Existing Aviation War Risk Liability Program

Canadian aircraft operators are required by law to maintain certain levels of insurance. In addition to these legal minimums, financiers and lessors normally have their own prescribed coverage requirements, which include war risk liability and hull coverage. War risk coverage is now usually only available for an additional premium. Prior to 9/11, war risk insurance was readily available at commercially reasonable rates, but after 9/11, private war risk insurance was temporarily cancelled. When such insurance was reinstated, it was done so at reduced indemnity coverage and, for most airlines, became prohibitively expensive. As a result, Canada created the Aviation War Risk Liability Program (Program) in 2001 to fill this gap. The aim of the Program was to provide war risk indemnity to the Canadian air industry in an amount equal to the amount of general insurance coverage carried by the entity. The Program is required to be periodically renewed.

All Good Things Come to an End

The 2014 Undertaking by the Government of Canada to provide war risk indemnity under the Program came to an end on December 31, 2015, but was extended for another six months, by the Undertaking issued on November 16, 2015, by the Government of Canada, until June 30, 2016. Initially, it had provided coverage for “risks listed in the clause headed ‘War,  Hi jacking [sic] and Other Perils Exclusion Clause’ in the standard aviation insurance policy, to the extent that such risks have been included in a standard write-back endorsement to a policy, and any other such risk that is not included in the standard write-back endorsement that the Minister of Transport may, from time to time, in his sole discretion, declare in writing to be subject to the Undertaking, to the limit of the amount covered for aviation liability under the insurance policy, less whatever coverage is commercially available during the subject period.” Coverage was provided to “any person covered under an insurance policy held by an airline, an airport operator, NAV Canada, or any supplier of goods or services to an airport operator, an airline in Canada or NAV Canada who is insured against general liability under an insurance policy.”1 This effectively meant that financiers and lessors, who are generally named as additional assureds in the insurance policy of the aircraft operator, could benefit from the government’s coverage.

However, the wording of the extended 2015  Undertaking on its face   appears to only indemnify aviation industry participants, which are defined by the Aviation Industry Indemnity Act (Act) as:

  1. An air carrier
  2. NAV Canada
  3. An owner or operator of an airport
  4. A supplier of goods or services that directly support the operation of aircraft from an airport, including with respect to (1) the preparation of an aircraft for departure or on its arrival, including maintenance  and cleaning of the aircraft and the loading and unloading of passengers, baggage and cargo, (2) freight forwarding, (3) air navigation, or (4) airport security services,   or
  5. An entity that is prescribed by regulation or a member of a class of entity that is prescribed by regulation

New Commercial Practice

This meant that financiers and lessors are not able to benefit from the Program coverage, and, therefore, that aircraft operators, in order to satisfy their insurance obligations under their respective leases and financing documents, have had to obtain war risk insurance from the commercial  markets.

While the Minister of Transport issued a letter to the National Airlines Council of Canada to clarify that the scope of the extended indemnity was meant to cover the same entities as under previous undertakings, the wording of the 2015 Undertaking itself was not amended.

As a result, all the major Canadian airlines have obtained war risk    coverage on the private market since the 2014 Undertaking period ended on December 31, 2015. In any event, the extension of the entire Program will terminate on June 30, 2016, unless there is a further extension, and all aircraft operators will have to obtain private war risk coverage if required to do so under their leases and/or financing    documents.