up (it is usually impractical to do so and may be resisted by insurers), coverage will cease.Renegade airlines may continue flying.If the aircraft are grounded,significant exposure to uninsured ground losses remain. Even if a bank/lessor has been given advance warning of the airline’s insurance terminating,it may be difficult to arrange sufficient coverage in a timely manner.
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b) Breach of Geographical Limits If the operator flies outside the terms of the ‘Geographical Limits’ all coverage can become invalid,including the endorsement of the financier’s interests. c) United Nations Sanctions If UN sanctions are imposed in the airline’s home country, it may become illegal for the insurers to pay claims in respect of hull losses. d) Errors and omissions by the Lessee’s insurance broker Financiers have to trust that certificates issued are correct and reflect the insurance that has been arranged.They will normally be supported by a Broker’s Letter of Undertaking and in some cases a report from an independent insurance consultant.However, errors can mean that coverage is not in force. In one recent case,an airline policy was extended without agreement being obtained from all underwriters.The insurance broker erroneously confirmed full coverage to be in effect.After the loss,certain underwriters refused to pay the claim,citing absence of a valid contract. Notwithstanding the inclusion of the AV67 type endorsement,all the safeguards protecting the lessor’s interests will prove worthless if the actual contract is not in force. In such circumstances the financier will probably sue the party responsible for the error.’Any recovery from an intermediary, and/or
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their professional indemnity insurers,is likely to take several years.’ Also,the level of professional indemnity protection that smaller intermediaries carry may prove insufficient. Fraud can also invalidate a policy. For example,if an intermediary were to embezzle premiums and yet simultaneously confirm to the bank/lessor that coverage is in force. e) Failure of the ‘Cut Through Clause’ Cut through clauses are illegal in certain countries (China for example).In other countries they are untested and of dubious legality (India and Korea for example).The clause cannot operate ‘in contravention of the laws of the country.’ f) Inadequate Liability Insurance The subject of ‘Lessor Liability’is addressed in depth in Section One of this book.It is possible that a bank/lessor could be exposed to liability claims once the operator’s policy limit has been exhausted. To protect against these and other unpredictable exposures, a bank/lessor can purchase a ‘sleep easy’ Contingent Hull and Liability policy. Such policies are relatively inexpensive, reflecting the remote exposures.Coverage can either be purchased on a portfolio basis,or on a ‘deal by deal’ basis. Some financiers only buy Contingent Hull Insurance,others only buy Contingent Liability Insurance.
Contingent Policy Wording The standard wording is LSW610A. Policies are normally placed in Lloyd’s and with major international aviation underwriters.
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The only significant exclusions to coverage are insolvency of the operator’s insurers (however, the insolvency exclusion only applies to hull claims – not liability),‘Major Powers’and nuclear war.The scope of coverage for pollution and noise liability is the same as a standard airline policy. One significant point is that the contingent liability insurance includes coverage in excess of the operator’s policy (where the limit has been exhausted). Coverage also includes legal fees in addition to the sum insured. The LSW610A policy can be endorsed to include repossessed aircraft. This is detailed in ii) Aircraft in the Care Custody and Control of Lessor/Bank,below. A copy of the LSW610A standard wording is included in Appendix E, page 189.
ii) Aircraft in the Care, Custody and Control of the Lessor/Bank There are times when banks/lessors have the primary responsibility for an aircraft.At such times primary coverage,similar to that carried by an operator, needs to arranged.This can include:- Aircraft awaiting lease - Sales and demonstration flights - Ferry flights
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- Aircraft being repossessed - Storage of repossessed aircraft
In such circumstances,most banks/lessors use the services of an agent with aviation expertise. If the financier buys an existing Contingent Hull and Liability policy, the aircraft (as described above) can be included, by application of the ‘Repossessed Aircraft Endorsement’. If no such contingent policy is in force, a ‘stand alone’policy can be arranged. One advantage in buying a Contingent Hull and Liability policy is that coverage for repossessed aircraft can be arranged automatically with no gap in cover. Premium for possessed/repossessed aircraft is normally charged at a rate for ‘Ground Risks’plus additional premiums for any ‘Flight Risks’. In addition to Hull ‘All Risks’and Legal Liability the financier can arrange Hull ‘War’Risks (based on LSW555B) and/or Hull Deductible insurance, applicable whilst the aircraft are in its care custody and control.
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Contingent Hull War Insurance Leases invariably require that the operator carries Aviation Hull War and Allied Perils insurance (usually on the LSW555B Wording).This policy will normally be endorsed to include the bank’s/lessor’s requirements in the same way that that the hull ‘All Risks’ policy is endorsed.This typically includes a Loss Payable clause, Breach of Warranty clause, minimum notices of cancellation and a Cut Though Clause (where appropriate). In addition, the financier will require that the operator’s appointed insurance broker issues a ‘Letter of Undertaking’ regarding material changes in coverage and the like. Notwithstanding that the financier is confident that all of the above safeguards have been put in place,the asset/collateral can be exposed by the following:i) Cancellation of the Operator’s War policy The standard Airline War Risks policy, LSW555B,contains cancellation and review clauses.These clauses are not negotiable with war underwriters (industry practice does not allow for them to be deleted) and will override any undertakings given, regarding 30 days notice of any cancellation etc.,to banks/lessors. In the event of an outbreak of war, civil disorder etc.that affects the operator, war underwriters can exercise their rights to give notice (7 days or less in times of conflict) to review the geographical limits and premium terms.If the operator is unwilling to pay the additional premiums levied,or continues flying to an excluded territory, then no cover will be in force for either the operator or
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the lienholders.This problem may be exacerbated by local politics. A state airline,and/or the national insurer issuing the direct insurance policy, may not accept that it is involved in a war and may cease cooperating with underwriters/reinsurers. War underwriters can also issue notice to cancel absolutely seven days prior to each policy quarter date.This happens very rarely but could occur if underwriters were to be exposed to large aggregate values in two countries at war with each other. In addition,some state insurers (in Brazil for example) have laws that dictate that war coverage is automatically terminated if the home country (i.e. Brazil) is involved in a war. ii) UN Sanctions If the country in which an airline operates becomes an international pariah and is subjected to UN sanctions,it may become illegal for insurers or reinsurers to continue coverage.The bank/lessor may be left with a gap in cover at the time of greatest risk. Countries where this scenario has occurred,include Yugoslavia,Iraq and Libya. Following the impostion of U.N. sanctions on Iraq, claims had to be paid in escrow accounts.However, many Western underwriters cancelled coverage for ‘patriotic’reasons. iii) Lease Default and circumstances thereafter If a country descends into civil or economic turmoil,this greatly increase the chance of defaults on leases to local airlines.At the same time,there is a good chance that the airline will have stopped paying insurance premiums.Normally the bank/lessor will declare a
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default and endeavour to repossess the aircraft.If Aircraft Repossession Insurance has been purchased by the bank/lessor, then the bank/lessor is protected against inability to repossess the aircraft due to interference of the ‘Foreign Government’.However, this policy is subject to ‘Waiting Period’of 180 days,prior to any claim being paid.During this ‘Waiting Period’the aircraft may be trapped in hazardous location, abandoned or generally misused. Physical damage during the ‘Waiting Period’is not covered under the Aircraft Repossession insurance and the likelihood is that the operator’s own policy will have been cancelled or lapsed. In the above circumstances (not an exhaustive list) a financier will probably be exposed for the value of their asset. Some banks/lessors may take the view that if there is a problem,they will then seek to buy a policy to cover their interests.However, the financier may only be aware of the problem when it has already occurred.Also, underwriters may refuse to offer coverage, or require very large premiums to cover a ‘distressed’ risk. Contingent War Insurance provides banks/lessors with up to 36 months (or possibly 60 months) of coverage.During this period the policy can be triggered, by defined events, to provide up to 180 days of noncancellable coverage (this coverage is only available for parties without an operational interest and is offered by Lloyd’s under a special dispensation agreement – it contravenes normal war underwriting criterion). Even if a war is ongoing in the area where an aircraft is trapped, underwriters cannot cancel coverage and cannot demand a change in conditions,or premium, for the duration of the 180 days (this 180 period being the same as the ‘Waiting Period’under the Aircraft Repossession insurance).
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Exhaustion of Aggregate/Ground Limit on Operator’s War Policy Contingent War policies can be extended to cover the financier for any shortfall in recovery, in respect of their financial interest, due to aggregate or ground limitations on the operator’s primary hull war policy.This coverage is slightly different from that described in i) to iii) above.Since it is not technically‘contingent’,the relevant section of the policy is subject to normal cancellation and review clauses (the same as LSW555B).
Contingent War Policy Wording There is no standard market wording.A sample wording is shown in Appendix E,page 216.
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TA K E M E T O . . . . ?
An American
“But, we’re already going to Miami”.
After a moment’s thought the captain replied,
The passenger immediately responded, “Maybe, but on the last occasion I travelled with you we were hijacked to Havana, and I wanted to make sure I got to you first!”
airliner was on a scheduled flight from New York to Miami.Some way into the flight a passenger approached and entered the flight deck and ordered the crew to, “Fly me to Miami”.
Total Loss Only Insurance There are circumstances when a bank/lessor may wish to purchase a policy that pays an agreed amount in the event of the Total Loss of the aircraft (Total Loss is as defined under the operators’s hull ‘All Risks’or ‘War Risks’policy).This amount would be over and above that which is already purchased under the main hull policies.It protects the financier against a specific financial loss that would occur following a total loss. For example, where the insured value under the operator’s policy reflects the market value of the aircraft,but this amount is less than the stipulated loss value (SLV) under the lease agreement. If an aircraft market value rises, it is possible that the SLV will be less than the true value of the financier’s asset.This may also create a need for TLO.
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Aircraft Repossession Expenses Insurance (Including ‘Return Condition’ and Technical Records Insurance) This insurance gives a bank/lessor coverage in respect of expenses incurred in repossessing an aircraft after a default or accelerated termination. In addition, the policy will pay the cost of rectifying any maintenance deficiency discovered at the end of a lease term, or following an early termination of the lease.
Expenses covered include:i) Legal,travel and labour expenses incurred by the lessor in obtaining full legal access to the aircraft, or incurred in the removal of any legal encumbrances placed on the aircraft. Cover continues until such time as sale,or re-leasing of the aircraft is possible (this would include legal costs in de-registering the aircraft). ii) The cost of maintenance to bring the aircraft up to the standard stipulated in the lease. iii) Aircraft recovery costs including:- Ferry Flight,crew, hotel expenses,fuel etc. - Airport storage and landing fees - Essential maintenance prior to fer ry flight - Certification charges
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iv) Loss or Dama ge of Technical Records In the event that the aircraft is returned without technical records or with incomplete technical records,there will be substantial cost incurred to reinstate the technical records.The ease of reinstating records will depend upon the quality (and currency) of back up records filed with the bank/lessor or manufacturer. If the ‘time life’ of a specific part cannot be established with certainty, a new part will be required. Some of the risks covered by this insurance product may be included under other policies that may, or may not, remain in force.For example, Aircraft Repossession Insurance covers technical records if they have been lost as a result of a named peril under that policy. As such,underwriters will expect the bank to explore the possibility of making recoveries under other policies first. Coverage for Technical records can also be purchased in conjunction with Contingent Hull and Liability insurance. This coverage is defined by the LSW611/LSW612 endorsements.This is not as broad as the coverage detailed above.
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A NOTHE R SO OTHI NG C AB IN A NNO U NCE ME NT!
After a real crusher of a landing in Phoenix,Arizona the flight attendant came on with: “Ladies and gentlemen, please remain in your seats until Captain Crash and his wrecking crew have
brought the aircraft to a screeching halt up against the gate. And once the tyre smoke has cleared and the warning bells are silenced, we’ll open the door and you can pick your way through the wreckage to the terminal.”
Residual Value Insurance Operating leases are the most common financing structure for new aircraft.‘Sale and lease-back’ transactions are also gaining favour with airlines seeking to restructure their balance sheets.The recent demise of the ‘German Leveraged Lease’and the ‘Japanese Leveraged Lease’has left many lenders pondering their future role in aircraft financing transactions. Banks are expert at evaluating and accepting credit risk; they are often very reluctant to accept ‘asset risk’. Future aircraft values are subject to the vagaries of economic conditions,new technology/obsolescence, FAA and manufacturer safety directives and local and international agreements (for example noise and emission requirements). Over the last 20 years there have been various ‘Residual Value Guarantee’ products available. These have included insurance type products,‘put & call options’ and ‘buy back’ guarantees. From time to time these guarantees have been offered by aircraft manufacturers in order to promote sales (there is a cash flow advantage to the manufacturer who otherwise may have to discount the cash price). A problem associated with some of the products offered in the past is that the credit rating of the sellers of RVI has not been high enough. This is allied to the typically long periods of coverage and large aggregate exposures. In addition, some of the contract wordings previously used have resulted in disputed claims, leaving banks with a jaundiced view of residual value guarantees.
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In the last three to five years, insurers/guarantors new to the asset financing market have brought significant capacity into the aircraft financing arena. These insurers/guarantors, who are offering clear contract wordings and carry excellent credit ratings, have been selectively selling RVI.The deals are all tailored according to the specific needs of the bank/lessor; there is no standard product. Most deals provide for a guarantee at one set date in the future.
Example of the potential benefits of RVI When a bank/lessor offers an operating lease, one of the principal factors in determining the rental charged is the projected residual value.There is no doubt that RVI as a financing tool has a key role in the future of aircraft financing. As the following illustration shows, the economic benefit it generates for the airline is significant:Full Pay-out Lease Aircraft
New Boeing 777-200
Full Pay-out Lease with Salvage New Boeing 777-200
Initial Cost
$130,000,000
$130,000,000
Term:
12 years
12 years
12 years
Rental Payable
Monthly in advance
Monthly in advance
Monthly in advance
Lease Rate
8.0% per annum
Residual/Salvage Nil
$130,000,000
New Boeing 777-200
8.0% per annum
8.0% per annum
US$25,000,000
US$66,000,000
RVI Premium Monthly Repayments
Operating Lease
$3,960,000 US$1,397,869
Monthly saving on Rental
US$1,294,611
US$1,125,268
US$103,258
US$272,601
Total Cost of Rentals plus RVI premium
US$201,293,169
US$186,424,004
US$165,998,572
‘PV’ of Rentals plus RVI premium (8% discount rate)
US$130,000,000
US$120,397,133
US$108,608,432
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It can be seen that even with a premium of $3,960,000 (being 6% of the $66,000,000 RVI Sum Insured) capitalised in the transaction,the airline is able to realise a saving on each monthly lease rental of US$272,601. Hence, within 15 months, the RVI premium is fully “recovered” from such monthly savings on each lease rental.
Other Benefits of RVI - Balance sheet relief for banks and manufacturers. - Achieving the desired accountancy and tax treatment. - Risk conversion. RVI converts an ‘asset risk’into a ‘credit risk’ - Enhancement of credit rating for securitisation.
A diagrammatic illustration of the above 777-200 transaction – 1) Principal outstanding
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2) Reducing Lease Rentals with RVI
3) Present Value of Lease Rentals (demonstrating benefits of RVI)
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RVI arrangers must have the following:- Ability to fully understand the financier’s motivation and
requirements. - Technical skills to document complex transactions. - Effective working relationships with both the Guarantor and the
Financier. - A proven track record.
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Revenue Stream Protection In addition to protecting the assets that underpin a portfolio of leases, it is possible to protect the stream of revenue derived from that portfolio.Protections can be arranged for long periods that mirror the periods of financing.The coverage can include causes wider than those traditionally available in insurance markets,including:- Insolvency/default of lessees. - Early termination of leases. - Reduced future lease rentals due to deterioration of market
conditions. - Escalation in costs such as marketing for re-leasing,aircraft
refurbishment and compliance with new regulations or industry standards.
As with residual value guarantees, these revenue protection schemes are tailored according to the needs of the client. The insurers/guarantors are covering adverse deterioration in the projected revenue stream. Before offering any cover, insurers will want to analyse detailed models/projections of future revenues.Underwriters may wish to audit these models with the assistance of specialist consultants. Revenue stream protection products can have the following benefits:- Enhancement of credit rating by rating agencies
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- Longer periods of coverage than are typically available in
insurance markets (up to 15 years). - Enabling a bank/lessor to exit a class of business without
reserving heavily against future losses. - Freeing up equity capital to focus on new aircraft leasing,or
other activities.
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Summary of Key Protections for Aircraft Financiers 1) Aircraft Repossession Insurance i) Protects against acts of confiscation/seizure by the Foreign Government. ii) Covers inability to enforce legal title and rights to an aircraft following a default under the lease.
2) Bank’s/Lessor’s Hull and Liability Insurance i) Contingent Hull and Liability insurance protects against inability to collect in full or in part under the operator’s policies. ii) Covers aircraft in the care,custody and control of the lessor/bank.
3) Contingent Hull War Insurance i) Provides 180 days of non-cancellable hull ‘War’insurance for the bank’s/lessor’s interest,following cancellation or non-renewal of the operator’s policy. ii) Covers the interests of the bank/lessor if claims are unrecoverable on the operators policy by virtue of ‘ground’or aggregate policy limits.
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4) Aircraft Repossession Expenses Insurance i) Covers the costs of repossessing an aircraft,including legal expenses. ii) Covers the cost of rectifying lost,damaged or incomplete technical records. iii) Pays for maintenance/overhaul to reinstate the aircraft to the ‘return condition’stipulated in the lease.
5) Residual Value Insurance i) Protects against reduction in market value at a future date, enabling a residual value to be guaranteed. ii) Converts ‘asset risk’to ‘credit risk’.
6) Revenue Stream Protection Protects the stream of revenue derived from a lease portfolio or a single transaction.
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B AC K S E AT D R I VE R S !
A Royal Air Force VC10 was on an arduous flight carrying the families of air force personnel from Brize Norton,England to Goa,India. In those days this was a long journey and,a few hours into the flight, the crew became bored with the monotony of their task. The captain,who had a reputation with his colleagues as being something of a joker, decided to liven up the proceedings. He took a ball of string and paid it out, whilst walking backwards down the aisle of the aircraft from the flight deck. On reaching the rear of the aircraft he asked an elderly
gentleman if he would hold the string, whilst he attended to the call of nature. He gingerly passed the string over, telling the man he was now controlling the aircraft. The flight engineer up on the flight deck, started tugging on the string to create the effect that the controls were moving. For a few minutes the old gentleman, with sweaty hands,perspiration pouring from his brow and no doubt his heart-in-his-mouth, fought to “control” the aircraft, and if the captain had not returned when he did,he may well have have returned to a collapsed passenger in a deep state of shock!
APPENDIX Appendix A – Specimen Insurance Article Appendix B – Sample Certificates Appendix C – Sample ‘Broker’s Letter of Undertaking’ Appendix D – Selected Clauses and Wordings Appendix E – Specimen Wordings for Specialist Bank/Lessor Insurances
Appendix A Specimen Insurance Article The following is a sample insurance article. Depending upon the structure of finance and type of operator it may need to be amended. However, it should be noted that the uniform adoption of the Aircraft Lease Finance Clause, AV67B, limits the extent to which the insurance articles can be amended. Also, the requirements are based upon the prevailing insurance environment and may become outdated.The following sample insurance article includes sections relating to reinsurance requirements. On a direct insurance placement these sections would not appear.
[ ]
[ ].1
INSURANCE
I n s u r a n c e s : Lessee will maintain in full fo rce and effe c t d u ring the Lease Pe riod insurances in respect of the Equipment (Airc ra f t , a ny Engine or any Pa rt) in fo rm and substance satisfa c t o ry to Lessor (the “ I n s u ra n c e s ” w h i ch ex p ression incl u d e s , w h e re the context so admits, a ny re l evant re - i n s u rance(s)) through such bro ke rs and with s u ch insure rs and having such deductibles and being subject to such ex clusions as may be approved by L e s s o r. The Insurances will be effected either:-
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( a ) on a direct basis with insure rs of recognised standing who norm a l ly participate in aviation insurances in the leading international insurance markets and led by re p u t able underwriter(s) approved by Lessor; o r ( b ) with a single insurer or group of insure rs approved by Lessor which does not retain the risk but effe c t s substantial re i n s u rance with re i n s u re rs in the leading i n t e rnational insurance markets and through bro ke rs e a ch of recognised standing and acceptable to Lessor for a perc e n t age of all risks insured acceptable to Lessor (the “ R e i n s u ra n c e s ” ) . [ ].2
R e q u i rements: L e s s o r ’s current re q u i rements as to re q u i red Insurances are as specified in this Clause and in Schedule [ ]. Lessor may from time to time stipulate other re q u i rements for the Insurances so that the scope and level of cover is maintained in line with best industry practice with the interests of Lessor p ro t e c t e d .
