Air Transport Act Leaves Questions For Insurers

For the insurance industry, however, the Act grants no reliefand raises more issues than existed without it.

Basic provisions are:

The Act provides business interruption coverage for the airlines (apart from any provided by private insurers). It grants $5 billion for "direct losses" incurred by air carriers as a result of any federal ground stop order, and for "incremental losses" incurred between Sept. 11 and Dec. 31, 2001 as a "direct result" of the "terrorist attacks."

The Act also provides that the Secretary of Transportation may reimburse an air carrier for an increase in insurance premium in the wake of Sept. 11, although that authority expires 180 days from enactment.

The Act allows the Secretary, with the approval of the President, to provide insurance and reinsurance against loss or damage arising out of any risk from the operation of an aircraft, for flights within the United States.

The Act limits air carriers liability for Sept. 11 claims to the amount of insurance coverage (reputed to be $1.5 billion per aircraft). If there are additional acts of terrorism on or to aircraft within 180 days following the Acts enactment, that air carriers liability for compensatory damages to third parties is limited to $100 million, with the government responsible for the rest. No punitive damages may be awarded against the air carrier or the government.

The Secretary has discretion to extend such provisions to vendors, agents and subcontractors of air carriers, so that such entities are not responsible in cases of such acts of terrorism for losses suffered by third parties that exceed the amount of their liability coverage.

The Act sets up a "Sept. 11th Victim Compensation Fund of 2001." Eligible claimants are "individuals" who sustained physical injury, or the personal representatives of those who died at crash sites in the "immediate aftermath" of Sept. 11 air crashes or in the aircraft.

A claimant may seek recovery for any pecuniary loss "to the extent allowed under applicable State law." A claimant may also seek compensation for non-pecuniary losses such as pain and suffering.

A claimant who files a claim waives any right to file or be a party in a civil action (other than one to recover collateral source obligations for losses). It is essentially a no-fault fund, in which a Special Master appointed by the Attorney General determines compensation based on the losses sustained and the circumstances of the claimant.

The award is not subject to judicial review. It is subject to reduction by the amount a claimant is entitled to recover from a collateral source.

From an insurance industry perspective, the Act raises a variety of issues.

Many potential claimants will elect to forego the Fund and seek more speculative–but potentially more lucrative–recovery in litigation, even though that would require a claimant to establish the fault of an air carrier.

Claimants who file with the Fund may still seek recovery from collateral sources, as the Act directs the Special Master to "reduce the amount of compensationby the amount of collateral source compensation the claimant has received or is entitled to receive."

A new claimant, the United States government, will have a right of subrogation with respect to any claim paid.

Thus, lawsuits may still be brought against first party insurers such as life and property insurers, air carriers, and any other arguably culpable entities whose liability insurers must then pay defense costs and potentially any resulting settlements or judgments.

The Act creates an exclusive federal cause of action for damages arising out of the hijacking and subsequent crashes of the aircraft involved in Sept. 11. At the same time, it provides that the substantive law for decision in any suit for such damages, including choice of law principles, shall be that of the state in which the crash occurred, "unless such law is inconsistent with or preempted by federal law." The Act does not specify if this federal cause of action also applies to claims of those that would not be covered by the Fund, such as claims by businesses.

The Act mandates that the United States District Court for the Southern District of New York shall have original and exclusive jurisdiction "for any claimresulting from or relating to the terrorist-related aircraft crashes of Sept. 11, 2001."

As worded, this grant of jurisdiction could apply to all claims relating to Sept. 11 losses, including those concerning insurance coverage. It is generally considered that the intended scope of the Act is limited to claims against the airlines.

Questions abound.

While recovery against the air carriers is limited to the amount of their insurance coverage, the Act does not specify how to apportion insurance proceeds among claimants: first filed, pro rata or per capita?

What is the effect of the provision that limits an air carriers liability for punitive and compensatory damages to the amount of its liability insurance in light of the law in many jurisdictions, including New York, which does not allow insurance coverage of punitive damages?

Are other potential litigation targets, apart from air carriers, a "collateral source" under the Act, and does a claimant filing with the Fund waive the right to recovery from those targets as well?

Will the U.S. government exercise its right of subrogation against insurers and other potentially liable entities?

The Act has been criticized for being too quickly enacted without adequate consideration of all its repercussions. One fallout is the reluctance of many members of Congress to enact legislation assisting other industries, such as the insurance industry.

Alan J. Levin is a partner based in the Hartford office of the law firm Edwards & Angell LLP (www.ealaw.com). Peter T. Maloney is an associate in the New York City office and Laurie A. Kamaiko is a counsel based in New York City.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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