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The

BankAssure
Guide

The Banker’s & Lessor’s Guide to

Insurance Aspects of Aircraft Financing

2000
Second Edition
THE BANKER’S & LESSOR’S

GUIDE
T O I N S U R A N C E A S P E C T S
of

A I R C R A F T
F I N A N C I N G

S E C O N D E D I T I O N

P U BL I SH E D BY
BANKASSURE INSURANCE SERVICES LIMITED

© 2 0 0 0

All rights reserved. No part of this publication may be reproduced, stored in a


retrieval system, or transmitted in any form or by any means whatsoever, without
the prior written permission of the copyright holder.
F I S H E R M E N ’S TA L E S

The crew of a Japanese fishing boat were rescued from The crew of a Russian cargo aircraft had stolen a small
the Sea of Japan and then arrested.They were accused of herd of cows from a remote airfield in Asia.During the
scuttling their boat in an insurance fraud.The fishermens’ flight the stolen animals ran riot and were destabilising
story was that a large cow had struck their vessel the aircraft. The crew lowered the cargo ramp and
amidships.After the hapless fisherman had spent 48 hours jettisoned the stolen cargo.
in prison, their story was proved correct.
This Guide is intended to serve as a ready reference for bankers, lessors
and lawyers involved in aircraft finance.

Table of contents

INTRODUCTION
Principles of Insurance Versus Principles of Aircraft Finance

SECTION ONE
AVIATION INSURANCE ....................................................................................1
Standard aircraft operator insurances
i) Aviation Hull ‘All Risks’Insurance....................................................................2
ii) Aviation Hull ‘War & Allied Perils’Insurance ...................................................3
iii) Spares ‘All Risks’Insurance...............................................................................4
iv) Aviation Legal Liability Insurance....................................................................4
v) General Legal Liability Insurance.....................................................................6

Aviation insurance wordings...................................................................................7

Other insurance covers described


i) Hull Deductible Insurance.............................................................................10
ii) Unearned Premium Insurance.......................................................................11
iii) Mechanical Breakdown Insurance.................................................................11
iv) Loss of Use/Aircraft Unavailability Insurance................................................11
v) Total Loss Only Insurance..............................................................................12
vi) Search and Rescue Expenses.........................................................................12
Important coverage issues on the Operators’ various insurances...........15
i) Agreed Values ................................................................................................15
ii) Level of liability limit ....................................................................................15
iii) Leased engines ..............................................................................................17
iv) Aggregate limit restrictions ...........................................................................17
v) 50/50 clause ..................................................................................................18
vi) War cancellation clauses ...............................................................................18
vii) ‘Breach’of Geographical Limits ....................................................................19
viii) Inadequacy of Confiscation/Deprivation coverage ......................................20
ix) Confiscation due to illegal acts and ‘Innocent Operators’ ............................21
x) Ongoing products liability insurance/‘Continuing Indemnity’ .....................22
xi) Insurance of Indemnities – a warning!..........................................................22
xii) Cancellation for non payment of premium ..................................................23

Endorsement and Acknowledgement of the Bank’s/Lessor’s Interests...27


i) Additional Insured .........................................................................................27
ii) Loss Payable Clause .......................................................................................27
iii) Breach of Warranty Endorsement .................................................................27
iv) Broker’s Letter of Undertaking .....................................................................29
v) Cut Through Clause ......................................................................................29
vi) Liability for premiums unpaid by the Lessee ...............................................29

Underwriting Security ..................................................................................31

Local Domestic Insurers and ‘Cut Through Clauses’.................................32


Loss Payable Clauses.....................................................................................37
Airworthiness and Aircraft Regulation.......................................................39
Maintenance of Technical Records........................................................................39
Chart of typical maintenance and certification programme.................................41

Insurance Claims ..........................................................................................42


i) Hull Claims ....................................................................................................42
a) Total Losses ...........................................................................................42
b) Partial Losses ..........................................................................................44
ii) Liability Claims...............................................................................................45

Lessor Liability ..............................................................................................46

Aviation Lease/Finance Clause – AVN67B ...................................................51


i) Background to ANV67B ................................................................................51
ii) ‘Operational Interest’ ....................................................................................52
iii) Amendments to standard text .......................................................................52
iv) AVN67B applicability on reinsurance contracts ...........................................53
v) Engine leases .................................................................................................53
vi) AVN67B ‘War’Clause .....................................................................................53
vii) Text of AVN67B and explanatory notes.........................................................54

Aircraft Financial Interest Endorsement – AVN28B...................................65

Insurance Documentation Checklist ..........................................................71

The Role of Independent Insurance Consultants ......................................73


SECTION TWO

INSURANCES AND GUARANTEES FOR AIRCRAFT FINANCIERS


Aircraft Repossession Insurance.................................................................79
i) ‘Perils’covered ..............................................................................................80
ii) Applicable law and legal opinions ................................................................81
iii) Security .........................................................................................................81
iv) Underwriting criterion...................................................................................81
v) Deficiencies of the operator’s confiscation insurance .................................82
vi) Repossession Insurance wordings ................................................................83
vii) Schematic diagram of Repossession Insurance ............................................84

Repossession Delay Insurance.....................................................................85

Bank’s/Lessor’s Hull and Liability Insurance.............................................89


i) Contingent hull and liability insurance .........................................................89
Examples of scenarios exposing a financier to unrecoverable claims
ii) Care Custody and Control Insurance ............................................................93
Contingent Hull War Insurance...................................................................95
Examples of scenarios exposing a financier to unrecoverable claims..................95
War Aggregate Extension Insurance......................................................................98

Total Loss Only Insurance .........................................................................101


Repossession Expenses and Technical Records Insurance ....................102
Repossession expenses covered..........................................................................102
Loss or damage of Technical Records..................................................................103

Residual Value Insurance............................................................................106


Example of RVI structure ....................................................................................107
Benefits of RVI.....................................................................................................108
Charts demonstrating the benefits of RVI...........................................................108

Revenue Stream Protection........................................................................111


Risks that can be covered
Benefits

SUMMARY OF KEY PROTECTIONS FOR AIRCRAFT FINANCIERS ............113


APPENDIX

Appendix A
Specimen Insurance Article.................................................................................119

Appendix B
Sample Certificates..............................................................................................133
i) Certificate of Insurance....................................................................................133
ii) Certificate of Reinsurance...............................................................................142

Appendix C
Sample ‘Broker’s Letter of Undertaking’..............................................................151

Appendix D
Selected Aviation Insurance Clauses and Wordings ............................................154
Clauses
Premium Payment Clause – AVN6A ............................................................154
Deferred Premium Clause – AVN5A ............................................................156
Personal Injury Extension – AVN60 ............................................................157
AV57A (USA) ...............................................................................................159
50/50 Provisional Claims Settlement Clause – AVS103 ...............................161
Sample ‘Orphan Engine’Clause ..................................................................162
Noise and Pollution and Other Perils Exclusion Clause – AVN46B ............163
Nuclear Risks Exclusion Clause – AVN38B .................................................165
War, Hi-jacking and Other Perils Exclusion Clause – AVN48B ....................168
Extended Coverage Endorsement (Aviation Liabilities) – AVN52C ............169
Aircraft Financial Interest Endorsement – AVN28B ....................................171
Airline Finance/Lease Contract Endorsement – AVN67B ...........................174
Airline Finance/Lease Contract – AVN67B (HULL WAR) ............................178
Wordings
Aviation Hull “War And Allied Perils” Policy – LSW 555B.............................182

Appendix E
Specimen Policy Wordings for Specialist Bank/Lessor Insurances
Contingent Aircraft Hull and Liability Insurance Policy – LSW610A ..........189
Repossession of Leased Aircraft Insuring Conditions – LSW147 ................207
Contingent War Insurance (sample wording) .............................................216
Introduction

Air travel has grown at an amazing rate over the past 30 years. In
order to satisfy this growth in demand,airlines have greatly expanded
their fleets.Notwithstanding the growth in demand,airlines continue
to operate in a very challenging commercial environment. Many
airlines have weak balance sheets but are operating in a highly
capital intensive industry. Profit margins are typically thin and the
regulatory environment uncertain.

Owing to noise and pollution restrictions,airlines are being forced to


renew their fleets;the replacement aircraft being of far higher values.
Also,in order to take advantage of the lower direct operating costs of
new generation aircraft,huge capital expenditure is required.

The financing and leasing of such aircraft is a major business for


banks and leasing companies and is crucial to airlines in upgrading
and modernising their fleets. With the demise of many of the tax
concessions afforded to ‘finance leases’ (for example the ‘German
Leveraged Lease’),the ‘operating lease’is now the dominant structure
for new aircraft finance.This is driven by the desire for ‘off balance
sheet’ finance which is often dictated by weak balance sheets and the
pressure of operating costs. If an airline were to amortise a Boeing
747-400 worth 150 million dollars over a period of ten years, the
revenue (in isolation) would be unlikely to justify the transaction.
However, a leasing company may be able to amortise the aircraft
utilising a residual value of ‘say’50 million dollars.This will effectively
mean that the asset being financed has a ‘cost’of 100 million dollars,
which the revenue stream may be able to sustain.
Another factor that has supported the high leverages of aircraft
finance has been the relatively stable, and predictable, values of
western airline equipment. Historically, values have been far more
stable than in shipping finance or for other transportation assets.

Notwithstanding the preponderance of ‘operating leases’, ‘finance


leases’, where the operator retains effective ownership of the
aircraft, are still common but are normally reserved for the major
carriers with strong balance sheets,or central government backing.

Owing to high leverage in aircraft financing and the fact that the
bank/lessor often remains the legal owner of the asset,it is vital that
the financier protect themselves against loss of their asset and
potential liability exposures. Substantial losses and catastrophic
liabilities may occur. Though banks/leasing companies are non-
operational owners, there is a risk, under some jurisdictions, of
liability ‘in the last resort’ for compensation claims should the liability
insurances on the aircraft be inadequate or fail.Insurance, therefore,
will be a major consideration for those contemplating aircraft
financing. Insurance can be divided into two categories. Firstly, the
essential Hull and Liability coverages maintained by the operator, and
endorsed to protect the financier’s interests.And secondly, specialist
insurances that financiers can arrange to protect themselves against
losses not covered by the operators’policies.

Concern about sovereign debt exposure has, moreover, forced


financiers to re-assess their lending to some national airlines. The
solution for mortgaged and leased aircraft is to purchase a 'political
risks' type insurance covering the risks of deprivation or the inability
to repossess and repatriate aircraft following a default. These
insurances are placed by specialist brokers,acting for the financier.

A thorough understanding of insurance, and the comfort derived


from correct protections,is of the utmost importance when making
lend commitments.

Banks/lessors are highly exposed to unexpected variations in future


residual values.In many lease structures there is a high probability, or
certainty, that the asset will be returned.Also,due to the long working
life of aircraft,the residual value represents a significant percentage
of the total amount financed. Financiers may be exposed to large
numbers of similar aircraft with similar lease expiry dates (or aircraft
return dates) that could result in large loss accumulations if residual
values are seriously degraded.Residual value risk can be mitigated by
taking out Residual Value Insurance (RVI), which is also known as
Asset Value Guarantees.

In the last three years ‘Alternative Risk Transfer’and financial insurance


products have become more widely available. Sophisticated
programmes can be designed to protect long term projected revenue
streams derived from a portfolio of leases.The perils protected might
include such risks as ‘credit’ and ‘contractual default’ (including risk
that are ‘in country’- for example a UK lessor leasing an aircraft to a UK
operator) that insurance markets have traditionally been precluded
from underwriting. These revenue stream protection products are
highly bespoke and can be arranged in conjunction with asset value
guarantees and/or political risk insurance protecting the financier
against loss or deprivation of selected collateral/assets.
Essential Principles Of Insurance
Versus Principles Of Aircraft Finance

Insurance and banking are at the opposite poles of the financial


services spectrum.Whereas the prudent banker underpins a credit risk
with securitisation,cross collateralisation and assignment of insurances
in endeavouring to achieve a zero risk position, the insurer's business
is to accept and underwrite fortuitous risks.The prudent insurer strives
to achieve an excess of premium income over claims, by minimising
the consequences of any one catastrophic claim by going for “spread”;
achieved by taking only a proportional share of any one risk and buying
various reinsurance protections.Insurance exists on the principle that
'the fortunes of the many pay for the misfortunes of the few'.

An Insurance Policy is a contract of indemnity for loss arising from


the accidental happening of any of the specific risks detailed within
the Policy; such risks are known as insured perils. The Policy will
invariably include specific exclusions (perils insurers have declined
to insure e.g. Radioactive Contamination and war between the ‘Five
Major Powers’) and they will also contain terms conditions and
warranties reflecting that the Insured will operate to recognised
industry standards and within worldwide regulations.

An Insurance Policy is also subject to the legal term 'uberrima fides'


(the utmost good faith). This imposes a duty on the Insured to
disclose all the material facts at the time the insurance is arranged,
hence 'every circumstance is material which would influence the
judgement of a prudent insurer in fixing the premium or determining
whether he will take the risk'.
An insurance policy is emphatically not as simple as a ‘Bank
Guarantee’or a ‘Letter of Credit’.When a banker wishes to rely on an
insurance policy to secure outstanding debt, he will need to satisfy
himself that the terms and conditions,net of exclusions,are as wide
as possible and the warranties reasonable. Furthermore, that the
insured value is sufficient for loan purposes and, finally, be satisfied
on the ‘claims paying ability’of insurers on the policy. Each insurer is
only liable to the extent of his proportionate share,or line.

Volumes of technical books on all types of insurance exist. As a


consequence most prime banks have general ‘in-house’ insurance
expertise and, in addition, often use specialist external insurance
consultants for their asset-based lending business.This is particularly
the case for aircraft financing owing to high operational risks and
associated liabilities.

Financiers’criteria for asset based financing are essentially as follows:

i) The estimated net earnings from operational use of the asset


comfortably exceed the debt servicing obligations of the
borrower (interest and principal repayment),at a level sufficient
to match the depreciation of the asset.

ii) The pessimistic (forced) resale value of the asset will, at any
time, exceed the debt outstanding in the currency of that debt.

iii) The asset is fully insured at all times against total and partial
loss under which insurers are fully liable to the bank/lessor and
able to pay claims due in the currency of the debt.
iv) The potential liabilities that may arise from the operational
use of the asset are insured for sufficient amounts to ensure
against catastrophic circumstances that might occur, and that the
bank/lessor is itself covered as Mortgagee/Lessor.

v) Through legal charges on the bor rower and security titles on


the asset,the bank/lessor is always able to repossess the asset
and realise a resale value,sufficient to clear the debt,should a
default by the borrower at any time jeopardise the security of the
underlying loan;

Insurance plays a key role in the above criteria and understanding


the essential principles is paramount.
“ IT F EL L OFF T HE BA CK O F AN AI RPL ANE , OFF ICE R”

A group of Boeing employees smuggled a life raft out The emergency locator beacon had been activated by
of the factory in Seattle.The following weekend they contact with the water.
took the inflata ble craft out for a little rafting trip.
Their ‘former’employer, Boeing,and the US coastguard
Their relaxing afternoon was ruined by a noisy were not amused.
coastguard helicopter, strangely far inland,that persisted
in hovering low over their heads.
SECTION ONE

AV I AT I O N
I N S U R A N C E
S E C T I O N O N E
Aviation Insurance
The aviation insurances referred to below are the unive rs a l ly
recognised insurances for aircraft with standard conditions accepted by
underwriters.

These insurances are purchased by an airline or aircraft operator. Often


the insurance is bought through one or more local domestic insurer,
who will then reinsure into the worldwide aviation insurance market
using an internationally recognised insurance broker. In the past three
years domestic insurers have greatly increased their ability to retain
insurance.This has resulted in some smaller risks being retained 100%
by local insure rs , often without the services of a recognised
international insurance broker.

The following is a list of the policies that are available, with a brief
summary of the conditions for each, and may be included within the
terms of a financing commitment:-

1
Standard Aircraft Operator Insurances
i) AVIATION HULL ‘ALL RISKS’ INSURANCE – Covers ‘All Risks’
of physical loss or damage to an aircraft from any cause (unless it is
excluded it is covered!).Cover includes pilot error, theft, all natural
causes,damage during maintenance, ground fires/taxiing accidents
etc. Coverage does not include groundings due to FAA or
manufacturer directives, or consequential loss of revenues.

Principal Exclusions are:-


- Radioactive Contamination/Nuclear causes

- War and Allied Perils (strikes/riots,hi-jacking,sabotage,


terrorism,confiscation etc.).

- Wear and Tear and Mechanical Breakdown (however


accidents consequent upon mechanical breakdown or wear
and tear are covered. For example,a crash following engine
failure).

- Damage of a progressive nature,not attributable to one


incident.

Hull ‘All Risks’ policies are also subject to a standard level of


deductible applicable in the event of a partial loss of the aircraft.
The standard deductibles for airline jet equipment are
US$1,000,000 for ‘wide-bodied’ aircraft, US$500,000 for ‘narrow
bodied’and US$750,000 for ‘hybrid’types.

2
ii) AVIATION HULL WAR AND ALLIED PERILS INSURANCE –
Covers loss or damage to an aircraft resulting from war and associated
perils including confiscation, terrorist acts, strikes, riots, sabotage and
hijacking,as excluded from the hull ‘All Risks’policy.

Principal exclusions are:-


- Losses arising from nuclear war.

- War between the Five Major Powers (defined as United Kingdom,


United States of America, France,the Russian Federation and the
People’s Republic of China).

- Confiscation/seizure due to debt, failure to provide bond,or other


financial causes.

- The repossession or attempted repossession of an aircraft by any


title holder, or arising out of any contractual agreement to which
any insured protected under the policy may be party.

In addition, geographical exclusions are sometimes imposed.This may


be as a result of sanctions (including United Nations sanctions) or
perceived instability of the area excluded.

War policies for large fleets are usually subject to an overall annual
Aggregate Limit; claims will be paid up to this point, but thereafter no
cover is given.At the time of writing,the normal maximum limit given
on large airlines is US$1,750,000,000 in any one policy year.

War policies are not normally subject to a deductible.

3
The standard wording is called LSW555B.Refer Appendix D (page 182)
for sample policy wording.

iii) SPARES ‘ALL RISKS’ INSURANCE – Covers ‘All Risks’ of physical


loss or damage to spares,including spare engines when not fitted to an
aircraft whilst on the ground and in transit for a limit ‘any one
occurrence’or a limit ‘any one item and/or any one sending and/or any
one location’. Cover can be extended to include strikes, riots and civil
commotions and limited war perils. Aircraft leases do not normally
include finance for spares or extra engines. However, it is normal to
require Spares Insurance. If an engine is removed for essential
maintenance and replaced by another separately leased or borrowed
engine,the ‘off wing’engine will need to be covered.

Spares policies are subject to a deductible.This is normally US$10,000


each and every loss but the normal aircraft deductible (for example
US$1,000,000 for a Boeing 747 engine) will apply for any engine
ingestion loss whilst running on a test bed.