[ ].3
Change: If at any time Lessor wishes to revo ke its a p p roval of any insure r, re i n s u re r, i n s u rance or re i n s u ra n c e , Lessor and/or its bro ke rs will consult with Lessee and Lessee’s bro ke rs (as for the time being a p p roved by Lessor) re g a rding whether that approva l should be revo ked to protect the interests of the p a rties insure d . I f, fo l l owing the consultation, L e s s o r
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c o n s i d e rs that any ch a n ge should be made, Lessee will then arra n ge or pro c u re the arra n gement of altern a t i ve c over satisfa c t o ry to Lessor. [ ].4
Insurance Covenants: Lessee will:-
( a ) e n s u re that all legal re q u i rements as to insurance of the A i rc ra f t , a ny Engine or any Pa rt which may fro m time to time be imposed by the laws of the State of R e gi s t ration or any state to, f rom or over which the A i rc raft may be f l ow n , in so far as they affect or c o n c e rn the operation of the A i rc ra f t , a re complied with an in particular those re q u i rements compliance with which is necessary to ensure that (i) the A i rc ra f t is not in danger of detention or fo r fe i t u re , (ii) the I n s u rances remain valid and in full fo rce and effe c t , and (iii) the interests of the Lessor in the Insura n c e s and the A i rc raft or any Pa rt are not there by pre j u d i c e d ; ( b ) not use, cause or permit the A i rc ra f t , a ny Engine or any Pa rt to be used for any purpose or in any manner not c ove red by the Insurances or outside any ge o gra p h i c a l limit imposed by the Insura n c e s ; ( c ) c o m p ly with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission which : -
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(i)
i nvalidates or may invalidate the Insura n c e s ; o r
( i i ) re n d e rs or may render void or vo i d able the whole or any part of the Insura n c e s ; o r ( i i i ) b rings any particular liability within the scope of an ex clusion or exception to the Insura n c e s ; ( d ) not take out without the prior written approval of Lessor any insurance or re i n s u rance in respect of the A i rc raft other than those re q u i red under this A greement unless relating solely to hull total loss, business interru p t i o n , p ro fit commission and d e d u c t i ble ri s k ; ( e ) commence re n ewal pro c e d u res at least 30 days pri o r to ex p i ry of any of the Insurances and provide to Lessor:(i)
if requested by Lessor, a written status re p o rt of re n ewal negotiation 14 days prior to each ex p i ry date;
( i i ) c o n fi rmation of completion of re n ewal prior to e a ch ex p i ry date; a n d ( i i i ) c e rt i ficates of insurance (and where appro p ri a t e c e rt i ficates of re i n s u ra n c e ) , and bro ke r ’s (and any re i n s u rance bro ke r s’) letter of undertaking in a
122
fo rm acceptable to Lessor in English, detailing the c ove rage and confi rming the insure rs ’ (and any re i n s u re rs’) agreement to the specified insura n c e re q u i rements of this A greement within 7 day s after each re n ewal date; (f)
not make any modification or alteration to the I n s u rances material and adve rse to the interests of any of the Indemnitiees; a n d
( g ) be re s p o n s i ble for any deductible under the I n s u ra n c e s . [ ].5
F a i l u re to Insure: If Lessee fails to maintain the I n s u rances in compliance with this A gre e m e n t , t h e Lessor will be entitled but not bound, ( w i t h o u t p rejudice to any other rights of Lessor under this A gre e m e n t ) : -
( a ) to pay the premiums due or to effect and maintain i n s u rances satisfa c t o r y to it or otherwise re m e dy Lessees fa i l u re in such manner (incl u d i n g , w i t h o u t limitation to effect and maintain an “ ow n e r ’s intere s t ” policy) as it considers appro p ri a t e .A ny sums so expended by it will become immediately due and p ayable by Lessee to Lessor together with intere s t t h e re o n , f rom date of ex p e n d i t u re by it up to the date of re i m b u rsement by Lessee, a n d
123
( b ) at any time while such fa i l u re is continuing to re q u i re the A i rc raft to remain at any airport or to proceed to and remain at any airport designated by it until the fa i l u re is remedied to it’s satisfa c t i o n . [ ].6
Continuing Indemnity: Lessor may re q u i re Lessee to e ffect and to maintain insurance after the Lease Pe ri o d with respect to its liability under the indemnities in Clause [ ] for a period of two ye a rs or until the nex t major overhaul of the A i rc ra f t , w h i ch ever the sooner, w h i ch provides for each Indemnitiee to be named as additional insure d . L e s s e e ’s obligation in this Clause shall not be affected by Lessee ceasing to be Owner of the A i rc raft and/or the Lessor ceasing to have any i n t e rest in respect of the A i rc ra f t .
[ ].7
Application of Insurance Pro c e e d s : As between Lessor and Lessee:
( a ) all insurance payments re c e i ved as the result of To t a l Loss occurring during the Lease Pe riod will be paid to Lessor and Lessor will pay the balance of those amounts to Lessee after deduction of all amounts w h i ch may be or become payable by Lessee to Lessor under the A gre e m e n t . (b) any insurance proceeds of any pro p e rt y, damage or loss to the A i rc ra f t ,a ny Engine or any Part occurring during the Term not constituting an Event of Loss and in excess of
124
US$[
] will be paid to Lessor and applied in
payment (or to reimburse Lessee) for repairs or replacement property upon Lessor being satisfied that the repairs or replacement have been effected in accordance with this Agre e m e n t .I n s u rance proceeds in amounts below US$[
] may be paid by the insurer directly to
L e s s e e .A ny balance remaining may be retained by Lessor. ( c ) notwithstanding Clause [ ].7 (a) or (b), if at the time of the payment of any such insurance proceeds an E vent of Default has occurred and is continu i n g , a l l s u ch proceeds will be paid to or retained by Lessor to be applied towa rd payment of any amounts which may be or become payable by Lessee in such order as Lessor sees fit or as Lessor may elect.
SCHEDULE [ ] INSURANCE REQUIREMENTS
The Insurances re q u i red to be maintained as fo l l ow s : 1.
HULL ALL RISKS of Loss of Damage whilst f lying and on the ground with respect to the A i rc raft on an “ agreed va l u e b a s i s ” for the A greed Value and with a deductible not exceeding [
] or such other
amount agreed by Lessor from time to time, and to incl u d e d e d u c t i ble insura n c e s , if necessar y, to ach i eve that limit.
125
2.
HULL WAR AND ALLIED PERILS, being such risks excluded from the Hull All Risks Policy to the fullest extent available from the leading international insurance markets including confiscation and requisition by the State of Registration for the Agreed Value.
3.
ALL RISKS (INCLUDING WAR AND ALLIED PERILS ex c e p t when on the ground or in transit other than by air or sea) p ro p e rty insurance on all Engines and Pa rts when not installed on the A i rc raft on an “ agreed va l u e ” basis for their full replacement value and including engine test and running ri s k s .
4.
AIRCRAFT THIRD PA RTY (BODILY INJURY and PRO P E RT Y DA M AG E ) , PA S S E N G E R , BAG G AG E , CARGO AND MAIL A N D AIRLINE GENERAL THIRD PA RTY (INCLUDING PRO D U C T S ) LEGAL LIABILITY for a Combined Single Limit (Bodily I n j u ry / P ro p e rty Damage) of an amount not less than [ ] any one occurrence (but in respect of pro d u c t s l i ability this limit may be an ag gregate limit for any and all losses occurring during the currency of the policy). Wa r and Allied Risks are also to be cove red under the Policy to the fullest extent ava i l able from the leading intern a t i o n a l i n s u rance marke t s .
5.
All required hull and spares insurance (as specified above), so far as it relates to the Equipment (Airc ra f t ,a ny Engine or Part) will: ( 1 ) name Lessor as additional insured for its re s p e c t i ve rights and intere s t s ,
126
( 2 ) p rovide that any loss will be payable in Dollars , a n d : ( a ) in respect of any claim that becomes payable on the basis of an Event of Loss, settlement shall be made to or to the order of Lessor; ( b ) in respect of any other cl a i m , settlement (net of a ny policy deductible) shall be made with such p a rty(ies) as may be necessary to repair the Equipment unless otherwise agreed after consultation between the insure rs , Lessee and, w h e re the loss exceeds the Damage Notifi c a t i o n T h re s h o l d , L e s s o r ; (c) include a notice and/or acknowledgments of any assignment relating to the Insurances (relating to the assignment of Lessees interest in the Insurances to Lessor) in a form acceptable to Lessor; ( d ) if separate Hull “all ri s k ” and “ war ri s k s ” i n s u rances are arra n ge d , i n clude a 50/50 prov i s i o n in accordance with market practice (AVS103 in the current market language ) . 6.
All re q u i red liability insurances (specified ab ove) will: ( 1 ) i n clude Lessor, and its successors and assigns and their re s p e c t i ve share h o l d e rs , s u b s i d i a ri e s , d i re c t o rs , o ffi c e rs , age n t s , e m p l oyees and indemnitiees as
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additional insureds for their re s p e c t i ve rights and i n t e re s t s , ( 2 ) o p e rate in all respects as if a separate policy had been issued cove ring each party insure d , but shall not i n clude any claim under hull and spares insurances (as s p e c i fied ab ove ) ; notwithstanding the fo re go i n g , t h e total liability of insure rs shall not exceed the limits of l i ability stated in the policy; ( 3 ) contain a provision confi rming that the policy is p ri m a ry without right of contribution from any other i n s u rance ava i l able to the Lessor. 7.
All Insurances will: ( 1 ) be in accordance with normal industry practice of p e rsons operating similar Equipment in similar c i rc u m s t a n c e s ; ( 2 ) p rovide cover denominated in US Dollars and any other currencies which Lessor may re a s o n ably re q u i re in relation to liability insura n c e ; ( 3 ) o p e rate on a world-wide basis subject to such limitations and ex clusions as Lessor may agre e ; ( 4 ) a ck n ow l e d ge the insurer is awa re of the Lease A greement and that the Equipment is owned by Lessor
128
and that the Insurances are subject to a securi t y assignment in favour of Lessor; ( 5 ) p rovide that, in relation to the interests of each of the additional insureds the Insurances will not be inva l i d a t e d by any act or omission (including misre p resentation and n o n - d i s cl o s u re) of any other person or party which results in a bre a ch of any term , condition or wa rranty of the policy, p rovided that the additional insured party so p rotected has not caused, c o n t ributed to or know i n g ly condoned the said act or omission; ( 6 ) p rovide that upon payment of any loss or claim to or on behalf of any additional insure d , i n s u re rs shall to the extent and in respect of such payment be t h e reupon subrogated to all legal and equitable ri g h t s of that additional insured indemnified here by (but not against any additional insure d s ) . I n s u re rs shall not exe rcise such rights without the consent of those i n d e m n i fi e d , s u ch consent not to be unre a s o n ably w i t h h e l d . At the expense of insure rs such additional i n s u reds shall do all things re a s o n ably necessary to assist the insure r s to exe rcise said ri g h t s ; ( 7 ) p rovide that the additional insureds will have no o bligation or responsibility for the payment of any p remiums due and that the insure rs will not exe rc i s e a ny right of set-off or counter-claim in respect of any
129
p remium due against the re s p e c t i ve interests of the additional insureds other than outstanding pre m i u m s relating to the Equipment which is the subject of the re l evant cl a i m ; ( 8 ) p rovide that, except in respect of any provision fo r cancellation or automatic termination specified in the Policy or any endorsement there o f, c over provided by the Insurances may only be cancelled or materi a l ly a l t e red in a manner adve rse to the additional insure d s by the giving of not less than 30 days (or such lesser p e riod as is customari ly ava i l able in respect of war and allied risks) notice in writing to the appointed bro ke r. Notice shall be deemed to commence from the date s u ch notice is gi ven by the insure rs . S u ch notice will n o t , h oweve r, be gi ven the normal ex p i r y date of the Policy or any endors e m e n t ; (9) re i n s u rance will (a) be on the same terms as the o ri ginal insurances and will include the provisions of this Sch e d u l e , (b) provide that notwithstanding any b a n k ru p t c y, i n s o l ve n c y, liquidation or similar p roceedings affecting the re i n s u red that the re i n s u re rs ’ l i ability will be to make such pay m e n t s , i n respect of the Equipment, as would have fallen due under the re l evant policy of re i n s u rance if the re i n s u red had (immediately befo re such bankru p t c y, i n s o l ve n c y, l i q u i d a t i o n , dissolution or similar
130
p roceedings) disch a rged its obligations in full under the ori ginal insurance policies in respect of which the then re l evant policy of re i n s u rance has been effe c t e d ; and (c) contain a “ c u t - t h ro u g h ” clause in the fo l l ow i n g fo rm (or otherwise, s a t i s fa c t o r y to Lessor): “The Reinsure rs here by agree (at the request and with the consent of the Reinsured) that in the event of any valid claim arising hereunder the R e i n s u re rs shall in lieu of payment to the R e i n s u red its successors in interest and assigns p ay to the person(s) named as loss payee(s) under the ori ginal insurance effected by the Insured that p o rtion of any loss for which the Reinsure rs would otherwise be liable to pay the Reinsure d (subject to proof of loss) it being understood and agreed that any such payment shall fully disch a rge and release Reinsure r s from any and all furt h e r l i ability in connection with such cl a i m . The Reinsure rs re s e rve the right to set off ag a i n s t a ny claim payable hereunder in accordance with this clause any outstanding premiums due on this re i n s u ra n c e . Payment shall be made under this re i n s u ra n c e notwithstanding (i) any bankru p t c y, i n s o l ve n c y, liquidation or dissolution of the Reinsure d , a n d / o r
131
(ii) that the Reinsured has made no pay m e n t under the ori ginal insurance policies. It is a condition that the provisions of this cl a u s e shall not operate in contravention of the law s , statutes or decrees of the Gove r nment of the c o u n t ry of domicile of the Reinsure d .” ( 1 0 ) AVN67B A c c e p t able under Contra c t O p e rator shall be entitled to maintain insurance in re s p e c t of the Equipment for the purposes of this A greement which i n c o r p o rates the terms and conditions of A i r l i n e Finance/Lease Contract Endorsement AVN67B into such i n s u ra n c e . In that eve n t , to the extent that any provision of AVN67B conf licts or is otherwise inconsistent with the re q u i rements of this A greement relating to insura n c e , t h e n (so long as it shall be ge n e ral practice to insure Equipment financed or leased on the basis of such endorsement) such c o n flicting or inconsistent provision of AVN67B shall p revail and such endorsement shall be deemed to satisfy the re q u i rements of this A gre e m e n t . ( 1 1 ) Date Recognition If at any time the Lessee’s insurances become subject to a ny ex clusion relating to computer ‘ d a t e - re c o g n i t i o n ’ t h e n the Lessee will pro c u re that a wri t e b a ck of cove rage is obtained to the fullest extent ava i l abl e .
132
Appendix B Sample Certificates of Insurance and Reinsurance Brokers confirm coverage to Contract Parties by issuing certificates. If the London/international broker is handling a direct insurance then he will send a Certificate of Insurance.However, if the insurance is placed as a reinsurance of a local company the London/international broker will only issue a certificate of Reinsurance. Banks/lessors may also require a Certificate of Insurance from the local broker or local policy issuing company. The London/international broker may be able to assist the local intermediary in drafting a certificate, but will not be able to issue or sign it.
i) Certificate of Insurance TO WHOM IT MAY CONCERN DAT E : CERTIFICATE OF INSURANCE
THIS IS TO CERTIFY that we ,
as insura n c e
b ro ke rs , h ave placed in London and the International i n s u rance Markets with effect from to in the name of
(the “ I n s u red”) cove ring their airc raft (as per schedule) against the fo l l owing risks and up to the limits stated:G E O G R A P H I C A L L I M I T S a re wo r l dw i d e , but in respect of Hull War Risks and Associated perils subject the fo l l ow i n g ex cl u s i o n s : 1.
HULL ALL RISKS of Loss or Damage to airc raft as per S chedule whilst f ly i n g , taxying and on the gro u n d . This cove rage is subject to a deductible of US$ e a ch and eve ry cl a i m , other than total loss, c o n s t ru c t i ve total loss, a rra n ged total loss of the airc ra f t . ORDER: 100% of ......%
2.
LIABILITIES – A i rc raft T h i rd Pa rt y, Pa s s e n ge r, B ag g age , C a rgo , M a i l , P remises Products and Hangarke e p e rs Legal Liability fo r a Combined Single Limit (Bodily Injury / P ro p e rty Damage) of US$
a ny one accident/occurrence and in
the ag gregate in respect of Pro d u c t s , subject to a bag g age and personal effects deductible of US$ 1,250 each and eve ry loss and a cargo deductible of US$ 10,000 each and eve ry loss but Pe rsonal Injury limited to US$ 25,000,000 any one o ffence and in the annual ag gre g a t e .( N OT E :T H I S AG G R E G ATE LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF CLAIMS MADE IN RESPECT OF OTHER A I R C R A F T INSURED UNDER THIS INSURANCE). War and Allied Risks are c ove red under this policy in accordance with AV N 5 2 C . ORDER: 100% of ......%
3.
HULL WAR RISKS, H I JACKING AND OTHER PERILS in re s p e c t of the A i rc raft as per Sch e d u l e . This policy cove rs the peri l s ex cluded on the Hull All Risks Insurance by the application of AVN 48B except paragraph (b) there o f. I n cl u d i n g C o n fi s c a t i o n , n a t i o n a l i z a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , requisition for title or use by or under the order of any G ove rnment or public or local authority of the State of R e gi s t ra t i o n . This policy is subject to a limit of US$
any one
loss and in the annual ag gre g a t e . N OT E : THIS AG G R E G AT E LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF CLAIMS MADE IN RESPECT OF OTHER AIRCRAFT INSURED UNDER THIS INSURANCE. ORDER: 100% of ......% 4.
AIRCRAFT SPARES (including War Risks whilst in transit) – being the pro p e rty of the Insured or the pro p e rty of others for which the Insured is re s p o n s i bl e , i n cluding engi n e s whilst detached from the airc ra f t , for a Limit of US$ a ny one occurrence subject to a deductible of US$ e a ch and eve ry loss (but US$
e a ch and eve ry
loss in respect of ingestion whilst engine ru n n i n g ) . ORDER: 100% of ......% The Hull All Risks and Hull War Risks insurances are arra n ge d s e p e ra t e ly and contain a 50/50 provisional claims settlement clause AV S 1 0 3 .
SCHEDULE OF EQUIPMENT
MAKE/MODEL
SERIAL NUMBER
AGREED VALUE
It is further cert i fied that the insurances have been endorsed as fo l l ow s : AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT It is noted that the Contract Party(ies) have an interest in respect of the Equipment under the Contract(s). A c c o rd i n g ly, with respect to losses occurring during the period from the E ff e c t i v e Date until the expiry of the Insurance or until the expiry or agreed termination of the Contract(s) or until the obligations under the Contract(s) are terminated by any action of the Insured or the Contract Party(ies), whichever shall first occur, in respect of the said interest of the contract party(ies) and in consideration of the Additional Premium it is confirmed that the insurance affo rd e d by the Policy is in full force and effect and it is further agreed that the following provisions are specifically endorsed to the Policy. 1. Under the Hull, Aircraft Spares, Hull War Risks Insurances 1 . 1 In respect of any claim on Equipment that becomes payabl e on the basis of a Total Loss, settlement (net of any re l eva n t Policy Deductible) shall be made to or to the order of the Contract Party(ies). In respect of any other cl a i m , settlement (net of any re l evant Policy Deductible) shall be made with such Pa rty(ies) as may be necessary to repair the
E q u i p m e n t unless otherwise agreed after consultation b e t ween the Insure rs and the Insured and, w h e re necessary under the terms of the C o n t r a c t ( s ), the Contract P a r t y ( i e s ). S u ch payments shall only be made provided they are in compliance with all applicable laws and re g u l a t i o n s . 1.2 I n s u re rs shall be entitled to the benefit of salvage in respect of any property for which a claims settlement has been made. 2. Under the Legal Liability Insurance 2 . 1 Subject to the provisions of this Endors e m e n t , t h e I n s u rance shall operate in all respects as if a separa t e Policy had been issued cove ring each party Insure d h e re u n d e r, but this provision shall not operate to incl u d e a ny claim how s o ever arising in respect of loss or damage to the Equipment I n s u red under the Hull or Spares Insura n c e of the Insure d . Notwithstanding the fo re going the total l i ability of Insure rs in respect of any and all Insureds shall not exceed the limits of liability stated in the Po l i c y. 2 . 2 The Insurance provided hereunder shall be pri m a r y and without right of contribution from any other Insura n c e w h i ch may be ava i l able to the Contract Party(ies). 2 . 3 This Endorsement does not provide cove rage for the Contract Party(ies) with respect to claims arising out of their legal liability as manu fa c t u re r, re p a i re r, or ser v i c i n g agent of the Equipment.
