Iceland's volcano - the impact continues to reverberate

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The eruption on 14 April 2010 of Iceland's Eyjafjallajokull volcano (the second eruption in a month) has caused havoc throughout Europe and beyond. The impact of this first eruption in 190 years looks set to continue for the short to medium term, even though airspace restrictions have now been lifted.

Criticism has already been made of the regulators' decision to shut down airspace, which is costing airlines some $200 million per day from cancelled flights and causing the European economy to suffer massive losses in lost business. Interested parties may well be considering action against the regulators but, whilst these actions are possible, they will certainly not be without difficulty, particularly in this case where the issue of safety is given absolute priority.

In this briefing we take a look at some of the key insurance issues arising for businesses, in particular airlines and those handling cargo, as a result of this "act of God".

Damage caused by delay

Many cargo policies will not cover damage caused by delay, even if the delay has been caused by a risk insured against. Cargo owners may therefore find themselves uninsured. Will they then seek to bring claims against their forwarders and carriers and if so, how are those parties likely to respond?

Excluding and/or limiting liability

Freight forwarders acting in the capacity of a forwarding agent (or a carrier where they issue their own House Air Waybill) will seek to rely upon their terms of business to exclude and or limit liability (or the international conventions when acting as a carrier). Most terms of business will exclude liability for failing to adhere to agreed departure or arrival dates; contain a force majeure clause and will in any event limit liability (insofar as liability attaches).

Force majeure clauses

Force majeure clauses typically will only apply where the force majeure event is the sole cause of the loss. Potential claimants will therefore be looking closely at whether there has been an intervening event caused by the forwarder or carrier, which was in fact the actual cause of their loss. This might arise where the forwarder or carrier failed to store perishable cargo in the appropriate environment or where it can be argued that there were other means by which the cargo could have been carried. Each case will of course turn on its own facts.

International conventions carriage by air

Cargo owners or their forwarding agents will similarly find claims presented to the airlines are rejected. In the context of international air carriage the relevant international conventions will provide airlines (and freight forwarders acting in the capacity of a carrier) with a defence where they can show that they and their agents had taken all necessary measures to avoid the damage (caused by the delay) or that it was impossible for it or them to take such measures. Even if liability does attach, liability will be limited to 19 SDR's per kilo (approx 18.75 per kilo).

What this means for insurance

Businesses impacted by the shutdown of airspace should:

Examine their insurance policies to determine whether they cover business interruption (including ICW/EE). Physical damage to property will only have occurred in relation to perishable goods. Otherwise, businesses will only be covered if the policy includes business interruption triggers that specifically respond to non-physical damage scenarios. This could mean that impact of supply chain disruption, as a result of airspace restrictions, is covered if the business interruption policy is appropriately worded and contains trigger language which deems the airspace restrictions to be treated as if it was first party property damage.

Examine their insurance policies to ascertain whether they respond to the increased costs of working/extra expenses incurred as a result of the shutdown, in addition to the loss of revenue (business interruption).

Air carriers may have similar triggers in their business interruption policies as they may have recognised from their risk assessment/potential claims profiling work the implications of regulatory orders which restrict or curtail their operations, such as the seven day closure of US airspace that followed 9/11 in 2001. A regulatory preclusion on operations is a standard feature of many bespoke business interruption policies and may be broadly enough worded to afford coverage.

Air carriers may also consider whether their liability policies respond to the statutory liability that may exist for the provision of alternate travel.

Conclusion

With Europe's airspace gradually re-opening the impact of a six-day shutdown in the UK will reverberate for some time to come. The aviation industry is set to convene a working group to consider the safety issues surrounding this type of event. In the meantime, there will be much dialogue between insurers, brokers and insureds over claims that can be made

Author-Transport Intelligence

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