War coverage for spares can be effected either under the Hull War
policy, or by extending the Spares ‘All Risks’ policy. Owing to market
agreements, war coverage excludes war and civil war in respect of
storage risks. This was highlighted by the Gulf War where Kuwait
Airlines had their spares inventory plundered by Iraq. Whereas the
cover was in force for the aircraft seized, the spares claim was
disputed.

iv) AVIATION LEGAL LIABILITY INSURANCE – Covers the operator’s


liabilities to passengers, passengers baggage, cargo and mail and legal

4
liability to third parties. The policy also covers legal expenses/costs
incurred in defending a claim; these costs are covered in addition to the
overall sum insured and can be claimed even if no legal liability claim is
paid. For airlines, coverage is normally extended to cover ‘Personal Injury’
claims for an annual aggregate limit of US$25,000,000 (within the overall
limit). Personal injury is defined as false arrest, malicious prosecution,
invasion of privacy, discrimination, slander/false advertising and medical
malpractice (refer AVN60 clause Appendix D, page 157). In addition,
coverage is normally extended to include liability arising out of war
perils, other than nuclear/major powers war, by inclusion of AVN52C –
the war ‘writeback’endorsement (refer Appendix D, page 169).

Deductibles are normally only applied in respect of baggage and cargo


liability claims.The prevailing levels being US$1,250 for baggage claims
and US$10,000 for cargo claims.

Liability limits are expressed on a ‘Combined Single Limit’ basis for


bodily injury/property damage. Ideally limits should be on a ‘smooth’
basis with no ‘sub limits’ for passenger legal liability.

Principal exclusions are:-


- Liability arising out of noise,or seepage and pollution (unless
caused by an aviation accident or in flight emergency). Cover for
noise and pollution can normally be given in respect of the
passengers; this would cover food poisoning (from
contamination) and noise injuries etc.

- Fines and certain contractual liability (for example flight delays)

5
- Liability to pilots/crew and payments made under any Workmens’
Compensation Act/Employers Liability law

- Liability to property of the Insured

- Radioactive contamination and nuclear risks

- ‘Major powers’and nuclear war

v) GENERAL LEGAL LIABILITY INSURANCE – This comprises a)


Premises Liability Insurance, b) Hangarkeepers Liability Insurance and
c) Products Liability Insurance.This coverage is normally included on
the Third Party and Passenger Legal Liability insurance and is subject to
the same general conditions and exclusions.

a) Premises Liability Insurance indemnifies the operator for


general claims for property damage and bodily injury at
premises (ramps, terminals, hangars etc) located at airports.
It includes vehicle liability whilst such vehicles are operated
‘airside’. Motor Liability insurance policies typically exclude
damage to aircraft (which can be very expensive) or damage
occurring ‘airside’.

b) Hangarkeepers Liability Insurance indemnifies the operator for


damages to ‘third party’aircraft whilst in the Insured’s care custody
and control.This would include ‘third party’aircraft hangared and
aircraft being worked upon at the operator’s premises.

6
c) Products Liability Insurance indemnifies aviation manufacturers,
suppliers and repairers from liability arising from accidents due to
faulty equipment/product failure.Many operators provide maintenance
services to third parties on an ‘ad hoc’, or contracted basis.The coverage
would also apply to claims arising out of aircraft disposed of, where the
faulty work had occurred during the period of the operator’s control
and such work is a contributory cause of an accident.

Hull and Liability Wordings


Hull, Spares and Liability insurances are normally combined on a
single placement. Airline wordings are usually ‘manuscript’ forms.
These manuscript wordings provide much broader coverage than the
standard wordings, as listed below, from which they evolved:-

AVN1C Worldwide Hull and Liability wording


AVN16 North American Hull wording
AVN20 North American Liability wording
Ariel Form Sections 1, 2 and 3 Premises,Hangarkeepers and Products
Liability wording

General aviation risks are usually insured on standard wordings without


the benefit of a manuscript form.

North American insurers use their own wordings and other


international insurers (France, Italy and Germany are examples) use
local wordings in their own language. The coverage afforded under
these wordings is essentially the same as under the standard Lloyd’s
forms.

7
Hull ‘War’insurance is usually placed on a separate form with different
insurers. Wordings are based upon the LSW555B form (refer Appendix
D, page 182)

8
Other insurance covers described
i) DEDUCTIBLE INSURANCE – is designed to reduce the standard level
of deductible imposed under the main hull ‘All Risks’ insurance. It is
normally a separate policy and is subject to an aggregate limit for all
claims.The policy is primarily intended to cover damage to aero engines
caused by ingestion of ‘foreign objects’, but will cover other damage such
as landing gear or damage to the fuselage .N ew generation jet engines are
valued at over US$15,000,000 and minor incidents can easily result in
claims of over US$1,000,000.Aircraft financiers often require that smaller,
or less well capitalised airlines, purchase this insurance. The standard
deductibles for airline jet aircraft are:-

‘Wide bodied’aircraft US$1,000,000


‘Narrow bodied’aircraft US$ 500,000
‘Hybrid’aircraft (MD-90,A320 etc) US$ 750,000

It is common for financiers to insist that this deductible is reduced to


US$100,000 or US$50,000 each loss. Deductible policies ‘follow’ the
overlying hull ‘All Risks’ policy in most respects,and are subject to the
same general conditions and exclusions.However, deductible wordings
tend to include tighter definitions of ‘wear and tear’ and what
constitutes an ‘ingestion’loss.

Most Deductible policies are subject to an aggregate limit (for example


3 x the ‘Any One Occurrence’limit).Insurers will pay all valid claims up
to that point and thereafter the cost of repairs will have to be borne by
the operator.

10
ii) UNEARNED PREMIUM INSURANCE (UPI) – in the event of a total
loss,premium instalments normally become payable in full.UPI covers
the pro rata premium from the date of total loss to expiry, that would
otherwise be deemed ‘earned’ and payable to insurers.This protection
can normally be included under the Hull policies.

iii) MECHANICAL BREAKDOWN INSURANCE – Covers operating


losses resulting from mechanical breakdown to engines as excluded
under the main hull ‘All Risks’and spares insurances.As with deductible
insurance, aircraft financiers may insist that smaller airlines buy this
coverage. New generation high thrust engines can be worth over
US$15,000,000 each and hence the loss of just one engine may create
a financial problem for a smaller operator. The need for Mechanical
Breakdown insurance is mitigated if there is a strong manufacturer’s
warranty in force.

iv) LOSS OF USE INSURANCE/AIRCRAFT UNAVAILABILITY


INSURANCE – Loss of Use covers the loss of income if an aircraft is
unable to operate due to an ‘intervening peril’. Coverage is normally
restricted to the same perils as covered under hull ‘All Risks’ and ‘War
Risks’ policies but can be extended to include such causes as
mechanical breakdown, strikes by air traffic control, groundings by a
manufacturer or FAA,and United Nations sanctions.Coverage excludes
claims due to total loss of the aircraft hull.The policy will pay a fixed
daily amount after an excess period (for example 7 days).

Sometimes financiers will require that the coverage is purchased by a


lessee to ensure that lease payments can be met whilst the aircraft is
inoperable.

11
v) TOTAL LOSS ONLY INSURANCE (TLO) – Provides an additional
insured amount payable in the event of a total loss of the aircraft.
Some airlines purchase hull insurance for an Agreed Value and then buy
a separate ‘TLO’ amount in addition to the Agreed Value amount. This
should satisfy the financier (actually any loss will be adjusted on the
Agreed Value and hence a ‘total loss’ will be achieved with a lesser
amount of damage) and will typically result in a premium saving for the
operator;‘TLO’insurance is normally less expensive than ‘All Risks’.‘TLO’
can also be purchased by the financier in their own name.This type of
policy is described in greater detail under Section Two ,p age 101.

vi) SEARCH AND RESCUE and Additional Expenses coverage should


be endorsed onto the hull ‘All Risks’ or legal liability policies. In the
event of an accident, or aircraft disappearance, an operator has a duty
to its passengers.In addition,after an accident there may be substantial
costs incurred, such as clean up costs, recovery of human remains,
wreckage removal and public enquiry/investigation expenses.The costs
can be very high and may involve charter of aircraft or even mini
submarines. Sometimes the costs may be greater than the value of the
aircraft hull and/or liability claims resulting from the initial incident.It
is therefore recommended that this coverage is purchased by operators.
The standard endorsement is LSW705.

12
OK, SO WHO’S RESPONSIBLE?

A drunken teenager, a member of a party of rugby and the stewardess, she eventually agreed for it to be
players, boarded an aircraft in Darwin carrying a stowed in a cupboard adjacent to the first class cabin.
freezer box containing a large number of live mud
crabs. On arrival in Melbourne,and as the passengers were about
to disembark, the stewardess made the following
“I’m sorry, Sir, but you cannot bring that container announcement to all the passengers, over the aircraft
on board” the stewardess said to the youth.After much intercom.“Could the young guy who gave me the crabs in
discussion and stubbornness by both the teenager Darwin, please make himself known to the cabin crew”.
Important coverage issues on the
Operator’s various insurances

i) Agreed Values
It is normal for aircraft to be insured on an ‘Agreed Value’ basis.This
means that the underwriters do not have the option to replace a lost
aircraft with another of similar age and condition.Insurers are normally
comfortable with Agreed Values of plus or minus 10% of a market value
estimate.Hence the financier can require a level of Agreed Value that is
greater than the amount outstanding on the loan/lease at the date of any
loss. In the event of a loss the insurance proceeds will then clear the
debt plus any outstanding interest and expenses.

If a further increased sum insured is required, a separate ‘Total Loss


Only’policy can be taken out.Refer Section Two,page 101.

ii) Level of liability limit


It is easy to envisage catastrophic liability scenarios involving airlines.
These may not necessarily involve great loss of life or mid air collisions
over big cities.Aircraft are valued at up to US$200,000,000; values over
US$150,000,000 are commonplace. Damage to a single ‘third party’
aircraft can result in large claims.Ground accumulations at airports like
London Heathrow are vast; aircraft are parked very close to active
runways.Consequential loss exposures also need to be considered.

In determining the minimum liability limit that the aircraft operator


must carry, aircraft financiers should consider the legal environment in

15
which the airline is operating, the type and weight of aircraft, the
passenger nationality profile, passenger seating numbers and airport
destinations. Passenger liability exposures depend upon the nationality
of passengers,domestic laws,and a number of international treaties.

It is important to consider the implications of the ‘IATA Intercarrier


Agreement’ and European Union rulings (EC 2027), the provisions of
which are now being adopted by airlines worldwide. These new
‘contracts of carriage’ effectively mean that liability awards to
passengers are unlimited. Potential catastrophe exposures have
increased significantly. For example, the anticipated average passenger
awards arising out of the Swissair MD-11 loss in 1998, with 218
fatalities, is over US$2,500,000 per passenger. Prior to adoption of the
IATA/EC 2027 type contracts of carriage, liability awards of this size
were only likely for claims involving US or Japanese airlines.

Minimum liability limits are often stipulated by domestic law. These


minimum limits can be surprisingly low and should not be viewed as
recommendations.Some airports require their own minimum limits and
insist that the airline carry a certificate to verify the limit is in place.
Passenger airlines are normally expected to carry higher limits than
cargo airlines. However, the potential liability resulting from a mid-air
collision is little different.

Liability limits should be worded to apply to each aircraft separately.


Therefore a mid air collision between two aircraft,covered on the same
fleet,will not restrict the available policy limit for each aircraft.

16
iii) Leased engines
Some small airlines,which ‘out-source’their maintenance, do not keep
a spares inventory. However, when an engine is removed for repair or
service it is common for a replacement engine to be leased or
borrowed on a short term basis.In such circumstances it is important
that the airline has purchased a spares insurance policy and that the
aircraft value is increased by the value of the replacement leased
engine. In the event of a total loss, insurers will then pay the agreed
value of the aircraft plus the value of the replacement engine and take
title to the original engine that is off the wing (sometimes known as the
‘Orphan Engine’).A suggested clause is shown in Appendix D, page 162.

iv) Aggregate limit restrictions


Insurers,like banks,are keen to monitor their aggregate exposures to a
single occur rence, or series of occurrences. Some events can result in
coverage being exhausted by aircraft in which the financier has no
interest.Hull and spares ‘War Risk’policies for fleets of aircraft typically
have policy aggregate limits.Had the Kuwait Airlines fleet been heavily
financed,the financiers would have suffered a shortfall.The total value
of assets seized by Iraq was around US$800,000,000. The insurance
policies were subject to various aggregate limits that restricted the final
recoverable amount (after many years of legal wrangling) to
US$500,000,000 plus fees.

‘Personal Injury’ coverage, an extension to the liability insurance, is


limited to US$25,000,000 per airline (the US$25m sub-limit provision
can sometimes be re m oved for ‘ p e rsonal injury ’ l i ability to
passengers).

17
Hull deductible ‘buy down’ policies are subject to aggregate limits,
though the potential for lar ge financial shortfalls is limited.

If the financier is uncomfortable with the level of aggregate protection


afforded under the operator’s policies,it can purchase separate ‘excess
aggregate’policies.This type of policy is taken out in the name of the
bank or lessor and covers their interest only.

v) 50/50 clause
In the event of a mid-air explosion and catastrophic loss of an aircraft
t h e re is always speculation about potential terro rist causes.
Sometimes the actual cause of the loss is never determined with any
certainty. In other cases it takes many months for the accident
investigation to report its conclusions. During this period the airline
and/or financiers will want their hull claim paid and will not want to
be prejudiced by arguments between the hull ‘All Risks’ and hull ‘War
Risks’ insurers. The 50/50 Provisional Claims Settlement Clause
(AVS103) states that the respective ‘All Risks’ and ‘War Risk’ insurers
will immediately pay half the total loss amount each, and then resolve
the final apportionment at a later date. This results in the loss payee
receiving claim proceeds quickly.This clause has operated on several
occasions, including, after the 1985 Air India loss, where the aircraft
exploded over the Atlantic Ocean. For full text of AVS103 clause refer
Appendix D, page 161.

vi) War cancellation clauses


Long-standing agreements between international insurers dictate that
‘War’insurances are subject to certain cancellation clauses and review

18
provisions.Historically this was to protect insurers from unmanageable
exposures that would result from wars.War insurers on hull,spares and
liability policies monitor wars and regional conflicts very closely.

It is very rare for an existing airline to have cover withdrawn


completely. Insurers normally offer to cover airlines operating into
dangerous areas,albeit at increased charges.

Problems may arise for a financier if aircraft are chartered or requisitioned


for use, during a war, by a government.The airline’s insurers may decline
to continue cover.Also, the airline may be unable, or unwilling to pay the
extra premiums levied.There are ‘Contingent War’insurance products that
protect the financier’s interests in such situations.This is described fully
in Section Two ,p age 95.

vii) ‘Breach’ of Geographical Limits


Most insurance policies contain a clause defining the geographical scope
of the policy.Most leases require that geographical limits are ‘Worldwide’.
However, on occasions this is not possible to negotiate and the insurers
require certain exclusions. Excluded areas are typically unstable
countries/territories or countries subject to UN sanctions.Sometimes the
exclusion may be qualified, for example to include ‘overflying’. Also,
diversion due to ‘Force Majeure’ or other emergency would be covered.

It should be noted that if a lessee suffers a loss whilst operating outside


the geographical limits,the standard ‘Breach of Warranty’coverage may
not protect the financier’s interests.

19
It is sometimes possible to include a form of words in the Geographical
Limits section of the operator’s policy to ensure that such a gap in
coverage does not occur.

For example: If the Geographical Limits read ‘Worldwide excluding


countries subject to United Nations sanctions’, the words ‘or held
covered at terms to be agreed by leading insurer, as soon as
practicable’, could be added.

viii) Inadequacy of Confiscation/Deprivation coverage


Hull ‘War’insurance often excludes ‘confiscation by the government of
registry’. This is because insurers are not prepared to cover a
government confiscating assets that in many cases may already belong
to it (for example on a state owned airline). Also, the potential for
aggregation of exposures is perceived to be high.

Even where ‘confiscation by government of registry’ is included, it


provides very limited protection to the aircraft financiers.The Hull War
Risks policy wording (LSW555B) contains the following exclusions:-

- ‘The repossession or attempted repossession of the Aircraft by


any title holder, or arising out of any contractual agreement to
which any Insured protected under this Policy may be party…’

- ‘Any debt, failure to provide bond or security or any other


financial cause under court order or otherwise…’

20
If a bank/lessor is unable to repossess and de-register an aircraft
following a default under the lease,it will be very hard to convince war
risk underwriters that a ‘bona fide’ confiscation has occurred. Only in
circumstances where a country descends into general turmoil, with
widespread acts of seizure, would the policy be expected to respond.
However, in such circumstances (general turmoil or outright war) there
is a strong chance that underwriters will have already exercised their
rights to cancel or review the conditions of coverage.

If an aircraft is parked at an airport, in an undamaged condition, in a


country where other trade and air travel continues without problems,
it will be hard to convince war underwriters that the asset in question
has been confiscated.

If financiers are concerned about confiscation or deprivation risks a


separate, non-cancellable, ‘Aircraft Repossession Insurance’ policy
should be taken out, in the name of the bank/lessor. These long term
policies are detailed in Section Two,page 79.

ix) Confiscation due to illegal acts


Many countries (particularly USA) show little leniency to aircraft caught
carrying illegal cargoes (drugs and arms etc.). Insurance policies are
invalidated by illegal acts.Aircraft can be seized, notwithstanding the
protestations from the airline that they were unaware of the cargoes
being carried.

Some airlines have negotiated the inclusion of an ‘Innocent Operators’


endorsement that ensures full coverage remains in force provided the
airline concerned have taken all relevant measures to prevent carriage

21
of illegal cargoes,notwithstanding that local officials may deem that the
airline has acted illegally.

x) ‘Ongoing’ products liability insurance/’Continuing Indemnity’


It is normal to require that Products Liability insurance is included on
an airline liability insurance policy. Aircraft financiers should consider
the implications after an aircraft is sold or moved to another lessee.
Products Liability could attach to the original lessee arising out of
service or repair work performed during the original period of
operation. If there is no Products Liability policy remaining in force
then there could be an uncovered exposure. This is not a problem
where the original lessee continues to operate a fleet of aircraft.
Products liability coverage is not ‘aircraft specific’but covers an airline
for all its aviation activities,past and present.

Financiers may wish to insist upon a certificate confirming that


Products Liability insurance remains in force for a stipulated period,
subsequent to the lease termination (a period of 2 years, or until next
‘D’Check,is fairly standard).This is especially significant for operators
who perform their own ‘heavy maintenance’.

Normally, any subsequent disposal of an aircraft will include strong


indemnities in the language of the sale or re-lease agreement (waiving
recourse for product failure etc.).

xi) Insurance of ‘Indemnities’ – a Warning!