3. Under ALL Insurances 3 . 1 The Contract Party(ies) a re included as A d d i t i o n a l I n s u re d ( s ) . 3 . 2 The cover affo rded to each Contract Party by the Po l i c y in accordance with this Endorsement shall not be i nvalidated by any act or omission (incl u d i n g m i s re p resentation and non-discl o s u re) of any other pers o n or party which results in a bre a ch of any term , condition of wa rranty of the policy PROVIDED T H AT the C o n t r a c t P a r t y so protected has not caused, c o n t ributed to or k n ow i n g ly condoned the said act or omission. 3 . 3 The provisions of this Endorsement apply to the C o n t r a c t P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e r ( s ) / l e s s o r ( s ) in the identified Contract(s) and not in any other capacity. K n ow l e d ge that any Contract Party m ay have or acquire or actions that it may take or fail to take in that other capacity (pursuant to any other contract or otherwise) shall not be considered as invalidating the cover affo rd e d by this Endors e m e n t . 3.4 The Contract Party(ies) shall have no responsibility for premium and Insurers shall waive any right of set-off or counterclaim against the Contract Party(ies) except in respect of outstanding premium in respect of the Equipment. 3 . 5 Upon payment of any loss or claim to or on behalf of any Contract Party(ies), I n s u re rs shall to the extent and in
respect of such payment be thereupon subrogated to all legal and equitable rights of the Contract Parties i n d e m n i fied here by (but not against any Contract Party) . I n s u re rs shall not exe rcise such rights without the consent of those indemnifi e d , s u ch consent not to be unre a s o n ably w i t h h e l d . At the expense of Insure rs such C o n t r a c t P a r t y ( i e s ) shall do all things re a s o n ably necessary to assist the Insure rs to exe rcise said ri g h t s . 3 . 6 Except in respect of any provision for Cancellation or Automatic Te rmination specified in the Policy or any E n d o rsement there o f, c over provided by this Endors e m e n t m ay only be cancelled or materi a l ly altered in a manner a d ve rse to the Contract Pa rty(ies) by the giving of not less than T h i rty (30) days (but 7 days or such lesser period as may be customari ly ava i l able in respect of War and Allied Pe ri l s Risks) notice in writing to the Appointed Bro ke r. Notice shall be deemed to commence from the date such notice is gi ve n by the Insure rs . S u ch notice will NOT, h oweve r, be gi ven at n o rmal ex p i ry date of the Policy or any endors e m e n t . EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF THIS ENDORSEMENT : 1.
THE CONTRACT PA RTY(IES) ARE COVERED BY THE POLICY SUBJECT TO ALL TERMS, CONDITIONS, L I M I TATIONS, WARRANTIES, EXCLUSIONS AND C A N C E L L ATION PROVISIONS THEREOF.
2.
THE POLICY SHALL NOT BE VARIED BY ANY PROVISIONS CONTAINED IN THE CONTRACT(S) WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR AMENDMENT TO THE POLICY.
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT
1.
Equipment:
2.
Policy Deductible a p p l i c able to physical damage to the Equipment (Insert all applicable Policy Deductibl e s ) HULL: US$
e a ch and eve r y loss (ex cluding To t a l
L o s s / A rra n ged Total Loss/Constru c t i ve Total Loss). S PA R E S : U S $
e a ch and eve ry loss but in respect of
i n gestion losses whilst Spare Engines Running the Hull A l l Risks Deductibles apply. 3.
( a ) Contract Party(ies) A N D, (b) in respect of Legal Liability Insura n c e s .
4.
C o n t r a c t ( s ) Lease A greement betwe e n and
5.
E ffe c t i ve Date
6.
Additional Pre m i u m US$100 the receipt of which is h e re by ack n ow l e d ge d .
7.
Appointed Insurance Bro k e r
This endorsement does not: a.
i n c o r p o rate the Contract into the policy.
b.
P rovide cove rage to the Contract Pa rties in the event of the repossession of the equipment.
Several Liability Notice (LSW 1001) ( This clause will always be included if Lloy d ’s underwri t e rs p a rticipate in the ri s k ) The subscribing insure rs ’ o bligations under contracts of i n s u rance to which they subscribe are seve ral and not joint and a re limited solely to the extent of their individual subscri p t i o n s . The subscribing insure rs are not re s p o n s i ble for the s u b s c ription of any co-subscribing insurer who for any re a s o n does not satisfy all or part of its obl i g a t i o n s . DIRECTOR SIGNAT U R E S :
ii) Certificate of Reinsurance
TO WHOM IT MAY CONCERN DAT E : CERTIFICATE OF REINSURANCE
THIS IS TO CERTIFY that Reinsurance has been placed in London and the International Insurance Markets with effe c t f rom
to
in the name of (the “ I n s u red”) cove ring their airc raft (as per Schedule) ag a i n s t the fo l l owing risks and up to the limits stated, and that we , as Reinsurance Bro ke rs , h ave placed R e i n s u rance in the name of
(the “ R e i n s u re d ” )
for the account of the Insure d : G E O G R A P H I C A L L I M I T S a re wo r l dw i d e , but in respect of Hull War Risks and Associated perils subject the fo l l ow i n g ex cl u s i o n s : 1.
HULL ALL RISKS of Loss or Damage to airc raft as per S chedule whilst f ly i n g , taxying and on the gro u n d .T h i s c ove rage is subject to a deductible of US$ e a ch and eve ry cl a i m , other than total loss, c o n s t ru c t i ve total loss, a rra n ged total loss of the airc ra f t . Amount Reinsure d:
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100% of
%.
2.
LIABILITIES – A i rc raft T h i rd Pa rt y, Pa s s e n ge r, B ag g age , C a rgo , M a i l , P remises Products and Hangarke e p e rs Legal Liability fo r a Combined Single Limit (Bodily Injury / P ro p e rty Damage) of US$
a ny one accident/occurrence and in
the ag gregate in respect of Pro d u c t s , subject to a bag g age and personal effects deductible of US$ 1,250 each and eve ry loss and a cargo deductible of US$ 10,000 each and eve ry loss but Pe rsonal Injury limited to US$ 25,000,000 any one o ffence and in the annual ag gre g a t e . ( N OT E :T H I S AG G R E G ATE LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF CLAIMS MADE IN RESPECT OF OTHER A I R C R A F T INSURED UNDER THIS INSURANCE). War and Allied Risks are c ove red under this policy in accordance with AV N 5 2 C . Amount Reinsure d: 3.
100% of
%.
HULL WAR RISKS, H I JACKING AND OTHER PERILS in respect of the A i rc raft as per Sch e d u l e . This policy cove rs the perils ex cluded on the Hull All Risks Insurance by the application of AVN 48B except paragraph (b) there o f. I n cluding Confi s c a t i o n , n a t i o n a l i z a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , requisition for title or use by or under the ord e r of any Gove rnment or public or local authority of the State of Regi s t ra t i o n . This policy is subject to a limit of US$
any one
loss and in the annual ag gre g a t e . N OT E : THIS AG G R E G AT E LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF
143
CLAIMS MADE IN RESPECT OF OTHER AIRCRAFT INSURED UNDER THIS INSURANCE. Amount Reinsure d: 4.
100% of
%.
AIRCRAFT SPARES (including War Risks whilst in transit) – being the pro p e rty of the Insured or the pro p e rty of others for which the Insured is re s p o n s i bl e ,i n cluding engines whilst d e t a ched from the airc ra f t , for a Limit of US$ a ny one occurrence subject to a deductible of US$ e a ch and eve ry loss (but US$
e a ch and
eve ry loss in respect of ingestion whilst engines ru n n i n g ) . Amount Reinsure d:
100% of
%.
The Hull All Risks and Hull War Risks insurances are arra n ge d s e p e ra t e ly and contain a 50/50 provisional claims settlement cl a u s e AV S 1 0 3 . SCHEDULE OF EQUIPMENT MAKE/MODEL
SERIAL NUMBER
AGREED VALUE
It is further cert i fied that the ori ginal insurances have been e n d o rsed as fo l l ow s : AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT It is noted that the Contract Party(ies) have an interest in respect of the Equipment under the Contract(s).Accordingly, with respect to losses occurring during the period from the Effective Date until the expiry of the Insurance or until the expiry or agreed termination of the Contract(s) or until the obligations under the Contract(s)
144
are terminated by any action of the Insured or the Contract Party(ies), whichever shall first occur, in respect of the said interest of the contract party(ies) and in consideration of the Additional Premium it is confirmed that the insurance afforded by the Policy is in full force and effect and it is further agreed that the following provisions are specifically endorsed to the Policy. 1. Under the Hull, Aircraft Spares, Hull War Risks Insurances 1 . 1 In respect of any claim on Equipment that becomes p ayable on the basis of a Total Loss, settlement (net of any re l evant Policy Deductible) shall be made to or to the o rder of the Contract Party(ies). In respect of any other cl a i m , settlement (net of any re l evant Policy Deductible) shall be made with such Pa rty(ies) as may be necessary to repair the E q u i p m e n t unless otherwise agreed after consultation between the Insure rs and the Insured and, w h e re necessary under the terms of the C o n t r a c t ( s ), t h e Contract Party(ies). S u ch payments shall only be made p rovided they are in compliance with all applicable law s and re g u l a t i o n s . 1 . 2 I n s u re rs shall be entitled to the benefit of salvage in respect of any pro p e rty for which a claims settlement has been made. 2. Under the Legal Liability Reinsurance 2 . 1 Subject to the provisions of this Endors e m e n t , t h e I n s u rance shall operate in all respects as if a separa t e
145
Policy had been issued cove ring each party Insure d h e re u n d e r, but this provision shall not operate to incl u d e a ny claim how s o ever arising in respect of loss or damage to the E q u i p m e n t I n s u red under the Hull or Spares Insura n c e of the Insure d . Notwithstanding the fo re going the total l i ability of Insure rs in respect of any and all Insureds shall not exceed the limits of liability stated in the Po l i c y. 2 . 2 The Insurance provided hereunder shall be pri m a ry and without right of contribution from any other Insura n c e w h i ch may be ava i l able to the Contract Party(ies). 2 . 3 This Endorsement does not provide cove rage for the Contract Party(ies) with respect to claims arising out of their legal liability as manu fa c t u re r, re p a i re r, or serv i c i n g agent of the E q u i p m e n t. 3. Under ALL Insurances 3.1 The Contract Party(ies) are included as Additional Insured(s). 3 . 2 The cover affo rded to each Contract Party by the Po l i c y in accordance with this Endorsement shall not be i nvalidated by any act or omission (incl u d i n g m i s re p resentation and non-discl o s u re) of any other pers o n or party which results in a bre a ch of any term , condition of wa rranty of the policy PROVIDED T H AT the C o n t r a c t Party so protected has not caused, c o n t ributed to or k n ow i n g ly condoned the said act or omission.
146
3 . 3 The provisions of this Endorsement apply to the C o n t r a c t P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e r ( s ) / l e s s o r ( s ) in the identifi e d C o n t r a c t ( s ) and not in any other capacity. K n ow l e d ge that any Contract Pa rty may have or acquire or actions that it may take or fail to take in that other capacity (pursuant to any other contract or otherwise) shall not be considered as invalidating the cover affo rd e d by this Endors e m e n t . 3 . 4 The Contract Party(ies) shall have no responsibility fo r p remium and Insure rs shall wa i ve any right of set-off or c o u n t e rclaim against the Contract Party(ies) except in respect of outstanding premium in respect of the E q u i p m e n t. 3 . 5 Upon payment of any loss or claim to or on behalf of any Contract Party(ies), I n s u re rs shall to the extent and in respect of such payment be thereupon subrogated to all legal and equitable rights of the Contract Parties i n d e m n i fied here by (but not against any Contract Party) . I n s u re rs shall not exe rcise such rights without the consent of those indemnifi e d , s u ch consent not to be unre a s o n ably w i t h h e l d . At the expense of Insure rs such Contra c t Pa rty(ies) shall do all things re a s o n ably necessar y to assist the Insure rs to exe rcise said ri g h t s . 3 . 6 Except in respect of any provision for Cancellation or Automatic Te rmination specified in the Policy or any
147
E n d o rsement there o f, c over provided by this Endors e m e n t m ay only be cancelled or materi a l ly altered in a manner a d ve rse to the Contract Party(ies) by the giving of not less than T h i rty (30) days (but 7 days or such lesser peri o d as may be customari ly ava i l able in respect of War and A l l i e d Pe rils Risks) notice in writing to the Appointed Bro k e r. Notice shall be deemed to commence from the date such notice is gi ven by the Insure rs . S u ch notice will NOT, h oweve r, be gi ven at normal ex p i r y date of the Policy or a ny endors e m e n t . EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF THIS ENDORSEMENT: -
1.
THE CONTRACT PA RTY(IES) ARE COVERED BY THE POLICY SUBJECT TO ALL TERMS, CONDITIONS, L I M I TATIONS, WARRANTIES, EXCLUSIONS AND C A N C E L L ATION PROVISIONS THEREOF.
2.
THE POLICY SHALL NOT BE VARIED BY ANY PROVISIONS CONTAINED IN THE CONTRACT(S) WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR AMENDMENT TO THE POLICY.
148
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT
1.
Equipment:
2.
Policy Deductible a p p l i c able to physical damage to the Equipment (Insert all applicable Policy Deductibl e s ) HULL: US$
e a ch and eve ry loss (ex cluding To t a l
L o s s / A rra n ged Total Loss/Constru c t i ve Total Loss). S PA R E S : U S $
e a ch and eve r y loss but in respect of
i n gestion whilst Spare Engines Running the Hull All Risks D e d u c t i bles apply. 3.
( a ) Contract Party(ies) A N D, (b) in respect of Legal Liability Insura n c e s .
4.
Contract(s) Lease A greement betwe e n and
5.
E ffective Date
6.
Additional Pre m i u m
7.
Appointed Insurance Bro k e r
US$100 the receipt of
w h i ch is here by ack n ow l e d ge d . This endorsement does not: a. b.
I n c o r p o rate the Contract into the policy. P rovide cove rage to the Contract Pa rties in the event of the repossession of the equipment.
Cut through clause applicable to all Reinsurers certified h e re u n d e r “The Reinsure rs here by agree (at the request and with the consent of the Reinsured) that in the event of any valid cl a i m a rising hereunder the Reinsure rs shall in lieu of payment to the R e i n s u red its successors in interest and assigns pay to the p e rson(s) named as loss payee(s) under the ori ginal insura n c e
149
e ffected by the Insured that portion of any loss for which the R e i n s u re rs would otherwise be liable to pay the Reinsure d (subject to proof of loss) it being understood and agreed that a ny such payment shall fully disch a rge and release Reinsure rs f rom any and all further liability in connection with such cl a i m . The Reinsure rs re s e rve the right to set off against any cl a i m p ayable hereunder in accordance with this clause any outstanding premiums due on this re i n s u ra n c e . Payment shall be made under this re i n s u rance notwithstanding (i) any bankru p t c y, i n s o l ve n c y, liquidation or dissolution of the R e i n s u re d , and/or (ii) that the Reinsured has made no pay m e n t under the ori ginal insurance policies. It is a condition that the provisions of this clause shall not o p e rate in contravention of the law s , statutes or decrees of the G ove rnment of the countr y of domicile of the Reinsure d .” Several Liability Notice (LSW 1001) ( This clause will always be included if Lloy d ’s underwri t e rs p a rticipate in the ri s k ) The subscribing re i n s u re rs ’ o bligations under contracts of re i n s u rance to which they subscribe are seve ral and not joint and are limited solely to the extent of their individual s u b s c ri p t i o n s . The subscribing re i n s u re rs are not re s p o n s i ble fo r the subscription of any co-subscribing re i n s u rer who for any reason does not satisfy all or part of its obligations LSW 1001 ( re i n s u rance) Seve ral Liability Notice. DIRECTOR SIGNAT U R E S :
150
Appendix C Sample ‘Broker’s Letter of Undertaking’ In addition to requiring brokers to issue certificates,Banks/lessors need to formalise the obligations of the insurance broker. This is done by a ‘Brokers Letter of Undertaking’. The following is a sample (i.e. a suggested format that the Bank/lessor will request from brokers) that can be incorporated into the lease insurance covenants.This letter can be amended, as appropriate, if the broker is arranging reinsurance, as opposed to direct insurance.
To : Date: Dear Sirs , I n s u re d : A i rc raft Ty p e : with serial nu m b e r / re gi s t ra t i o n We confi rm that, as Insurance Bro ke rs , we have effe c t e d i n s u rance for the account of the Insured cove ring airc ra f t o p e rated by them, for the risks detailed in the attach e d C e rt i ficate of Insurance (dated
)
151
P u r suant to instructions re c e i ved from the Insured and in c o n s i d e ration of your approving ours e l ves as the Insura n c e B ro ker for such insura n c e , we undert a ke as fo l l ows in connection with the Insure d ’s policy arra n gements (under w h i ch the A i rc raft identified ab ove is insure d ) , but only in relation to your interest(s) in the A i rc ra f t : 1
In relation to the Hull, S p a res and Hull War Risks insura n c e , to hold the insurance slips and the benefit of those i n s u rances to your order in accordance with the loss p ayable provision re fe renced in the said Cert i ficate of I n s u ra n c e , but subject always to our re q u i rements to o p e rate the Fleet Policy in so far as it relates to any other a i rc raft insured there u n d e r.
2.
To advise yo u , p ro m p t ly : 2.1 of the receipt by us of any notice of cancellation or m a t e rial ch a n ge in the insura n c e ; and 2 . 2 if any premiums are not paid to us in accordance with the accounting pro c e d u res that exist between the I n s u red and ours e l ves befo re we notify Insure rs of s u ch non-payment of pre m i u m s ; and 2 . 3 upon application from yo u , of the premium pay m e n t situation; and
152
2 . 4 if we cease to be Insurance Bro ke r s to the Insure d . 3.
Fo l l owing a written application re c e i ved from you not later than one month befo re ex p i r y of these insurances to notify you within fo u rteen days of the receipt of such application in the event of our not having re c e i ved re n ewa l i n s t ructions from the Insure d .
The ab ove undertakings are gi ven subject to: a)
our continuing appointment for the time being as I n s u rance Bro ke rs to the Insure d ;
and b)
all claims and re t u rn premiums being collected t h rough ours e l ves as Insurance Bro ke rs ;
and c)
our lien, if any, on the said Insurance for pre m i u m s due in respect of the A i rc ra f t .
This letter shall be gove rned by English Law. Yo u rs fa i t h f u l ly,
D i rector
153
Appendix D Aviation Insurance Wordings and Clauses Larger, more sophisticated airlines tend to have ‘manuscript’ policy wordings that are tailored according to their needs. These wordings have evolved from the standard AV1B/AVIC, AV16/AV20 wordings. Section One of this book provides descriptions of the insurance coverage usually provided for aircraft operators. Policies issued by local companies are normally based on,or similar to, the normal London wordings, even if they are issued in another language. A full description of wordings and clauses will run to hundreds of pages and is contained in reference publications that are generally available. Below are selected clauses of specific relevance to aircraft finance.
PREMIUM PAYMENT CLAUSE – AVN 6A
154
1)
It is understood and agreed that the premium due at the inception of this Policy shall be payable in the fo l l owing instalments:
2)
In the event of a claim hereunder which exceeds the instalments of premium paid on this Po l i c y, the instalments of premium then outstanding shall become payable fo rt h w i t h .
3)
Notwithstanding any cancellation provision contained within the Po l i c y, in the event that an instalment of premium is not paid by
its due date Insure rs shall have the right to terminate the cove r a ffo rded by the Policy to the Insured and any other part y ( i e s ) p rotected there by, whether by endorsement or otherwise, by the giving of not less than T h i rty (30) days notice in writing to the Appointed Bro ke r. Notice shall be deemed to commence from the date such notice is gi ven by the Insure rs .
