Mindy Pollack of Risk Capital Re wonders if recent aviation and space losses will affect future underwriting of these risks as much as the industry's bottom line for 1998.

Insurance and reinsurance underwriters may have been holding their collective breath when the Leonid meteor showers passed through in November. Over 600 satellites orbiting the planet were vulnerable to particles travelling at close to 150,000 miles an hour. Technicians adjusted solar panels and orbits to reduce the chances of a space collision, but the risk could not be eliminated. You may have heard the sigh of relief when the storm passed without incident, save the excitement from viewing a spectacular event. That was the good news for the year.

While safe from meteors, the aviation and space reinsurance market could not evade significant losses in 1998. Major satellite failures and the Swissair crash converged in the third quarter to more than offset any profits from the first six months of the year. In the aftermath, early aviation lawsuits seek hundreds of millions of dollars and communications companies are scrambling to schedule replacement launches in 1999 and 2000.

None of the accidents in 1998, taken by themselves, signal any dramatic trends for the aviation and space industry. However, when recent losses are placed in the context of an unlimited liability regime and falling premium rates, the consequences of an even moderate accident year can be staggering. Swissair 111 did not make the world's top 10 air disasters as measured in fatalities, but total compensation to the families of victims will likely exceed that of any larger catastrophe.

Reinsurers know the importance of putting loss experience, no matter how high or low, in historical context. One bad year does not necessarily equate with bad business. The challenge for underwriters is determining whether industry, legal, scientific and other developments are significant enough to alter the context. In other words, can underwriters even get comfort from a long period of good results when forces are changing the rules? The answer may be a bit different for aviation and space, but the questions are the same.

Swissair and damage awards
We knew immediately that the Swissair 111 crash would make history for at least one reason: it is the first major disaster to be adjusted without the protection of the Warsaw Convention liability limits. Under the 1929 Convention and subsequent protocols, damages on covered international flights are limited to $75,000 per passenger. However, Swissair is one of the over 100 airlines who have waived those damage caps. Many airlines executed the International Air Transport Association (IATA) waiver agreement, but Swissair had independently voided the limit before endorsing the industry measure. Few people were against the movement, but many wonder exactly where it will lead us.

Before the waivers took effect, airlines and their insurers relied on a $75,000 maximum payout for purposes of reserving, settlement and pricing. Now companies must look to US domestic catastrophes and a handful of other international incidents for signals. Some plaintiffs have demonstrated “wilful misconduct” to avoid the Warsaw caps, as in the Cali, Korea and Lockerbie disasters, but the vast majority of claims were settled and the few high verdicts do not provide a good picture of air crash compensation. What can insurers and reinsurers expect in the post-Warsaw regime?

Based on industry and news reports, the average air passenger death case settles in the $2 to $3 million range. Swissair Flight 111 may not be average. A rather high portion of the 215-passenger manifest were business executives and diplomats, likely commanding more than the average payout. The question we have is not where Swissair will lie in the range, but whether it will push the higher end beyond $3 million. When I first reviewed large aviation accounts, a $1 million per passenger reserve and settlement was common, and now I wonder if $3 million will be enough.

The early Swissair suits and press releases reflect law firm marketing efforts more than realistic damage outcomes. The first action was filed within a week of the accident, seeking $50 million compensatory and $75 million punitive damages for the family of Joseph LaMotta, son of US boxing great Jake LaMotta. Not to be outdone, subsequent plaintiffs asked for $550 million in total damage and even more than $1 billion, including punitive amounts. While $1 billion demands cannot be taken seriously, do not discount the ingenuity and persistence of the plaintiff bar. For example, to avoid the prohibition on soliciting business within 30 days of a crash, several law firms held “educational seminars” on aviation liability. We note that the monetary advances made by Swissair - the special drawing rights - do not affect the civil lawsuits.

If the Swissair crash does set the compensation record, not all of the legal and financial burden will rest on the airline. Defendants Boeing and McDonnell Douglas are product liability targets, presumably based upon any causation connection to faulty wiring and insulation. Warsaw has never protected manufacturers. Now they can share more of the financial and litigation burden with the uncapped airline. One other interesting twist is that Delta Airlines also sits at the defence table as the US ticketing agent and code carrier for Swissair. The presence of additional defendants does not bode higher settlements, but it probably means that no one company will absorb the full impact.

