RATES MAY TAKE OFF WITH IATA AGREEMENTPosted On: May. 11, 1997 12:00 AM CST
LONDON-Aviation underwriters are starting to count the cost of a voluntary agreement by scores of airlines to offer unlimited passenger liability limits on international flights.
The underwriters are concerned that the new IATA Intercarrier Agreement, which overrides liability limitations in the Warsaw Convention governing international flights, will increase the cost of liability claims in the future.
However, these fears may not be justified, as the agreement may result in lower litigation costs, defense lawyers say.
Regardless, the agreement "is a groundbreaking initiative which draws a line in the sand," said Lorne S. Clark, general counsel and corporate secretary for the International Air Transport Assn. in Geneva. "There is no way that we would ever go back to artificial fixed limits for passenger liability in (the airline) industry.*.*.*. The new liability regime is here to stay, and we have to make it work. And one of the more important elements in the new era is for (airlines) to work with the insurance industry."
The IATA agreement waives the Warsaw Convention's liability limitations, which include a $75,000 per passenger cap on flights to, from and through the United States.
The only way the Warsaw limitation could be waived before the agreement became effective in February was for plaintiffs to prove willful misconduct by an airline. This type of litigation to waive the liability limit often took years to conclude.
Eighty-five airlines have signed the IATA Intercarrier Agreement, and 53 have signed the Measures to Implement the Agreement (BI, Jan. 20), Mr. Clark said at the 12th annual International Airline Insurance conference run by DYP Group late last month. By the summer, IATA hopes 100 air carriers will sign the IIA and 75 will sign the MIA.
In the future, governments may require that airlines declare to the public whether they are signatories to the IATA agreement. As a result, IATA is recommending an insignia such as "a flying heart" be put on passenger documentation of the signatories of the agreement, said Mr. Clark.
There are still troubles to iron out, however.
For example, two passengers who "are sitting side by side on the same aircraft and have paid the same price for their ticket may have vastly different coverage" under the new agreements-depending on whether their tickets originated on a signatory airline-during this transitional period when some airlines have signed and some have not, said Mr. Clark.
"That position is unfair, unconscionable and totally immoral. We must move quickly to resolve this position," he said.
Aviation underwriters at the DYP conference think that if the IATA agreement is designed to give more in compensation to passengers and their relatives, then airlines should be charged more for their airline liability insurance.
The IATA agreement "is a good thing," summed up Andre Clerc, general manager of La Reunion Aerienne in Paris. But because the agreement is designed to give more, then airlines "can pay more in premium and charge the passenger."
Recent data show that airline liability insurance claims will increase because of the new IATA agreement.
Lloyd's aviation underwriter John Westcott, for example, told an IATA meeting in Miami in February that he estimates the new agreement would cost an additional $300 million in liability claims per year.
He added that if every underwriter charged an identical additional premium to cover this cost, and the airline passed this cost onto each passenger, "It would put the price of a London-Paris airline ticket up by
1.5 cents or a London-Miami ticket by 50 cents."
At the DYP conference, Swiss Reinsurance Co. estimated that average airline liability claims after the agreement would increase to $2.5 million per passenger in the United States in the next century from $1.75 million in the 1990s and to $1 million from $200,000 for non-U.S. flights.
Airlines will require higher liability limits as a result of the new agreement and also because third-party personal injury risks on the ground are increasing, added Tony Galbraith, group treasurer for British Airways P.L.C.
The new agreement could cost more than underwriters think, however, warned Tony Medniuk, managing director and chief
underwriter of The British Aviation Insurance Group in London.
For example, Mr. Medniuk foresees additional litigation costs as a result of the new agreement. The agreement allows for damages to be decided under the law of the passenger's domicile.
"You may think me cynical, but I foresee a new kind of forum-shopping evolving," said Mr. Medniuk.
Plaintiffs could seek a favorable jurisdiction based on their place of birth, marriage or where they pay their taxes.
"The ingenuity of the plaintiffs bar beckons, and as far as I can tell, they have always risen to a challenge," said Mr. Medniuk. "Not much saving for insurers in that scenario."
Passengers who in the past have accepted Warsaw limits for non-grievous claims such as "nervous shock" or "fear of flying" also may seek unlimited compensatory damages, Mr. Medniuk surmised. Warsaw forbids punitive damage awards.
"The architects and advocates of unlimited airline liability have either ignored or underestimated what will be a significant impact upon claims handling of the individual one-off cases or so called attrition losses," Mr. Medniuk said.
Airlines also will continue to sue manufacturers to try to recover passenger liability costs if there is evidence that some component caused the loss.
But because the IATA agreement is "voluntary" rather than regulatory, plaintiffs may be able to sue the manufacturers directly after they receive damage awards from the airline, said Mr. Medniuk.
That could mean that insurers pay out twice for the same loss-once for their airline client and once for the manufacturer, he noted.
"It does seem that the size of the legal minefield which insurers are required to traverse is steadily growing and the explosive power of each individual mine is strengthening almost exponentially," said Mr. Medniuk.
However, George N. Tompkins Jr., senior partner at Tompkins, Harakas, Elsasser & Tompkins
in New York, thinks Mr. Medniuk is "dead wrong" in many respects.
"The approach to settlements will alter substantially," said Mr. Tompkins, a longtime advocate of the elimination of the Warsaw liability limits.
Plaintiffs lawyers "are inter-ested in one thing and one thing only: money. And they're interested in getting it quickly, and
they do not want to have to
spend a single day in the courtroom."
The reason passenger cases have been tied up in the courts for "years and years and years" is because plaintiffs lawyers have had an obligation to their clients to try and prove willful misconduct to break the Warsaw limit, said Mr. Tompkins. "Now they don't have to do it. They're delighted with the new system."
The value of the passenger liability cases will neither go up nor down as a result of the IATA agreement.
What will drive up the cost of the claims is "economics," as it has done in the past, Mr. Tompkins added.
What should be reduced are claims expenses, because willful misconduct litigation will not have to be defended, said Mr. Tompkins.
Airlines now will be able to settle with passengers in a just way, and "no court will penalize the airline for doing the right thing," he said.