AVN 6A (1.10.96)
Author’s Note The authors endorse the use of AVN 6A. However, we stro n g l y caution against the use of AVN 5A. In the event that insurers insist upon AVN 5A, specific safeguards should be taken to ensure that coverage provided for the bank/lessor is not subject to the automatic cancellation pro v i s i o n .
155
AVN 5A DEFERRED PREMIUM CLAUSE It is here by understood and agreed that the premium shall be paid in the fo l l owing instalments:-
N eve rtheless it is further understood and agreed that:Notwithstanding any provision as to notice of cancellation contained in this Po l i c y, it is a condition that in the event of any instalment not being paid by its due date the cover affo rded by this Policy shall be deemed to have ceased at midnight of such due date. In the event of a claim hereunder which exceeds the instalments of p remium paid on this Policy the instalments of premium then outstanding shall become payable fo rt h w i t h .
AVN 5A (9.10.74)
156
PERSONAL INJURY EXTENSION (AVN60) The insurance provided by this Policy extends to include the Named I n s u re d ’s legal liability for damages sustained by any person arising out of one or more of the fo l l owing offences committed during the Po l i c y p e ri o d . 1.
False arre s t : re s t ra i n t , detention or impri s o n m e n t .
2.
Malicious pro s e c u t i o n .
3.
W rongful entry, eviction or other invasion of the right of pri va t e o c c u p a n c y.
4.
I n a d ve rtent discrimination with respect to withholding or refusal of t ra n s p o rtation except with respect to ove r b o o k i n g .
5.
The publication or utterance of a libel or slander or of other d e fa m a t o ry or disparaging material in violation of an individual’s right of pri vacy except publication or utterance in the course of or related to adve rt i s i n g , b roadcasting or telecasting activities conducted by or on behalf of the Named Insure d .
6.
Incidental medical malpractice error or mistake by a phy s i c i a n , s u rge o n , nu rs e , medical technician or other person perfo rm i n g medical services but only for or on behalf of the Insured in the p rovision of emergency medical re l i e f.
The fo l l owing additional ex clusions shall apply to the Insura n c e p rovided by this ex t e n s i o n : (a)
l i ability assumed by the Named Insured under any contract or agre e m e n t .
(b)
p e rsonal injury arising out of the wilful violations of penal statute or ordinance committed by or with the know l e d ge or consent of the Named Insure d .
(c)
p e rsonal injury arising out of offence 5 ab ove ,
157
(d)
(i)
if the fi rst injurious publication or utterance of the same or similar material was made prior to the effe c t i ve date of this insura n c e .
(ii)
if such publication or utterance was made by or at the d i rection of the Insured with the know l e d ge of the fa l s e n a t u re there o f.
l i ability for personal injury sustained by any person dire c t ly or indire c t ly related to the past, p resent or potential e m p l oyment of such person by the Insure d .
The limit of liability applicable to Pe rsonal Injury claims shall be . . . . . . . . . . . . . .a ny one offence and in the ag gregate during the Po l i c y p e riod being within the ove rall Policy limit and not in addition t h e re t o . It is understood and agreed that, except as specifi c a l ly provided in the fo re going to the contra ry, this extension in cove rage is only applicabl e w h e re cove rage is provided in accordance with Clause AVN 59. AVN 60 (19.12.85)
158
AV57A(USA) D.O.T. 14 CFR PART 205 (HEREINAFTER CALLED “PART 205”) AIRCRAFT ACCIDENT LIABILITY INSURANCE IT IS UNDERSTOOD AND AGREED T H AT: 1.
The policy to which this endorsement is attached is here by amended to provide cove rage in compliance with the provisions of Pa rt 205.
2.
S u ch cove rage shall be within the limits of liability in the Po l i c y and not in addition to or in excess there o f.
3.
S u ch cove rage shall continue until cancelled by Insure rs or their a u t h o rised re p re s e n t a t i ve giving the appro p riate notice.
4.
Unless the policy otherwise provides the fo l l owing ex clusions not p rohibited by the provisions of Pa rt 205 shall apply : (i)
War Exclusions Clause AVN48B paragraphs (a) and (b) or e q u i valent cl a u s e ( s ) .
(ii)
Noise and Pollution and Other Pe rils Exclusion Clause AVN46B or equivalent cl a u s e ( s ) .
( i i i ) Aviation Radioactive Contamination Exclusion Clause AV N 3 8 B or equivalent cl a u s e ( s ) . ( i v ) B o d i ly injury to or sick n e s s , disease or death of any employe e a rising out of and in the course of his/her employ m e n t . (v)
5.
I n j u ry to or destruction of pro p e rty ow n e d , re n t e d , l e a s e d , loaned to or occupied or used by the Insure d .
If the Insure rs are called upon to provide cove rage to the Insure d in compliance with Pa rt 205 including the defence and legal costs associated therewith and if by reason of the term s ,c o n d i t i o n s , limitations and ex clusions of the Policy such cove rage would not
159
h ave been provided except for this endorsement then the Insure d will re i m b u rse the Insure rs for such payments made in prov i d i n g c ove rage under Pa rt 205. 6.
The term s , c o n d i t i o n s , limitations and ex clusions of the Po l i c y shall apply to claims made under the Policy which (a) are in excess of the limits specified in Pa rt 205 or (b) are not gove rn e d by the provisions of Pa rt 205.
AVN 57A (USA) 1.10.96
160
50/50 PROVISIONAL CLAIMS SETTLEMENT CLAUSE (AVS103) WHEREAS the Insured has in full fo rce and effe c t A)
a “Hull All Risks” policy which inter alia contains the Wa r, H i j a ck i n g and Other Pe rils Exclusion Clause (AVN 48B)/the Common Nort h A m e rican Airline War Exclusion Clause, a n d
B)
a “Hull War Risks” policy which inter alia cove rs certain of the risks ex cluded by AVN 48B/the Common North A m e rican A i r l i n e War Exclusion Clause in A) ab ove
N OW IT IS HEREBY UNDERSTOOD AND AGREED T H AT in the event of loss of or damage to an airc raft identified on the s chedule of airc raft fo rming part of this policy and where agreement is re a ched between the “Hull All Risks” I n s u re rs and the “Hull War Risks” I n s u re rs that the Insured has a valid claim under one or other policy where neve rtheless it cannot be re s o l ve d within 21 days from the date of occurrence as to which policy is l i abl e ,e a ch of the afo rementioned groups of insure rs agre e , WITHOUT PREJUDICE to their liab i l i t y, to advance to the Insure d 50% of such amount as may be mu t u a l ly agreed between them until such time as final settlement of the claim is agre e d P ROVIDED A LWAYS T H AT (i)
the “Hull All Risks” and “Hull War Risks” placing slips are identically e n d o rsed with this provisional claims settlement cl a u s e
(ii)
within 12 months of the advance being made all Insure rs specifi e d in (i) ab ove agree to re fer the matter to arbitration in London in a c c o rdance with the Statutor y provision for arbitration for the time being in fo rc e
(iii) once the arbitration decision has been conveyed to the parties concerned, the “Hull All Risks” Insurers as the case may be shall repay the amount advanced by the other group of Insurers together with interest for the period concerned which is to be calculated using the London Clearing Banks’ Base Rate
161
( i v ) if the “Hull All Risks” and “Hull War Risks” policies contain diffe ri n g amounts payabl e , the advance will not exceed the lesser of the amounts invo l ve d . In the event of Co-insurance or risks invo l v i n g u n i n s u red pro p o rt i o n ( s ) , the appro p riate adjustment will be made. AVS 103 (12.10.83)
Sample ‘Orphan Engine’ Clause It is understood and agreed that in the event of any engine the subject of a lease or finance agreement being installed on an airc raft insure d h e reunder the agreed value of such airc raft is automatically incre a s e d by the agreed value of such engine for the period it is installed subject to the maximum agreed value any one airc raft (incl u s i ve of such e n gine[s]) not exceeding US$ . In the event of a claim payable on the basis of a total loss the Insure rs shall be entitled to the benefit of salvage in respect of the re m oved engi n e .
162
NOISE AND POLLUTION AND OTHER PERILS EXCLUSION CLAUSE (AVN46B) 1.
This Policy does not cover claims dire c t ly or indire c t ly occasioned by, happening through or in consequence of:(a)
noise (whether audible to the human ear or not), v i b ra t i o n , sonic boom and any phenomena associated therew i t h ,
(b)
pollution and contamination of any kind whatsoeve r,
(c)
e l e c t rical and electro m agnetic interfe re n c e ,
(d)
i n t e r fe rence with the use of pro p e rt y ; unless caused by or resulting in a crash fi re explosion or collision or a re c o rded in-f light emergency causing ab n o rm a l a i rc raft opera t i o n .
2.
3.
With respect to any provision in the Policy concerning any duty of I n s u re rs to investigate or defend cl a i m s , s u ch provision shall not a p p ly and Insure rs shall not be re q u i red to defe n d (a)
Claims ex cluded by Pa ragraph 1 or
(b)
a claim or claims cove red by the Policy when combined with a ny claims ex cluded by Pa ragraph 1 (re fe rred to below as “Combined Claims”).
In respect of any Combined Claims, I n s u re rs shall (subject to pro o f of loss and the limits of the Policy) re i m b u rse the Insured for that p o rtion of the fo l l owing items which may be allocated to the claims cove red by the Po l i c y : (i)
d a m ages awa rded against the Insured and
(ii)
d e fence fees and expenses incurred by the Insure d .
163
4.
Nothing herein shall ove rride any ra d i o a c t i ve contamination or other ex clusion clause attached to or fo rming part of this Po l i c y.
AVN 46B (12.1.72)
164
NUCLEAR RISKS EXCLUSION CLAUSE (AVN38B). (1)
This Policy does not cove r (i)
loss or destruction of or damage to any pro p e rty whatsoeve r or any loss or expense whatsoever resulting or ari s i n g t h e re f rom or any consequential loss
(ii)
a ny legal liability of whatsoever nature
directly or indirectly caused or contributed to by or arising from:
(2)
(3)
(a)
the ra d i o a c t i ve ,t ox i c , ex p l o s i ve or other hazard o u s p ro p e rties of any ex p l o s i ve nu clear assembly or nu cl e a r component there o f ;
(b)
the ra d i o a c t i ve pro p e rties of, or a combination of ra d i o a c t i ve p ro p e rties with tox i c , ex p l o s i ve or other hazard o u s p ro p e rties of, a ny other ra d i o a c t i ve material in the course of c a rri age as cargo , i n cluding storage or handling incidental t h e re t o ;
(c)
ionising radiations or contamination by radioactivity fro m , o r the tox i c , ex p l o s i ve or other hazardous pro p e rties of, a ny ra d i o a c t i ve source whatsoeve r.
It is understood and agreed that such ra d i o a c t i ve material or ra d i o a c t i ve source in paragraph (1)(b) and (c) ab ove shall not i n cl u d e : (i)
depleted uranium and natural uranium in any fo rm ;
(ii)
radioisotopes which have re a ched the final stage of fab rication so as to be usable for any scientifi c , m e d i c a l , agri c u l t u ra l , c o m m e rc i a l , educational or industrial purpose.
This Po l i c y, h oweve r, does not cover loss of or destruction of or d a m age to any pro p e rty or any consequential loss or any legal l i ability of whatsoever nature with respect to which :
165
(i)
the Insured under this Policy is also an insured or an additional insured under any other insurance policy, i n cl u d i n g a ny nu clear energy liability policy; o r
(ii)
a ny person or organization is re q u i red to maintain fi n a n c i a l p rotection pursuant to legislation in any country ; o r
( i i i ) the Insured under this Policy is, or had this Policy not been issued would be, entitled to indemnification from any gove rnment or agency there o f. (4)
L o s s ,d e s t ru c t i o n , d a m age , expense or legal liability in respect of the nu clear risks not ex cluded by reason of paragraph (2) shall (subject to all other term s , c o n d i t i o n s , l i m i t a t i o n s , wa rranties and ex clusions of this Policy) be cove re d , p rovided that: (i)
in the case of any claim in respect of ra d i o a c t i ve material in the course of carri age as cargo , i n cluding storage or handling incidental there t o , s u ch carri age shall in all respects have complied with the full International Civil Av i a t i o n O rganisation “ Te chnical Instructions for the Safe Tra n s p o rt of D a n ge rous Goods by A i r ” , unless the carri age shall have been subject to any more re s t ri c t i ve legi s l a t i o n , when it shall in all respects have complied with such legi s l a t i o n ;
(ii)
this Policy shall only apply to an incident happening during the p e riod of this Policy and where any claim by the Insured ag a i n s t the Insure rs or by any claimant against the Insured arising out of s u ch incident shall have been made within three ye a rs after the date there o f ;
( i i i ) in the case of any claim for the loss of or destruction of or d a m age to or loss of use of an airc raft caused by or c o n t ributed to by ra d i o a c t i ve contamination, the level of such contamination shall have exceeded the maximum perm i s s i bl e l evel set out in the fo l l owing scale:-
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Emitter
(IAEA Health and S a fety Regulations)
M a x i mum perm i s s i ble leve l of non-fi xed ra d i o a c t i ve
s u r face contamination (Ave raged over 300 cm 2)
B e t a , gamma and low t oxicity alpha emitters
Not exceeding 4 B e q u e re l s / c m 2 -4 ( 1 0 m i c ro c u ri e s / c m 2 )
All other emitters
Not exceeding 0.4 B e q u e re l s / c m 2 ( 1 0- 5 m i c ro c u ri e s / c m 2 )
( i v ) the cover affo rded here by may be cancelled at any time by the Insure rs giving seven day s ’ notice of cancellation. AVN 38B (22.7.96)
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WAR,HI-JACKING AND OTHER PERILS EXCLUSION CLAUSE (AVN48B) This Policy does not cover claims caused by (a)
Wa r, i nva s i o n , acts of fo reign enemies, hostilities (whether war be d e cl a red or not), civil wa r, re b e l l i o n , revo l u t i o n , i n s u rre c t i o n , m a rtial law, m i l i t a ry or usurped power or attempts at usurpation of p owe r.
(b)
A ny hostile detonation of any weapon of war employing atomic or nu clear fission and/or fusion or other like reaction or ra d i o a c t i ve fo rce or matter.
(c)
S t ri ke s , ri o t s , civil commotions or labour disturbances.
(d)
A ny act of one or more pers o n s , whether or not agents of a s ove reign Powe r, for political or terro rist purposes and whether the loss or damage resulting there f rom is accidental or intentional.
(e)
A ny malicious act or act of sab o t age .
(f)
C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , a p p ro p ri a t i o n , requisition for title or use by or under the order of a ny Gove rnment (whether civil military or de facto) or public or local authori t y.
(g)
H i j a cking or any unlawful seizure or wrongful exe rcise of contro l of the A i rc raft or crew in flight (including any attempt at such s e i z u re or control) made by any person or persons on board the a i rc raft acting without the consent of the Insure d .
F u rt h e rm o re this policy does not cover claims arising whilst the A i rc ra f t is outside the control of the Insured by reason of any of the ab ove peri l s . The A i rc raft shall be deemed to have been re s t o red to the control of the I n s u red on the safe re t u rn of the A i rc raft to the Insured at an airfield not ex cluded by the ge o graphical limits of this Po l i c y, and entire ly suitabl e for the operation of the A i rc raft (such safe re t u rn shall re q u i re that the A i rc raft be parked with engines shut down and under no dure s s ) . AVN 48B (26.8.71)
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WAR ‘WRITEBACK’ CLAUSE Extended Coverage Endorsement (Aviation Liabilities) AV N . 5 2 C 1.
WHEREAS the Policy of which this Endorsement fo rms part i n cludes the Wa r, H i - Ja cking and Other Pe rils Exclusion Clause (Clause AV N. 4 8 B ) , IN CONSIDERATION of an Additional Pre m i u m of ........... , it is here by understood and agreed that with effe c t f rom ................. , all sub-paragraphs other than ................. o f Clause AV N.48B fo rming part of this Policy are deleted SUBJECT TO all terms and conditions of this Endors e m e n t .
2.
EXCLUSION applicable only to any cover extended in respect of the deletion of sub-paragraph (a) of Clause AV N. 4 8 B C over shall not include liability for damage to any fo rm of p ro p e rty on the ground situated outside Canada and the United States of A m e rica unless caused by or arising out of the use of a i rc ra f t .
3.
AU TO M ATIC T E R M I NAT I O N To the extent provided below, c over extended by this Endors e m e n t shall T E R M I NATE AU TO M AT I C A L LY in the fo l l owing circ u m s t a n c e s : (i)
All cover – upon the outbreak of war (whether there be a decl a ra t i o n of war or not) between any two or more of the fo l l ow i n g S t a t e s , n a m e ly, Fra n c e , the Pe o p l e ’s Republic of China, t h e Russian Fe d e ra t i o n , the United Kingdom, the United States of A m e ri c a
(ii)
Any cover extended in respect of the deletion of subparagraph (a) of Clause AV N . 4 8 B – upon the hostile detonation of any weapon of war employ i n g atomic or nu clear fission and/or fusion or other like re a c t i o n or ra d i o a c t i ve fo rce or matter where s o ever or whensoeve r s u ch detonation may occur and whether or not the Insure d A i rc raft may be invo l ve d
169
( i i i ) All cover in respect of any of the Insured Airc r a f t requisitioned for either title or use – upon such re q u i s i t i o n P ROVIDED T H AT if an Insured A i rc raft is in the air when (i), (ii) or (iii) o c c u rs , then the cover provided by this Endorsement (unless otherwise c a n c e l l e d , t e rminated or suspended) shall continue in respect of such an A i rc raft until completion of its fi rst landing thereafter and any p a s s e n ge rs have disembarke d . 4.
REVIEW AND CANCELLAT I O N (a)
Review of Premium and/or Geographical Limits (7 days) I n s u re rs may gi ve notice to rev i ew premium and/or ge o graphical limits – such notice to become effe c t i ve on the ex p i ry of seven days from 23.59 hours GMT on the day on w h i ch notice is gi ve n .
(b)
Limited Cancellation (48 hours) Fo l l owing a hostile detonation as specified in 3. (ii) ab ove , I n s u re rs may gi ve notice of cancellation of one or more part s of the cover provided by paragraph 1. of this Endorsement by re fe rence to sub-paragraphs (c), ( d ) , ( e ) , (f) and/or (g) of Clause AV N.48B – such notice to become effe c t i ve on the ex p i ry of fo rty-eight hours from 23.59 hours G. M . T. on the d ay on which notice is gi ve n .
(c)
Cancellation (7 days) The cover provided by this Endorsement may be cancelled by either Insure rs or the Insured giving notice to become e ffe c t i ve on the ex p i ry of seven days from 23.59 hours GMT on the day on which such notice is gi ve n .
(d)
Notices All notices re fe rred to herein shall be in wri t i n g .
AVN 52C (12.11.92)
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AIRCRAFT FINANCIAL INTEREST ENDORSEMENT (AVN28B) It is noted that the P a r t y named in the Schedule hereto has a fi n a n c i a l i n t e rest in the A i rc r a f t under the A g re e m e n t. A c c o rd i n g ly, w i t h respect to losses occurring during the period from the E ffective Date of this Endorsement until the ex p i ry of the Insurance or until the s a t i s faction of the obligations under the A gre e m e n t ,w h i ch ever shall fi rst occur, in respect of the interest of the P a r t y and in considera t i o n of an Additional Pre m i u m IT IS UNDERSTOOD AND AGREED T H AT: 1.
The insurance affo rded by this Policy for loss of or physical damage to the insure d A i rcraft shall not be invalidated as re g a rds the intere s t of the Party by any act or omission by the Insured which results in a b re a ch of any term , condition or wa rranty of the Policy PROV I D E D T H AT the P a r t y has not caused, c o n t ributed to or know i n g ly condoned the said act or omission. N eve rtheless any ch a n ge in title or ow n e rship of the A i rc r a f t, c o nve rs i o n , embezzlement or secretion by the Insured in possession of the A i rc r a f t is not cove red here u n d e r.
2.
The protection affo rded to the Party by the terms of this E n d o rsement shall be limited to loss of or physical damage to the i n s u red A i rcraft and shall not exceed the Original Amount under the Agreement less any re l evant Policy Deductible a n d less all m a t u red I n s t a l m e n t s paid or due prior to the accident giving rise to a loss here u n d e r.