Insurance covenants usually contain ‘Indemnity’ provisions.The lessee
is typically required to indemnify the bank/lessor in respect of any

22
fines, taxes, penalties or contractual liability that may attach to the
bank/lessor arising out of the lease.Insurance protections (in respect of
perils covered) afforded to the bank/lessor will only be as wide as those
enjoyed by the operator. Since many of the ‘indemnity’ provisions are
not insurable, banks/lessors should accept that, having signed the
agreements,the liability will rest with the operator.

xii) Cancellation for non-payment of premium


The safeguards protecting the financier’s interests under the operator’s
policy (breach of warranty etc.) provide little comfort if the policy has
been cancelled for non-payment of premium.The following steps can
be taken by a financier to mitigate the risk of being left without
coverage,due to cancellation for non-payment:-

- Require 30 days notice of cancellation, for any reason,including


cancellation due to non payment of premium. (Financiers should
be aware that cancellation provisions in respect of War and
Nuclear risks will override the foregoing)

- Inclusion of AVN6A,deferred premiums clause,that provides for


lenient cancellation terms (refer Appendix D, page 154)

Aircraft financiers should strongly resist the use of AVN5A, Deferred


Premiums Clause.The wording of this clause provides for automatic
cancellation if an instalment of premium is not received by
underwriters on the due date.This could be interpreted as overriding
the notice provisions of AVN67B,hence leaving the bank/lessor without
coverage.

23
AVN5A is more commonly used on general aviation risks.However, for
airlines with premium payments problems (or a history thereof) airline
underwriters have been known to insist upon AVN5A. If this clause is
used, it is essential that the financier fully comprehends the
implications and receives clarification as to how coverage under
AVN67B (or AVN28A) will be affected,if the cancellation provisions of
AVN5A are invoked.

A copy of the full text of AVN5A is shown in Appendix D, page 156.


However, the Author again advises extreme caution when this clause is
applied on an operator’s policies.

The surest way to eliminate the risk of coverage being withdrawn,is for
the financiers to take out separate Contingent Hull and Liability
insurances in the name of the bank/lessor.These products are explored
further in Section Two,page 89.

24
PL EASE PR OMO TE THI S PI LO T – T O AN OFF IC E J OB!

A Boeing 747,operated by a large Asian airline,landed between wild gesticulations to cut the engine and
at Anchor age Alaska and taxied to the docking area. desperate scrambles for cover.
Unfortunately the pilot was having an off day and
parked in the wrong bay. Rather than calmly accepting The engine was broken off spewing large volumes of
his error and waiting for a tractor tug to pull the aircraft fuel and further, more serious damage was sustained b y
back out,the pilot attempted a u-turn.As the left hand the hapless Russian jet. In addition, a large cargo
wing swung around the wing tip struck an Aeroflot container was picked up in the vortex and hurled
aircraft in the next bay. Undeterred,the pilot increased through the airport terminal window (causing
power on the outer engine to full takeoff power in an considerable damage and several spilled cups of coffee).
attempt to complete the u-turn. This caused some Miraculously nobody was hurt,other than, we hope,the
consternation among ground staff who alternated career prospects of the pilot.
Endorsement and Acknowledgement of
the Bank’s/Lessor’s Interests
The primary aviation insurances will have been placed in the name of
the airline, or aircraft operator. The financier’s priority interest in the
aircraft will need to be included under these insurances.A specimen
‘insurance article’, is found in Appendix A, page 119. The principal
requirements are as follows:-

i) Additional Insured
The bank/lessor to be named as an additional insured on the
airline’s/operator’s insurance policies.When the financing is made by
way of a mortgage, then the Mortgagee may, alternatively, require an
assignment of the Hull policies. This is addressed in the Airline
Finance/Lease Contract Endorsement AVN67B. For full text of AVN67B
and explanatory notes refer to page 54.

ii) Loss Payable Clause


A Loss Payable Clause in favour of the bank/lessor, as either Mortgagee or
Lessor in respect of the hull, spares and hull war insurances.The subject
of Loss Payable Clauses is explained more fully on page 37.

iii) Breach of Warranty Endorsement


A Breach of Warranty Endorsement in favour of the bank/lessor
provides that the bank’s/lessor’s interests under the policy cannot be
invalidated by any act, omission or misrepresentation of the operator,

27
provided that the bank/lessor has not caused, contributed to or
condoned such act,omission or misrepresentation.

It is important to note that Breach of Warranty coverage does


not extend the scope of coverage beyond that which would have
existed, but for the breach of warranty.

Examples of a ‘Breach of Warranty’include:-

- An airline f lying with pilots who have less than the stipulated
qualifications.

- The aircraft being operated outside the manufacturer’s limits. For


example,landing at a runway that is too short.

- Non-disclosure by the operator of previous adverse loss


experience.

- An aircraft that is not ‘airworthy’,or not maintained,and/or


operated within the manufacturer’s stipulations/guidelines.This is
an implied warranty of any aviation insurance policy.

For airline equipment Breach of Warranty is normally provided by


inclusion of the AVN67B Endorsement. For the full text of AVN67B and
explanatory notes refer to page 54.

28
iv) Letter of Undertaking
Financiers should insist upon a ‘Letter of Undertaking’from the placing
insurance broker (or direct insurer). The letter should include the
following:-

- Acknowledgement of the interests of the bank/lessor.

- An undertaking to maintain the insurance policies throughout the


policy period,and advise promptly of any notice of cancellation
from underwriters.

- Undertaking to advise of any adverse material change in coverage.

- Agreement to answer any enquiry from the bank/lessor in respect


of renewal,or premium payment.

Refer to Appendix C, page 151 for sample ‘Broker’s Letter of


Undertaking’.

v) Cut Through Clause


A ‘Cut Through Clause’ should be included whenever the operator’s
policies are issued by the local/domestic insurer (where such insurer is
not fully acceptable to the financier) with reinsurance placed in
international insurance markets.Refer to page 32 for a detailed analysis
of Cut Through Clauses.

vi) Liability for premiums unpaid by the Lessee


Responsibility for the payment of premiums rests jointly and severally

29
with the named insureds. Therefore, the bank/lessor could be held
responsible for such payment unless provision is made in the
insurances to the contrary.This is addressed in the text of the AVN67B
Endorsement (refer page 51).Insurers will normally agree to waive any
liability for premium set off (i.e.deducting outstanding premium from
a claim payment) other than in respect of outstanding premium due in
respect of the particular aircraft,subject to a claim (AVN67B contains
such a provision).

30
Underwriting Security
An insurance policy is only as strong as the security backing it. Each
underwriter is only liable for his proportionate share;there is no joint
liability.

All recognised international insurance brokers should have internal


arrangements to vet and approve security.Although prudent brokers go
to considerable lengths to ensure that the underwriters are solvent and
will remain so,brokers will not,and cannot,guarantee the claims paying
ability of insurers.

Interested parties can refer to established rating agencies such as


A.M.Best or Standard & Poor.These companies publish ratings of claims
paying ability.The ratings take multiple factors into account, including
balance sheets, reserving against future claims, trading results and
reinsurance arrangements.

Lloyd’s Insurance policies are all backed by the Lloyd’s Central Fund.

31
Local Domestic Insurers and
‘Cut Through Clauses’
In many countries local law dictates that all insurance is placed with a
domestic insurer, who will typically reinsure into international markets.
The ratings of such companies are often far lower than would normally
be acceptable to major insurance brokers and financial institutions. In
the event that the domestic insurer becomes insolvent,not only may his
share of claims be unrecoverable, but as the direct insurer, the whole
policy may be jeopardised

In addition,a problem may occur even if the domestic insurer remains


solvent but,due to local currency controls or central bank interference,
is unable to settle a claim in hard currency.

It is possible that funds could be collected in a timely fashion from


reinsurers and then paid to the domestic insurance company, for
onward payment to the loss payees.At this point the domestic company
may be unable, or unwilling, to remit the funds to the bank/lessor
named as Loss Payee.

Banks/lessors should therefore:-

1.Monitor the proportion of a risk retained by the domestic insurer


(a minimum percentage of facultative reinsurance into international
markets may be stipulated).

2.Require the inclusion of a suitable ‘Cut Through Clause’.

32
Cut through clauses can be an emotive issue with local governments
and domestic insurers.The inclusion of a clause must be agreed by the
domestic policy issuing company (the reinsured) as well as the
international reinsurers.In addition,it must not act in contravention of
local law. There are certain countries where the clause is currently
illegal (including People’s Republic of China) and other countries
where its legality is untested (India and South Korea for example).

Cut Through Clauses can also be an emotive subject with reinsurers.


They are nervous of being made to pay a claim twice.This could occur
if the cut through clause was invoked by a loss payee and then the
reinsurers were to be presented with a second claim by the domestic
company, seeking indemnification for a claim they also have paid.

The clause applies to physical damage policies only and should not
normally apply to liability claims.

The following is an example of a ‘cut through clause’acceptable to most


banks/lessors and aviation insurers:-

“The Reinsure rs here by agree (at the request and with the
consent of the Reinsured) that in the event of any valid cl a i m
a rising hereunder the Reinsure rs shall in lieu of payment to the
R e i n s u red its successors in interest and assigns pay to the
p e rson(s) named as loss payee(s) under the ori ginal insura n c e
e ffected by the Insured that portion of any loss for which the
R e i n s u re rs would otherwise be liable to pay the Reinsure d
(subject to proof of loss) it being understood and agreed that

33
a ny such payment shall fully disch a rge and release Reinsure rs
f rom any and all further liability in connection with such cl a i m .

The Reinsure rs re s e rve the right to set off against any cl a i m


p ayable hereunder in accordance with this clause any
outstanding premiums due on this re i n s u ra n c e .

Payment shall be made under this re i n s u rance notwithstanding


(i) any bankru p t c y, i n s o l ve n c y, liquidation or dissolution of the
R e i n s u re d , and/or (ii) that the Reinsured has made no pay m e n t
under the ori ginal insurance policies.

It is a condition that the provisions of this clause shall not


o p e rate in contravention of the law s , statutes or decrees of the
G ove rnment of the country of domicile of the Reinsure d .”

34
W H Y A R E W E WA I T I N G ?

P assengers boarded an aircraft for a scheduled flight increasingly agitated at the delay. No announcement
from the Indian subcontinent to Europe.The checked was made, and none of the aircrew appeared to have
baggage was loaded,the catering arrangements finalised any knowledge of the circumstances causing the
and completed,and with the chief steward confirming delay.
the passenger manifest,the cabin doors were closed and
sealed. Everything was ready for the scheduled Suddenly, there was a tapping noise on the cabin
departure time. door at the front of the airc ra f t . The chief steward
released the safety catches and the door was opened.
Thirty minutes elapsed. The aircraft remained on the T h e re , standing on the steps, were the captain and
ground, and not surprisingly, the passengers became co-pilot.
Loss Payable Clauses
Paragraph 1.1 of AVN67B contains the following ‘Loss Payable’
language:-

“In respect of any claim on E q u i p m e n t that becomes payabl e


on the basis of a Total Loss, settlement (net of any re l eva n t
Policy Deductible) shall be made to, or to the order of the
Contract Party(ies). In respect of any other cl a i m , s e t t l e m e n t
(nett of any re l evant Policy Deductible) shall be made with
s u ch party(ies) as may be necessary to repair the E q u i p m e n t
unless otherwise agreed after consultation between the Insure r s
and the Insured and, w h e re necessar y under the terms of the
C o n t r a c t ( s ), the Contract Party(ies).”

This is a change from established practice where, generally speaking,


insurers have been prepared to agree that all valid losses shall be settled
in accordance with the loss payable clause found in the lease.Contract
Parties understandably want to name a Loss Payee for all claims
payments in order to be able to control the funds relating to their asset.
The insurers, however, undertake in the policy that in the event of a
partial loss, they will pay for the repair of the aircraft.If the necessary
repairs are to be effected without undue delay, the repairers will want
an assurance that they will be paid directly by insurers.

The repairers may insist on a deposit,as well as stage payments as the


aircraft is repaired. Therefore, insurers will not wish to agree, in
advance,to pay a partial loss to the named loss payee.Clearly, payment

37
to the named loss payee of funds intended to pay for repair, could delay
the process of repair or curtail it completely. Insurers obviously cannot
pay the same funds to both loss payee and the repairer.

Although insurers will generally pay the repairer, the clause does
provide for consultation with the Contract Parties in the settlement;
thus the bank/lessor will be kept informed of what is happening to
their asset.The clause does leave the question of settlement process of
a partial loss open. If there is a good reason why the partial loss
proceeds should be paid to the Loss Payee then this would be a subject
for negotiation. If, for example, the operator was insolvent then the
recipient of funds may need to be amended.

38
Airworthiness and Aircraft Regulation
There is an implied warranty on all aviation policies that aircraft are
maintained to the specified standards. The standards and procedures
are dictated by the aircraft manufacturers, in conjunction with the FAA
and/or the relevant civil aviation authority. The procedures are
minutely documented and require very detailed records to be kept.

In addition,the aircraft and engine manufacturers specify the parameters


for an aircraft’s operation. For example, a minimum runway length for a
particular aircraft loading, altitude above sea level and temperature.

If an airline breaches any of the above requirements they are in danger


of invalidating their insurance coverage.

Maintenance of Technical Records


Major airlines file all their service and maintenance records into a
computer database. Small operators in the lesser developed countries
sometimes rely on a card system for their servicing and aircraft
maintenance records.Should these record cards be lost or damaged by
fire or otherwise,it could be very expensive satisfying the airworthiness
authorities as to the maintenance status and therefore airworthiness of
the aircraft.

The security of maintenance and aircraft service documents should be


checked and insured.

It is standard for banks/lessors to include a section in the lease


stipulating that correct and up to date records be kept. Many

39
banks/lessors require periodic updates of the maintenance/certification
programme and may require duplicate records to be filed with them.

Reconstitution of technical records is expensive and may necessitate


significant additional maintenance and replacement of expensive parts.

The subject of Technical Records and Repossession Expenses


Insurance, covering the financier’s interest in the aircraft, is explained
in greater detail in Section Two,page 102.

40
The Vital Checks for Aircraft Safety

Step by Step to Safety – the programme that keeps an aircraft in the air

A – CHECK B – CHECK C – CHECK P1 – CHECK D – CHECK

E V E RY FLIGHT E V E RY 36 HRS E V E RY 300 HRS E V E RY 1,500 HRS E V E RY 18,000-24,000

Takes 10-20 minutes Takes 2 hours Takes half a day Takes 24 hours in hangar Takes 3-8 weeks in hangar

C aptain walks aro u n d As A - C h e c k , but re c o rd As previous checks, but Open all panels, t a ke Complete strip dow n
a i rc r a f t . Checks fo r t y re pre s s u re s , top up in more detail. Check engine cowls off. Check to bare metal; eve ry
obvious damage, l e a k a g e, f l u i d s , check braking and replace hydraulic critical systems – fire, component taken to
loose panels. Visual e f f i c i e n c y, open access f i l t e r s , rectify any faults stall and overheat pieces and replaced or
check of engine area and panels and doors. advised by airc rew s . w a r n i n g s . Check wiring, re b u i l t .
of fuel and fluid leve l s . change fluids, and check
Checks that control all items in A , B and C.
surfaces are fre e, Repeat every 1,500 hours
emergency equipment until P-5: major strip
and lighting in good d ow n ; non destructive
o rd e r, that engine fans testing of airframe
a re undamaged using X-rays and dye
and turning fre e ly. p e n e t r a t i o n , check for
c o rrosion and cracks.

41
Insurance Claims

i) Hull Claims
The predominant structure for aircraft financing is the lease.As such the
lessor effectively retains title to the asset and is particularly concerned
that it is maintained in excellent condition. The condition has a
considerable impact on residual values; RVI guarantees do not normally
cover loss in value due to the aircraft ‘return condition’ being below
stipulated lease standards.

Aviation hull claims are far more clear cut and subject to less negotiation
than marine hull claims.This is due to several factors including:-

- Standardisation of aircraft types.

- Strict regulation by civil aviation authorities/FAA.This leaves very


little choice as to how the aircraft will be repaired.

- Limited choice of approved repairers.

- Single source of parts supplier (for example,GE fan blades for GE


engine).

a) Total Losses (and contested total losses)


If the aircraft is declared a total loss,then the full amount of lien
should be paid off and the bank/lessor should not have a problem
(other than that a performing lease has been prematurely
terminated).It is normal to insist upon an agreed value of 110% to

42
120% of the financed amount outstanding,this ensures that
bank’s/lessor’s costs and lost revenues are recovered.

Some losses are borderline cases between being a total loss or large
partial loss. For example,if a Boeing 747-400 insured for
US$175,000,000 sustains US$150,000,000 worth of damage,the
airline operators and the financiers may not wish for it to be
repaired.They will try to negotiate for a total loss,with the
underwriters retaining salvage.The long-term desirability of an
aircraft that has suffered serious damage is questionable.
Underwriters may argue for the damaged aircraft to be repaired.In
such cases it is helpful to have an agreed threshold,beyond which
the aircraft will be declared a total loss. For example,if repair costs
exceed 75% of the agreed value.

Engine leases
Complications can arise when an aircraft suffering a loss is fitted
with a borrowed or replacement engine;the engine not being
subject to the aircraft lease in question.In such circumstances the
agreed value of the aircraft should be increased to include the value
of the replacement engine (i.e.Boeing 747 airframe plus five
engines).Then underwriters will pay a total loss, for the increased
agreed value,and take the replaced engine as salvage.Such
scenarios need to be addressed by a specific policy clause.
If the value has not been increased,then the respective owners of
the engines may become embroiled in a dispute as to the
distribution of claim proceeds.This may result in underpayment,or
a lessor being presented with an unwanted ‘Orphan Engine’!
Refer Appendix D, page 162 for a suggested ‘Orphan Engine’ clause.

43
b) Partial losses
Following partial losses, financiers will want to ensure
that the repairs are carried out to their satisfaction. For this reason
leases contain loss payable clauses that typically require for claim
proceeds, over a stipulated amount,to be paid directly to the
bank/lessor.This threshold varies depending upon the standing of
the airline. For example,the threshold for a ‘start up’airline may be
US$500,000,but US$10,000,000 for a large international airline.
However, normal practice is that claims are paid directly to the
repairer and this is reflected in the language of paragraph 1.1 of
AVN67B.It is important that banks/lessors appreciate that,unless
specifically addressed with insurers,the provisions of AVN67B may
override the ‘Loss Payable’provisions contained in the lease
contract.This subject is explored in further detail in Loss Payable
Clauses.Refer to page 37.

Aircraft financiers should be aware of certain potential problems in


dealing with partial loss adjustment and repair:-

- ‘BETTERMENT’may be applied. For example,if an old engine is


damaged and the replacement parts are new, and of higher value
than the old discarded parts,underwriters may deduct a
‘betterment’ factor from the claim payment.The logic being that
the repair has enhanced the value of the aircraft.Most aircraft
parts have a specified life (usually defined as number of cycles or
hours).The part,which has suffered damage,may have been due
for replacement in the near future.

44
- CHOICE OF REPAIRER.The aircraft financier does not have the
right to insist upon a chosen repairer. Insurers will seek to repair
the damage in the most economic way, but will be bound to use
an approved repairer.This would typically be an FAA/JAA/CAA or
equivalent licenced repair station.Normally insurers will
consider the wishes of a bank/lessor and this could be the basis
for negotiation.

ii) Liability Claims


Liability claims are usually settled directly by insurers with the
plaintiffs, without the operator or financier being involved.
Banks/lessors are advised to steer clear of liability issues (other than in
the unlikely event of them being joined in a suit).The provisions of ‘cut
through clauses’should only be applicable to hull claims.

