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LONDON-The crash last week of Korean Air Lines Ltd.'s Flight 801 in Guam could become the first major disaster in which an airline has voluntarily waived the liability limitation on international flights under the Warsaw Convention.
Sources in London last week said aviation underwriters would set up a liability reserve of at least $200 million for the disaster, but the airline's broker, J&H Marsh & McLennan Inc., and lead underwriter at Lloyd's of London would not comment. No official liability reserve has so far been set up.
London brokers said the crash is unlikely to drive up aviation premiums.
U.S. National Transportation Safety Board investigators arrived in Guam late last week to investigate why the Boeing 747-300 landed in mountains on Nimitz Hill only a few miles from Agana International Airport in the early hours of the morning on its flight from Seoul, South Korea. At least 225 passengers and crew died, though 29 people survived the crash. Thirteen or more Americans were on board.
A complex combination of bad weather, broken airport equipment and pilot error are being blamed for the disaster.
In particular, glide slope equipment to help guide jetliners into the airport was shut down for maintenance. Although the air traffic control tower at the airport is privately run by Barton ATC International in Gibbsboro, N.J., the Federal Aviation Administration owns the instrument landing equipment in question.
The FAA notified pilots through a "notice to airmen" that since July 7 the landing equipment had been out of service to be upgraded, said an FAA spokesman in Washington. Flight 801 also was notified sometime during its landing approach that the equipment was out of order, the spokesman said.
Without the equipment, pilots are supposed to follow a chart showing how to descend using a "step landing." According to this chart, an aircraft should not be below an altitude of 1,440 feet when going over one of the airport's radio beacon, but Flight 801 nearly clipped that beacon before crash-landing, the FAA spokesman said.
Korean Air Lines' hull and liability insurance, which renews Nov. 1, is underwritten by the Oriental Fire & Marine Insurance Co. Ltd. of Seoul, but most of the coverage is reinsured in London. The reinsurance is led by Murray Lawrence aviation syndicate 824. The hull is insured for $60 million, and the airline carries a liability limit of at least $1 billion.
The Murray Lawrence aviation syndicate's claims manager flew out to the region last week, said underwriter John Butler.
Korean Air Lines has had 12 major or partial airline losses since 1983. That year, one of its Boeing 747s was forced down by Soviet fighters on a flight from Anchorage to Seoul, killing 246 passengers and 23 crew.
Eleven passenger claims are outstanding in the United States 14 years after KAL Flight 007 was shot down in 1983, according to George N. Tompkins Jr., a partner with Tompkins, Harakas, Elsasser & Tompkins in White Plains, N.Y. It has taken this long to pay passenger damages because "lawyers representing the families want more money than the law says they are allowed," he said. About $100 million so far has been paid to the KAL Flight 007 victims' families, he said.
Korean Air Lines is a signatory to the International Air Transport Assn.'s Intercarrier Agreement on Passenger Liability. That agreement waives the liability limitation on recoverable compensatory damages found in the Warsaw Convention, which governs international flights. The limitation varies between $10,000 and $145,000 per passenger, depending on the region, unless willful misconduct can be proved.
Korean Air Lines also signed an IATA implementation agreement that calls for strict liability up to 100,000 special drawing rights ($134,130), with proof of negligence required for damages above that amount. The implementation agreement also defines what conditions should be put in a passenger's conditions of carriage and in tariffs filed to governments.
It is not known, however, whether the airline agreed to an option in the agreements that would allow damages to be determined by the domicile of the passenger. Legal experts believe airlines cannot determine voluntarily where passengers can sue anyway because other articles in the Warsaw Convention that are still in effect state that lawsuits can be filed only where the ticket was issued or in the passenger's final destination.
This would mean that if an American on board the KAL flight bought a round trip ticket in Seoul, then he or his survivors could only sue in South Korea and not in Guam or in the United States, according to Lee Kreindler, senior partner for Kreindler & Kreindler in New York.
Although Korean Air Lines signed the IATA agreements, sources believe the South Korean government has yet to approve the new ticket wordings that would implement the agreement. Attorneys at the airline's London-based law firm, Beaumont & Son, did not return phone calls.
By signing the IATA agreement, KAL has waived all passenger limits, regardless of whether the airline has filed anything with the South Korean government, said Mr. Kreindler. "If we are assigned to represent any of the (KAL Flight 801) families, we will take the position that the signing of the (IATA) agreement is all that is necessary to waive the limits. . . .If they waived the limit, there is no limit."
KAL officials last week reportedly stated that the airline's liability will be 100,000 SDRs per passenger to pay for compensation for injury or death, medical treatment and funeral costs.
According to a KAL filing for a certificate of insurance with the U.S. Department of Transportation, the airline has a minimum liability limit of $300,000 per passenger for bodily injury for flights through the United States.
"This is an interesting loss (because) it's the first post-signatory case," said one aviation underwriter. "It's the first real test" of the IATA agreements.
To date this year, there have been nine total Western-built jet losses costing about $348 million in hull claims, including Flight 801, according to analyst Airclaims Ltd. In the past 12 months, there have been 20 such total jetliner losses, costing about $647 million in hull losses.
There has been a spate of losses and near misses since June, including the fiery crash last month of a Federal Express Corp. jet with an estimated value of $115 million (BI, Aug. 4).
This excludes the crash of a cargo plane in Miami last Thursday. The plane-a $10 million DC-8 cargo plane operated by Fine Air Inc. and owned by its sister company Agro Air & Associates-crashed on takeoff. The plane, on its way to Santo Domingo with 80,000 pounds of textiles, skidded across a six-lane highway, narrowly missing cars and pedestrians before crashing into a parking lot of a shopping mall. Four crew and one person on the ground were killed, and three others were injured.
The hull and liability insurance is placed in London by C.E. Heath P.L.C. and led by Westminster Aviation Insurance Group.
Underwriters would like to raise airline hull and liability rates in the fall as a result of these losses, but this is probably wishful thinking, according to London brokers.
"They will need more (losses) to turn the market," summed up one broker. While total airline hull and liability premiums have dropped about 14% this year from this time last year, year-to-date claims also were down substantially until the past few weeks, he said.
Though claims may now be rising, "we're only halfway through the year. If the rest of the year remains quiet (in terms of airline losses), then we could have an average year again," and premiums would stay where they are.