3.
The P a r t y shall notify the Insure rs of any increase in hazard which comes to the P a r t y ’ s attention and if agreed by the Insure rs it shall be endorsed on the Po l i c y, the P a r t y agreeing to pay any additional re q u i red premium if the Insured fails to do so on demand of the Insure rs .
4.
If the Insured fails to notify the Insure rs as specified in the Po l i c y Conditions of any event like ly to gi ve rise to a claim under the Po l i c y, the P a r t y shall do so immediately he becomes awa re of the event in fo rm and manner as pre s c ribed by the Po l i c y.
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5.
Upon payment of any loss or claim to the P a r t y, I n s u re rs shall to the extent and in respect of such payment be subrogated to all legal and equitable rights of the P a r t y. At the expense of Insure rs the Party shall do whatever is n e c e s s a ry to assist the Insure rs to exe rcise such ri g h t s .
6.
Except in respect of any provision for Cancellation or Au t o m a t i c Te rmination specified in the Policy or any endorsement there o f, c over provided by this Endorsement may only be cancelled by I n s u re rs giving not less than T h i rty (30) days notice in writing to the Appointed Bro k e r. Notice shall be deemed to commence f rom the date such notice is gi ven by the Insure rs . In the event of cancellation for non-payment of pre m i u m , the P a r t y shall have the option to pay all outstanding premiums in respect of the A i rc r a f t within the notice peri o d .
EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF THIS ENDORSEMENT THE FINANCIAL INTEREST OF THE PA RT Y I S C OVERED BY THE POLICY FOR LOSS OF OR PHYSICAL DA M AGE TO THE INSURED A I R C R A F T O N LY SUBJECT TO ALL T E R M S ,C O N D I T I O N S , L I M I TAT I O N S , WA R R A N T I E S , EXCLUSIONS AND CANCELLAT I O N P ROVISIONS T H E R E O F.
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SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT 1.
A i rc ra f t : R e gi s t ra t i o n :
2.
Pa rty (enter the name of the Pa rty having a financial intere s t ) :
3.
A greement (enter identifying details and date):
4.
The Ori ginal Amount under the A gre e m e n t : Payable in
Instalments of
the last Instalment being due The amount outstanding at the Effe c t i ve Date of this Endors e m e n t : 5.
Policy Deductibl e :
6.
Additional Pre m i u m :
7.
Appointed Bro ke r :
AVN28B 17.10.1996
173
AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT AVN67B It is noted that the Contract Party(ies) have an interest in respect of the Equipment under the Contract(s).Accordingly, with respect to losses occurring during the period from the Effective Date until the expiry of the Insurance or until the expiry or agreed termination of the Contract(s) or until the obligations under the Contract(s) are terminated by any action of the Insured or the Contract Party(ies), whichever shall first occur, in respect of the said interest of the Contract Party(ies) and in consideration of the Additional Premium it is confirmed that the Insurance afforded by the Policy is in full force and effect and it is further agreed that the following provisions are specifically endorsed to the Policy:1. Under the Hull and Aircraft Spares Insurances 1 . 1 In respect of any claim on E q u i p m e n t that becomes payable on the basis of a Total Loss, settlement (net of any re l evant P o l i c y D e d u c t i b l e) shall be made to, or to the order of the C o n t r a c t P a r t y ( i e s ). In respect of any other cl a i m , settlement (nett of any re l evant Policy Deductible) shall be made with such party(ies) as m ay be necessary to repair the E q u i p m e n t unless otherwise agreed after consultation between the Insure rs and the Insure d a n d , w h e re necessary under the terms of the C o n t r a c t ( s ), t h e Contract Party(ies). S u ch payments shall only be made provided they are in compliance with all applicable laws and re g u l a t i o n s . 1.2
I n s u re rs shall be entitled to the benefit of salvage in respect of any p ro p e rty for which a claims settlement has been made.
2. Under the Legal Liability Insurance 2 . 1 Subject to the provisions of this Endors e m e n t , the Insurance shall o p e rate in all respects as if a separate Policy had been issued c ove ring each party insured here u n d e r, but this provision shall not o p e rate to include any claim how s o ever arising in respect of loss or damage to the E q u i p m e n t i n s u red under the Hull or Spare s I n s u rance of the Insure d . Notwithstanding the fo re going the total
174
l i ability of Insure rs in respect of any and all Insureds shall not exceed the limits of liability stated in the Po l i c y. 2.2
The Insurance provided hereunder shall be pri m a ry and without right of contribution from any other insurance which may be ava i l able to the Contract Party(ies).
2.3
This Endorsement does not provide cove rage for the C o n t r a c t P a r t y ( i e s ) with respect to claims arising out of their legal liab i l i t y as manu fa c t u re r, re p a i re r, or servicing agent of the E q u i p m e n t.
3. Under ALL Insurances 3.1 The Contract Party(ies) are included as Additional Insured(s). 3.2
The cover affo rded to each Contract Party by the Policy in a c c o rdance with this Endorsement shall not be invalidated by any act or omission (including misre p resentation and non-discl o s u re ) of any other person or party which results in a bre a ch of any term , condition or wa rranty of the Policy PROVIDED T H AT the C o n t r a c t Party so protected has not caused, c o n t ributed to or know i n g ly condoned the said act or omission.
3.3
The provisions of this Endorsement apply to the C o n t r a c t P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e rs(s)/lessor(s) in the i d e n t i fied Contract(s) and not in any other capacity. K n ow l e d ge that any Contract Party m ay have or acquire or actions that it m ay take or fail to take in that other capacity (pursuant to any other contract or otherwise) shall not be considered as i nvalidating the cover affo rded by this Endors e m e n t .
3.4
T h e Contract Party(ies) shall have no responsibility for pre m i u m and Insure rs shall wa i ve any right of set-off or countercl a i m against the Contract Party(ies) except in respect of outstanding p remium in respect of the E q u i p m e n t.
175
3.5
Upon payment of any loss or claim to or on behalf of any Contract Party(ies), I n s u re rs shall to the extent and in respect of s u ch payment be thereupon subrogated to all legal and equitabl e rights of the Contract Party(ies) i n d e m n i fied here by (but not against any Contract Party) . I n s u re rs shall not exe rcise such rights without the consent of those indemnifi e d , s u ch consent not to be unre a s o n ably withheld. At the expense of Insure rs such Contract Party(ies) shall do all things re a s o n ably necessary to assist the Insure rs to exe rcise said ri g h t s .
3.6
Except in respect of any provision for Cancellation or Au t o m a t i c Te rmination specified in the Policy or any endorsement there o f, c over provided by this Endorsement may only be cancelled or m a t e ri a l ly altered in a manner adve rse to the Contract Party(ies) by the giving of not less than T h i rty (30) days notice in writing to the Appointed Bro k e r. Notice shall be deemed to commence f rom the date such notice is gi ven by the Insure rs .S u ch notice will N OT, h oweve r, be gi ven at normal ex p i ry date of the Policy or any e n d o rs e m e n t .
EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF THIS ENDORSEMENT: -
176
1.
THE CONTRACT PA RTY(IES) ARE COVERED BY THE POLICY SUBJECT TO ALL TERMS, CONDITIONS, LIMITAT I O N S , WARRANTIES, EXCLUSIONS AND CANCELLATION PROVISIONS T H E R E O F.
2.
THE POLICY SHALL NOT BE VARIED BY ANY PROVISIONS C O N TAINED IN THE CONTRACT(S) WHICH PURPORT TO S E RVE AS AN ENDORSEMENT OR AMENDMENT TO THE P O L I C Y.
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT 1.
E q u i p m e n t (Specify details of any airc ra f t , e n gines or spares to be c ove re d ) :
2.
Policy Deductible a p p l i c able to physical damage to the E q u i p m e n t ( i n s e rt all applicable Policy deductibl e s ) :
3.
(a) Contract Party(ies). AND (b), in addition, in respect of Legal Liability Insura n c e s :
4.
C o n t r a c t ( s ):
5.
E ffective date (being the date that the E q u i p m e n t a t t a ches to the Policy or a specific date there a f t e r ) :
6.
Additional Pre m i u m :
7.
Appointed Bro k e r :
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AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT (AVN 67B HULL WAR) It is noted that the Contract Party(ies) h ave an interest in respect of the E q u i p m e n t under the C o n t r a c t ( s ). A c c o rd i n g ly, with respect to losses occurring during the period from the E ffective Date until the ex p i ry of the Insurance or until the ex p i ry or agreed termination of the Co n t r a c t ( s ) or until the obligations under the C o n t r a c t ( s ) a re t e rminated by any action of the Insured or the Contract Party(ies), w h i ch ever shall fi rst occur, in respect of the said interest of the Contract Party(ies) and in consideration of the Additional Pre m i u m it is confi rmed that the Insurance affo rded by the Policy is in full fo rc e and effect and it is further agreed that the fo l l owing provisions are s p e c i fi c a l ly endorsed to the Po l i c y : 1.
In respect of any claim on Equipment that becomes payable on the basis of a Total Loss, settlement (net of any re l evant P o l i c y D e d u c t i b l e) shall be made to, or to the order of the C o n t r a c t P a r t y ( i e s ). In respect of any other cl a i m , settlement (net of any re l evant Policy Deductible) shall be made with such party(ies) as m ay be necessary to repair the Equipment unless otherwise agreed after consultation between the Insure rs and the Insure d a n d , w h e re necessary under the terms of the C o n t r a c t ( s ), t h e Contract Party(ies). S u ch payments shall only be made provided they are in compliance with all applicable laws and re g u l a t i o n s .
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2.
I n s u re rs shall be entitled to the benefit of salvage in respect of any p ro p e rty for which a claims settlement has been made.
3.
The Contract Party(ies) a re included as Additional Insure d ( s ) .
4.
The provisions of this Endorsement apply to the C o n t r a c t P a r t y ( i e s ) s o l e ly in their capacity as financier(s)/lessor(s) in the i d e n t i fied C o n t r a c t ( s ) and not in any other capacity. K n ow l e d ge that any Contract Party m ay have or acquire or actions that it m ay take or fail to take in that other capacity (pursuant to any
other contract or otherwise) shall not be considered as i nvalidating the cover affo rded by this Endors e m e n t . 5.
The cover affo rded to each Contract Party by the Policy in a c c o rdance with this Endorsement shall not be invalidated by any act or omission (including misre p resentation and non-discl o s u re ) of any other person or party which results in a bre a ch of any term , condition or wa rranty of the Policy PROVIDED T H AT the C o n t r a c t P a r t y so protected has not caused, c o n t ributed to or know i n g ly condoned the said act or omission.
6.
The Contract Party(ies) shall have no responsibility for pre m i u m and Insure rs shall wa i ve any right of set-off or countercl a i m against the Contract Party(ies), except in respect of outstanding p remium in respect of the E q u i p m e n t.
7.
Upon payment of any loss or claim to or on behalf of any Contract Party(ies), I n s u re rs shall to the extent and in respect of s u ch payment be thereupon subrogated to all legal and equitabl e rights of the Contract Party(ies) i n d e m n i fied here by (but not against any Contract Party) . I n s u re rs shall not exe rcise such rights without the consent of those indemnifi e d ,s u ch consent not to be unre a s o n ably withheld. At the expense of Insure rs , s u ch Contract Party(ies) shall do all things re a s o n ably necessary to assist the Insure rs to exe rcise said ri g h t s .
8.
Except in respect of any provision for Cancellation or Au t o m a t i c Te rmination specified in the Policy or any endorsement there o f, c over provided by this Endorsement may only be cancelled or m a t e ri a l ly altered in a manner adve rse to the Contract Party(ies) by the giving of Seven (7) days (or such lesser period as may be c u s t o m a ri ly ava i l able) notice in writing to the Appointed Bro k e r. Notice shall be deemed to commence from the date such notice is gi ven by the Insure rs .S u ch notice will NOT however be gi ven at n o rmal ex p i ration date of the Policy or any endors e m e n t .
179
EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF THIS ENDORSEMENT: -
180
1.
THE CONTRACT PA RTY(IES) ARE COVERED BY THE POLICY SUBJECT TO ALL TERMS, CONDITIONS, L I M I TATIONS, WARRANTIES, EXCLUSIONS AND C A N C E L L ATION PROVISIONS THEREOF.
2.
THE POLICY SHALL NOT BE VARIED BY ANY PROVISIONS CONTAINED IN THE CONTRACT(S) WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR AMENDMENT TO THE POLICY.
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT 1.
E q u i p m e n t (Specify details of any airc ra f t , e n gines or spares to be c ove re d ) :
2.
Policy Deductible a p p l i c able to physical damage to the E q u i p m e n t ( I n s e rt all applicable Policy deductibl e s ) :
3.
Contract Party(ies):
4.
Contract(s):
5.
E ffective Date (being the date that the E q u i p m e n t a t t a ches to the Policy or a specific date there a f t e r ) :
6.
Additional Pre m i u m :
7.
Appointed Bro k e r :
AVN 67B (Hull Wa r ) 28.9.94
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Aviation Hull War Wording (LSW 555B) The following wording is almost always used to cover war and ‘allied perils’.
AVIATION HULL “WAR AND ALLIED PERILS” POLICY SECTION ONE:- LOSS OF OR DAMAGE TO AIRCRAFT Subject to the term s , conditions and limitations set out below, t h i s Policy cove rs loss of or damage to the A i rc raft nominated in the S chedule against claims ex cluded from the Insure d ’s Hull “All Risks” Policy as caused by :
182
(a)
Wa r, i nva s i o n , acts of fo reign enemies, hostilities (whether war be d e cl a red or not), civil wa r, re b e l l i o n , revo l u t i o n , i n s u rre c t i o n , m a rtial law, m i l i t a ry or usurped power or attempts at usurpation of p owe r.
(b)
S t ri ke s , ri o t s , civil commotions or labour disturbances.
(c)
A ny act of one or more pers o n s , whether or not agents of a s ove reign powe r, for political or terro rist purposes and whether the loss or damage resulting there f rom is accidental or intentional.
(d)
A ny malicious act or act of sab o t age .
(e)
C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , a p p ro p ri a t i o n , re q u i s i t i o n , for the title or use by or under the o rder of any Gove rnment (whether civil militar y or de facto) or p u blic or local authori t y.
(f)
H i - j a cking or any unlawful seizure or wrongful exe rcise of contro l of the A i rc raft or crew in flight (including any attempt at such s e i z u re or control) made by any person or persons on board the A i rc raft acting without the consent of the Insure d .
F u rt h e rm o re this Policy cove rs claims ex cluded from the Hull Po l i c y f rom occurrences whilst the A i rc raft is outside the control of the I n s u red by reason of any of the ab ove peri l s . The A i rc raft shall be deemed to have been re s t o red to the control of the Insured on the safe re t u rn of the A i rc raft to the Insured at an airfield not ex cluded by the ge o graphical limits of this Po l i c y, and entire ly suitable for the opera t i o n of the A i rc raft (such safe re t u rn shall re q u i re that the A i rc raft be parke d with engines shut down and under no dure s s ) . SECTION TWO:- EXTORTION AND HI-JACK EXPENSES 1. This Policy will also indemnify the Insured subject to the term s , c o n d i t i o n s , ex clusions and limitations set out below, and up to the limit stated in the Sch e d u l e , for 90% of any payment pro p e r ly made in respect of:
2.
(a)
t h reats against any A i rc raft described in the Schedule or its p a s s e n ge rs or crew made during the currency of this Po l i c y.
(b)
ex t ra expenses necessari ly incurred fo l l owing confi s c a t i o n , e t c e t e ra (as Section One clause (e)) or hi-jack i n g , e t c e t e ra (as Section One clause (f)) of any A i rc raft described in the S ch e d u l e .
No cover will be provided under this Section of the Policy in any t e rri t o ry where such insurance is not law f u l , and the Insured is at all times re s p o n s i ble for ensuring that no arra n gements of any kind a re made which are not permitted by the proper authori t i e s .
183
SECTION THREE:- GENERAL EXCLUSIONS This insurance ex cludes loss, d a m age or ex p e n s e 1.
2.
184
caused by one or any combinations of any of the fo l l ow i n g : (a)
War (whether there be a decl a ration of war or not) betwe e n a ny of the fo l l owing States: United Kingdom, United States of A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n , the Pe o p l e ’s R e p u blic of China; n eve rt h e l e s s , if any A i rc raft is in the air when an outbreak of such war occurs , this ex clusion shall not a p p ly in respect of such A i rc raft until the said A i rc raft has completed its fi rst landing there a f t e r ;
(b)
C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , a p p ro p ri a t i o n , requisition for title or use by or under the a u t h o rity of the Gove rnment(s) named in the Sch e d u l e , or any p u blic or local authority under its juri s d i c t i o n ;
(c)
A ny debt, fa i l u re to provide bond or security or any other financial cause under court order or otherwise;
(d)
The repossession or attempted repossession of the A i rc raft by a ny title holder, or arising out of any contractual agre e m e n t to which any Insured protected under this Policy may be p a rt y ;
(e)
D e l ay, loss of use, or except as specifi c a l ly provided in Section Two any other consequential loss: whether fo l l ow i n g upon loss of or damage to the A i rc raft or otherwise.
d i re c t ly or indire c t ly arising out of any detonation of any we a p o n of war employing atomic or nu clear fission and/or fusion or other l i ke reaction or ra d i o a c t i ve fo rce or matter, whether hostile or otherwise;
SECTION FOUR:- GENERAL CONDITIONS 1. This Policy is subject to the same wa rra n t i e s , t e rms and conditions ( except as re g a rds the pre m i u m , the obligations to investigate and d e fe n d , the re n ewal agreement (if any ) , the amount of deductibl e or self insurance provision where applicable AND EXCEPT A S OT H E RWISE PROVIDED HEREIN) as are contained in or may be added to the Insure d ’s Hull “All Risks” Po l i c y. 2.
Should there be any Material Change in the nature or area of the I n s u re d ’s opera t i o n s , the Insured shall gi ve immediate notice of s u ch Change to the Insure rs ; no claim arising subsequent to a M a t e rial Change over which the Insured had control shall be re c ove rable hereunder unless such ch a n ge has been accepted by the Insure rs . “ M a t e rial Change ” shall be understood to mean any ch a n ge in the o p e ration of the Insured which might re a s o n ably be re g a rded by the Insure rs as increasing their risk in degree or fre q u e n c y, o r reducing possibilities of re c ove ry or subro g a t i o n .
3.
The due observance and fulfilment of the term s , p rov i s i o n s , conditions and endorsements of this Policy shall be conditions p recedent to any liability of the Insure rs to make any pay m e n t under this Po l i c y : in particular the Insured should use all re a s o n able effo rts to ensure that he complies and continues to c o m p ly with the laws (local or otherwise) of any country within whose jurisdiction the A i rc raft may be, and to obtain all perm i t s n e c e s s a ry for the lawful operation of the A i rc ra f t .
4.
Subject always to the provisions of Section Fi ve , and the Sch e d u l e , I n s u re rs hereon agree to fo l l ow the Hull “All Risks” Policy in respect of Bre a ch of Wa rranty Cove r, Hold Harmless A gre e m e n t s and Wa i ve rs of Subro g a t i o n .
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SECTION FIVE:- CANCELLATION, REVISION AND AUTOMAT I C T E R M I N AT I O N Amendment of 1 . ( a ) I n s u re rs may gi ve notice effe c t i ve on Te rms or the ex p i ry of 7 days from midnight Cancellation G. M . T. on the day on which notice is i s s u e d , to rev i ew the rate of premium and/or the ge o graphical limits. In the event of the rev i ew of the rate of p remium and/or ge o graphical limits not being accepted by the Insured then at the ex p i ry of the said 7 day s , this Po l i c y shall become cancelled at that date.
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Automatic Review of Te rms or Cancellation
(b)
Notwithstanding 1.(a) ab ove , this Policy is subject to automatic rev i ew by I n s u re rs of the rate of premium and/or conditions and/or ge o graphical limits e ffe c t i ve on the ex p i r y of 7 days from the time of any hostile detonation of a ny weapon of war employing atomic or nu clear fission and/or fusion or other l i ke reaction or ra d i o a c t i ve fo rce or matter where s o ever or whensoever such detonation may occur and whether or not the insured A i rc raft may be dire c t ly a ffe c t e d . In the event of the rev i ew of the rate of premium and/or conditions and/or ge o graphical limits not being accepted by the Insured then at the ex p i r y of the said 7 day s , this Po l i c y shall become cancelled at that date.
