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Insurers Say Airlines Not Covered for Volcano Disruption

Source: Dow Jones

Posted on 19 Apr 2010

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Facing huge losses in revenue due to the volcanic ash cloud that has prevented aircraft from flying in northern Europe, airlines won't be able to make insurance claims to cover those losses because they aren't covered for grounding planes due to volcanic events.

Typical airline insurance policies would cover damage to planes if they flew through a volcanic ash cloud, but so far no plane has been damaged because of the ban on flights in the vicinity of the cloud, insurance companies and experts said. And airlines don't have insurance for grounding planes due to natural events because policies would be very expensive, they said.

"A plane crash as a consequence of a flight through ash would be 100% insured. It's an obligatory insurance but unlikely to happen due to the closure of airports," said Christoph Groffy, a spokesman for Talanx AG's unit HDI-Gerling, one of the largest insurers of German aviation companies such as airlines and airports.

"Business interruption policies are expensive and generally, airlines or airports haven't bought them, so the full risk lies with them," Groffy said.

A spokeswoman for reinsurer Hannover Re AG (HNR1.XE) said business interruption isn't covered in the company's aviation policies, so "no impact is expected from this event." The comments were echoed by insurers in Germany and the U.K.

"The way the airlines are treating this is very much like a weather delay such as a severe snowstorm or an ice storm," said Robert Hartwig, president of the New York-based Insurance Information Institute, which provides data to better understand insurance issues.

"Even though the event is going to be very, very expensive, costing billions in terms of economic losses, it's unlikely that much of it will be insured," Hartwig said.

A volcano under Iceland's Eyjafjallajokull glacier erupted Wednesday, spewing clouds up to 30,000 feet into the air. Air space across northern Europe was closed from early Thursday, grounding thousands of planes across the world. The disruption was set to continue into the weekend and weather experts couldn't say when the problems would end.

Thousands of flights have been cancelled into and out of Europe and hundreds of thousands of passengers have been unable to fly to or from the region. Airlines aren't able to fly planes even if they wanted to because national aviation authorities have shut down airports and air space.

Some of those stranded passengers may be covered under personal insurance policies for the costs of the delays to holidays and business trips, but others won't be covered.

"Not all insurance policies are the same and travellers are urged to contact their insurance provider to clarify their specific policy coverage as not all insurers will necessarily cover this," said Steve Foulsham, Technical Services Manager of the British Insurance Brokers' Association.

The British Insurance Brokers' Association, an industry body covering 1,700 brokers and intermediaries in the U.K., said that its policies, underwritten by Tokio Marine Europe Insurance Ltd, cover travelers for travel delay and claims caused by the volcanic ash will be covered.

Airlines and industry experts are still trying to estimate the cost of the travel disruption, but the losses will run into millions of dollars at a time when airlines are already struggling with reduced demand for air travel due to the economic downturn.

The Air Transport Association, or IATA, which represents some 230 airlines and 93% of scheduled international global air traffic said that at current levels of disruption, its initial and conservative estimate of the financial impact on airlines is in excess of $200 million per day in lost revenues. However, it said airlines would be hurt further as it they will incur added costs for re-routing of aircraft, care for stranded passengers and aircraft at various ports.

British Airways PLC (BAY.LN), for example, will see the cost of grounding its entire 245-plane fleet for the first time in its history run to several millions of pounds.

BA legal documents related to the recent strike held by the employees' union show that the company estimates the average cost of taking a single long-haul aircraft out of service for a day is about GBP174,000 while the cost of grounding the entire long-haul fleet for a day is roughly GBP13 million.

BA hasn't come up with an official estimate yet on how much money it is losing from the closure of airports, but a spokeswoman for the airline confirmed that the grounding of its planes is not covered by insurance.

Belgian carrier Brussels Airlines, a much smaller carrier than BA, was one of the first to estimate the costs of the disruption. It said it expects the air travel disruption to cost its several hundreds of thousands euro. Finnish airline Finnair said it had been forced to cancel 435 flights so far, affecting about 54,000 passengers, which was costing it about EUR2 million a day in lost revenue.

German reinsurer Munich Re AG (MUV2.XE) Friday said it may be able to offer the insurance needed by airlines in the future. A Munich Re spokeswoman said the company "can offer airlines cover against such air-traffic interruptions due to force majeure, as in the present case because of the cloud of ash, or due to snowfall."

"Given sufficient demand for such cover, the group's know-how could in future help to ameliorate the consequences of such interruptions for airlines," she said.

Earlier Friday, a Munich Re spokesman said the reinsurer expects "very limited impact" from the current event, as the flight cancellations aren't insured and that, under European Union regulations, air passengers aren't entitled to compensation when "force majeure" is involved.

The spokesman said its business interruptions policies would only pay out if aircraft were damaged.

"From the current perspective, we don't see any impact from the volcanic ash. A business interruption or delayed delivery to industrial companies would have to be caused by materials damage, which isn't the case here," a spokesman for Allianz SE's (ALV.XE) industrial insurance business said.

A spokeswoman for a London-based aviation insurer said a business interruption policy in this situation would only be triggered if there is physical damage to a plane. She said an airline may be able to claim damages only if the airline has previously signed up for some special arrangement which covers an event like the current volcanic eruption. But she doesn't know whether any airline has that special kind of coverage.

"At the moment, it's more a case of airlines reviewing and making sure their continuity plans are up to date. But from an insurance point of view, there's unlikely to be any insured losses," she said.