Some ‘loss payable’ clauses require that all claims, including liability
claims are paid via the bank/lessor.This langua ge is not recommended
and is likely to cause added workload, delay in claim payments and,
more dangerously, could lead to the bank/lessor becoming needlessly
involved in expensive liability suits. If a claim payment, destined for a
dependant of a deceased passenger, were to be inadvertently held up
within a bank’s/lessor’s accounting process, this could attract un-
quantifiable liability suits for bad faith etc.

45
Lessor Liability
One of the primary concerns of a bank/lessor financing transportation
assets is to avoid any legal liability exposure arising out of operation of
the asset.The essential defences against aviation liability exposures are:-

- Lease covenants that absolve the bank/lessor of any liability, or


legal expenses,arising from the operation of the aircraft.Hence,
even if the relevant insurance fails to respond,the financier will
stand behind the assets of the operator.

- Requirement that the airline purchases reasonable liability limit.

- Ensure that widest possible coverage is purchased.

- Ensuring that the financier plays no part in managing or operating


the aircraft (refer ‘Operational Interest’– page 52).

- Bank/lessor added as Additional Insured,with Breach of Warranty


coverage in their favour (this is catered for by inclusion of AVN67B
endorsement – refer pa ge 54).

- Requirement that insurers give reasonable notice of any


cancellation or material change in coverage.

In addition, often the ownership/title of the aircraft is vested with an


SPC (‘special purpose company’), not directly in the name of the bank
or lessor.

46
Aviation lawyers consider the possibility of a lawsuit filed directly
against an aircraft financier to be remote. In order to bring a suit
successfully the plaintiff will need to be able to demonstrate some
‘contribution’ by the bank/lessor. In most jurisdictions it is very unlikely
that the act of leasing an aircraft to an operator could satisfy this pre-
requisite. Furthermore, if a suit is successfully brought against the
financier, the operator’s policy should afford protection to the named
financier as an Additional Insured.

Notwithstanding the safeguards a prudent financier will employ, there


are circumstances where third parties may attempt to enjoin a
bank/lessor.These could possibly include:-

- When the operator’s policy limit is exhausted. Potential claims for


passenger legal liability have recently been increased by the
adoption of the ‘IATA Intercarrier Agreement’and ‘EC 2027’
unspecified contracts of carriage (refer page 16).

- The operator’s policy being invalidated/cancelled.


Notwithstanding the safeguards detailed above,it is possible that
adequate coverage may not be in place.*

- A ‘scattergun’approach by plaintiffs enjoining multiple parties,


especially those with ‘deep pockets’.

In the event that the financier is enjoined in a suit, whilst we believe


that the plaintiff’s chances of success are slim, it is possible that
significant legal expenses could accrue.

47
Any financier who is uncomfortable with the liability exposure
assumed when financing aircraft can buy a contingent liability policy.
This type of policy is detailed in Section Two of this book – refer page
89.

* For airlines operating in USA, Canada, Switzerland and Australia,


it is almost impossible for passenger liability coverage to be
invalidated, or valid passenger liability claims to be denied by
insurers. This is due to specific legislation enacted (in USA being
‘D.o.T 14 CFR Part 205’) to protect the interests of passengers or their
dependents. The provisions apply equally to domestic airlines (i.e.
based in USA, Canada, Australia and Switzerland) and foreign
airlines operating in the airspace. These provisions are incorporated
into the liability policy by inclusion of the relevant version of the
AVN57 endorsement. Full text of AVN57A (USA) is included in
Appendix D page 159.

It should be noted that AV57 clauses contain reimbursement


provisions that would enable the insurer to seek recovery, from the
insured, of claims paid by virtue of the clause.

48
SO MU CH BE TT E R THA N T HE F IL M ?

A B o e i n g jet was cruising overnight on route to Lagos. many minutes of panic the captain decided that the
The aircraft was on autopilot and the majority of the only way to regain access was to physically break it
passengers had settled down to sleep. For one reason or down. A fire axe was brought from the rear of the
another, first the flight engineer and then the captain a i rc raft and, under the full glare and to the
departed the flight deck leaving the co-pilot in sole charge. consternation of the passengers, the crew started to
hack away madly at the door. After apprehensive
The co-pilot needed to attend to a call of nature and minutes of frantic exertion it finally gave way and the
likewise took his leave allowing the flight deck door embarrassed crew were able to regain control of the
to close behind him. On the return of the crew it was aircraft.
suddenly appreciated that the door was fitted with an
anti-hijacking security lock which would not allow For many of those passengers of a strong nervous
re-entry from the first class passenger cabin. After disposition this incident was so much better than the film!
Aviation Lease/Finance Clause AVN67B
Unlike Marine Insurance where financiers are normally obliged to take
out separate ‘Mortgagee’s Interest Insurance’ policies, AVN67B is
endorsed onto the operator’s own policy with the same insurers. On
occasions insurers may deny a claim to the airline/operator but pay a
valid claim in respect of the bank’s/lessor’s interests.

AVN67B effectively acts as a separate ‘policy within a policy’,protecting


the interests of the financiers.

i) Background to AVN67B
The AVN67 clause was introduced by insurers in an attempt to
standardise the method and language used in giving effect to the
insurance requirements of financiers.Previously, insurers felt that they
were frequently being asked to agree the ‘Insurance Article’ of a lease
agreement with little time to review the often complex language and
being told that the transaction might fall through if they did not agree
without question. Insurers also felt that rather than perhaps reacting
negatively to a set of words constructed by others, it was appropriate
that they should state the coverage they were prepared to give for the
benefit of financiers. The development of a standard clause was
intended to enable insurers to react immediately and confidently when
presented with contracts in respect of financed aircraft.

The original AVN67 clause has been refined and improved in stages –
the cur rent clause is designated AVN67B.Whilst its incorporation into
airlines insurance programmes was initially haphazard, it is now
included automatically (though there is some lingering resistance in US

51
insurance markets). When drawing up insurance provisions for new
leases,the requirements of AVN67B must therefore be considered.

It is normal for old leases, negotiated prior to the advent of


AVN67/AVN67B,to continue to be endorsed on the basis negotiated at
the date the lease incepted.

ii) ‘Operational Interest’


The cover afforded to ‘Contract Parties’ under AVN67B is broader than that
enjoyed by the operator. This is granted on the assumption that the
financier have exercised due diligence in requiring that the operator is
complying with laws, aviation regulations, policy conditions and the like .I t
is prudent for the bank/lessor to distance itself from the day to day activities
of an operator. Otherwise, insurers may argue that the actions of the
Contract Party have contributed to a claim under AVN67B (non-disclosure,
breach etc.) and as such invalidate coverage to the Contract Party.

Avoiding an ‘operational interest’is not normally a problem for financiers.


However, for aircraft manufacturers, or airlines involved in aircraft leases
great care needs to be taken to ensure that the full protection afforded
under AVN67B is not prejudiced. This can be assisted by setting up a
separate dedicated finance company. Many large airlines and
manufacturers have done this. The implications of paragraph 2.3 of
AVN67B may also need to be addressed with a special endorsement.

iii) Amendments to standard text


AVN67B is generally regarded as a good means of protecting the
bank’s/lessor’s interests.The current form has evolved taking the views and

52
needs of financiers into account. In view of this, insurers are reluctant to
amend the provisions of AVN67B and will only do so with good reason.

iv) AVN67B applicability on reinsurance contracts


It is important to ensure that the clause has also been agreed by the
domestic/local insurer, as well as the reinsurers.Unlike the cut through
clause, that is only applicable on the reinsurance contract, AVN67B
applies to the direct policy. Notwithstanding which, the technical
agreement is usually negotiated with the leading reinsurer.

v) Engine Leases
AVN67B is designed so that it can be applied to engine leases as well as
complete aircraft.

vi) AVN67B War


For endorsement to Hull War policies there is an amended clause
(omitting reference to Liability etc.) that can be used. This mirrors
AVN67B.Refer to Appendix D, page 178 for full text of AVN67B War.

53
vii) Text of AVN67B and explanatory notes

AIRLINE FINANCE/LEASE CONTRAC T


ENDORSEMENT AVN67B E X P L A N ATO RY NOT E S

It is noted that the C o n t r a c t The pre a m ble ack n ow l e d ge s


that th e Contract Pa r ties have
Party(ies) h ave an interest in re s p e c t an insurable intere s t .

of the E q u i p m e n t under the


A n ominal additional pre m i u m
C o n t r a c t ( s ). A c c o rd i n g ly, with re s p e c t is ch a rged to ensure that the
c o n t ract cannot be voided fo r
to losses occurring during the peri o d l a ck of ‘ c o n s i d e ra t i o n ’ .
E s s e n t i a l ly AVN67B opera t e s
f rom the E ffective Date until the as a separate contrac t for the
b e n e fit of the Contra c t
ex p i ry of the insurance or until the Pa rt i e s , and as such ne eds a
s e p a rate ch a r ge .N o rm a l ly the
ex p i ry or agreed termination of the amount is ‘US$100 receipt of
w h i ch is ack n ow l e d ge d ’ by
Contract(s) or until the obl i g a t i o n s u n d e r w ri t e rs . In practice this
p remium is never invo i c e d .
under the Contract(s) a re term i n a t e d
by any action of the Insured or the The pre a m ble also states that
c ove ra ge is in ‘full fo rce and
Contract Party(ies), w h i ch ever shall e ffe c t ’ . This gi ves comfo rt to
C o n t ra ct Pa rties that cove rage
fi rst occur, in respect of the said is in fo rce notwithstanding
that a bre a ch , or non-
i n t e rest of the Contract Party(ies) d i s cl o s u re ,m ay have alre a dy
o c c u rred – on the part of the
and in consideration of A d d i t i o n a l o p e ra t o r.
P remium it is confi rmed that the
I n s u rance affo rded by the Policy is in
full fo rce and effect and it is furt h e r
agreed that the fo l l owing prov i s i o n s
a re specifi c a l ly endorsed to the Po l i c y : -

54
1. Under the Hull and Airc r a f t
S p a res Insurances
1.1 In respect of any claim on equipment This section relates to the Loss
Payable clause contained in the
that becomes payable on the basis of lease. If the terms of the lease
differ from section 1.1, then the
a Total Loss, settlement (net of any provisions of AVN67B override
the lease provisions (unless
relevant policy deductible) shall be s p e c i fi c a l ly agreed by insurers
to the contra ry ) .I n s u re rs are
made to, or to the order of the reluctant to pay amounts in
respect of partial losses direct
Contract Party(ies). In respect of to a bank/lessor. In order to
make good damage in a timely
any other claim, settlement (net of any manner (insure rs ’p ri m a ry duty
under the policy), i n s u re rs will
relevant policy deductible) shall be n o rm a l ly make payments
d i re c t ly to the repairer, but are
made with such party(ies) as may be happy to consult with the
Contract Party prior to doing
necessary to repair the Equipment so.
unless otherwise agreed after
‘Equipment’ can mean a single
consultation between the Insure rs spare engine or a complete
aircraft (comprising airframe
and the Insured and, where necessary and non-specified engines).
under the terms of the Contract(s),
the Contract Party(ies). S u ch
payments shall only be made provided
t h ey are in compliance with all
applicable laws and regulations

1 . 2 I n s u re rs shall be entitled to the This is a simple statement in line with


the principles of indemnity under an
b e n e fit of salvage in respect of any insurance policy. Complications can
arise when borrowed or leased
p ro p e r ty for which a cl a i m s engines are fitted to a lost aircraft.
Refer to Appendix D page 162 for
settlement has been made. a recommended clause to address
this issue.

55
2. Under the Legal Liability
Insurance
2 . 1 Subject to the provisions of this This is the ‘severability of
interest cl a u s e ’ .E a ch insured
E n d o rs e m e n t , the Insurance shall receives separate cover, but this
is subject to the overall policy
o p e rate in all respects as if a limit for each occurrence.

s e p a rate Policy had been issued


The reason for the statement to
c ove ring each party insure d exclude hull damage to the
i n s u re d ’s aircraft is as fo l l ow s .
h e re u n d e r, but this provision shall In the event of two aircraft
from the same f leet having a
not operate to include any cl a i m collision this clause might
otherwise result in a hull claim,
h ow s o ever arising in respect of or claim for hull deductible
amount, in respect of an aircraft
loss or damage to the E q u i p m e n t in which the Contract Party has
no interest.
i n s u red under the Hull or Spare s
I n s u rance of the Insure d .
Notwithstanding the fo re going the
total liability of Insure rs in re s p e c t
of any and all Insureds shall not
exceed the limits of liability stated
in the Po l i c y.

2 . 2 The Insurance provided here u n d e r This statement confirms that


the insurers will pay fi rs t , on a
shall be pri m a r y and without ri g h t ‘ p ri m a ry ’b a s i s , without seeking
contribution or recovery from
of contribution from any other other policies purchased by the
Contract Pa rt y, or from which
i n s u rance which may be ava i l abl e they have benefit. This includes
any Contingent Hull or Liability
to the Contract Party(ies). policies that may be in force in
the name of a Contract Pa rt y.

56
2 . 3 This Endorsement does not I n s u re rs are retaining their
rights to proceed against
p rovide cove rage for the C o n t r a c t m a nu fa c t u re rs , re p a i re rs ,o r
servicing agents. Since contract
Party(ies) with respect to cl a i m s parties are added as ‘additional
i n s u re d s ’ this could pre cl u d e
a rising out of their legal liab i l i t y insurers from subrogating
against such parties if they
as manu fa c t u re r, re p a i re r, o r contributed to a loss. Most
banks/lessors have no
s e rvicing agent of the operational interest in the
aircraft they fi n a n c e .H owever,
E q u i p m e n t. many manufacturers lease
a i rc ra f t , either directly or
through their own finance
company. The provisions of this
clause may need to be
specifically addressed in such
cases.

In addition, this wo rd i n g
cl a ri fies that no coverage is in
force for liability suits enjoining
an insured, in his capacity as
m a nu fa c t u re r. Following a major
accident, with loss of life, it is
commonplace for suits to be
filed against manufacturers
d i re c t ly.

For further comments re g a rd i n g


‘Operational Interest’, refer to
page 52.

3. Under ALL Insurances Contract Parties have the


benefit of protection under the
3 . 1 The Contract Party(ies) a re airline’s policy and the right to
initiate a claim.
i n cluded as Additional Insure d ( s ) .

57
3.2 The cover afforded to each Contract This provides the ‘Breach of
Warra n t y ’c overage.
Party by the Policy in accordance
with this Endorsement shall not be As discussed elsewhere in this
report (refer ‘ O p e ra t i o n a l
invalidated by any act or omission I n t e re s t ’ – page 52) it is
important that the bank/lessor
(including misrepresentation and distances itself from the
operation of the aircraft.
non-disclosure) of any other person
or party which results in a breach of
any term, condition or warranty of
the Policy PROVIDED THAT the
Contract Party so protected has not
c a u s e d ,c o n t ributed to or knowingly
condoned the said act or omission.

3.3 The provisions of this Endorsement This language was included to


satisfy lessors who were also
apply to the Contract Party(ies) m a nu fa c t u re rs (Airbus for
example).
solely in their capacity as
financier(s)/lessor(s) in the For example. If one division of
the manufacturer has
identified Contract(s) and not in any k n ow l e d ge of a breach by the
airline, and another division is
other capacity. K n ow l e d ge that any involved in leasing an aircraft to
the same airline, then the
Contract Party may have or coverage remains in full force
for the benefit of the lessor.
acquire or actions that it may take
or fail to take in that other capacity
(pursuant to any other contract or
otherwise) shall not be considered
as invalidating the cover afforded by
this Endorsement.

58
3.4 The Contract Party(ies) shall Even if the airline has paid no
premium the policy is still valid
have no responsibility for premium as far as the Contract Party’s
interests are concerned
and Insurers shall waive any right of (provided notice of cancellation
has not expired or automatic
set-off or counterclaim against the termination occurred). The only
premium that can be offset by
Contract Party(ies) except in the underwriters is the premium
due in respect of the equipment
respect of outstanding premium in (i.e. the aircraft or engine subject
to a claim – not the whole fleet)
respect of the E q u i p m e n t. subject to a claim.This would be
deducted from the final
settlement. Since aviation rates
are low, this will typically be a
very small percentage of the
claim proceeds.

3.5 Upon payment of any loss or claim Having paid a claim to a


Contract Party, I n s u re rs may
to or on behalf of any Contract wish to pursue a claim against
another party. For example,
Party(ies), I n s u re rs shall to the against the insured, a
m a nu fa c t u re r, a i r p o rt , or
extent and in respect of such third party airline.

payment be thereupon subrogated


In certain circumstances this
to all legal and equitable rights of may be a sensitive issue with
the bank/lessor (if, for example,
the Contract Party(ies) the underwriters intend to sue
the insured, a government or
indemnified hereby (but not against major client of the bank/lessor)
and as such the contract party
any Contract Party) .I n s u re rs shall will be asked for consent.

not exercise such rights without the


consent of those indemnified, such
consent not to be unreasonably
withheld. At the expense of Insurers
such Contract Party(ies) shall do all
things reasonably necessary to assist
the Insurers to exercise said rights.

59
3.6 Except in respect of any prov i s i o n Aviation policies contain
automatic cancellation/
for Cancellation or Au t o m a t i c termination clauses fo l l ow i n g
hostile nuclear detonation and
Te rmination specified in the outbreak of war between the
five major powers (refer AV38B,
Policy or any endors e m e n t AV48B and AV52C clauses in
Appendix D). ‘ B ro ke rs Letters of
t h e re o f, c over provided by this U n d e rt a k i n g ’ cannot override
these clauses.
E n d o rsement may only be
cancelled or materi a l ly altered in a Other than in respect of these
prov i s i o n s ,i n s u re rs are re q u i re d
manner adve rse to the Contra c t to give 30 days notice to the
appointed broker (or lesser
Pa rty(ies) by the giving of not less customary period in respect of
War risks – usually 7 days but
than T h i rty (30) days notice in may be reduced in times of
major conflict). In practice the
w riting to the appointed bro ke r. Contract Party may have less
time to resolve the fo rt h c o m i n g
Notice shall be deemed to lapse in cover – unless the
broker can notify them
commence from the date such immediately.
notice is gi ven by the Insure rs .
There is no requirement to
S u ch notice will NOT, h oweve r, b e advise of cover lapsing at
expiry – this can be addressed
gi ven at normal ex p i ry date of the in ‘ B ro ker Letters of
U n d e rt a k i n g ’( re fer Appendix
Policy or any endors e m e n t . C ,p age 151).

60
EXCEPT AS SPECIFICALLY VARIED OR The AVN67B endorsement does
not broaden the scope of
P ROVIDED BY THE TERMS OF T H I S coverage, other than as
s p e c i fi c a l ly addressed in the
E N D O R S E M E N T: - e n d o rs e m e n t .N o t w i t h s t a n d i n g
the Insurance Requirements
detailed in the lease covenants,
coverage is only as broad as
1. THE CONTRACT PA RTY(IES) A R E that which would have been in
place, but for the bre a ch ,n o n -
C OVERED BY THE POLICY d i s cl o s u re or misrepresentation.
SUBJECT TO ALL T E R M S ,
C O N D I T I O N S , L I M I TAT I O N S ,
WA R R A N T I E S , EXCLUSIONS A N D
C A N C E L L ATION PROV I S I O N S
T H E R E O F.