Cancellation by Notice
(c)
This insurance may be cancelled by the I n s u re rs or the Insured giving notice not less than 7 days prior to the end of e a ch period of 3 months from inception.
Au t o m a t i c Te rm i n a t i o n
2.
Whether or not such notice of cancellation has been gi ven this i n s u rance shall T E R M I NATE AU TO M AT I C A L LY Upon the outbreak of war (whether there be a decl a ration of war or not) between a ny of the fo l l owing States, n a m e ly, The United Kingdom, United States of A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n , the Pe o p l e ’s Republic of China. P ROVIDED T H AT if the A i rc raft is in the air when such outbreak of war occurs then this insura n c e , subject to its terms and conditions and provided not otherwise cancelled, t e rminated or suspended will be continued in respect of such A i rc raft until the said A i rc raft has completed its fi rst landing there a f t e r.
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THE SCHEDULE Policy Number: I n s u re d : A d d ress of Insure d : Additional Insure d ( s ) : Ap p roved Lienholder(s) for Bre a ch Of Wa rranty pro t e c t i o n : A i rc raft here by insure d : M a nu fa c t u re r Model R e gi s t ra t i o n A greed Va l u e G e o graphical Limitations: E x cluding Confi s c a t i o n , e t c e t e ra by Gove rnment(s) of: Pe riod of Po l i c y : F ro m : To : Both days incl u s i ve E x t o r tion and Hi-Ja ck Expenses Limit of Po l i c y : 90% of any one loss and in all ( WARRANTED REMAINING 10% UNINSURED). P re m i u m Immediate notice of ch a n ges in risk or of circumstances like ly to gi ve rise to a loss hereunder to be communicated to: Dated in LONDON the LSW 555
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Appendix E Specimen Policy Wordings for Specialist Bank/Lessor Insurances LSW610A CONTINGENT AIRCRAFT HULL (INCLUDING SPARES AND EQUIPMENT) AND CONTINGENT LIABILITY INSURANCE POLICY Policy No: POLICY SCHEDULE Item 1. Name and Address of the Insure d : Item 2. Policy Period: Fro m : To : Item 3. Limits of Insurers’ Liability: ( a ) Section One – Hull and Spares and Equipment Cove rage 1.
Hull
M a x i mum “stipulated loss va l u e ” . . . . . . . . . . . . . . . a ny one airc ra f t
2.
S p a res and Equipment
M a x i mum any one sending . . . . . . . . . . . . . . . . M a x i mum any one location ................
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(b)
Section Two – Liability Cove rage Combined single limit (“bodily injury ” / “ p ro p e rty damage ” ) . . . . . . . . . . . . . . . . . . . . . . . . a ny one “ o c c u rre n c e ” ,b u t 1.
the limit set fo rth ab ove shall apply separa t e ly in respect of “ o c c u rre n c e s ” happening whilst the Insured has a fi n a n c i a l i n t e rest in the airc ra f t ;
2.
the limit set fo rth ab ove shall apply in the ag gregate in re s p e c t of all “ o c c u rre n c e s ” in any one annual period of insura n c e happening after the Insure d ’s financial interest in the airc raft or s p a res and equipment has ceased.
Item 4.
Geographical Limits:
Item 5. P re m i u m : The premium to be paid to the Insure rs in respect of this Policy is as fo l l ow s : (a)
For Section One – Hull and Spares and Equipment Cove rage
(b)
For Section Two – Liability Cove rage
Item 6. A d d ress for Notices: All notices pursuant to the terms and conditions of this Policy shall be gi ven to: Dated in London:
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SCHEDULE OF AIRCRAFT Ty p e
Registration
Stipulated Loss Value at inception here o f
Operator
SCHEDULE OF SPARES AND EQUIPMENT Value of Spares and Equipment Package at inception here o f
Operator
SECTION ONE – HULL AND SPARES AND EQUIPMENT COVERAGE 1.
Hull Coverage This Section One cove rs “ a i rc ra f t ” in which the Insured has a financial interest (as per the Schedule of A i rc raft herein) against all risks of loss or damage how s o ever occasioned, except as h e reinafter ex cl u d e d , sustained during the Policy Pe ri o d .
2. Exclusions This Section One does not cove r : (a)
M e chanical bre a k d own (which in this ex clusion shall mean m e chanical bre a k d ow n , we a r, t e a r, d e t e ri o ra t i o n , d e fects and fa i l u re s , but shall not mean items lost ove r b o a rd ) , h oweve r the Insure rs will pay for any resultant loss of or damage to the “ a i rc ra f t ”f rom mechanical bre a k d ow n . For the purposes of this ex clusion each propulsion unit shall be re g a rded as a complete unit, and shall consist of the engine and the a n c i l l a ries necessar y for its operation as a propulsion unit, and mechanical bre a k d own and the consequences there o f within such a propulsion unit are not cove re d .
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3.
(b)
Loss of use, d e p re c i a t i o n , or any other loss which may re s u l t f rom loss or damage which is cove red by this Po l i c y.
(c)
Loss or damage as set out in the WA R ,H I - JACKING A N D OTHER PERILS EXCLUSION CLAUSE (AV I ATION) attached to this Po l i c y.
(d)
Loss or damage as set out in the NUCLEAR RISKS EXCLUSION C L AUSE attached to this Po l i c y.
(e)
Loss or damage which is re c ove rable as a claim from the “ p rincipal policy”.
(f)
Loss or damage which is not re c ove rable (in whole or in part ) as a claim from the “ p rincipal policy” by reason of the i n s o l vency of an insurer or insure rs .
Stipulated Loss Value – Total Loss ( a ) In the event of a claim adjustable on the basis of a total loss the Insure rs will pay the “stipulated loss va l u e ” of the “ a i rc ra f t ” at the date of loss, less the value of any maintenance fund which has accrued to the “ a i rc ra f t ” and which is ava i l able to the Insure d . In the event that such pay m e n t re p resents the entire interest in the “ a i rc ra f t ” the Insure rs m ay elect to take the “ a i rc ra f t ”( t o gether with all documents of re c o rd re gi s t ration and title thereto) as salvage .W h e re s u ch payment re p resents a partial interest then Insure rs shall be entitled to negotiate their salvage rights with any other p a rty at intere s t . (b)
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A total loss may be decl a red under this Po l i c y, at the option of the Insure d , in the event that the cost of repair of the damage t o gether with the cost of salvage and/or tra n s p o rt from the place of the accident to the place of repair and re t u rn to s e rvice be estimated at 75% or more of the agreed value on the “ p rincipal policy”.
4.
Cost of Repair – Partial Loss With respect to partial loss the Insure rs will pay for the “ i n s u re d p ro p o rt i o n ” of re p a i rs less any applicable deductible as set fo rth in clause 5. The cost of re p a i rs to the “ a i rc ra f t ” shall include the cost of t ra n s p o rtation of pers o n n e l ,m a t e ri a l s , tools and equipment re q u i re d to effect the re p a i rs to and from the place where the “ a i rc ra f t ” is to be re p a i red and/or the cost of tra n s p o rting the “ a i rc ra f t ” or damage d p a rts to and/or from the place where the re p a i rs are to be carri e d o u t . Tra n s p o rtation shall be by the most practical means, be it by s u r face or by air. I n s u re rs will in addition pay (a)
for necessary test flights and the cost of obtaining reinstatement of the cert i ficate of airwo rt h i n e s s ;
(b)
for the re t u rn of the “ a i rc ra f t ” to its home airport or the n e a rest airport to the place where the loss occurred suitabl e for the operation of the “ a i rc ra f t ” , w h i ch ever is the most p ra c t i c abl e .
In no event shall the amount due with respect of any loss cove re d by this clause 4. exceed the “stipulated loss va l u e ” of the “ a i rc ra f t ” less the amount of the applicable deductibl e . 5.
Deductibles The deductible to be borne by the Insured in respect of each loss w h i ch becomes payable under clause 4. of this Section One is:(a)
the “ i n s u red pro p o rt i o n ” of the maximum deductibl e p e rmitted under the “ p rincipal policy” p u rsuant to the p rovisions of the “lease agre e m e n t ” , o r
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(b)
the “ i n s u red pro p o rt i o n ” of the fo l l owing amounts, w h i ch eve r is the gre a t e r.
A i rcraft Ty p e
Deductible Amount
N eve rtheless in the event of an incident arising hereon involving the application of more than one deductible only one deductible shall apply being the highest deductible applicable to the incident. This deductibl e shall be applied as an ag gregate deductible for all losses arising out of that incident. 6. No Abandonment In the event of loss or damage the Insured may not abandon the d a m aged “ a i rc ra f t ” to the Insure rs . 7.
Definitions 1. “A i rc ra f t ”i n cludes the propulsion system and equipment u s u a l ly installed in or on the airc ra f t , (a)
while installed in or on the airc ra f t ;
(b)
while tempora ri ly re m oved from the airc raft prior to being re - i n s t a l l e d ;
(c)
while re m oved from the airc raft for replacement until such time as installation of the replacement item has commenced at which time the replacement item shall be c o n s i d e red a part of the airc ra f t ;
also tools and equipment in the airc raft which have been s p e c i a l ly designed for the airc raft and which are ord i n a ri ly c a rried there i n . 2.
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“ I n s u red pro p o rt i o n ” shall mean the amount of the Insure d ’s i n t e rest at the time of any loss, and accord i n g ly,
(a)
w h e re the Insure d ’s interest in the “ a i rc ra f t ” is an entire i n t e rest then the “ i n s u red pro p o rt i o n ” h e reon shall be 100%,
(b)
w h e re the Insure d ’s interest in the “ a i rc ra f t ” is a part i a l i n t e rest then the “ i n s u red pro p o rt i o n ” h e reon shall be s u ch pro p o rtion as the Insure d ’s interest in the “ a i rc ra f t ” b e a rs to the total interest in the “ a i rc ra f t ” .
In the event that the Insured is obl i ged to incur costs or m a ke supplementary payments re l a t i ve to the interests not i n s u red here by in order to ach i eve repair of the “ a i rc ra f t ” then this policy will indemnify the Insured for such amounts subject to the Insured pre s e rving and pursuing any ri g h t s and/or liens against such other interests for the benefit of I n s u re rs to the extent of any such costs or payment made. 3.
“Stipulated loss va l u e ” shall mean the quantum of the I n s u re d ’s interest in the “ a i rc ra f t ” as set fo rth in the “ l e a s e agre e m e n t ” with the Opera t o r, and shall ex clude any loadings w h i ch may be imposed by the terms of the “lease agre e m e n t ” for the purposes of establishing the agreed value to be i n s u red by the Opera t o r.
8.
Disappearance If any “ a i rc ra f t ” is missing and not re p o rted for a period of thirt y (30) days subsequent to take off then in the absence of any evidence that Exclusion 2.(c) of this Section One applies the “ a i rc ra f t ” shall be deemed to have been lost due to a peril cove re d by this Section One.
9.
Supplementary Payments To the extent that re c ove ry is not ava i l able from the “ p ri n c i p a l p o l i c y ” this Section One also cove rs the “ i n s u red pro p o rt i o n ” o f : (a)
the cost of dismantling the “ a i rc ra f t ” in the event of the “ a i rc ra f t ”t h rough fo rce majeure or error in judgement hav i n g
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alighted in any place from which it is unable to take off ag a i n t o gether with the cost of tra n s p o rt from the place of alighting to the nearest suitable aero d rome and the cost of re a s s e m bling there even if no damage has been sustained, ( b ) s u e , l abour and travel costs and expenses and salvage ch a rge d and expenses incurred on behalf of the Insured in or ab o u t the defe n c e ,s a fe t y, p re s e rvation and re c ove ry of the “ a i rc ra f t ” and also such ex t ra o rd i n a ry sacri fice and ex p e n d i t u re which is vo l u n t a ri ly and re a s o n ably made or incurred in time of p e ril for the purpose of pre s e rving the “ a i rc ra f t ” . The Insure rs will indemnify the Insured for costs, ch a rges and expenses incurred under this clause 9. in addition to any other amounts which may be payable under this Section One. 1 0 . Additions and Deletions ( a ) The insurance affo rded by this Section One is automatically extended to include at pro rata additional premium furt h e r “ a i rc ra f t ” as described in clause 1. of this Section One which a re added during the Policy Pe riod provided that the “stipulated loss va l u e ” of such airc raft does not ex c e e d . . . . . . . . . . . . . . . . . . . . . . . . . . . . a ny one “ a i rc ra f t ” . (b)
“A i rc ra f t ” in which the Insure d ’s financial interest ceases shall be deleted from this Policy and the Insured shall be entitled to a pro rata re t u rn of pre m i u m .
(c)
Notice of the addition or deletion of any “ a i rc ra f t ” under the p rovisions of paragraphs 10.(a) and 10.(b) re s p e c t i ve ly shall be gi ven to Insure rs or their re p re s e n t a t i ves as soon as p ra c t i c able and shall be taken into account in the fi n a l adjustment of the premium at the ex p i ry of the Policy Pe ri o d . H owever no account shall be taken for premium adjustment purposes of the deletion of any “ a i rc ra f t ” the subject of a cl a i m under this Section One settled on the basis of a total loss.
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1 1 . S p a res and Equipment Coverage This Section One also cove rs “ s p a re s ” and “ e q u i p m e n t ” (as per the S chedule of Spares and Equipment herein) being pro p e rty in w h i ch the Insured has a financial interest against all risks of loss or damage how s o ever occasioned, except as hereinafter ex cl u d e d , sustained during the Policy Pe ri o d . (a)
Additional Exclusions applicable to Spares and Equipment C ove rage
This clause 11. does not cove r : 1.
Loss of or damage to pro p e rty occurring at any time after the “commencement of the operation of fitting it t o ” or placing it on board an airc raft to fo rm part of an a i rc ra f t .
2.
Loss of or damage to pro p e rty which has been “ d e t a ch e d f ro m ” an airc raft and which is intended to be re fitted to the airc raft and not to be replaced by other pro p e rt y.
3.
Loss of or damage to pro p e rty which may be sustained whilst the same is under any process and dire c t ly resulting there f ro m .
4.
P ro p e rty carried in an airc raft as a spare parts kit.
5.
P ro p e rty fitted to or fo rming part of an airc raft for the o p e ration of the airc ra f t .
6.
M y s t e rious disappearance or unexplained loss or s h o rt age disclosed upon taking inve n t o r y.
( b ) Limit of liability applicable to Spares and Equipment C ove rage
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The “ i n s u red pro p o rt i o n ” of the cost of repair or the cost of re p l a c e m e n t , w h i ch ever shall be the least amount, or any p re d e t e rmined value agreed by Insure rs in respect of any one item of pro p e rty subject to the limit of the Insure rs ’l i ab i l i t y as set fo rth in the Policy Sch e d u l e . (c)
D e d u c t i ble applicable to Spares and Equipment Cove rage The deductible to be borne by the Insured in respect of each loss shall be the “ i n s u red pro p o rt i o n ”o f ................................., but
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1.
claims for loss or damage caused by fi re , w i n d ,t o rn a d o , c y clone and/or f lood shall be paid in full;
2.
in the event of a claim for damage arising in respect of an airc raft engine whilst undergoing test running such claim shall be subject to the “ i n s u red pro p o rt i o n ” of the a p p l i c able deductible amount for the type of airc raft in w h i ch such engine is norm a l ly installed.
(d)
D e finitions applicable to Spares and Equipment Cove rage
1.
“ S p a re s ” shall mean spare engi n e s , s p a re part s , components and equipment destined to be fitted to or h aving been detached from airc ra f t .
2.
“ E q u i p m e n t ” shall mean ground support equipment ( i n cluding mobile equipment and unlicensed ve h i cles) fo r use in connection with airc ra f t .
3.
“commencement of the operation of fitting it to” s h a l l mean from the moment the part ceases to be in contact with the ground or the tro l l ey/stand on which it is located when the process of fitting it to the airc raft is commenced.
4.
“ d e t a ched fro m ” shall mean from the moment such part is in contact with the ground or the tro l l ey/stand on w h i ch it is to be located when the process of re m ov i n g it from the airc raft is completed and it is totally disconnected from the airc ra f t , and until the moment the replacement part is deemed to fo rm part of the a i rc raft as defined in paragraph 11.(d) 3. ab ove .
SECTION TWO LIABILITY COVERAGE 1.
Bodily injury and Property Damage Liability Coverage Subject always to the limits of Insure rs ’ l i ability as set fo rth in the Policy Schedule the Insure rs will pay on behalf of the “ i n s u re d ” a l l sums which the “ i n s u re d ” shall become legally obligated to pay as d a m ages arising from “ b o d i ly injury ” and/or “ p ro p e rty damage ” caused by an “ o c c u rre n c e ” i nvolving airc ra f t , s p a res or equipment in which the Insured has/or has had a financial intere s t .
2.
Exclusions This Section Two does not cove r : (a)
L i ability dire c t ly assumed by the “ i n s u re d ” under any contra c t or agreement (other than as provided for under clause 4. o f the General Policy Conditions) unless such liability wo u l d h ave attached to the “ i n s u re d ” even in the absence of such c o n t ract or agre e m e n t .
(b)
L i ability arising under any employe rs ’ l i ab i l i t y, wo rk m e n s ’ compensation or other similar enactment.
(c)
L i ability for “ p ro p e rty damage ” to pro p e rty owned by, re n t e d t o , leased to, loaned to or occupied by the “ i n s u re d ” .
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(d)
3.
1.
illegal or criminal activities or dishonest acts alleged or otherwise committed by or at the direction of or with the know l e d ge and consent of the management or d i re c t o rs and offi c e rs of the “ i n s u re d ” ;
2.
a ny fi d u c i a ry re s p o n s i b i l i t y.
(e)
Liability for claims as set out in the NOISE AND POLLUTION AND OTHER PERILS EXCLUSION CLAUSE attached to this Policy.
(f)
L i ability for claims as set out in the WA R , H I - JACKING A N D OTHER PERILS EXCLUSION CLAUSE (AV I ATION) attached to this Po l i c y.
(g)
L i ability for claims as set out in the NUCLEAR RISKS EXCLUSION CLAUSE attached to this Po l i c y.
(h)
L i ability for which indemnity can be obtained as a claim on the “ p rincipal policy”.
Defence, Settlement and Supplementary Payments In the event that the “ p rincipal policy” does not make a timely response to a claim with respect to the insurance affo rded under this Section Two then Insure rs shall have the right to make such e n q u i ries as may be appro p riate as re g a rds the status of n e gotiations on the “ p rincipal policy”, and thereafter shall (if they deem it in the “ i n s u re d ’s ” i n t e re s t ) (a)
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L i ability arising fro m
d e fend in the name of and on behalf of the “ i n s u re d ”a ny suit or other proceedings against the “ i n s u re d ” , even if any of the allegations thereof are gro u n d l e s s , false or fra u d u l e n t , but the I n s u re rs shall have the right to make such inve s t i g a t i o n , n e gotiation and settlement of any claim or suit as they deem ex p e d i e n t ;
(b)
p ay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of the Insure rs ’ l i ability and all premiums on appeal bonds re q u i red in any s u ch defended suit, but without any obligation to apply for or f u rnish any such bonds;
( c ) p ay all costs taxed against the “ i n s u re d ” in any such suit or p roceedings and all interest accruing after entry of judge m e n t until the Insure rs have paid, t e n d e red or deposited in court , s u ch part of such judgement as does not exceed the a p p l i c able limit of the Insure rs ’ l i ab i l i t y ; p rovided that in the event of the amount of such judgement exceeding the a p p l i c able limit of the Insure rs ’ l i ab i l i t y, the Insure rs shall o n ly be liable to pay for that pro p o rtion of the said costs and i n t e rest which the applicable limit of the Insure rs ’ l i ab i l i t y b e a rs to the amount of such judge m e n t ; (d)
p ay all expenses incurred by the Insure rs for inve s t i g a t i o n , adjustment and defe n c e , and re i m b u rse the “ i n s u re d ” for all re a s o n able ex p e n s e s , other than loss of earn i n g s , i n c u rred at the Insure rs ’ re q u e s t ;
(e)
p ay all costs and expenses necessari ly incurred by the “ i n s u re d ”a rising out of any public enquiry or similar p roceedings called to investigate an “ o c c u rre n c e ” to which the insurance applies.
The amounts incurred under this clause 3. ( except settlements of claims and suits) are payable by the Insure rs in addition to the limits of liability applicable to this Section Two . 4.
