Insurance Contracts Act
Damage by Aircraft Act
The Insurance and Aviation Liability Legislation Amendment Bill 2002 has now been submitted to the Australian Parliament. It aims to remedy defects in previous legislation with regard to aviation insurance.
While some commercial war risk insurance has become available since the terrorist attacks of September 11 2001, the Australian aviation industry (airlines, airports and other aviation service providers) is still facing major difficulties in obtaining sufficient third-party aviation war or terrorism cover.
Consistent with other approaches adopted throughout the world, the Australian government temporarily stepped in to plug the gap between the insurance available in the market and the level of insurance held prior to the worldwide withdrawal of war risk insurance on September 24 2001. The Australian government has announced strong support for the International Civil Aviation Organization scheme as offering a firm foundation for the aviation industry until the insurance market is able to recover.
Commercial cover has started to return as the industry re-evaluates risks and premiums and competitive forces begin to re-assert themselves. However, international aviation insurers have declared themselves reluctant to provide coverage to Australian firms as long as the Insurance Contracts Act 1984 prohibits them from taking action to protect their interests in the event of another catastrophic incident. There is also a problem contained in the Damage by Aircraft Act 1999.
When insurers attempted to cancel war risk cover on September 24 2001 they encountered the embargo against cancellation (except in the events specified) contained in Section 53 (non-variation) and Section 63 (non-cancellation) of the Insurance Contracts Act 1984. Section 52 contains a general provision declaring void anything which has the effect of excluding, restricting or modifying the provisions of the act and that applies to Sections 53 and 63.
While the Insurance Contracts Act is intended to provide business and consumer protection, certain types of cover were exempted, such as the exclusion in Section 9(3) from the cancellation provision of contracts of insurance against the risk of the loss of an aircraft, or damage to an aircraft, as a result of war.
This provision was made in recognition of the fact that such insurance is only readily available on global markets, and would probably not be available to Australian carriers if such insurance had to comply with the non-cancellation regime of the act. It was not foreseen that third-party cover for catastrophic damage on the ground as a result of terrorism would fall into the same category.
Instead of specifying situations in which variation would be prohibited, Section 53 of the Insurance Contracts Act adopted the approach of prohibiting all variation which prejudiced any person except the insurer, other than for classes of insurance contract exempted from the ban by regulation. The current regulations are of no assistance to aviation insurers.
Since modification by regulation was not available, an even more stringent blanket-banning approach was adopted in Section 63 of the act, which prohibits cancellation and invalidates any attempt to do so (except as stipulated in the act). Section 60 specifies the circumstances in which cancellation is permitted. In brief, these are restricted to situations where the insured has:
- breached the requirements of good faith or the duty of disclosure;
- made a misrepresentation to the insurers;
- committed a breach of contract, such as failing to pay premiums; or
- made a fraudulent claim.
When aviation insurers attempted to cancel on September 24 2001, they could not in the light of Section 63. Inevitably, the act's protection provided only temporary relief, since on renewal the insurers simply refused to provide the cover.
The Insurance and Aviation Liability Legislation Amendment Bill 2002 is designed to amend the legislation, in order to allow for the exemption of war and terrorism risk insurance from the cancellation and variation provisions of the act. The government also debated whether simply to make a regulation to exempt third-party aviation war risk insurance from the Section 53 prohibition against variation, which would allow insurers to vary such covers. However, it was eventually appreciated that the only real solution was to amend the Insurance Contracts Act to exempt third-party aviation war-risk insurance from both its cancellation and the variation provisions. The government observed that this
"is regarded as the best long-term solution as it would place Australian aviation firms in the same position as the rest of the world, thus providing no reason why the global insurance market should discriminate against Australian industry."
Clause 6 of the Insurance and Aviation Liability Legislation Amendment Bill 2002 would amend Section 9 of the Insurance Contracts Act to provide that Sections 53 and 63 of the act do not apply to prescribed insurance provisions providing cover for war or terrorism risk. This would be followed by a regulation prescribing aviation third-party war and terrorism risk cover, thus bringing this class of insurance into line with international practice.
The Damage by Aircraft Act 1999 was put in place to reform the regime of liability of aircraft operators for damage caused on the ground.
The act entered into force in 2000, and introduced a regime of strict and unlimited liability of the owners of aircraft in respect of injury and damage on the ground caused by aircraft. There is no definition of 'owner' in the act, and consequently financiers or lessors are caught by the joint and several liability provisions imposed by Section 10(2) of the act regardless of the fact that they may have no operational control over their aircraft. This is a minority approach also adopted by Greece, Norway and Denmark.
The intention of the government, which relied on the easy availability of insurance, had been to ensure that someone paid. That reliance was dealt a severe blow when, in the immediate aftermath of September 11, international aircraft financiers and leasing companies threatened to cease operations by their aircraft in and over Australia. Apart from Australian registered aircraft, the situation threatened operations into Australia by a number of foreign carriers. While the concerns of international lessors have been mollified (in Australia) due to the indemnity action taken by the Australian government a longer-term solution to the problem needed to be found.
The proposed amendments would remove the liability of an owner who did not have an active role in the operation of the aircraft immediately before the damage occurred, provided that another person has the exclusive right to use the aircraft and finance or other arrangements are in place.
The aviation industry has been advised that a bid has been lodged for legislation in Spring 2003 to amend the relevant acts. Stakeholders are being consulted over the potential amendments.
For further information on this topic please contact Ian Awford at Ebsworth & Ebsworth by telephone (+61 2 9234 2366) or by fax (+61 2 9235 3606) or buy email ([email protected]).