2. THE POLICY SHALL NOT BE AVN67B does not incorporate


the lease provisions into the
VARIED BY ANY PROV I S I O N S insurance coverage. For
example, the lease contract may
C O N TAINED IN T H E include indemnity provisions
for fines and contractual
C O N T R ACT(S) WHICH PURPORT disputes. The insurance will not
provide cover for such
TO SERVE AS AN ENDORSEMENT indemnities, either under the
o p e ra t o r ’s coverage or under
OR AMENDMENT TO THE POLICY. the cover afforded by AVN67B.

61
SCHEDULE IDENTIFYING TERMS USED
IN THIS ENDORSEMENT

1. Equipment (Specify details of any


a i rc ra f t , e n gines or spares to be
c ove re d ) :

2. Policy Deductible(s) applicable to


p hysical damage to the Equipment
[ i n s e rt all applicable Po l i c y
d e d u c t i bl e ( s ) ] .

3. (a) Contract Party(ies):

AND (b), in addition, in respect of


Legal Liability Insura n c e s :

4. C o n t ra c t ( s ) :

5. E ffe c t i ve date (being the date that


the Equipment attaches to the
Policy or a specific date
t h e re a f t e r ) :

6. Additional Pre m i u m : N o rm a l ly shown as ‘US$100 the


receipt of which
a ck n ow l e d ge d ’ . This satisfies
the need for ‘consideration’,
but in practice will not be
s e p a ra t e ly invoiced.

62
A QU EST IO N OF P RIO R IT IES

A Boeing 747 was approaching Kai Tak Airport, Hong and proclaimed, “Jeez, you know what I fancy?
Kong on a flight originating from Sydney,Australia. Firstly, an iced cold beer, and then a really buxom
blonde!”
As the aircraft was making its landing approach the
co–pilot switched on the intercom to inform the On realising the the pilot had failed to sw i t ch off the
passengers of the sights and landmarks they could see i n t e rc o m , a blonde air hostess immediately ru s h e d
through the windows.On completing his geographical t h rough the passenger cabin towa rds the f l i g h t
narrative he failed to switch off the intercom. d e ck .A little old lady noticing her frantic dash called
to her, s ay i n g “ D e a r, t h e re re a l ly is no ru s h . I
When he had landed the aircraft the captain handed d i s t i n c t ly heard him say that he wanted the iced
over the controls to the co-pilot, leant back in his seat cold beer fi rs t ! ”
Aircraft Financial Interest
Endorsement – AVN28B
Whilst AVN67B is now the standard method of endorsing a
bank’s/lessor’s interests in airline equipment,the AVN28B clause is still
used for general aviation and helicopter finance.The scope of AVN28B
is not as broad as AVN67B and, where possible, it is recommended to
use AVN67B.

AVN28B, evolved from AVN28, and is essentially a hull ‘breach of


warranty’ endorsement. As such, when using AVN28B it is normally
necessary to include the following additional clauses:-

- A Loss Payable Clause

- Additional Insured Clause in respect of liabilities

Text of AVN28B and explanatory notes

AIRCRAFT FINANCIAL INTEREST ENDORSEMENT

It is noted that the P a r t y named in the The preamble ack n ow l e d ge s


that the Party has an insurable
S chedule hereto has a financial intere s t i n t e re s t .

in the A i rc r a f t under the A g re e m e n t.


The additional premium is
A c c o rd i n g ly, with respect to losses usually waived although this
raises the question of whether
o c c u rring during the period from the a cynical insurer may try to
void the contract for ‘lack of
consideration’.

65
E f fective Date of this Endorsement
until the ex p i ry of the Insurance or
until the satisfaction of the obl i g a t i o n s
under the A g re e m e n t, w h i ch ever shall
fi rst occur, in respect of the interest of
the P a r t y and in consideration of an
Additional Pre m i u m IT IS
U N D E R S TOOD AND AGREED T H AT:

1. The insurance affo rded by this This provides the ‘ B re a ch of


Warra n t y ’c overage.
Policy for loss of or phy s i c a l
d a m age to the insure d A i rc r a f t As discussed elsewhere in this
report (refer ‘ O p e ra t i o n a l
shall not be invalidated as re g a rd s I n t e re s t ’ – Section page 52) it is
important that the bank/lessor
the interest of the P a r t y by any distances itself from the
operation of the aircraft.
act or omission by the Insure d
w h i ch results in a bre a ch of any
t e rm , condition or wa rranty of the
Policy PROVIDED T H AT the P a r t y
has not caused, c o n t ributed to or
k n ow i n g ly condoned the said act
or omission. N eve rtheless any
ch a n ge in title or ow n e rship of
the A i rc r a f t, c o nve rs i o n ,
embezzlement or secretion by the
I n s u red in possession of the
A i rc r a f t is not cove red here u n d e r.

66
2. The protection affo rded to the Coverage is limited to hull
physical damage (which will be
P a r t y by the terms of this defined in the relevant
wo rd i n g ) . The amount insured
E n d o rsement shall be limited to should be specified in the
s ch e d u l e .
loss of or physical damage to the
i n s u red A i r craft and shall not Some deductibles (normally on
helicopters) apply in respect of
exceed the Original Amount total losses.This clause
establishes that even if 100%
under the A greement less any finance is in place, the
deductible will still apply.
re l evant Policy Deductible a n d In such cases the financier may
require that the Agreed Value
l e s s all m a t u re d I n s t a l m e n t s p a i d is increased to take this into
account.
or due prior to the accident gi v i n g
rise to a loss here u n d e r.

3. The P a r t y shall notify the Insure rs This clause is more onerous


than that contained in AVN67B.
of any increase in hazard which Banks/lessors should be aware
of the implications.
comes to the P a r t y ’ s a t t e n t i o n
and if agreed by the Insure rs it
shall be endorsed on the Po l i c y,
the Party agreeing to pay any
additional re q u i red premium if the
I n s u red fails to do so on demand
of the Insure rs .

4. If the Insured fails to notify the AVN67B stipulates no such


re q u i re m e n t .
I n s u re rs as specified in the Po l i c y
Conditions of any event like ly to
gi ve rise to a claim under the
Po l i c y, the P a r t y shall do so

67
i m m e d i a t e ly he becomes awa re of
the event in fo rm and manner as
p re s c ribed by the Po l i c y.

5. Upon payment of any loss or cl a i m This clause is far stronger than


the equivalent in AV N 6 7 B ,t h a t
to the P a r t y, I n s u re rs shall to the requires insurers to seek the
consent of the Pa rt y, before
extent and in respect of such exercising the rights of
subrogation/recovery.
p ayment be subrogated to all legal
and equitable rights of the P a r t y.
At the expense of Insure rs the
P a r t y shall do whatever is
n e c e s s a ry to assist the Insure r s to
exe rcise such ri g h t s .

6. Except in respect of any prov i s i o n This notice of cancellation is


similar to that contained in
for Cancellation or Au t o m a t i c AVN67B.

Te rmination specified in the


There is no requirement for the
Policy or any endors e m e n t Party to pay outstanding
p re m i u m .
t h e re o f, c over provided by this
E n d o rsement may only be
cancelled by Insure rs giving not
less than T h i rty (30) days notice in
w riting to the A p p o i n t e d
B ro k e r. Notice shall be deemed to
commence from the date such
notice is gi ven b y the Insure rs .
In the event of cancellation fo r

68
n o n - p ayment of pre m i u m , t h e
Party shall have the option to pay
all outstanding premiums in
respect of the A i rc r a f t within the
notice peri o d .

EXCEPT AS SPECIFICALLY VARIED OR The AVN28B endorsement


does not broaden the scope
P ROVIDED BY THE TERMS OF T H I S of coverage, other than as
s p e c i fi c a l ly addressed.
ENDORSEMENT THE FINA N C I A L Notwithstanding the Insurance
Requirements detailed in the
INTEREST OF THE PA RT Y IS COV E R E D Agre e m e n t ,c overage is only as
broad as that which would have
BY THE POLICY FOR LOSS OF OR been in place, but for the
b re a ch , or omission.
PHYSICAL DA M AGE TO THE INSURED
A I R C R A F T O N LY SUBJECT TO A L L For example, if an aircraft is
operated outside the
T E R M S , C O N D I T I O N S , L I M I TAT I O N S , geographical scope of the
policy, all claims may be denied.
WA R R A N T I E S , EXCLUSIONS A N D
C A N C E L L ATION PROV I S I O N S
T H E R E O F.

69
SCHEDULE IDENTIFYING TERMS USED
IN THIS ENDORSEMENT

1. A i rc ra f t :
R e gi s t ra t i o n :

2. Pa rty (enter the name of the Pa rt y


h aving a financial intere s t ) :

3. A greement (enter identifying


details and date):

4. The Ori ginal Amount under the


A gre e m e n t :

Payable in Instalments of

the last Instalment being due

The amount outstanding at the


E ffe c t i ve Date of this
E n d o rs e m e n t :

5. Policy Deductibl e :

6. Additional Pre m i u m :

7. Appointed Bro ke r :

AVN 28B
17.10.1996

70
Insurance Documentation Checklist
The insurance requirements are detailed in full in the Specimen
Insurance Article (refer to Appendix A,page 119).The following serves
as a brief checklist of the documentation that the bank/lessor should
receive prior to ‘drawdown’and/or delivery, and annually thereafter.

1. Certificates of Insurance for each leased or mortgaged


aircraft for :
i) Aviation Hull ‘All Risks’.

ii) Aviation Hull ‘War and Allied Perils’.

iii) Aviation Third Party (Bodily Injury and Property Damage),


Passenger, Baggage,Cargo and Mail and Airline General Third
Party (including Products) Legal Liability.

iv) ‘All Risks’in respect of Engines and Spares,if any.

v) Hull Deductible (if required by the bank/lessor).

2. Certificates of Insurance should contain the following :-


i) Name of the Insured and Additional Insureds.

ii) Brief description of coverage.

iii) Identification of the Aircraft by serial number or registration


marks.

71
iv) Limits of coverage.Being the insured value of the aircraft,on
an Agreed Value basis,and for the liability insurances,the
Limit of Liability insured.

v) Inception and expiry time and dates.

vi) Geographical Limits for each coverage;which should be


‘Worldwide’with any exclusions specifically agreed by the
bank/lessor.

vii) The Amount Insured or Reinsured.This is usually expressed as


a percentage of the Maximum Agreed Value/Liability Limit.

viii) The Deductibles (Hull,Spares and Liability) to be borne by


the Insured in the event of any claims together with details
of any sub limits,or aggregate limits,that apply.

ix) Details of the Lease Finance endorsement (typically AVN67B


or AVN28B) included in respect of the financier’s interest,
including details of any ‘Notice of Cancellation’provisions.

x) In respect of the Hull ‘All Risks’and Hull ‘War Risks’,the


inclusion of a 50/50 clause.

3. If Reinsurance is involved:-
i) Certificates of Reinsurance with details as per 1. and 2. above.

ii) Confirmation that a ‘Cut Through Clause’is included.

72
4. Broker’s Letter of Undertaking in respect of insurance and
reinsurance arrangements.

Verification by independent consultant


In addition to checking the above,many aircraft financiers employ the
services of an independent consultant to check that all the insurance
requirements have been complied with.Certain London firms specialise
in this work and can provide written opinions upon request.

73
W H AT V E G E T A R I A N M E A L S D O Y O U H AV E ?

The following is a transcript of genuine control tower traffic


Control Tower “Delta 702, cleared for takeoff, contact Departure on 124.7.”

Delta 702 “Tower, Delta 702 switching to Departure… by the way, as we lifted off, we saw some
kind of dead animal on the far end of the runway.”

Control Tower “Continental 635, cleared for takeoff, contact Departure on 124.7… did you copy the
report from Delta?”

Continental 635 “Continental 635, cleared for takeoff… and yes, we copied Delta and we’ve already
notified our caterers.”
SECTIONTWO

I N S U R A N C E S
a n d
G UA R A N T E E S F O R
A I R C R A F T F I N A N C I E R S
S E C T I O N T WO
Aircraft Repossession Insurance
These policies are designed to protect aircraft financiers in the event of
them being unable to enforce their legal title and rights to repossess or
repatriate their collateral, the aircraft, following a default under a
loan/lease a greement.These policies have been variously described as
Aircraft Repossession Insurance, Political Risks, Collateral Deprivation
Insurance or Repatriation Insurance.

Banks/lessors and their lawyers have been particularly concerned when


financing aircraft for foreign airlines when the aircraft is registered in a
foreign country and is therefore subject to the laws,government orders
or decrees of that country.This is especially true should the borrower
be the national airline of a developing nation where political,economic
or jurisdiction uncertainties are perceived,and,where there is existing
sovereign debt exposure.

Subsequent laws or court orders (or unfair interpretation of existing


laws), could have the effect of limiting or even prohibiting the
bank/lessor from repossessing, repatriating and reselling aircraft
registered in the foreign jurisdiction.This can all occur regardless of the
terms of the lease contract, or loan agreement, signed between
bank/lessor and airline.In addition,the policy protects against outright
confiscation or appropriation by the foreign government that may, or
may not,be derived from a default under the lease/loan.

79
i) ‘Perils’ covered:-
1) Confiscation,seizure,appropriation, expropriation,
nationalisation, restraint or detention by the Foreign
Government (the meaning of Foreign Government is clearly
defined under the policy wording) of the aircraft.

2) Refusal or failure of the Foreign Government to allow the


Bank/Lessor to exercise its rights to repossess the aircraft.

3) Refusal or failure of the Foreign Government to allow the


Bank/Lessor to remove the aircraft from the Foreign Country.

4) Refusal or failure of the Foreign Government to de-register


the aircraft from the aviation register of the Foreign Country.

5) Refusal or failure of the Foreign Government, following a


compulsory sale of the aircraft,to forward the proceeds of
such a sale in hard currency following an occurrence as set
out in 1,2,or 3 above.

6) Refusal or failure of the Foreign Government or the United


Nations to allow the Bank/Lessor to exercise its rights to
repossess and or remove the aircraft as a result of sanctions
being imposed by the United Nations.

In addition to loss of the aircraft,the policy is extended to cover


loss of the aircraft technical records, notwithstanding that the
aircraft may have been returned undamaged.The policy will pay
for re-constituting the technical records and for any
maintenance, checks, repairs or replacement of timed

80
components necessary to reinstate the aircraft and records to FAA
standard,or equivalent.

ii) Applicable Law, Jurisdiction and the necessity for Legal


Opinions
Underwriters are insuring against any adverse changes in government
decrees,local laws and foreign exchange controls.Since jurisdiction and
foreign exchange controls vary from country to country, underwriters
require a written legal opinion from independent lawyers expert in the
Foreign Country.

This legal opinion should detail the regulations in force,at inception of


the policy, that relate to the titleholder’s rights within the Foreign
Country’s jurisdiction. It should also confirm that the bank’s interests
and title have been fully registered. The legal opinion should then
express an opinion as to the enforceability of the relevant provisions of
the lease.

iii) Security
Aircraft Repossession policies are insured with underwriters at Lloyd’s
of London and with certain leading insurance companies.

iv) Criterion for rating/underwriting Repossession Insurance


In order to quote and arrange coverage, full information and
documentation (lease and legal opinion etc.) is required.The premium
charged will largely depend upon the following factors:-

- The political and economic stability of the ‘Foreign Country’.

81
- The applicable laws in force and the perception of the local
judicial system

- The type of aircraft. For example – ‘wide-bodied’aircraft are often


of little use for operating internally.As such they are viewed as a
better risk than regional aircraft.

- Routes operated.An aircraft operating internally may be much


harder to physically repossess.

- The hard currency earnings,credit rating and standing of the


operator.

- Past experience of the financier, operator and ‘Foreign Country’.

(v) Why is ‘Confiscation’ coverage afforded by the operator’s


hull ‘War’ policy deficient?
Insurance covenants of a lease will normally require that coverage for
confiscation, requisition etc. is included in the operators hull ‘war and
allied perils’insurance.However, it is not advisable for a financier to rely
on this policy to protect its asset.

The confiscation coverage included under an airline’s Hull ‘War’ policy


(LSW555B) has the following deficiencies:-

- The operator’s hull ‘War’coverage can be amended by underwriters


giving ‘7 days notice to review’.Underwriters have the right to review
premium and geographical limits.The review may leave the operator
and the bank/lessor with no effective coverage.

82
- The operator’s hull ‘War’coverage is available for only a 12 month
period

- The operator’s hull ‘War’coverage may exclude ‘Confiscation by


Government of Registry’.

- The operator’s hull ‘War’coverage specifically excludes “the


repossession or attempted repossession of the Aircraft by any
titleholder or arising out of any contractual agreement to which
any Insured protected under this Policy may be a party…”

The operator’s policy will probably respond to an overt and hostile act of
confiscation by a government undertaking widespread seizure of assets or
nationalisation. If the aircraft confiscation is an isolated act, it will be very
hard to persuade hull ‘War’ underwriters that this is a ‘bona fide’ political
act,as opposed to a contractual dispute.As one hull ‘war’underwriter was
quoted as saying, “governments do not declare war on a single asset”.

vi) Repossession Insurance policy wording


Aircraft Repossession Insurance is based on the LSW147 wording.It is
our view that the standard LSW147 wording is deficient in certain
aspects. The wording is normally tailored according to the specific
needs of each client.

For reasons of confidentiality, a BankAssure tailored wording is not


published here.A copy of the standard market wording,upon which the
BankAssure Repossession Wording is based, is shown in Appendix E,
page 207.

83
The BankAssure Repossession Insurance policy will respond
in the following manner:

The occurrence The occurrence of a


of Peril 1 or Default under the Lease
Confiscation Agreement,leading to:

Aircraft
The triggering of the Yes Yes
Deregistration returned and
Waiting Period under the
of Aircraft no claim
Insurance Policy, leading to
required
Yes
The Lessor exercising
their rights to recover
the Aircraft,leading to

No
No
Peril 2 + 3
Peril 5 Peril 6 Peril 4
Non Repossession
Proceeds of sale Sanctions Non De-registration
or Non Removal

Claim paid under repossession policy after


occurrence of an Insured Peril and the
expiry of the Waiting Period

84
Lease Payment Delay Insurance
(single transaction)
Aircraft Repossession Insurance, as described above, protects the
bank/lessor against the loss of the asset. It is also possible to increase
the sum insured to include provision for a limited amount of unpaid
lease payments and ‘default interest’.However, if no claim is recoverable
under the Repossession Insurance,and/or the asset is returned prior to
the maturation of the relevant ‘Waiting Period’, the bank/lessor will
suffer a significant unrecoverable loss.

There is no standard insurance product to cover this payment risk,but


the products available can be broadly divided into two types.

i) Firstly, cover can be arranged that is based upon the ‘perils’as


covered under the Aircraft Repossession Insurance policy. However,
the policy will pay on a ‘franchise’basis once lease payments have
been delayed beyond a certain number of days.This means that
once the Waiting Period has expired,the policy will retroactively
pay for lease rentals unpaid during the Waiting Period and
thereafter.