Important legal issues

Before estimating any Swissair and future accident loss payouts, reinsurance underwriters need to appreciate how many legal and regulatory factors could influence the ultimate outcome. For a fairly narrow exposure and product line, the aviation market faces a remarkably complex and unsettled liability framework. A variety of laws, including the Warsaw Convention, converge on the aviation accident scene. We review a few such issues closely connected to recovery and compensation.1

All necessary measures

While Swissair and major airlines waived defenses up to the amount of special drawing rights, they retain Warsaw Convention's “all necessary measures” defence above that level. If the airline can show it took all precautions, or it was impossible to do so, liability is limited. However, this obstacle is rarely surmounted because any degree of negligence will doom the “all necessary measures” defence.

We doubt that Swissair will prevail given early suppositions of flight crew errors in judgement. We also question if the booking carrier, Delta, can maintain the defence, because the Convention applies only to the carrier who “performed the transportation” when the accident occurred. As a result, the defence is of little significance here, even for the carrier who did not contribute to the accident. Unfortunately for booking carriers, the costs of defence and settlements may be out of proportion to their nominal role.

Punitive damages

The Warsaw Convention is silent on punitive damages, which most courts have interpreted as reflecting an intent to preclude recovery. The US Supreme Court has even weighed in on the issue in striking down punitive damages awarded in the KAL 007 litigation. Zicherman v. Korean Air Lines, 516 US 217 (1996). Given that most signatories do not authorise punitive damages, this strict interpretation is quite reasonable. Does the waiver of damage caps alter that result?One school of legal thought is that waivers do not create new rights to punitive damages, and the Korean Air and Lockerbie litigation strengthens the argument. Plaintiffs demonstrated wilful misconduct to avoid the caps, but the courts concluded that the proof had nothing to do with punitive damages and the general compensation scheme of the Convention. Swissair plaintiffs will test this precedent. We expect arguments that waivers signal airline willingness to pay punitive as well as unlimited compensatory damages, and that any pre-waiver case law is inapplicable.

In contrast, the manufacturer defendants (and possibly Delta) are exposed to the full brunt of punitive damages. It is true that many states have tightened the laws on punitive damages, making it harder to recover awards out of proportion to the compensatory component. While punitive awards are moderating, we still believe that the exposure influences the settlement process and claim payments. If only the manufacturers can be socked with punitive verdicts, we can see a bit more of the financial contribution shifting away from the airline to Boeing and McDonnell Douglas.

High seas question

When an airplane crashes off the coast, yet another layer of legal questions is revealed. The Death on the High Seas Act (DOHSA) creates a private and exclusive right of action arising from death caused by wrongful act occurring “on the high seas beyond a marine league from the shore of the US . . . ” Although created for mariners, the statute has been applied to aviation disasters at the behest of air crash victims seeking to avoid Warsaw limits. DOHSA is limited to pecuniary relief, but even this financial recovery usually exceeds $75,000.

Airline waivers turn the tables. Now plaintiffs want to avoid DOHSA, and often find that they cannot. The US Supreme Court has made it clear that DOHSA compensates financial loss only and gives nothing for pre-death pain and suffering, thereby depressing recovery for children and others without large incomes. Dooley v. Korean Air Lines, 118 US 1890 (1998). Sometimes geography is on the plaintiff's side, as in recent TWA Flight 800 litigation. The lower court in New York ruled for plaintiffs that the crash did not occur on the “high seas” and that for DOHSA to apply, both the marine league and high seas tests must be satisfied. In re Crash off Long Island, 1998 WL 292333 (SDNY June 2, 1998). Will DOHSA apply to the Swissair disaster? Look for more discussion of DOHSA issues in Congress, the legal press and the courts.

Which jurisdiction?

The Warsaw Convention and case law deny punitive damages, but they do not provide important details on compensatory damages available. For example, can the family recover for the victim's lost enjoyment of life, so-called hedonistic damages, which are recognised in only a handful of states? On a grander scale, can a non-US citizen receive the benefit of a US state law? Industry agreements are not all that clear on the applicable law. The basic IATA waiver agreement refers to the law of the passenger's domicile, but the Measures to Implement the IATA Agreement (MIA) say that passenger domicile is an option available to the carrier. A third air carrier agreement also recognises the law where of permanent residence. In an air accident involving many diplomats, like Swissair, the outcome can be very important.