Definitions ( a ) The term “ i n s u re d ”m e a n s 1.
the Insured as named in Item 1. of the Policy Sch e d u l e ;
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2.
a ny board member, d i re c t o r, o fficer or employee whilst acting within the scope of his duties on behalf of said I n s u re d ;
3.
if so requested by the Insured named in 1. ab ove at the time of any claim cove red by Section Two of this Po l i c y a ny agent dire c t ly or indire c t ly acting on behalf of the “ i n s u re d ” within the authority delegated to them by the “ i n s u re d ” ;
4.
a ny person or organisation who is re q u i red to be i n cluded as an Insured under the terms of a contract or agreement but only to the extent and for the purposes s p e c i fied in such agreement and provided such contra c t or agreement has been prev i o u s ly agreed by the Insure rs or by insure rs under the policy of which this Policy is a re n ewa l .
In no event shall the term Insured incl u d e
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(i)
a ny opera t o r, lessee or sub lessee of the airc ra f t ;
(ii)
a ny manu fa c t u re r, m a i n t e n a n c e , repair or ove r h a u l o rg a n i s a t i o n , or supplier of airc raft equipment and s p a re s .
(b)
The term “ b o d i ly injury ” means bodily injury, mental anguish, f ri g h t , s h o ck , s i ck n e s s , disease or disab i l i t y, i n cluding death at a ny time resulting there f ro m .
(c)
The term “ p ro p e rty damage ” means damage to or loss or d e s t ruction of tangi ble pro p e rt y, or delay in the perfo rm a n c e of a contract of carri age caused by an airc raft accident.
(d)
The term “ o c c u rre n c e ” means an accident or a continuous or repeated ex p o s u re to substantially the same ge n e ral harm f u l
conditions which results in “ b o d i ly injury ” or “ p ro p e rt y d a m age ”d u ring the Policy Pe riod which is neither ex p e c t e d nor intended from the standpoint of the Insure d . All “ b o d i ly i n j u ry ” or “ p ro p e rty damage ”a rising out of one accident or s u b s t a n t i a l ly the same ge n e ral conditions shall be deemed to a rise out of one “ o c c u rre n c e ” .
APPLICABLE TO SECTIONS ONE AND TWO OF THIS POLICY GENERAL POLICY DEFINITIONS 1.
“ P rincipal Po l i c y ” shall mean the policy or policies re q u i red to be e ffected by the Operator pursuant to the provisions of the “ l e a s e agre e m e n t ”( i n cl u s i ve of policies such as hull deductibl e p rotection policies as may be necessary to meet the lease re q u i re m e n t s ) .
2.
“Lease A gre e m e n t ” shall mean the written agreement concl u d e d b e t ween the Insured (or the Insure d ’s authorised agent) and the O p e rator where by the operator obtains rights of use and possession in the “ a i rc ra f t ” , and/or “ s p a re s ” and/or “ e q u i p m e n t ” .
SPECIAL POLICY CONDITIONS 1.
It is a condition of this Policy that any “ a i rc ra f t ” , and/or “ s p a re s ” and/or “ e q u i p m e n t ” to which Section One of this Policy applies, and any airc raft and/or spares and/or equipment (other than a i rc raft and/or spares and/or equipment in which the Insure rd ’s financial interest has ceased) to which Section Two of this Po l i c y a p p l i e s , shall be subject to a “lease agre e m e n t ” the terms of which re q u i re the “ p rincipal policy” to be endorsed with the A i r l i n e Finance/Lease Contract endorsements designated AVN 67A and AVN 67A (Hull Wa r ) , as appro p ri a t e , or with comparabl e e n d o rsement language intended to ach i eve a similar purpose, o r
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with endorsement language notified to and approved by Insure rs h e re o n . 2.
The Insured shall not know i n g ly disclose the existence of this i n s u rance to the Opera t o r, and shall in all respects act as though u n i n s u red by this Policy when negotiating or evaluating a p ro s p e c t i ve lease agre e m e n t .
GENERAL POLICY CONDITIONS 1.
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Claims – Insured’s Duties ( a ) Upon the Insured becoming awa re of the happening of an event like ly to gi ve rise to a claim on the “ p rincipal policy” notice containing part i c u l a rs sufficient to identify the Insure d and also re a s o n ably obtainable info rmation with respect of the t i m e , place and circumstances thereof shall be gi ven by or fo r the Insured to the Insure rs at the address as set fo rth in the S chedule as soon as re a s o n ably possibl e .T h e reafter furt h e r notice of developments shall not be re q u i red unless the I n s u red becomes awa re or suspects that the “ p rincipal policy” m ay not respond to the cl a i m s , or may delay in the settlement of a claim to which Section One of this Policy applies. (b)
If a claim is made or a suit is brought against the Insure d , then in addition to compliance with the re q u i rements of the “ p rincipal policy”, the Insured shall immediately copy to the I n s u re rs eve r y demand, n o t i c e , summons or other pro c e s s re c e i ved by them or their re p re s e n t a t i ve s .
(c)
Fo l l owing the assumption of claims responsibility by Insure rs , the Insured shall co-operate with the Insure rs and upon request will assist in making settlements and in the conduct of suits; and the Insured shall attend hearings and trials and assist in securing and giving evidence and obtaining the attendance of witnesses.
(d)
2.
The Insured shall render such further info rmation and assistance as the Insure rs may re a s o n ably re q u i re and shall not act in any way to the detriment or prejudice of the i n t e rest of the Insure rs . No admission, o ffe r, p romise or p ayment shall be made by the Insured without the wri t t e n consent of the Insure rs .
Assignment This Policy shall not be assigned in whole or in part except with the consent of the Insurers ve ri fied by endorsement hereon.
3.
S u b ro g a t i o n In the event of any payment under this Po l i c y, the Insure rs may exe rcise their rights of re c ove ry against any re s p o n s i ble part y, a n d will advise the “ i n s u re d ” of their intention so to do. H oweve r, should the “ i n s u re d ” request the Insure rs not to pursue a re c ove ry then such request will not be unre a s o n ably denied.
4.
Contractual Agre e m e n t s I n s o far as provision may be made under va rious contracts and agreements entered into by the “ i n s u re d ” re l a t i ve to the fi n a n c i n g of the “ a i rc ra f t ” re q u i ring hold harmless agre e m e n t s ; wa i ve rs of s u b ro g a t i o n ; b re a ch of wa rranty prov i s i o n s ; and loss payabl e clauses it is here by understood and agreed that such re q u i re m e n t s a re automatically cove red here u n d e r, p rovided alway s : (a)
that the other parties to the said contracts and agre e m e n t s h ave no invo l vement in the day to day operation of the “ a i rc ra f t ” ,
(b)
that eve ry endeavour is made to ach i eve the re q u i rements of the said contracts and agreements on the “ p rincipal policy” via appro p riate provisions in the “lease agre e m e n t ” .
It being understood and agreed that noting contained in this condition shall extend the cove rage of this Policy to risks not otherwise cove red here u n d e r.
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206
5.
Non-Contribution It is specifi c a l ly understood and agreed that this Policy does not c over any loss, d a m age or liability which is re c ove rable as a cl a i m on the “ p rincipal policy”. F u rt h e rm o re , if at the time of any “ b o d i ly i n j u ry ” , or “ p ro p e rty damage ” t h e re is or but for the existence of this Policy would be any other policy of indemnity or insurance in favour of the “ i n s u re d ” a p p l i c able to such cl a i m , the Insure rs shall not be liable under this Policy to indemnify the “ i n s u re d ”i n respect of such claim except for any excess beyond the amount w h i ch would be payable under such policy of indemnity or i n s u rance had this Policy not been effe c t e d .
6.
Limitation of Liability E a ch of the Insureds included for cover under Section Two of this Policy will be considered as a separate person or org a n i s a t i o n , i t being the intention for this Policy to protect each such person or o rganisation in the same manner as though a separate policy had been issued to each , p rovided always that nothing contained in this Condition 6. shall operate to increase the limits of liab i l i t y a p p l i c able to Section Two of this Po l i c y. This Condition 6. shall not, h oweve r, o p e rate to enable claims in respect of loss of or damage to A i rc raft insured under Section One of this Po l i c y, to be re c ove red under Section Two of this Po l i c y.
7.
Jurisdiction This Policy shall be construed and gove rned by the laws of . . . . . . . . . . . . . . . . . . . . . . . . . . . and any dispute or diffe rence between the I n s u red and the Insure rs shall be submitted to arbitration in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in accordance with the Statutor y provision fo r the time being in fo rc e .
REPOSSESSION OF LEASED AIRCRAFT INSURING CONDITIONS – LSW147 INSURING CLAUSE W h e reas the Insured has entere d into a L ease A greement dated . . . . . . . . . . . . . . . . . 19 ........ to supply the Les see with the Insu re d Equipment. N ow this Policy is to pay the Insured the A greed Value in the event of the Insured Equipment being lost as a consequence of the occurre n c e d u ring the period of this Policy of an Insured Pe ri l , subject to the D e fi n i t i o n s , E x cl u s i o n s , Conditions and Wa rranties below. DEFINITIONS 1. INSURED PERIL Means an action taken by, or refusal or fa i l u re by, the Fo re i g n G ove rn m e n t , b e i n g : a)
C o n fi s c a t i o n ,s e i z u re ,a p p ro p ri a t i o n , expropriation,nationalisation, restraint, detention or requisition for title or use of the Insured Equipment by the Foreign Government.
or
b)
Refusal or fa i l u re of the Fo reign Gove rnment to allow the I n s u red to exe rcise its rights to repossess the Insured Equipment in accordance with the terms and conditions of the Lease A gre e m e n t .
or
c)
Refusal or fa i l u re of the Fo reign Gove rnment to allow the I n s u red to re m ove the Insured Equipment from the Fo reign C o u n t ry fo l l owing the Insure d ’s exe rcise of its rights to repossess the Insured Equipment in accordance with the terms and conditions of the Lease A greement (or its mort g age over the Insured Equipment).
207
or
d)
Refusal or fa i l u re of the Fo reign Gove rnment to allow the Insured Equipment to be dere gi s t e red from the aviation re gister of the Fo reign Country fo l l owing the I n s u re d ’s exe rcise of its rights to repossess the Insured Equipment in accordance with the terms and conditions of the Lease A gre e m e n t .
or
e)
Refusal or fa i l u re of the Fo reign Gove rn m e n t , fo l l owing a compulsory sale or other compulsory disposal or dive s t i t u re of the Equipment in the Fo reign C o u n t ry, to allow the Insured to obtain the proceeds of sale, disposal or dive s t i t u re in United States dollars or another currency which is fre e ly conve rt i ble into US dollars in the international ex ch a n ge marke t s , fo l l owing Pe rils as per 1. a ) , b) and c) ab ove .
p rovided always that Insure rs hereon shall not be liable for any loss or damage to the Insured Equipment unless the action by the Fo reign Gove rnment is effe c t i ve for a period not shorter than the a p p l i c able Waiting Pe riod specified in the Schedule here t o . 2.
INSURED EQU I P M E N T Means the A i rc raft specified in the Schedule here t o . This policy also cove rs loss of all or any of the Engines specifi e d in the Schedule hereto from any of the Insured Pe ri l s (notwithstanding that the airframe does not suffer any such loss). This policy also cove rs loss of the technical re c o rds for the airc ra f t or engines from any of the Insured Pe rils (notwithstanding that the a i r f rame and engines do not suffer any such loss). In the event of s u ch loss, I n s u re rs will pay the Insured an amount equal to the costs i n c u rred by the Insured in reconstituting such technical re c o rds and c a rrying out any maintenance, ch e cks or re p a i rs necessary to effe c t the same, but only fo l l owing a loss as per 1. a ) ,b ) , c) and d) ab ove , subject to separate schedule limits endorsed here t o .
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3.
FOREIGN COUNTRY Means
4.
LESSEE Means the entity to which the Insured Equipment has been leased in the Fo reign Country.
5.
FOREIGN GOV E R N M E N T Means the present or any succeeding gove rnment or gove rn m e n t a l a u t h o rity (whether civil, m i l i t a ry or de facto) of the Fo re i g n C o u n t r y, or any defi n able re gion there o f, p rovided that such gove rning authority exe rcises effe c t i ve exe c u t i ve control there i n , and without having re g a rd to the manner of its accession.
6.
AGREED VA L U E Means the amount specified in the Schedule here t o . I n s u re r ’s maximum total liability shall not in any event exceed the A greed Value specified for the A i rc raft in the Sch e d u l e .
7. LEASE AG R E E M E N T Means the contract specified in the Schedule hereto and all support i n g d o c u m e n t a t i o n , under which the Insured agrees to lease the Insure d Equipment to the Lessee on terms and conditions seen by Insure rs h e reon and under which the Insured retains title to the Insure d Equipment. 8.
WAITING PERIOD Means the period specified in the Schedule here t o , and prior to the ex p i ry of which Insure rs hereon shall not be liable for any loss or damage to the Insured Equipment; p rovided that if the Insure d s a t i s fies Insure rs that there is no re a s o n able prospect of the action by the Fo reign Gove rnment being reve rsed or cancelled during the Waiting Pe ri o d ,I n s u re rs will pay the A greed Value to the Insure d upon being so satisfi e d , notwithstanding that the Waiting Pe ri o d has not ex p i re d .
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The Waiting Pe riod shall commence from the date of advice to I n s u re rs of an event like ly to gi ve rise to a claim under this Po l i c y. EXCLUSIONS 1. M ATERIAL DEFAU LT BY THE INSURED E x cluding any loss arising from material default by the Insured (or a ny sub-age n t , sub- or co-contractor of the Insured) in the p e r fo rmance of their obligations under the Lease A gre e m e n t .
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2.
LOSS OR DA M AGE DURING WAITING PERIOD E x cluding loss or damage to the Insured Equipment arising fro m a ny cause whatsoever prior to the ex p i ry of the Waiting Pe ri o d .
3.
WA R Excluding any loss arising from destruction or physical damage d i re c t ly or indirectly occasioned by, happening through or in consequence of war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurre c t i o n ,m i l i t a ry or usurped power.
4.
NON-COMPLIANCE WITH LAW S E x cluding any loss arising from any fa i l u re of the Insured to c o m p ly with the laws of the Fo reign Country in fo rce at inception of this policy (other than any laws whose purpose is to empowe r the Fo reign Gove rnment to confi s c a t e , s e i z e , a p p ro p ri a t e , ex p ro p ri a t e , n a t i o n a l i s e , re s t ra i n , detain or requisition assets), or of the Insure d ’s own country.
5.
N E C E S S A RY PERMITS E x cluding any loss arising from any fa i l u re of the Insured to obtain all permits and authorisations necessary at inception of this policy and/or make eve ry endeavour re a s o n ably pra c t i c able to keep such p e rmits and authorisations in fo rce during currency and/or make eve ry endeavour re a s o n ably pra c t i c able to obtain such new p e rmits and authorisations as may be stipulated by the Fo re i g n G ove rnment during curre n c y.
CONDITIONS 1. NON-ASSIGNMENT The Insured shall not (without Insure rs ’p rior written consent) assign or tra n s fer this Policy or the benefits or obligations there o f to any other pers o n ,p rovided always that the Insured can, w i t h the Insure rs ’p rior agre e m e n t , re q u i re any claims pay m e n t s h e reunder to be made to a named loss paye e , all the Insure d ’s o bligations under this Policy remaining unaffe c t e d . 2.
DUE DILIGENCE The Insured shall use due diligence and do and concur in doing all things re a s o n ably pra c t i c able to avoid or diminish any loss here i n i n s u re d . The Insured shall be deemed to have complied with this condition including but not limited to if the Insured shall have acted in accordance with the ex p ress written directions of the I n s u re rs during the Waiting Pe ri o d .
3.
N OTICE OF LOSS Upon the discove ry of any event like ly to gi ve rise to a claim under this Po l i c y, the Insured shall within a re a s o n able period there a f t e r gi ve notice thereof to the Insure rs here o n .
4.
ONUS OF PRO O F In any cl a i m , and/or any action, suit or proceeding to enfo rce a claim for loss here u n d e r, the burden of proving that the loss is re c ove rable under this Po l i c y, that no Wa rranty has been bre a ch e d and that no Exclusion applies shall fall upon the Insure d .
5.
COINSURANCE The Insured shall bear any coinsurance re q u i rement of all losses h e reunder at their own risk and uninsure d .
6.
E X A M I NATION OF THE INSURED The Insured shall submit to examination under oath, and shall p roduce for ex a m i n a t i o n , at such re a s o n able place as is designated by the Insure rs or their re p re s e n t a t i ve , all documents in their possession or control which relate to the specific matters in
211
q u e s t i o n , and shall permit ex t racts and copies thereof to be made. The fo re going re q u i rement shall not obl i ge the Insured to pro d u c e or copy any document, if to do so would constitute a bre a ch by the Insured of any obligation of confidentiality or a bre a ch of c o py right or similar ri g h t , until the Insured has obtained re q u i s i t e consents from third parties to avoid such a bre a ch being committed.
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7.
OTHER INSURANCES This insurance does not cover any loss or damage which at the time of the happening of such loss or damage is insured by or wo u l d ,b u t for the existence of this policy, be insured by any other ex i s t i n g policy or policies except in respect of any excess beyond the amount which would have been payable under such other policy or policies had this insurance not been effe c t e d . The insurance of other ex p o s u res under the Lease A greement in excess of or in addition to the cove rage provided hereunder shall not be effected by the I n s u red without the prior approval of Insure rs here o n .
8.
S U B RO G AT I O N The Insured under this Policy shall at the request and at the expense of the Insure rs do and concur in doing and permit to be done all such acts and things as may be necessary or re a s o n ably re q u i red by the Insure rs at any time after the Waiting Pe riod has commenced for the purpose of enfo rcing any rights and re m e d i e s , or of obtaining relief or indemnity from other parties to which the I n s u re rs shall or would become entitled or subrogated upon their p aying for any loss under this Po l i c y.
9.
R E C OV E R I E S After payment of a claim here u n d e r, all subsequent salvage and re c ove ries made by the Insured shall inu re to the benefit of I n s u re rs . The Insured here by ack n ow l e d ges that it will re c e i ve s u ch sums re c ove red in trust for Insure rs and that it will pay all sums upon receipt by it and/or by any person on its behalf to I n s u re rs .
10.
NO CANCELLATION AND PREMIUM RETURN No cancellation and no re t u rn of premium for short intere s t , unless specifi c a l ly agreed at inception.
11.
HEADINGS Headings in this Policy are included for convenience of re fe re n c e o n ly and shall not affect the interpretation of this Po l i c y.
12.
G OVERNING LAW AND A R B I T R AT I O N The constru c t i o n , validity and perfo rmance of this Policy and all m a t t e rs arising there f rom shall be gove rned by English law and all disputes which may arise under, out of, in connection with or in relation to this Policy or to the determination of the amount of loss h e reunder shall be submitted to arbitration at the London Court of I n t e rnational A r b i t ration in accordance with its rules at the date of s u ch submission. The awa rd re n d e red by the arbitrator(s) shall be final and binding upon all parties and judgement thereon may be e n t e red in any court having juri s d i c t i o n .
WA R R A N T I E S 1. LEASE AG R E E M E N T Wa rranted that the Lease A greement is signed by or on behalf of all n e c e s s a ry parties and is in full fo rce and effect at inception h e re o f. This wa rranty shall be deemed satisfied (as to the va l i d i t y and enfo rc e ability of the Lease A greement against the Lessee) by the terms of the independent legal opinion re fe rred to under wa rranty 4 below. In addition, it shall not constitute a bre a ch of this wa rranty if the Insured agrees to wa i ve or defer fulfilment of a ny conditions precedent or subsequent described in the Lease, but this qualification shall not apply to those conditions e nu m e rated under the Material Change wa rranty of this Po l i c y. 2.
DISCLOSURE Wa rranted that at inception hereof the Insured have no know l e d ge or info rmation of any matter, fact or circumstance which is like ly to gi ve rise to a loss here u n d e r.
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3.
HULL AND LIABILITIES INSURANCE Wa rranted that the Lease A greement re q u i res hull and war and allied perils insurances and liabilities insurances to be maintained by the lessee throughout the term of the leasing there u n d e r, o n the terms specified there i n .
4.
LEGAL OPINION Wa rranted that written independent legal opinion of a qualifi e d l aw yer in the Fo reign Country shall be supplied by the Insured to I n s u re rs confi rming that the laws of the Fo reign Country in effe c t at the date it is submitted do not prevent or hinder the Insure d ’s exe rcise of its rights under the Lease A gre e m e n t . I n s u re rs confi rm that the opinion of ........................ dated ................ 19 ........ s a t i s fies the wa rranty set fo rth here i n .