BankAssure have developed a favourable wording to cover this risk.

ii) The second form of insurance is basically specialist credit


insurance.This can be arranged for better rated lessees.Credit
insurance can work well,but the proposed cost is often greater
than the margin (in basis points) in the original financing.Also,the
‘Catch 22’is that credit insurance is more widely available for

85
countries and lessees where the financier is prepared to accept the
risk and vice versa for lower rated countries and lessees.

The level of due diligence and underwriting information required


for both the above products can be high,especially for ii) Credit
Insurance.

Revenue protection products that protect the income derived from


a portfolio of leases,as opposed to single transactions,are detailed
later in this section (refer to page 111).

86
A NEAR MISS!
Bank’s/Lessor’s Hull and
Liability Insurance
This can be divided into i) Contingent Hull and Liability Insurance and,
ii) insurance arranged for Aircraft in the Care Custody and Control of
the Bank/Lessor.

i) Contingent Hull and Liability Insurance


When financing an aircraft, a bank/lessor will require that their asset
and potential liability exposures are fully insured by the operator, with
the financier’s interests correctly endorsed on to the operator’s policy.
The normal safeguards include:-

- Stipulated minimum policy limits

- Breach of warranty coverage

- Loss payable clauses

- Bank/lessor named as Additional Insured

- Cut though clauses on reinsurance

- Minimum notices of cancellation

- Broker’s letters of undertaking

These requirements are fully explained in Section One of this book.

89
Notwithstanding the requirements of the insurance covenants of a
lease, some financiers insure against the remote risk of an operator’s
insurance failing to respond,or proving inadequate.

Contingent Hull and Liability Insurance provides coverage in


respect of the bank’s/lessor’s interests, on broadly the same
conditions as the primary (operator’s) insurances, that would
have existed but for the primary policy failing to respond, or
proving inadequate.

Examples of scenarios exposing a financier to unprotected


losses:-

a) Non payment of premium


A bank/lessor should be given advance notice of any non renewal
or cancellation for non payment of premium,in accordance with
the minimum notice periods contained in the insurance covenants.
The bank/lessor will normally have the option (but not obligation)
to pay the outstanding premium and keep coverage in force.If this
option is not taken up (it is usually impractical to do so and may
be resisted by insurers), coverage will cease.Renegade airlines may
continue flying.If the aircraft are grounded,significant exposure to
uninsured ground losses remain.

Even if a bank/lessor has been given advance warning of the


airline’s insurance terminating,it may be difficult to arrange
sufficient coverage in a timely manner.

90
b) Breach of Geographical Limits
If the operator flies outside the terms of the ‘Geographical Limits’
all coverage can become invalid,including the endorsement of the
financier’s interests.

c) United Nations Sanctions


If UN sanctions are imposed in the airline’s home country, it may
become illegal for the insurers to pay claims in respect of hull
losses.

d) Errors and omissions by the Lessee’s insurance broker


Financiers have to trust that certificates issued are correct and
reflect the insurance that has been arranged.They will normally be
supported by a Broker’s Letter of Undertaking and in some cases a
report from an independent insurance consultant.However, errors
can mean that coverage is not in force.

In one recent case,an airline policy was extended without


agreement being obtained from all underwriters.The insurance
broker erroneously confirmed full coverage to be in effect.After the
loss,certain underwriters refused to pay the claim,citing absence of
a valid contract.

Notwithstanding the inclusion of the AV67 type endorsement,all


the safeguards protecting the lessor’s interests will prove worthless
if the actual contract is not in force.

In such circumstances the financier will probably sue the party


responsible for the error.’Any recovery from an intermediary, and/or

91
their professional indemnity insurers,is likely to take several years.’
Also,the level of professional indemnity protection that smaller
intermediaries carry may prove insufficient.

Fraud can also invalidate a policy. For example,if an intermediary


were to embezzle premiums and yet simultaneously confirm to the
bank/lessor that coverage is in force.

e) Failure of the ‘Cut Through Clause’


Cut through clauses are illegal in certain countries (China for
example).In other countries they are untested and of dubious
legality (India and Korea for example).The clause cannot operate ‘in
contravention of the laws of the country.’

f) Inadequate Liability Insurance


The subject of ‘Lessor Liability’is addressed in depth in Section One
of this book.It is possible that a bank/lessor could be exposed to
liability claims once the operator’s policy limit has been exhausted.

To protect against these and other unpredictable exposures, a


bank/lessor can purchase a ‘sleep easy’ Contingent Hull and Liability
policy. Such policies are relatively inexpensive, reflecting the remote
exposures.Coverage can either be purchased on a portfolio basis,or on
a ‘deal by deal’ basis. Some financiers only buy Contingent Hull
Insurance,others only buy Contingent Liability Insurance.

Contingent Policy Wording


The standard wording is LSW610A. Policies are normally placed in
Lloyd’s and with major international aviation underwriters.

92
The only significant exclusions to coverage are insolvency of the
operator’s insurers (however, the insolvency exclusion only applies to
hull claims – not liability),‘Major Powers’and nuclear war.The scope of
coverage for pollution and noise liability is the same as a standard
airline policy.

One significant point is that the contingent liability insurance includes


coverage in excess of the operator’s policy (where the limit has been
exhausted). Coverage also includes legal fees in addition to the sum
insured.

The LSW610A policy can be endorsed to include repossessed aircraft.


This is detailed in ii) Aircraft in the Care Custody and Control of
Lessor/Bank,below.

A copy of the LSW610A standard wording is included in Appendix E, page


189.

ii) Aircraft in the Care, Custody and Control of the


Lessor/Bank
There are times when banks/lessors have the primary responsibility for
an aircraft.At such times primary coverage,similar to that carried by an
operator, needs to arranged.This can include:-

- Aircraft awaiting lease

- Sales and demonstration flights

- Ferry flights

93
- Aircraft being repossessed

- Storage of repossessed aircraft

In such circumstances,most banks/lessors use the services of an agent


with aviation expertise.

If the financier buys an existing Contingent Hull and Liability policy, the
aircraft (as described above) can be included, by application of the
‘Repossessed Aircraft Endorsement’. If no such contingent policy is in
force, a ‘stand alone’policy can be arranged.

One advantage in buying a Contingent Hull and Liability policy is that


coverage for repossessed aircraft can be arranged automatically with no
gap in cover.

Premium for possessed/repossessed aircraft is normally charged at a


rate for ‘Ground Risks’plus additional premiums for any ‘Flight Risks’.

In addition to Hull ‘All Risks’and Legal Liability the financier can arrange
Hull ‘War’Risks (based on LSW555B) and/or Hull Deductible insurance,
applicable whilst the aircraft are in its care custody and control.

94
Contingent Hull War Insurance
Leases invariably require that the operator carries Aviation Hull War and
Allied Perils insurance (usually on the LSW555B Wording).This policy
will normally be endorsed to include the bank’s/lessor’s requirements
in the same way that that the hull ‘All Risks’ policy is endorsed.This
typically includes a Loss Payable clause, Breach of Warranty clause,
minimum notices of cancellation and a Cut Though Clause (where
appropriate). In addition, the financier will require that the operator’s
appointed insurance broker issues a ‘Letter of Undertaking’ regarding
material changes in coverage and the like.

Notwithstanding that the financier is confident that all of the above


safeguards have been put in place,the asset/collateral can be exposed
by the following:-

i) Cancellation of the Operator’s War policy


The standard Airline War Risks policy, LSW555B,contains
cancellation and review clauses.These clauses are not negotiable
with war underwriters (industry practice does not allow for them
to be deleted) and will override any undertakings given, regarding
30 days notice of any cancellation etc.,to banks/lessors.

In the event of an outbreak of war, civil disorder etc.that affects the


operator, war underwriters can exercise their rights to give notice
(7 days or less in times of conflict) to review the geographical
limits and premium terms.If the operator is unwilling to pay the
additional premiums levied,or continues flying to an excluded
territory, then no cover will be in force for either the operator or

95
the lienholders.This problem may be exacerbated by local politics.
A state airline,and/or the national insurer issuing the direct
insurance policy, may not accept that it is involved in a war and
may cease cooperating with underwriters/reinsurers.

War underwriters can also issue notice to cancel absolutely seven


days prior to each policy quarter date.This happens very rarely but
could occur if underwriters were to be exposed to large aggregate
values in two countries at war with each other. In addition,some
state insurers (in Brazil for example) have laws that dictate that war
coverage is automatically terminated if the home country (i.e.
Brazil) is involved in a war.

ii) UN Sanctions
If the country in which an airline operates becomes an international
pariah and is subjected to UN sanctions,it may become illegal for
insurers or reinsurers to continue coverage.The bank/lessor may be left
with a gap in cover at the time of greatest risk.

Countries where this scenario has occurred,include Yugoslavia,Iraq


and Libya. Following the impostion of U.N. sanctions on Iraq, claims
had to be paid in escrow accounts.However, many Western
underwriters cancelled coverage for ‘patriotic’reasons.

iii) Lease Default and circumstances thereafter


If a country descends into civil or economic turmoil,this greatly
increase the chance of defaults on leases to local airlines.At the
same time,there is a good chance that the airline will have stopped
paying insurance premiums.Normally the bank/lessor will declare a

96
default and endeavour to repossess the aircraft.If Aircraft
Repossession Insurance has been purchased by the bank/lessor,
then the bank/lessor is protected against inability to repossess the
aircraft due to interference of the ‘Foreign Government’.However,
this policy is subject to ‘Waiting Period’of 180 days,prior to any
claim being paid.During this ‘Waiting Period’the aircraft may be
trapped in hazardous location, abandoned or generally misused.
Physical damage during the ‘Waiting Period’is not covered under
the Aircraft Repossession insurance and the likelihood is that the
operator’s own policy will have been cancelled or lapsed.

In the above circumstances (not an exhaustive list) a financier will


probably be exposed for the value of their asset. Some banks/lessors may
take the view that if there is a problem,they will then seek to buy a policy
to cover their interests.However, the financier may only be aware of the
problem when it has already occurred.Also, underwriters may refuse to
offer coverage, or require very large premiums to cover a ‘distressed’ risk.

Contingent War Insurance provides banks/lessors with up to 36 months


(or possibly 60 months) of coverage.During this period the policy can
be triggered, by defined events, to provide up to 180 days of non-
cancellable coverage (this coverage is only available for parties
without an operational interest and is offered by Lloyd’s under a
special dispensation agreement – it contravenes normal war
underwriting criterion). Even if a war is ongoing in the area where an
aircraft is trapped, underwriters cannot cancel coverage and cannot
demand a change in conditions,or premium, for the duration of the 180
days (this 180 period being the same as the ‘Waiting Period’under the
Aircraft Repossession insurance).

97
Exhaustion of Aggregate/Ground Limit on Operator’s War Policy
Contingent War policies can be extended to cover the financier for any
shortfall in recovery, in respect of their financial interest, due to
aggregate or ground limitations on the operator’s primary hull war
policy.This coverage is slightly different from that described in i) to iii)
above.Since it is not technically‘contingent’,the relevant section of the
policy is subject to normal cancellation and review clauses (the same as
LSW555B).

Contingent War Policy Wording


There is no standard market wording.A sample wording is shown in
Appendix E,page 216.

98
TA K E M E T O . . . . ?

An American airliner was on a scheduled flight from “But, we’re already going to Miami”.
New York to Miami.Some way into the flight a passenger
approached and entered the flight deck and ordered the The passenger immediately responded, “Maybe, but on
crew to, “Fly me to Miami”. the last occasion I travelled with you we were
hijacked to Havana, and I wanted to make sure I got
After a moment’s thought the captain replied, to you first!”
Total Loss Only Insurance
There are circumstances when a bank/lessor may wish to purchase a
policy that pays an agreed amount in the event of the Total Loss of the
aircraft (Total Loss is as defined under the operators’s hull ‘All Risks’or
‘War Risks’policy).This amount would be over and above that which is
already purchased under the main hull policies.It protects the financier
against a specific financial loss that would occur following a total loss.

For example, where the insured value under the operator’s policy
reflects the market value of the aircraft,but this amount is less than the
stipulated loss value (SLV) under the lease agreement.

If an aircraft market value rises, it is possible that the SLV will be less
than the true value of the financier’s asset.This may also create a need
for TLO.

101
Aircraft Repossession
Expenses Insurance
(Including ‘Return Condition’ and
Technical Records Insurance)

This insurance gives a bank/lessor coverage in respect of expenses


incurred in repossessing an aircraft after a default or accelerated
termination. In addition, the policy will pay the cost of rectifying any
maintenance deficiency discovered at the end of a lease term, or
following an early termination of the lease.

Expenses covered include:-


i) Legal,travel and labour expenses incurred by the lessor in obtaining
full legal access to the aircraft, or incurred in the removal of any
legal encumbrances placed on the aircraft. Cover continues until
such time as sale,or re-leasing of the aircraft is possible (this would
include legal costs in de-registering the aircraft).

ii) The cost of maintenance to bring the aircraft up to the standard


stipulated in the lease.

iii) Aircraft recovery costs including:-


- Ferry Flight,crew, hotel expenses,fuel etc.

- Airport storage and landing fees

- Essential maintenance prior to fer ry flight

- Certification charges

102
iv) Loss or Dama ge of Technical Records
In the event that the aircraft is returned without technical records
or with incomplete technical records,there will be substantial cost
incurred to reinstate the technical records.The ease of reinstating
records will depend upon the quality (and currency) of back up
records filed with the bank/lessor or manufacturer. If the ‘time life’
of a specific part cannot be established with certainty, a new part
will be required.

Some of the risks covered by this insurance product may be included


under other policies that may, or may not, remain in force.For example,
Aircraft Repossession Insurance covers technical records if they have
been lost as a result of a named peril under that policy.

As such,underwriters will expect the bank to explore the possibility of


making recoveries under other policies first.

Coverage for Technical records can also be purchased in conjunction


with Contingent Hull and Liability insurance. This coverage is
defined by the LSW611/LSW612 endorsements.This is not as broad as
the coverage detailed above.

103
A NOTHE R SO OTHI NG C AB IN A NNO U NCE ME NT!

After a real crusher of a landing in Phoenix,Arizona the brought the aircraft to a screeching halt up against the
flight attendant came on with: gate. And once the tyre smoke has cleared and the
warning bells are silenced, we’ll open the door and
“Ladies and gentlemen, please remain in your seats you can pick your way through the wreckage to the
until Captain Crash and his wrecking crew have terminal.”
Residual Value Insurance
Operating leases are the most common financing structure for new
aircraft.‘Sale and lease-back’ transactions are also gaining favour with
airlines seeking to restructure their balance sheets.The recent demise
of the ‘German Leveraged Lease’and the ‘Japanese Leveraged Lease’has
left many lenders pondering their future role in aircraft financing
transactions. Banks are expert at evaluating and accepting credit risk;
they are often very reluctant to accept ‘asset risk’.

Future aircraft values are subject to the vagaries of economic


conditions,new technology/obsolescence, FAA and manufacturer safety
directives and local and international agreements (for example noise
and emission requirements).

Over the last 20 years there have been various ‘Residual Value
Guarantee’ products available. These have included insurance type
products,‘put & call options’ and ‘buy back’ guarantees. From time to
time these guarantees have been offered by aircraft manufacturers in
order to promote sales (there is a cash flow advantage to the
manufacturer who otherwise may have to discount the cash price).

A problem associated with some of the products offered in the past is


that the credit rating of the sellers of RVI has not been high enough.
This is allied to the typically long periods of coverage and large
aggregate exposures. In addition, some of the contract wordings
previously used have resulted in disputed claims, leaving banks with a
jaundiced view of residual value guarantees.

106
In the last three to five years, insurers/guarantors new to the asset
financing market have brought significant capacity into the aircraft
financing arena. These insurers/guarantors, who are offering clear
contract wordings and carry excellent credit ratings, have been
selectively selling RVI.The deals are all tailored according to the specific
needs of the bank/lessor; there is no standard product. Most deals
provide for a guarantee at one set date in the future.

Example of the potential benefits of RVI


When a bank/lessor offers an operating lease, one of the principal
factors in determining the rental charged is the projected residual
value.There is no doubt that RVI as a financing tool has a key role in the
future of aircraft financing. As the following illustration shows, the
economic benefit it generates for the airline is significant:-

Full Pay-out Lease Full Pay-out Lease Operating Lease


with Salvage
Aircraft New Boeing 777-200 New Boeing 777-200 New Boeing 777-200
Initial Cost $130,000,000 $130,000,000 $130,000,000
Term: 12 years 12 years 12 years
Rental Payable Monthly in advance Monthly in advance Monthly in advance
Lease Rate 8.0% per annum 8.0% per annum 8.0% per annum
Residual/Salvage Nil US$25,000,000 US$66,000,000
RVI Premium $3,960,000
Monthly
Repayments US$1,397,869 US$1,294,611 US$1,125,268
Monthly saving
on Rental US$103,258 US$272,601
Total Cost of
Rentals plus
RVI premium US$201,293,169 US$186,424,004 US$165,998,572
‘PV’ of Rentals
plus RVI
premium (8%
discount rate) US$130,000,000 US$120,397,133 US$108,608,432

107
It can be seen that even with a premium of $3,960,000 (being 6% of the
$66,000,000 RVI Sum Insured) capitalised in the transaction,the airline
is able to realise a saving on each monthly lease rental of US$272,601.
Hence, within 15 months, the RVI premium is fully “recovered” from
such monthly savings on each lease rental.

Other Benefits of RVI


- Balance sheet relief for banks and manufacturers.

- Achieving the desired accountancy and tax treatment.

- Risk conversion. RVI converts an ‘asset risk’into a ‘credit risk’

- Enhancement of credit rating for securitisation.

A diagrammatic illustration of the above 777-200 transaction –

1) Principal outstanding

108
2) Reducing Lease Rentals with RVI

3) Present Value of Lease Rentals


(demonstrating benefits of RVI)

109
RVI arrangers must have the following:-
- Ability to fully understand the financier’s motivation and
requirements.

- Technical skills to document complex transactions.

- Effective working relationships with both the Guarantor and the


Financier.

- A proven track record.

110
Revenue Stream Protection
In addition to protecting the assets that underpin a portfolio of leases,
it is possible to protect the stream of revenue derived from that
portfolio.Protections can be arranged for long periods that mirror the
periods of financing.The coverage can include causes wider than those
traditionally available in insurance markets,including:-

- Insolvency/default of lessees.

- Early termination of leases.

- Reduced future lease rentals due to deterioration of market


conditions.

- Escalation in costs such as marketing for re-leasing,aircraft


refurbishment and compliance with new regulations or industry
standards.

As with residual value guarantees, these revenue protection schemes


are tailored according to the needs of the client.

The insurers/guarantors are covering adverse deterioration in the projected


revenue stream. Before offering any cover, insurers will want to analyse
detailed models/projections of future revenues.Underwriters may wish to
audit these models with the assistance of specialist consultants.

Revenue stream protection products can have the following benefits:-

- Enhancement of credit rating by rating agencies

111
- Longer periods of coverage than are typically available in
insurance markets (up to 15 years).

- Enabling a bank/lessor to exit a class of business without


reserving heavily against future losses.

