29 September 2023
Automatic Termination of AV52 Cover
Specific War Liability cover in all aviation insurance policies is subject to ‘Automatic Termination’ under certain circumstances. In this article, we explore what this means for aviation insurance buyers, the implication of an ‘event’ and what the market is doing to mitigate.
Automatic Termination - What is it?
What would the outcome of such an 'event' be?
As our readers may be aware, all aviation insurance policies are subject to ‘Automatic Termination’ under certain circumstances for specific war liability coverages, namely (a) any hostile detonation of any nuclear device and (b) the outbreak of war between the 5 major powers. As such, in the event of a nuclear detonation, it will result in automatic termination of AVN52 (Third party and passenger legal liability war cover) coverage on both the Excess AVN52 policies and the embedded coverage within Hull and Liability policies.
Current hostilities in Ukraine and increasing global geopolitical volatility have put these clauses strongly in focus. Designed in the Cold War era their intent is now divorced from today's more modern reality of the possible use of small tactical nuclear weapons. Whilst still hopefully very unlikely, this potential scenario, is becoming easier to envisage. The consequence, due to the ‘Automatic Termination’ of cover condition, is that all aviation operations would be grounded and tens of millions of passengers stranded all around the world. Automatic Termination would apply regardless of location and or weapon type or size and would affect all operators holding this cover and any additional insureds under the policy, again regardless of their domicile. This systemic disruption to air transport would also cause major logistical challenges and potential compensation issues.
“…cover extended by this Endorsement shall terminate automatically….upon the hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter wheresoever or whensoever such detonation may occur and whether or not the Insured Aircraft may be involved.”
What options are available?
Essentially, there are three options, all of which currently leave aviation insurance buyers exposed. Ultimately, if an ‘event’ were to occur tomorrow, it would potentially ground aviation operations worldwide and leave millions of passengers, cargo and assets stranded. It is important to recognise that following such an ‘event’, all clients from all brokers, including airlines, airports and service providers will be in the same position of having no cover meaning there will be an avalanche of work for brokers and underwriters re-negotiating reinstatement of cover for thousands of aerospace policies at the same time.
Most programmes have more than 30 underwriters making up the AVN52 coverage through two policies. All underwriters would need individual negotiations, multiple rounds of discussion and, for most, signoff from their management to progress, all of which could take a long time. Importantly, some underwriters may not be willing or even able to agree cover so obtaining 100% reinstatement will be very hard, if at all possible.
Is there another option? Yes, approach D - The Commercial Option
Recognising the insurance implications and significant impact that this event would have on our clients’ operations, since the onset of events in Ukraine, Gallagher has been actively working with market associations, governments and leading insurers to help reach a market solution. However, given the complexities and timeframes to this approach, Gallagher has also been working in parallel to establish an alternative and timelier commercial solution.
The Gallagher designed facility pools together a group of leading underwriters who are willing and able to commit now to providing an earmarked USD1bn of capacity to each AOC after such an ‘event’. The facility is now ‘live’ and accepting declarations. Although, of course, under such unprecedented circumstances there can never be an absolute guarantee that cover will be incepted, the participating panel of insurers are committed to an agreed framework to reinstate coverage en masse by geography post ‘event’ as quickly as possible. The panel of insurers are supported by a forum including Gallagher executives, legal and industry representatives, Government agencies and representatives of Aviation Brokers for non-Gallagher clients (who have utilised the facility).
This unique facility is designed to offer buyers a further bridge of cover to enable them to continue to fly beyond the market proposed 48hr window. The facility hedges against the uncertainty around any market solutions and emergency Government intervention and provides a ready-made contingency plan (if needed) to help mitigate the adverse circumstances of stranded passengers/assets and the accompanying revenue impacts. Importantly understanding this is an industry issue, this is a market wide facility and is available to any aviation insurance buyer and can be accessed directly with the panel of insurers by any broker on your behalf, whether a Gallagher client or not.
At Gallagher, we pride ourselves in being forward thinking, innovating to deliver creative solutions. In recent challenging times, our team has lead the charge on behalf of our clients and the aerospace industry on a number of fronts and this facility is another example of this. In an ever-evolving and volatile risk landscape, we will continue to innovate, working with our industry partners and the insurance community to deliver solutions to tackle challenges, reduce cost and add value.
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Nigel Weyman
Global Executive, Aerospace
Nigel_Weyman@ajg.com
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.