Claimants will seek access to US courts and the most favourable state law, and courts may ultimately undertake what may be the most procedural yet influential analysis to the damage result. Necessarily, the analysis is fact-specific so each case will vary, but airlines should anticipate more claims adjudicated and settled under US damage laws. Also, plaintiffs will have the manufacturers and other defendants, like Delta, in mind when preparing an “applicable law” strategy. We have seen jurisdiction and applicable law issues threshed out in many US domestic air crash suits, and must say that we do not relish the prospect in international incidents.

Future shocks

Federal and state legislation can change the liability and damage picture in an instant. Air crash victim rights groups are lobbying to broaden DOHSA recovery to include non-economic damages. House and Senate bills passed but Congress adjourned before inconsistencies could be resolved, suggesting that these measures will be revived this year. Underwriters should not be surprised if the DOHSA bills are retroactive to help TWA 800 as well as Swissair families. New EC regulations on airline liability are raising criticism for departing from industry agreements. The International Civil Aviation Organisation (ICAO) may revamp the rules for international disasters, but final action is several years off. The liability and damage picture is anything but clear now, and we do not see much hope of immediate improvement.

Back to where we started, the average payout in the Swissair disaster will likely surpass that from all previous aviation losses, pending the outcome of the legal issues we discussed. In any event, the airline will pay more in a post-Warsaw, uncapped world, and financial relief will come from other defendants. Where does this leave insurers and reinsurers underwriting all airline aviation risks? Notwithstanding Swissair, the compensation rules have changed and many legal rules are in flux. Whether or not average compensation sets a record, you do not need a calculator to figure that aviation liability exposures are rising faster than the premiums paid for the protection.

Multiple satellite failures

While we face complex liability issues and losses in the aviation line, we discuss only losses in the satellite reinsurance community. You know the basic loss facts: between August and October of 1998, there were failures from PanAmSat Galaxy IV and X, and the Zenit 2. Of the 19 space launches during the third quarter, only 15 were successful; the Globalstar failure accounts for 12 of 15 lost satellites. Over $600 million of insured losses emerged during one quarter from a line whose annual premium is around $800 million. Up until the third quarter, claims were keeping even with premium but the similarity ends there.

The recent spate of launch losses does not appear to reflect any systemic problem with satellites or the launch process. As former claims professionals, we do know that an unusual number of losses - technically known as a blip - can inexplicably occur in one quarter and miss the next, be they product liability, D&O, aviation or space. A look backward shows a relatively good albeit short loss history. The third quarter experience does highlight the relative youth of the commercial satellite industry and the fragility of space vehicles. Satellites and carriers are still in somewhat of a research and development mode, at least more so than other industries, and there is just more uncertainty from new than time-tested exposures.

Iridium and other well known in-orbit losses may have been overshadowed by launch events, but news reports highlight how many things can go wrong with operational satellites. Fortunately, many in-orbit breakdowns are temporary or partial, never developing into insurance claims. Other failures do reach claim status, and then insurers and reinsurers may confront a multitude of adjustment, coverage and salvage questions.

Whether the third quarter failures are a blip or permanent trend, it is too early to hazard a guess. Some insurance and reinsurance companies are reviewing their exposures and retrocessional arrangements, while closely monitoring events in early 1999. Unlike aviation, the legal and compensation rules are not different; rather, the number and concentration of failures have commanded public attention. Hopefully the new year will go the way of the meteor showers, and we can all breathe easier.

Growing market demands

The aviation and satellite reinsurance markets do share more than losses for the 1998 year. Both insured industries expect strong growth fuelled by demand for their products. The Boeing and Airbus reports predict continued increases in air travel and average plane size. Consumer expectations for better communications and information ensure a full launch log for many years to come. With more flights come more exposure and need for our products and services.

The short-term picture is rather bleak as reinsurers post reserves for Swissair, Galaxy X and Zenit 2, wondering what their combined ratios for aviation and space will be. Beyond the next annual report, we see industries with virtually unlimited insurance demands. The challenge is getting premium and losses flying at the same altitude.

Mindy Pollack is an attorney and manager of client service and communications with Risk Capital Reinsurance in Greenwich, Connecticut, USA. She has 19 years of reinsurance industry experience in legal, regulatory, contracts and claims matters. The views expressed in this article are her own and not necessarily those of Risk Capital Reinsurance Company.

1. See N. Hughes, “Aviation Liability Take-Off,” in the December 1998-February 1999 issue of Global Reinsurance for an excellent review of aviation liability laws.