- Freeing up equity capital to focus on new aircraft leasing,or


other activities.

112
Summary of Key Protections
for Aircraft Financiers

1) Aircraft Repossession Insurance


i) Protects against acts of confiscation/seizure by the Foreign
Government.

ii) Covers inability to enforce legal title and rights to an aircraft


following a default under the lease.

2) Bank’s/Lessor’s Hull and Liability Insurance


i) Contingent Hull and Liability insurance protects against inability
to collect in full or in part under the operator’s policies.

ii) Covers aircraft in the care,custody and control of the


lessor/bank.

3) Contingent Hull War Insurance


i) Provides 180 days of non-cancellable hull ‘War’insurance for the
bank’s/lessor’s interest,following cancellation or non-renewal of the
operator’s policy.

ii) Covers the interests of the bank/lessor if claims are


unrecoverable on the operators policy by virtue of ‘ground’or
aggregate policy limits.

113
4) Aircraft Repossession Expenses Insurance
i) Covers the costs of repossessing an aircraft,including legal
expenses.

ii) Covers the cost of rectifying lost,damaged or incomplete


technical records.

iii) Pays for maintenance/overhaul to reinstate the aircraft to the


‘return condition’stipulated in the lease.

5) Residual Value Insurance


i) Protects against reduction in market value at a future date,
enabling a residual value to be guaranteed.

ii) Converts ‘asset risk’to ‘credit risk’.

6) Revenue Stream Protection


Protects the stream of revenue derived from a lease portfolio or a
single transaction.

114
B AC K S E AT D R I VE R S !

A Royal Air Force VC10 was on an arduous flight gentleman if he would hold the string, whilst he
carrying the families of air force personnel from Brize attended to the call of nature. He gingerly passed the
Norton,England to Goa,India. string over, telling the man he was now controlling the
aircraft.
In those days this was a long journey and,a few hours
into the flight, the crew became bored with the The flight engineer up on the flight deck, started
monotony of their task. tugging on the string to create the effect that the
controls were moving.
The captain,who had a reputation with his colleagues as
being something of a joker, decided to liven up the For a few minutes the old gentleman, with sweaty
proceedings. He took a ball of string and paid it out, hands,perspiration pouring from his brow and no doubt
whilst walking backwards down the aisle of the aircraft his heart-in-his-mouth, fought to “control” the aircraft,
from the flight deck. and if the captain had not returned when he did,he may
well have have returned to a collapsed passenger in a
On reaching the rear of the aircraft he asked an elderly deep state of shock!
APPENDIX

Appendix A – Specimen Insurance Article

Appendix B – Sample Certificates

Appendix C – Sample ‘Broker’s Letter of Undertaking’

Appendix D – Selected Clauses and Wordings

Appendix E – Specimen Wordings for Specialist


Bank/Lessor Insurances
Appendix A

Specimen Insurance Article


The following is a sample insurance article. Depending upon the
structure of finance and type of operator it may need to be amended.
However, it should be noted that the uniform adoption of the Aircraft
Lease Finance Clause, AV67B, limits the extent to which the insurance
articles can be amended.

Also, the requirements are based upon the prevailing insurance


environment and may become outdated.The following sample insurance
article includes sections relating to reinsurance requirements. On a direct
insurance placement these sections would not appear.

[ ] INSURANCE

[ ].1 I n s u r a n c e s : Lessee will maintain in full fo rce and effe c t


d u ring the Lease Pe riod insurances in respect of the
Equipment (Airc ra f t , a ny Engine or any Pa rt) in fo rm and
substance satisfa c t o ry to Lessor (the “ I n s u ra n c e s ” w h i ch
ex p ression incl u d e s , w h e re the context so admits, a ny
re l evant re - i n s u rance(s)) through such bro ke rs and with
s u ch insure rs and having such deductibles and being
subject to such ex clusions as may be approved by
L e s s o r. The Insurances will be effected either:-

119
( a ) on a direct basis with insure rs of recognised standing
who norm a l ly participate in aviation insurances in the
leading international insurance markets and led by
re p u t able underwriter(s) approved by Lessor; o r

( b ) with a single insurer or group of insure rs approved by


Lessor which does not retain the risk but effe c t s
substantial re i n s u rance with re i n s u re rs in the leading
i n t e rnational insurance markets and through bro ke rs
e a ch of recognised standing and acceptable to Lessor
for a perc e n t age of all risks insured acceptable to
Lessor (the “ R e i n s u ra n c e s ” ) .

[ ].2 R e q u i rements: L e s s o r ’s current re q u i rements as to


re q u i red Insurances are as specified in this Clause and
in Schedule [ ]. Lessor may from time to time stipulate
other re q u i rements for the Insurances so that the
scope and level of cover is maintained in line with
best industry practice with the interests of Lessor
p ro t e c t e d .

[ ].3 Change: If at any time Lessor wishes to revo ke its


a p p roval of any insure r, re i n s u re r, i n s u rance or
re i n s u ra n c e , Lessor and/or its bro ke rs will consult
with Lessee and Lessee’s bro ke rs (as for the time being
a p p roved by Lessor) re g a rding whether that approva l
should be revo ked to protect the interests of the
p a rties insure d . I f, fo l l owing the consultation, L e s s o r

120
c o n s i d e rs that any ch a n ge should be made, Lessee will
then arra n ge or pro c u re the arra n gement of altern a t i ve
c over satisfa c t o ry to Lessor.

[ ].4 Insurance Covenants: Lessee will:-


( a ) e n s u re that all legal re q u i rements as to insurance of
the A i rc ra f t , a ny Engine or any Pa rt which may fro m
time to time be imposed by the laws of the State of
R e gi s t ration or any state to, f rom or over which the
A i rc raft may be f l ow n , in so far as they affect or
c o n c e rn the operation of the A i rc ra f t , a re complied
with an in particular those re q u i rements compliance
with which is necessary to ensure that (i) the A i rc ra f t
is not in danger of detention or fo r fe i t u re , (ii) the
I n s u rances remain valid and in full fo rce and effe c t ,
and (iii) the interests of the Lessor in the Insura n c e s
and the A i rc raft or any Pa rt are not there by pre j u d i c e d ;

( b ) not use, cause or permit the A i rc ra f t , a ny Engine or any


Pa rt to be used for any purpose or in any manner not
c ove red by the Insurances or outside any ge o gra p h i c a l
limit imposed by the Insura n c e s ;

( c ) c o m p ly with the terms and conditions of each policy


of the Insurances and not do, consent or agree to any
act or omission which : -

121
(i) i nvalidates or may invalidate the Insura n c e s ; o r

( i i ) re n d e rs or may render void or vo i d able the whole


or any part of the Insura n c e s ; o r

( i i i ) b rings any particular liability within the scope of


an ex clusion or exception to the Insura n c e s ;

( d ) not take out without the prior written approval of


Lessor any insurance or re i n s u rance in respect of the
A i rc raft other than those re q u i red under this
A greement unless relating solely to hull total loss,
business interru p t i o n , p ro fit commission and
d e d u c t i ble ri s k ;

( e ) commence re n ewal pro c e d u res at least 30 days pri o r


to ex p i ry of any of the Insurances and provide to
Lessor:-

(i) if requested by Lessor, a written status re p o rt of


re n ewal negotiation 14 days prior to each ex p i ry
date;

( i i ) c o n fi rmation of completion of re n ewal prior to


e a ch ex p i ry date; a n d

( i i i ) c e rt i ficates of insurance (and where appro p ri a t e


c e rt i ficates of re i n s u ra n c e ) , and bro ke r ’s (and any
re i n s u rance bro ke r s’) letter of undertaking in a

122
fo rm acceptable to Lessor in English, detailing the
c ove rage and confi rming the insure rs ’ (and any
re i n s u re rs’) agreement to the specified insura n c e
re q u i rements of this A greement within 7 day s
after each re n ewal date;

(f) not make any modification or alteration to the


I n s u rances material and adve rse to the interests of any
of the Indemnitiees; a n d

( g ) be re s p o n s i ble for any deductible under the


I n s u ra n c e s .

[ ].5 F a i l u re to Insure: If Lessee fails to maintain the


I n s u rances in compliance with this A gre e m e n t , t h e
Lessor will be entitled but not bound, ( w i t h o u t
p rejudice to any other rights of Lessor under this
A gre e m e n t ) : -

( a ) to pay the premiums due or to effect and maintain


i n s u rances satisfa c t o r y to it or otherwise re m e dy
Lessees fa i l u re in such manner (incl u d i n g , w i t h o u t
limitation to effect and maintain an “ ow n e r ’s intere s t ”
policy) as it considers appro p ri a t e .A ny sums so
expended by it will become immediately due and
p ayable by Lessee to Lessor together with intere s t
t h e re o n , f rom date of ex p e n d i t u re by it up to the date
of re i m b u rsement by Lessee, a n d

123
( b ) at any time while such fa i l u re is continuing to re q u i re
the A i rc raft to remain at any airport or to proceed to
and remain at any airport designated by it until the
fa i l u re is remedied to it’s satisfa c t i o n .

[ ].6 Continuing Indemnity: Lessor may re q u i re Lessee to


e ffect and to maintain insurance after the Lease Pe ri o d
with respect to its liability under the indemnities in
Clause [ ] for a period of two ye a rs or until the nex t
major overhaul of the A i rc ra f t , w h i ch ever the sooner,
w h i ch provides for each Indemnitiee to be named as
additional insure d . L e s s e e ’s obligation in this Clause
shall not be affected by Lessee ceasing to be Owner
of the A i rc raft and/or the Lessor ceasing to have any
i n t e rest in respect of the A i rc ra f t .

[ ].7 Application of Insurance Pro c e e d s :


As between Lessor and Lessee:

( a ) all insurance payments re c e i ved as the result of To t a l


Loss occurring during the Lease Pe riod will be paid to
Lessor and Lessor will pay the balance of those
amounts to Lessee after deduction of all amounts
w h i ch may be or become payable by Lessee to Lessor
under the A gre e m e n t .

(b) any insurance proceeds of any pro p e rt y, damage or loss to


the A i rc ra f t ,a ny Engine or any Part occurring during the
Term not constituting an Event of Loss and in excess of

124
US$[ ] will be paid to Lessor and applied in
payment (or to reimburse Lessee) for repairs or
replacement property upon Lessor being satisfied that the
repairs or replacement have been effected in accordance
with this Agre e m e n t .I n s u rance proceeds in amounts
below US$[ ] may be paid by the insurer directly to
L e s s e e .A ny balance remaining may be retained by Lessor.

( c ) notwithstanding Clause [ ].7 (a) or (b), if at the time


of the payment of any such insurance proceeds an
E vent of Default has occurred and is continu i n g , a l l
s u ch proceeds will be paid to or retained by Lessor to
be applied towa rd payment of any amounts which may
be or become payable by Lessee in such order as
Lessor sees fit or as Lessor may elect.

SCHEDULE [ ]
INSURANCE REQUIREMENTS

The Insurances re q u i red to be maintained as fo l l ow s :

1. HULL ALL RISKS of Loss of Damage whilst f lying and on the


ground with respect to the A i rc raft on an “ agreed va l u e
b a s i s ” for the A greed Value and with a deductible not
exceeding [ ] or such other
amount agreed by Lessor from time to time, and to incl u d e
d e d u c t i ble insura n c e s , if necessar y, to ach i eve that limit.

125
2. HULL WAR AND ALLIED PERILS, being such risks excluded from
the Hull All Risks Policy to the fullest extent available from the
leading international insurance markets including confiscation
and requisition by the State of Registration for the Agreed Value.

3. ALL RISKS (INCLUDING WAR AND ALLIED PERILS ex c e p t


when on the ground or in transit other than by air or sea)
p ro p e rty insurance on all Engines and Pa rts when not
installed on the A i rc raft on an “ agreed va l u e ” basis for their
full replacement value and including engine test and
running ri s k s .

4. AIRCRAFT THIRD PA RTY (BODILY INJURY and PRO P E RT Y


DA M AG E ) , PA S S E N G E R , BAG G AG E , CARGO AND MAIL A N D
AIRLINE GENERAL THIRD PA RTY (INCLUDING PRO D U C T S )
LEGAL LIABILITY for a Combined Single Limit (Bodily
I n j u ry / P ro p e rty Damage) of an amount not less than [
] any one occurrence (but in respect of pro d u c t s
l i ability this limit may be an ag gregate limit for any and all
losses occurring during the currency of the policy). Wa r
and Allied Risks are also to be cove red under the Policy to
the fullest extent ava i l able from the leading intern a t i o n a l
i n s u rance marke t s .

5. All required hull and spares insurance (as specified above), so far
as it relates to the Equipment (Airc ra f t ,a ny Engine or Part) will:

( 1 ) name Lessor as additional insured for its re s p e c t i ve


rights and intere s t s ,

126
( 2 ) p rovide that any loss will be payable in Dollars , a n d :

( a ) in respect of any claim that becomes payable on


the basis of an Event of Loss, settlement shall be
made to or to the order of Lessor;

( b ) in respect of any other cl a i m , settlement (net of


a ny policy deductible) shall be made with such
p a rty(ies) as may be necessary to repair the
Equipment unless otherwise agreed after
consultation between the insure rs , Lessee and,
w h e re the loss exceeds the Damage Notifi c a t i o n
T h re s h o l d , L e s s o r ;

(c) include a notice and/or acknowledgments of any


assignment relating to the Insurances (relating to the
assignment of Lessees interest in the Insurances to
Lessor) in a form acceptable to Lessor;

( d ) if separate Hull “all ri s k ” and “ war ri s k s ”


i n s u rances are arra n ge d , i n clude a 50/50 prov i s i o n
in accordance with market practice (AVS103 in
the current market language ) .

6. All re q u i red liability insurances (specified ab ove) will:

( 1 ) i n clude Lessor, and its successors and assigns and their


re s p e c t i ve share h o l d e rs , s u b s i d i a ri e s , d i re c t o rs ,
o ffi c e rs , age n t s , e m p l oyees and indemnitiees as

127
additional insureds for their re s p e c t i ve rights and
i n t e re s t s ,

( 2 ) o p e rate in all respects as if a separate policy had been


issued cove ring each party insure d , but shall not
i n clude any claim under hull and spares insurances (as
s p e c i fied ab ove ) ; notwithstanding the fo re go i n g , t h e
total liability of insure rs shall not exceed the limits of
l i ability stated in the policy;

( 3 ) contain a provision confi rming that the policy is


p ri m a ry without right of contribution from any other
i n s u rance ava i l able to the Lessor.

7. All Insurances will:

( 1 ) be in accordance with normal industry practice of


p e rsons operating similar Equipment in similar
c i rc u m s t a n c e s ;

( 2 ) p rovide cover denominated in US Dollars and any


other currencies which Lessor may re a s o n ably re q u i re
in relation to liability insura n c e ;

( 3 ) o p e rate on a world-wide basis subject to such


limitations and ex clusions as Lessor may agre e ;

( 4 ) a ck n ow l e d ge the insurer is awa re of the Lease


A greement and that the Equipment is owned by Lessor

128
and that the Insurances are subject to a securi t y
assignment in favour of Lessor;

( 5 ) p rovide that, in relation to the interests of each of the


additional insureds the Insurances will not be inva l i d a t e d
by any act or omission (including misre p resentation and
n o n - d i s cl o s u re) of any other person or party which
results in a bre a ch of any term , condition or wa rranty of
the policy, p rovided that the additional insured party so
p rotected has not caused, c o n t ributed to or know i n g ly
condoned the said act or omission;

( 6 ) p rovide that upon payment of any loss or claim to or


on behalf of any additional insure d , i n s u re rs shall to
the extent and in respect of such payment be
t h e reupon subrogated to all legal and equitable ri g h t s
of that additional insured indemnified here by (but not
against any additional insure d s ) . I n s u re rs shall not
exe rcise such rights without the consent of those
i n d e m n i fi e d , s u ch consent not to be unre a s o n ably
w i t h h e l d . At the expense of insure rs such additional
i n s u reds shall do all things re a s o n ably necessary to
assist the insure r s to exe rcise said ri g h t s ;

( 7 ) p rovide that the additional insureds will have no


o bligation or responsibility for the payment of any
p remiums due and that the insure rs will not exe rc i s e
a ny right of set-off or counter-claim in respect of any

129
p remium due against the re s p e c t i ve interests of the
additional insureds other than outstanding pre m i u m s
relating to the Equipment which is the subject of the
re l evant cl a i m ;

( 8 ) p rovide that, except in respect of any provision fo r


cancellation or automatic termination specified in the
Policy or any endorsement there o f, c over provided by
the Insurances may only be cancelled or materi a l ly
a l t e red in a manner adve rse to the additional insure d s
by the giving of not less than 30 days (or such lesser
p e riod as is customari ly ava i l able in respect of war and
allied risks) notice in writing to the appointed bro ke r.
Notice shall be deemed to commence from the date
s u ch notice is gi ven by the insure rs . S u ch notice will
n o t , h oweve r, be gi ven the normal ex p i r y date of the
Policy or any endors e m e n t ;

(9) re i n s u rance will (a) be on the same terms as the


o ri ginal insurances and will include the provisions of
this Sch e d u l e , (b) provide that notwithstanding any
b a n k ru p t c y, i n s o l ve n c y, liquidation or similar
p roceedings affecting the re i n s u red that the
re i n s u re rs ’ l i ability will be to make such pay m e n t s , i n
respect of the Equipment, as would have fallen due
under the re l evant policy of re i n s u rance if the
re i n s u red had (immediately befo re such bankru p t c y,
i n s o l ve n c y, l i q u i d a t i o n , dissolution or similar

130
p roceedings) disch a rged its obligations in full under
the ori ginal insurance policies in respect of which the
then re l evant policy of re i n s u rance has been effe c t e d ;
and (c) contain a “ c u t - t h ro u g h ” clause in the fo l l ow i n g
fo rm (or otherwise, s a t i s fa c t o r y to Lessor):

“The Reinsure rs here by agree (at the request and


with the consent of the Reinsured) that in the
event of any valid claim arising hereunder the
R e i n s u re rs shall in lieu of payment to the
R e i n s u red its successors in interest and assigns
p ay to the person(s) named as loss payee(s) under
the ori ginal insurance effected by the Insured that
p o rtion of any loss for which the Reinsure rs
would otherwise be liable to pay the Reinsure d
(subject to proof of loss) it being understood and
agreed that any such payment shall fully disch a rge
and release Reinsure r s from any and all furt h e r
l i ability in connection with such cl a i m .

The Reinsure rs re s e rve the right to set off ag a i n s t


a ny claim payable hereunder in accordance with
this clause any outstanding premiums due on this
re i n s u ra n c e .

Payment shall be made under this re i n s u ra n c e


notwithstanding (i) any bankru p t c y, i n s o l ve n c y,
liquidation or dissolution of the Reinsure d , a n d / o r

131
(ii) that the Reinsured has made no pay m e n t
under the ori ginal insurance policies.

It is a condition that the provisions of this cl a u s e


shall not operate in contravention of the law s ,
statutes or decrees of the Gove r nment of the
c o u n t ry of domicile of the Reinsure d .”