5.
M ATERIAL CHANGE Wa rranted that immediate notice of any material ch a n ge in the Lease A greement shall be gi ven to Insure rs . No claim ari s i n g subsequent to such ch a n ge shall be re c ove rable hereunder unless s u ch ch a n ge has been accepted by Insure rs . The fo l l owing shall constitute material ch a n ge : 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
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Te rms of pay m e n t s . E vents of defa u l t . Legal status of lease contract in host country. Uses of insured airc ra f t / ro u t e s . Maintenance prov i s i o n s . Pe riod of agre e m e n t . C ro s s - c o l l a t e ralization prov i s i o n s , if any. Identity of Lessee/Sub-Lessee. I n t e rest ch a n ge in nature of lease. A r b i t ra t i o n / L aw. C h a n ge in insurance re q u i re m e n t . A ny ch a n ge which could re a s o n ably be fo reseen by lessor to u l t i m a t e ly affect collateral value of the airc ra f t .
SCHEDULE INSURED: O P E R ATO R : C O U N T RY OF OPERATO R : LEASE AG R E E M E N T: INSURED EQU I P M E N T: AGREED VA L U E : PERIOD: WAITING PERIOD:
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CONTINGENT
WAR INSURANCE
W h e re a s The Insured and the Airline have entered into the A gre e m e n t in order for the Insured Equipment to be supplied to the A i r l i n e . A n d the Airline is re q u i re d , under the terms of the A gre e m e n t , t o maintain in fo rce at all times Hull War and Allied Pe rils Insura n c e c ove rage (the Pri m a ry Policy) and the specific Reinsurance Po l i c y t h e re o f, if applicabl e . INSURED PERILS N ow in consideration of the premium as described in the Schedule and subject to the Defi n i t i o n s ,C o n d i t i o n s , Wa rranties and Exclusions contained h e re i n , this Policy is to pay the Insured the A greed Value as described in the Sch e d u l e , in the event of the Insured Equipment being lost or damage d as a consequence of the occurrence during the period of this Po l i c y, of a Pe ril as described in Section A or Section B below and which would have otherwise been re c ove red from the A i r l i n e ’s and/or Opera t o r ’s Hull and Allied Pe rils Insurance Policy and/or specific Reinsurance Policy there o f subject to the same Te rm s ,D e fi n i t i o n s ,C o n d i t i o n s , Wa rranties and E x clusions as contained there i n , except as may be specified here i n . Section (A) This Section shall automatically attach for a maximum period of 180 d ays from the fi rst occurrence of an Eve n t , as defined here i n ,p rov i d e d that such Event dire c t ly causes the termination of the A i r l i n e ’s and/or O p e ra t o r ’s Hull War and Allied Pe rils Insurance Policy and/or specifi c R e i n s u rance Policy there o f : -
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E vent 1.
Refusal of the Airline to pay the additional War Risk Pre m i u m re q u i red by the Hull War Risk Policy Underwri t e rs and/or s p e c i fic Reinsure rs there o f, o r
E vent 2.
Cancellation of the A i r l i n e ’s Hull War Risk Policy by either the Airline or A i r l i n e ’s War Risks Underwri t e rs and/or specifi c R e i n s u re rs there o f, o r
E vent 3
N o n - re n ewal of the A i r l i n e ’s Hull War Risks Policies and/or s p e c i fic Reinsurance Policy there o f, o r
E vent 4.
An Event of Default under the A gre e m e n t ,p rovided that the I n s u red under this Policy have exe rcised their Right to Repossess the Insured Equipment
The Insured undert a kes to notify Underwri t e rs immediately they become awa re of such an Event taking place. Section (B) This Section shall provide Hull War and Allied Pe rils Insurance cove rage as the Pri m a ry Policy contingent upon the Insured being unable to re c over their financial interest as described in the Schedule either in whole or in part under the A i r l i n e ’s Hull War and Allied Pe rils Insura n c e Policy and/or specific Reinsurance Policy there o f, due to the implementation of any ground accumulation or ag gregate limits a p p l i c able there u n d e r. AGREED VA L U E The amount specified in the Schedule hereto provided that U n d e r w ri t e r ’s maximum total liability shall not in any event exceed the A greed Value specified in the Sch e d u l e . DEFINITIONS “A gre e m e n t ” means the contract and all supporting documentation under w h i ch the Insured agrees to (a) lease the Insured Equipment to the Airline and under which the Insured retains title to the Insure d Equipment or (b) lend to the Mort g agor upon the security of the Insure d Equipment under which the Insured retains rights as Mort g age e . “ E vent of Defa u l t ” shall have the same meaning as set fo rth in the A greement between the Insured and the A i r l i n e . “ D e cl a ration of Defa u l t ” shall have the same meaning as set fo rth in the A greement between the Insured and the A i r l i n e .
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“ Fo reign Gove rn m e n t ” shall have the meaning as set fo rth in the A greement between the Insured and the A i r l i n e . EXCLUSIONS 1. C O N F I S C ATION BY THE FOREIGN COUNTRY In the event of actual war cove rage hereon being prov i d e d subsequent to the cancellation of the Pri m a ry Po l i c y / R e i n s u ra n c e Po l i c y, c ove rage shall not be provided in respect of direct losses of c o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n , a p p ro p ri a t i o n , ex p ro p ri a t i o n , requisition for the title or use ( c o l l e c t i ve ly “ C o n fiscation Pe rils”) by or under the order of the Fo reign Gove rn m e n t . 2.
RADIOACTIVE CONTA M I N AT I O N This clause shall be paramount and shall ove rride any t h i n g contained in this insurance inconsistent therew i t h : In no case shall this insurance cover loss damage liability or expense dire c t ly or indire c t ly caused by or contributed to by or a rising fro m :
3.
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2.1
ionising radiations from or contamination by ra d i o a c t i v i t y f rom any nu clear fuel or from any nu clear waste from the combustion of nu clear fuel.
2.2
the ra d i o a c t i ve , t ox i c , ex p l o s i ve or other hazardous or contaminating pro p e rties of any nu clear installation, re a c t o r or other nu clear assembly or nu clear component there o f.
2.3
a ny detonation of any weapon of war employing atomic or nu clear fission and/or fusion or other like reaction or ra d i o a c t i ve fo rce or matter whether hostile or otherwise.
S PARE EQUIPMENT E x cluding any loss arising from destruction or physical damage to S p a re Equipment (spares and/or engines all as more fully descri b e d
in the A greement) dire c t ly or indire c t ly occasioned by, h a p p e n i n g t h rough or in consequence of wa r, i nvasion acts of fo re i g n e n e m i e s , hostilities (whether war be decl a red or not) civil wa r, revo l u t i o n ,i n s u rre c t i o n , m i l i t a ry or usurped power (such peri l s being defined by Section One, p a ragraph (a) of LSW555B wo rd i n g ) H owever this ex clusion does not apply in respect of Spare Equipment whilst attached to, or loaded on an airc raft or whilst in t ransit by sea. 4.
I N S O LV E N C Y E x cluding loss damage or expense caused solely by any debt, fa i l u re to provide bond or security or any other financial cause under court order or otherwise.
5.
FINANCIAL DEFAULT (applicable to Insured Peril Section B only) E x cluding any loss arising from insolvency and/or financial defa u l t of the A i r l i n e ’s and/or Opera t o r ’s Hull War and Allied Pe ri l s I n s u rance Underwri t e rs ’ and/or specific Reinsurance Underwri t e rs t h e re o f.
GENERAL CONDITIONS 1. DUE DILIGENCE CLAUSE The Insured undert a kes that they will do and concur in doing all things re a s o n ably pra c t i c abl e , at all times during the Po l i c y, to avoid or diminish any loss hereunder and/or to re c over the Insured Equipment after the occurrence of an Insured Pe ri l , and/or Event (as described in Section A ) , in each case by taking such action under or in connection with the A greement as the Insured would take if they did not have the b e n e fits and protection of this Po l i c y : it being nonetheless agreed that: i)
Upon the occurrence of an Event or Defa u l t , the Insured may in their sole discretion exe rcise or not exe rcise their rights under the A greement as the result of such Event or Defa u l t , and
ii)
After the exe rcise of such rights the Insured will be obligated to t a ke only such action to avoid or diminish loss hereunder or to
219
re c over the Insured Equipment or otherwise exe rcise remedies as m ay be mu t u a l ly agreed upon between the Insure d , the Loss Paye e s p e c i fied in the Schedule hereto and the Underwri t e rs . 2.
S E RVICE OF SUIT CLAUSE (USA) / OVERSEAS JURISDICTION CLAUSE) To be inserted dependent upon domicile of Insure d .
3.
C A N C E L L AT I O N Section fi ve (5) of LSW 555B Fo rm – or the equivalent prov i s i o n s in the A i r l i n e ’s policy – is deleted in its entirety and replaced by the fo l l ow i n g : Except in the event of non payment of premium when due and w h e re shown in Special Condition 3 (iii) as applicable to Insure d Pe ril Section B only, this Policy shall not be cancelled by either the U n d e r w ri t e rs or the Insure d , except the Insured may cancel this Policy to the extent of the Cove rage hereunder with respect to any I n s u red Equipment for which the A greement has been paid in full, or if such Insured Equipment has been sold to a third party or becomes a total loss or constru c t i ve total loss or the A gre e m e n t n ever becomes effe c t i ve with respect to such Insured Equipment. If the Policy is so cancelled the Underwri t e rs will allow a re t u rn p remium in respect of such Insured Equipment calculated at p ro - ra t a . In the event of premium not being paid on due date, U n d e r w ri t e rs a re here by authorised by the Insured to cancel this Policy in respect of such Insured Equipment at their discre t i o n . S u ch cancellation may be effected by the Underwri t e rs or the Bro ke rs giving twenty (30) days notice of intent to cancel by re gi s t e re d l e t t e r, c able or telex to the Insured as specified in paragraph 1 of the Sch e d u l e . S u ch cancellation shall take effect at midnight G. M . T. on the twentieth (30th) day from the date that such notice wa s re c e i ved by the Insured specified in paragraph 1 of the sch e d u l e and the Underwri t e rs shall adjust the premium under this policy p ro - rata tempori s . In the event of the Insured Equipment becoming
220
a loss or partial loss from any Insured Pe ril hereunder any p remium due and then owing by the Insured shall become payabl e i m m e d i a t e ly, or the Underwri t e rs shall be entitled to take cre d i t t h e re o f. 4.
5.
HEADINGS Headings in the Conditions, Wa rranties and Exclusions of this Policy are included herein for convenience of re fe rence only and shall not constitute a part of this Po l i c y. NON-ASSIGNMENT The Insured shall not (without Underwri t e rs ’ p rior wri t t e n consent) assign or tra n s fer this Policy or the benefits of o bligations thereof to any other pers o n ,p rovided that the Insure d can re q u i re any claims payments hereunder to be made to the Loss Payee (as per the Sch e d u l e ) , all the Insure d ’s obligations under this Policy remaining unaffe c t e d .
6.
NO CANCELLATION AND PREMIUM RETURN No cancellation and no re t u rn of premium for short intere s t , o t h e r than as outlined under General Condition 3.
7.
GOVERNING LAW AND ARBITRAT I O N The constru c t i o n , validity and perfo rmance of this Policy and all m a t t e rs arising there f rom shall be gove rned by English Law and all disputes which may arise under, out of, in connection with or in relation to this Policy or to the determination of the amount of loss h e reunder shall be submitted to arbitration at the London Court of I n t e rnational A r b i t ration in accordance with its rules at the date of s u ch submission. The awa rd re n d e red by the arbitrator(s) shall be final and binding upon all parties and judgement there fo re may be e n t e red in any court having juri s d i c t i o n .
SPECIAL CONDITIONS 1. ( Ap p l i c able to Insured Pe ril Section A only ) In the event of the occurrence of Section A Events 1-4 during the p e riod here o n , this policy shall thencefo rth automatically prov i d e
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180 days of actual war cove rage as the Pri m a ry Policy and/or specifi c R e i n s u rance Policy thereof and shall not exceed 180 days in all. 2.
( Ap p l i c able to Insured Pe ril Section A only ) P u rsuant to Special Condition 1, in the event of the occurrence of Section A Events 1-4, this policy shall provide cove rage as per the P ri m a ry Policy and/or specific Reinsurance Policy thereof but with the cancellation and rev i ew condition thereon deleted (but alway s subject to the “Automatic Te rm i n a t i o n ”p rovisions here i n ) .
3. (i)
( Ap p l i c able to Insured Pe ril Section B only ) U n d e r w ri t e rs may gi ve notice effe c t i ve on the ex p i ry of 7 day s f rom midnight G. M . T. on the day on which notice is issued, t o rev i ew the rate of premium and/or the ge o graphical limits. In the event of the rev i ew of the rate of premium and/or ge o gra p h i c a l limits not being accepted by the Insured then at the ex p i ry of the said 7 day s , this Policy shall become cancelled at that date.
(ii)
Notwithstanding (i) ab ove , this Policy is subject to automatic rev i ew by Underwri t e rs of the rate of premium and/or conditions and/or ge o graphical limits effe c t i ve on the ex p i ry of 7 days from the time of any hostile detonation of any weapon of war employing atomic or nu clear fission and/or fusion or other like reaction or ra d i o a c t i ve fo rce or matter where s o ever or whensoever such detonation may occur and whether or not the insured Insured Equipment may be d i re c t ly affe c t e d . In the event of the rev i ew of the rate of pre m i u m and/or conditions and/or ge o graphical limits not being accepted by the Insured then at ex p i ry of the said 7 day s , this policy shall become cancelled at that date.
( i i i ) C over provided by Insured Pe ril Section B may be cancelled by the U n d e r w ri t e rs or the Insured giving notice not less than seven day s p rior to the end of each period of three months from inception. ( i v ) F u rt h e rm o re ,c ove rage affo rded under this section shall not be deemed to affo rd greater cove rage to the Insured than such Amendment of terms and cancellation by Notice provisions imposed.
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WA R R A N T I E S 1. HULL & LIABILITIES INSURANCE Wa rranted that the A greement re q u i res war and allied peri l s i n s u rances to be maintained by the Airline throughout the term t h e re o f, on the terms specified there i n . 2.
RIGHTS AND INTERESTS Wa rranted that the Insured has endorsed and continues to endors e their re s p e c t i ve rights and interests on to the Pri m a ry Po l i c y and/or specific Reinsurance Policy there o f.
A U T O M ATIC TERMINAT I O N Whether or not such notice of cancellation has been gi ven this I n s u rance shall T E R M I NATE AU TO M AT I C A L LY. Upon the outbreak of war (whether there be a decl a ration of war or not) between any of the fo l l owing States, n a m e ly : the United Kingdom, United States of A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n , The Pe o p l e ’s R e p u blic of China. P ROVIDED T H AT if the Insured Equipment is in the air when such o u t b reak of war occurs then this Po l i c y, subject to its terms and conditions and provided not otherwise cancelled, t e rminated or s u s p e n d e d , will be continued in respect of such Insured Equipment until the said Insured Equipment has completed its fi rst landing t h e re a f t e r.
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CONTINGENT WAR INSURANCE SCHEDULE 1.
INSURED
2.
O P E R ATO R
3.
INSURED EQU I P M E N T
4.
AGREED VA L U E
5.
FOREIGN COUNTRY
6.
PREMIUM
SECTION A SECTION B
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7.
LOSS PAY E E
8.
POLICY PERIOD
INDEX Word 50/50 clause (AVS103) A check (scheduled maintenance) Additional insured Aggregate extension Aggregate limit restrictions Agreed value Aircraft checks Aircraft Financial Interest Endorsement – AVN28B Aircraft recovery costs Aircraft regulation Aircraft repossession insurance Aircraft return condition insurance Aircraft service documents Aircraft unavailability insurance Airline Finance/Lease Contract Endorsement – AVN67B Airworthiness Ariel Form Asset value guarantees Automatic termination Aviation hull ‘all risks’insurance Aviation hull ‘war and allied perils’insurance Aviation insurance wordings and clauses Aviation legal liability insurance AVN28B (Financial Interest Endorsement) AVN38B (nuclear risks exclusion clause) AVN46B (noise and pollution exclusion clause) AVN48B (war exclusion clause) AVN52C (war liability writeback clause)b AVN57A (“Part 205”) AVN5A (deferred premium clause) AVN67 (lease/finance endorsement) AVN67B (lease/finance endorsement) AVN67B War (lease/finance endorsement) AVN6A (deferred premium clause) AVS103 (50/50 clause) Betterment Breach of geographical limits Breach of warranty Breach of warranty endorsement
Page 18,161 39,41 27,51,65 98 17,98 15 39,41 65 12,102 39 79 102 41 11,85 51,54,174 39 6, 7 106 18 2,89 3,95 7 4 65 165 163 168 169 48,159 23,156 51 51,54,174 53,178 23,154 18,161 44 19 27,51,90 51,54,65
Breaches of warranties (examples) Broker’s letter of undertaking Buy back guarantees C check (scheduled maintenance) Cancellation clauses Cancellation for non-payment of premium Care,custody and control insurance (for financiers) Cargo legal liability insurance Certificates of airworthiness Certificates of insurance Certificates of reinsurance Checklist of insurance requirements Civil aviation authorities Claims Collateral deprivation insurance Combined single limit Confiscation by government of registr y Confiscation/deprivation coverage Contingent hull and liability insurance Contingent hull war risks insurance Continuing indemnity Contracts of carriage for passengers Credit insurance Cut through clause D Check (scheduled maintenance) D.o.T. 14 CFR Part 205 Deductible insurance Deferred premiums clause Domestic insurers EC 2027 Errors and omissions Extended Coverage Endorsement (Aviation Liabilities) – AVN52C FAA Foreign object damage/ingestion General legal liability insurance Geographical limits Hangarkeepers liability insurance Hull ‘all risks’insurance Hull ‘war risks’insurance Hull and liability insurance wordings Hull claims Hull deductible ‘buy down’ IATA Intercarrier Agreement
90 29,151 106 41 18,23 23 93 4 39,41 71,133 71,142 71 39 42 79 5 20,79,83 79 89 95 22 15 85,111 27,32 41 48,159 10 154,156 32 15 91 5,169 39 10 6 19,95 6 6 3,95 7 42 10 15,47
IATA/EC 2027 (contracts of car riage) Illegal acts Illegal cargoes Indemnities Independent consultants Ingestion/foreign object damage Innocent operator’s coverage Insurance article Insurance covenants Lease covenants Lease payment insurance Leased engines Legal liability insurance Legal opinions (for repossession insurance) Lessor liability Letter of undertaking Liability claims Liability for premiums Liability insurance Liability limits Lloyd’s Central Fund Local domestic insurers Loss of use insurance Loss payable clauses Loss payee LSW147 wording LSW555B airline hull ‘war’ wording LSW610A contingent hull and liability wording Mechanical breakdown Mechanical breakdown insurance Non-payment of premium Notice of cancellation Nuclear Risks Exclusion Clause – AVN38B Ongoing products liability insurance Operational interest Orphan engine Orphan engine Clause Partial loss claims Passenger legal liability Personal injury Personal Injury Extension – AVN60 Political risks Premises liability insurance
15,47 21 21 22 73 10 21 119 119 119 85,111 4,17,43,162 4,89 81 46 29,151 45 29,59 4,6,89 4,15 31 32 11,85 27,37 37 79,207, 3,207 89,189 2,11 11 23 18,23 165 22 52,57 17,43,162 162 44 4,15 4,157 157 79 6,15
Products liability insurance Rating agencies (for insurers) Repatriation insurance (of assets) Repossession delay insurance Repossession expenses insurance Residual value guarantees Residual value insurance Return condition of leased aircraft Revenue stream protection RVI Salvage Search and rescue coverage Spare parts Spares ‘all risks’insurance Specimen insurance article Technical records Technical records insurance TLO Total loss claims Total loss only insurance Underwriting security Unearned premium insurance (UPI) United Nations sanctions UPI War ‘writeback’endorsement War aggregate extension insurance War cancellation clauses War, Hi-jacking and Other Perils Exclusion Clause – AVN48B
6 31 79 85 102 106 106 102 85,111 106 42 12 4 4 119 39,102 102 12,101 42 12,101 31 11 96 11 4,169 98 18,95 168
