Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

Air transport service providers, aircraft rental service providers, air charter operators, aircraft owners and aircraft operators must all have in place adequate aviation insurance as prescribed by the Ministry of Land, Infrastructure and Transport (MOLIT) (Articles 70(1) and (2) of the Aviation Business Act). ‘Aviation insurance’ constitutes:

  • passenger insurance;
  • airframe insurance;
  • cargo insurance;
  • war risk insurance;
  • third-party insurance;
  • aircrew insurance; and
  • other insurance prescribed by the MOLIT (Article 2(37) of the Aviation Business Act).

Where insurance is retained, the maximum limitation of liability is the limit prescribed by an international convention on air transportation of which South Korea is a signatory (ie, the Hague Convention or the Montreal Convention). Where it is unreasonable to apply these rules, the liability limit will be as prescribed by the MOLIT (Article 70(2) of the Aviation Business Act Enforcement Decree). Failure to have adequate insurance in place is punishable by imprisonment for a maximum of three years or a fine not exceeding W30 million (Articles 78(1)(5) and (6) of the Aviation Business Act).

According to a research report published in November 2015, for international air carriers, the average insurance coverage per aircraft was:

  • W2 trillion in passenger insurance;
  • W65 billion in gas insurance;
  • W10 million in cargo insurance;
  • W7 billion in war insurance;
  • W600 million in third-party insurance; and
  • W1.3 billion in crew insurance.
Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

Article 724(2) of the Commercial Act provides that a third party may directly request an insurer to compensate for losses caused by an accident attributable to the insured and Article 726 provides that the provisions relating to liability insurance will also apply to reinsurance mutatis mutandis. However, certain schools of thought take the position that Article 724(2) does not apply to reinsurance, unless the reinsurance agreement exceptionally specifies the right of the beneficiary of the original insurance to make a direct claim under the reinsurance agreement. Therefore, the terms and conditions by which a beneficiary of insurance may make a direct claim are decided under the parties’ agreement and if such terms and conditions exist, the beneficiary of insurance can only make a direct claim in accordance with and subject to such terms.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

There is no legislation mandating reinsurance but aviation businesses typically cede to reinsurance or form reinsurance pools to diversify risks. At the time of the Asiana Airline’s airliner crash at the San Francisco International Airport in 2013, domestic insurers had ceded most of their insurances to overseas reinsurers, retaining only 2.5% domestically.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

In principle, the air carrier and the aircraft operator are liable for air transport and aircraft operation. However, the owner may be liable under Article 758(1) of the Civil Act if damages have been caused to another person by reason of any defect in the construction or maintenance of the aircraft. Further, under Articles 930(1) to (3) of the Commercial Act, an aircraft operator will be liable for damages to a third party on the ground (including underground, on the water’s surface or underwater) who has been killed or injured or whose property has been damaged by an aircraft during flight or by a person or object that fell from the aircraft. For the purposes of this article, ‘aircraft operator’ means a person using an aircraft at the time that the accident occurs and the ‘aircraft owner’ as stated on the aircraft register will be presumed to be an aircraft operator.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

Case law has found that the liability of aircraft owners (see “Liability”) to be a strict liability. According to the Product Liability Act, a party that manufactures, processes or imports aircraft or a party that, by using its name, trade name, trademark or other distinguishing symbol, appears to be or misrepresents itself to be a manufacturer, processor or importer will be liable for damages if a defect in the aircraft causes loss or damage to life, body or assets (loss or damage solely to the aircraft is excluded).

It will be assumed that the object was defective at the time that it was supplied by the manufacturer and that the loss or damage was a result of such defect if the following can be proved:

  • The injured party was using the object properly at the time that it suffered the loss.
  • The cause of the loss or damage was within the actual control of the manufacturer.
  • The loss or damage is not something that would normally arise but for the defect in the object.

However, this will not apply to cases where the manufacturer proves that the damage was a result of a different cause other than a defect in the product (Article 3(2)).

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

As South Korea is not a signatory to the Rome Convention or the Montreal Protocol, provisions therein relating to third-party liability do not apply. Instead, Article 932 of the Commercial Act deals with third-party liability and provides that the liability of an aircraft operator will be limited to the following amounts:

  • where the maximum weight of the aircraft is less than 2,000kg:
    • 300,000 units of account; and
  • where the maximum weight exceeds 2,000kg:
    • 300,000 units of account for the portion up to 2,000kg;
    • 175 units of account per kilogram for the portion between 2,000kg and 6,000kg;
    • 62.5 units of account per kilogram for the portion between 6,000kg and 30,000kg; and
    • 65 units of account per kilogram for the portion exceeding 30,000kg.

Where death or bodily injury occurs, the liability of the aircraft operator will be limited to the amount of 125,000 units of account per death or injured person within the amount prescribed above. Where an aggregate amount of damage sustained by several persons due to an accident in which an aircraft is involved exceeds the prescribed maximum amount, each instance of damage will be compensated in proportion to the prescribed maximum amount. Where death, bodily injury or property damage occurs due to an accident in which an aircraft is involved, any damage sustained due to death or bodily injury will first be compensated within the limit of the prescribed maximum amount and the property damage will then be compensated with any remaining amount thereof.

According to a research report published in December 2015, entitled “Study on Airline Insurance and Management Plan, Ministry of Land, Infrastructure and Transport”, the average insurance coverage per aircraft for international air carriers was W600 million for third-party insurance.