( 1 0 ) AVN67B A c c e p t able under Contra c t

O p e rator shall be entitled to maintain insurance in re s p e c t


of the Equipment for the purposes of this A greement which
i n c o r p o rates the terms and conditions of A i r l i n e
Finance/Lease Contract Endorsement AVN67B into such
i n s u ra n c e . In that eve n t , to the extent that any provision of
AVN67B conf licts or is otherwise inconsistent with the
re q u i rements of this A greement relating to insura n c e , t h e n
(so long as it shall be ge n e ral practice to insure Equipment
financed or leased on the basis of such endorsement) such
c o n flicting or inconsistent provision of AVN67B shall
p revail and such endorsement shall be deemed to satisfy
the re q u i rements of this A gre e m e n t .

( 1 1 ) Date Recognition

If at any time the Lessee’s insurances become subject to


a ny ex clusion relating to computer ‘ d a t e - re c o g n i t i o n ’ t h e n
the Lessee will pro c u re that a wri t e b a ck of cove rage is
obtained to the fullest extent ava i l abl e .

132
Appendix B

Sample Certificates of Insurance and Reinsurance


Brokers confirm coverage to Contract Parties by issuing certificates. If
the London/international broker is handling a direct insurance then he
will send a Certificate of Insurance.However, if the insurance is placed
as a reinsurance of a local company the London/international broker will
only issue a certificate of Reinsurance. Banks/lessors may also require a
Certificate of Insurance from the local broker or local policy issuing
company. The London/international broker may be able to assist the
local intermediary in drafting a certificate, but will not be able to issue
or sign it.

i) Certificate of Insurance
TO WHOM IT MAY CONCERN

DAT E :

CERTIFICATE OF INSURANCE

THIS IS TO CERTIFY that we , as insura n c e


b ro ke rs , h ave placed in London and the International
i n s u rance Markets with effect from
to
in the name of
(the “ I n s u red”) cove ring their airc raft (as per schedule)
against the fo l l owing risks and up to the limits stated:-

G E O G R A P H I C A L L I M I T S a re wo r l dw i d e , but in respect of Hull


War Risks and Associated perils subject the fo l l ow i n g
ex cl u s i o n s : -

1. HULL ALL RISKS of Loss or Damage to airc raft as per


S chedule whilst f ly i n g , taxying and on the gro u n d .
This cove rage is subject to a deductible of US$
e a ch and eve ry cl a i m , other than total loss, c o n s t ru c t i ve
total loss, a rra n ged total loss of the airc ra f t .
ORDER: 100% of ......%

2. LIABILITIES – A i rc raft T h i rd Pa rt y, Pa s s e n ge r, B ag g age , C a rgo ,


M a i l , P remises Products and Hangarke e p e rs Legal Liability fo r
a Combined Single Limit (Bodily Injury / P ro p e rty Damage) of
US$ a ny one accident/occurrence and in
the ag gregate in respect of Pro d u c t s , subject to a bag g age
and personal effects deductible of US$ 1,250 each and eve ry
loss and a cargo deductible of US$ 10,000 each and eve ry
loss but Pe rsonal Injury limited to US$ 25,000,000 any one
o ffence and in the annual ag gre g a t e .( N OT E :T H I S
AG G R E G ATE LIMIT MAY BE REDUCED OR EXHAUSTED BY
V I RTUE OF CLAIMS MADE IN RESPECT OF OTHER A I R C R A F T
INSURED UNDER THIS INSURANCE). War and Allied Risks are
c ove red under this policy in accordance with AV N 5 2 C .
ORDER: 100% of ......%
3. HULL WAR RISKS, H I JACKING AND OTHER PERILS in re s p e c t
of the A i rc raft as per Sch e d u l e . This policy cove rs the peri l s
ex cluded on the Hull All Risks Insurance by the application
of AVN 48B except paragraph (b) there o f. I n cl u d i n g
C o n fi s c a t i o n , n a t i o n a l i z a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n ,
requisition for title or use by or under the order of any
G ove rnment or public or local authority of the State of
R e gi s t ra t i o n .

This policy is subject to a limit of US$ any one


loss and in the annual ag gre g a t e . N OT E : THIS AG G R E G AT E
LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF
CLAIMS MADE IN RESPECT OF OTHER AIRCRAFT INSURED
UNDER THIS INSURANCE.
ORDER: 100% of ......%

4. AIRCRAFT SPARES (including War Risks whilst in transit) –


being the pro p e rty of the Insured or the pro p e rty of others
for which the Insured is re s p o n s i bl e , i n cluding engi n e s
whilst detached from the airc ra f t , for a Limit of US$
a ny one occurrence subject to a deductible of US$
e a ch and eve ry loss (but US$ e a ch and eve ry
loss in respect of ingestion whilst engine ru n n i n g ) .
ORDER: 100% of ......%

The Hull All Risks and Hull War Risks insurances are arra n ge d
s e p e ra t e ly and contain a 50/50 provisional claims settlement
clause AV S 1 0 3 .
SCHEDULE OF EQUIPMENT

MAKE/MODEL SERIAL NUMBER AGREED VALUE

It is further cert i fied that the insurances have been endorsed as


fo l l ow s : -

AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT


It is noted that the Contract Party(ies) have an interest in respect
of the Equipment under the Contract(s). A c c o rd i n g ly, with
respect to losses occurring during the period from the E ff e c t i v e
Date until the expiry of the Insurance or until the expiry or agreed
termination of the Contract(s) or until the obligations under the
Contract(s) are terminated by any action of the Insured or the
Contract Party(ies), whichever shall first occur, in respect of the
said interest of the contract party(ies) and in consideration of the
Additional Premium it is confirmed that the insurance affo rd e d
by the Policy is in full force and effect and it is further agreed that
the following provisions are specifically endorsed to the Policy.

1. Under the Hull, Aircraft Spares, Hull War Risks Insurances


1 . 1 In respect of any claim on Equipment that becomes payabl e
on the basis of a Total Loss, settlement (net of any re l eva n t
Policy Deductible) shall be made to or to the order of the
Contract Party(ies). In respect of any other cl a i m ,
settlement (net of any re l evant Policy Deductible) shall be
made with such Pa rty(ies) as may be necessary to repair the
E q u i p m e n t unless otherwise agreed after consultation
b e t ween the Insure rs and the Insured and, w h e re necessary
under the terms of the C o n t r a c t ( s ), the Contract P a r t y ( i e s ).
S u ch payments shall only be made provided they are in
compliance with all applicable laws and re g u l a t i o n s .

1.2 I n s u re rs shall be entitled to the benefit of salvage in respect of


any property for which a claims settlement has been made.

2. Under the Legal Liability Insurance


2 . 1 Subject to the provisions of this Endors e m e n t , t h e
I n s u rance shall operate in all respects as if a separa t e
Policy had been issued cove ring each party Insure d
h e re u n d e r, but this provision shall not operate to incl u d e
a ny claim how s o ever arising in respect of loss or damage to
the Equipment I n s u red under the Hull or Spares Insura n c e
of the Insure d . Notwithstanding the fo re going the total
l i ability of Insure rs in respect of any and all Insureds shall
not exceed the limits of liability stated in the Po l i c y.

2 . 2 The Insurance provided hereunder shall be pri m a r y and


without right of contribution from any other Insura n c e
w h i ch may be ava i l able to the Contract Party(ies).

2 . 3 This Endorsement does not provide cove rage for the


Contract Party(ies) with respect to claims arising out of
their legal liability as manu fa c t u re r, re p a i re r, or ser v i c i n g
agent of the Equipment.
3. Under ALL Insurances
3 . 1 The Contract Party(ies) a re included as A d d i t i o n a l
I n s u re d ( s ) .

3 . 2 The cover affo rded to each Contract Party by the Po l i c y


in accordance with this Endorsement shall not be
i nvalidated by any act or omission (incl u d i n g
m i s re p resentation and non-discl o s u re) of any other pers o n
or party which results in a bre a ch of any term , condition of
wa rranty of the policy PROVIDED T H AT the C o n t r a c t
P a r t y so protected has not caused, c o n t ributed to or
k n ow i n g ly condoned the said act or omission.

3 . 3 The provisions of this Endorsement apply to the C o n t r a c t


P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e r ( s ) / l e s s o r ( s )
in the identified Contract(s) and not in any other capacity.
K n ow l e d ge that any Contract Party m ay have or acquire
or actions that it may take or fail to take in that other
capacity (pursuant to any other contract or otherwise)
shall not be considered as invalidating the cover affo rd e d
by this Endors e m e n t .

3.4 The Contract Party(ies) shall have no responsibility for


premium and Insurers shall waive any right of set-off or
counterclaim against the Contract Party(ies) except in
respect of outstanding premium in respect of the Equipment.

3 . 5 Upon payment of any loss or claim to or on behalf of any


Contract Party(ies), I n s u re rs shall to the extent and in
respect of such payment be thereupon subrogated to all
legal and equitable rights of the Contract Parties
i n d e m n i fied here by (but not against any Contract Party) .
I n s u re rs shall not exe rcise such rights without the consent
of those indemnifi e d , s u ch consent not to be unre a s o n ably
w i t h h e l d . At the expense of Insure rs such C o n t r a c t
P a r t y ( i e s ) shall do all things re a s o n ably necessary to assist
the Insure rs to exe rcise said ri g h t s .

3 . 6 Except in respect of any provision for Cancellation or


Automatic Te rmination specified in the Policy or any
E n d o rsement there o f, c over provided by this Endors e m e n t
m ay only be cancelled or materi a l ly altered in a manner
a d ve rse to the Contract Pa rty(ies) by the giving of not less
than T h i rty (30) days (but 7 days or such lesser period as may
be customari ly ava i l able in respect of War and Allied Pe ri l s
Risks) notice in writing to the Appointed Bro ke r. Notice shall
be deemed to commence from the date such notice is gi ve n
by the Insure rs . S u ch notice will NOT, h oweve r, be gi ven at
n o rmal ex p i ry date of the Policy or any endors e m e n t .

EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE


TERMS OF THIS ENDORSEMENT : -

1. THE CONTRACT PA RTY(IES) ARE COVERED BY THE


POLICY SUBJECT TO ALL TERMS, CONDITIONS,
L I M I TATIONS, WARRANTIES, EXCLUSIONS AND
C A N C E L L ATION PROVISIONS THEREOF.
2. THE POLICY SHALL NOT BE VARIED BY ANY
PROVISIONS CONTAINED IN THE CONTRACT(S)
WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR
AMENDMENT TO THE POLICY.

SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT

1. Equipment:

2. Policy Deductible a p p l i c able to physical damage to the


Equipment (Insert all applicable Policy Deductibl e s )

HULL: US$ e a ch and eve r y loss (ex cluding To t a l


L o s s / A rra n ged Total Loss/Constru c t i ve Total Loss).

S PA R E S : U S $ e a ch and eve ry loss but in respect of


i n gestion losses whilst Spare Engines Running the Hull A l l
Risks Deductibles apply.

3. ( a ) Contract Party(ies)
A N D, (b) in respect of Legal Liability Insura n c e s .

4. C o n t r a c t ( s ) Lease A greement betwe e n


and

5. E ffe c t i ve Date
6. Additional Pre m i u m US$100 the receipt of which is
h e re by ack n ow l e d ge d .

7. Appointed Insurance Bro k e r

This endorsement does not:

a. i n c o r p o rate the Contract into the policy.

b. P rovide cove rage to the Contract Pa rties in the event of the


repossession of the equipment.

Several Liability Notice (LSW 1001)


( This clause will always be included if Lloy d ’s underwri t e rs
p a rticipate in the ri s k )

The subscribing insure rs ’ o bligations under contracts of


i n s u rance to which they subscribe are seve ral and not joint and
a re limited solely to the extent of their individual subscri p t i o n s .
The subscribing insure rs are not re s p o n s i ble for the
s u b s c ription of any co-subscribing insurer who for any re a s o n
does not satisfy all or part of its obl i g a t i o n s .

DIRECTOR SIGNAT U R E S :
ii) Certificate of Reinsurance

TO WHOM IT MAY CONCERN

DAT E :

CERTIFICATE OF REINSURANCE

THIS IS TO CERTIFY that Reinsurance has been placed in


London and the International Insurance Markets with effe c t
f rom to
in the name of
(the “ I n s u red”) cove ring their airc raft (as per Schedule) ag a i n s t
the fo l l owing risks and up to the limits stated, and that we ,
as Reinsurance Bro ke rs , h ave placed
R e i n s u rance in the name of (the “ R e i n s u re d ” )
for the account of the Insure d : -

G E O G R A P H I C A L L I M I T S a re wo r l dw i d e , but in respect of Hull


War Risks and Associated perils subject the fo l l ow i n g
ex cl u s i o n s : -

1. HULL ALL RISKS of Loss or Damage to airc raft as per


S chedule whilst f ly i n g , taxying and on the gro u n d .T h i s
c ove rage is subject to a deductible of US$
e a ch and eve ry cl a i m , other than total loss, c o n s t ru c t i ve
total loss, a rra n ged total loss of the airc ra f t .

Amount Reinsure d: 100% of %.

142
2. LIABILITIES – A i rc raft T h i rd Pa rt y, Pa s s e n ge r, B ag g age , C a rgo ,
M a i l , P remises Products and Hangarke e p e rs Legal Liability fo r
a Combined Single Limit (Bodily Injury / P ro p e rty Damage) of
US$ a ny one accident/occurrence and in
the ag gregate in respect of Pro d u c t s , subject to a bag g age
and personal effects deductible of US$ 1,250 each and eve ry
loss and a cargo deductible of US$ 10,000 each and eve ry
loss but Pe rsonal Injury limited to US$ 25,000,000 any one
o ffence and in the annual ag gre g a t e . ( N OT E :T H I S
AG G R E G ATE LIMIT MAY BE REDUCED OR EXHAUSTED BY
V I RTUE OF CLAIMS MADE IN RESPECT OF OTHER A I R C R A F T
INSURED UNDER THIS INSURANCE). War and Allied Risks are
c ove red under this policy in accordance with AV N 5 2 C .

Amount Reinsure d: 100% of %.

3. HULL WAR RISKS, H I JACKING AND OTHER PERILS in


respect of the A i rc raft as per Sch e d u l e . This policy cove rs
the perils ex cluded on the Hull All Risks Insurance by the
application of AVN 48B except paragraph (b) there o f.
I n cluding Confi s c a t i o n , n a t i o n a l i z a t i o n , s e i z u re , re s t ra i n t ,
d e t e n t i o n , requisition for title or use by or under the ord e r
of any Gove rnment or public or local authority of the State
of Regi s t ra t i o n .

This policy is subject to a limit of US$ any one


loss and in the annual ag gre g a t e . N OT E : THIS AG G R E G AT E
LIMIT MAY BE REDUCED OR EXHAUSTED BY V I RTUE OF

143
CLAIMS MADE IN RESPECT OF OTHER AIRCRAFT INSURED
UNDER THIS INSURANCE.
Amount Reinsure d: 100% of %.

4. AIRCRAFT SPARES (including War Risks whilst in transit) –


being the pro p e rty of the Insured or the pro p e rty of others
for which the Insured is re s p o n s i bl e ,i n cluding engines whilst
d e t a ched from the airc ra f t , for a Limit of US$
a ny one occurrence subject to a deductible of US$ e a ch and
eve ry loss (but US$ e a ch and
eve ry loss in respect of ingestion whilst engines ru n n i n g ) .
Amount Reinsure d: 100% of %.

The Hull All Risks and Hull War Risks insurances are arra n ge d
s e p e ra t e ly and contain a 50/50 provisional claims settlement cl a u s e
AV S 1 0 3 .

SCHEDULE OF EQUIPMENT
MAKE/MODEL SERIAL NUMBER AGREED VALUE

It is further cert i fied that the ori ginal insurances have been
e n d o rsed as fo l l ow s : -

AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT


It is noted that the Contract Party(ies) have an interest in respect
of the Equipment under the Contract(s).Accordingly, with respect
to losses occurring during the period from the Effective Date until
the expiry of the Insurance or until the expiry or agreed termination
of the Contract(s) or until the obligations under the Contract(s)

144
are terminated by any action of the Insured or the Contract
Party(ies), whichever shall first occur, in respect of the said interest
of the contract party(ies) and in consideration of the Additional
Premium it is confirmed that the insurance afforded by the Policy is
in full force and effect and it is further agreed that the following
provisions are specifically endorsed to the Policy.

1. Under the Hull, Aircraft Spares, Hull War Risks Insurances


1 . 1 In respect of any claim on Equipment that becomes
p ayable on the basis of a Total Loss, settlement (net of any
re l evant Policy Deductible) shall be made to or to the
o rder of the Contract Party(ies). In respect of any other
cl a i m , settlement (net of any re l evant Policy Deductible)
shall be made with such Pa rty(ies) as may be necessary to
repair the E q u i p m e n t unless otherwise agreed after
consultation between the Insure rs and the Insured and,
w h e re necessary under the terms of the C o n t r a c t ( s ), t h e
Contract Party(ies). S u ch payments shall only be made
p rovided they are in compliance with all applicable law s
and re g u l a t i o n s .

1 . 2 I n s u re rs shall be entitled to the benefit of salvage in


respect of any pro p e rty for which a claims settlement has
been made.

2. Under the Legal Liability Reinsurance


2 . 1 Subject to the provisions of this Endors e m e n t , t h e
I n s u rance shall operate in all respects as if a separa t e

145
Policy had been issued cove ring each party Insure d
h e re u n d e r, but this provision shall not operate to incl u d e
a ny claim how s o ever arising in respect of loss or damage to
the E q u i p m e n t I n s u red under the Hull or Spares Insura n c e
of the Insure d . Notwithstanding the fo re going the total
l i ability of Insure rs in respect of any and all Insureds shall
not exceed the limits of liability stated in the Po l i c y.

2 . 2 The Insurance provided hereunder shall be pri m a ry and


without right of contribution from any other Insura n c e
w h i ch may be ava i l able to the Contract Party(ies).

2 . 3 This Endorsement does not provide cove rage for the


Contract Party(ies) with respect to claims arising out of
their legal liability as manu fa c t u re r, re p a i re r, or serv i c i n g
agent of the E q u i p m e n t.

3. Under ALL Insurances


3.1 The Contract Party(ies) are included as Additional Insured(s).

3 . 2 The cover affo rded to each Contract Party by the Po l i c y


in accordance with this Endorsement shall not be
i nvalidated by any act or omission (incl u d i n g
m i s re p resentation and non-discl o s u re) of any other pers o n
or party which results in a bre a ch of any term , condition of
wa rranty of the policy PROVIDED T H AT the C o n t r a c t
Party so protected has not caused, c o n t ributed to or
k n ow i n g ly condoned the said act or omission.

146
3 . 3 The provisions of this Endorsement apply to the C o n t r a c t
P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e r ( s ) / l e s s o r ( s )
in the identifi e d C o n t r a c t ( s ) and not in any other capacity.
K n ow l e d ge that any Contract Pa rty may have or acquire or
actions that it may take or fail to take in that other
capacity (pursuant to any other contract or otherwise)
shall not be considered as invalidating the cover affo rd e d
by this Endors e m e n t .

3 . 4 The Contract Party(ies) shall have no responsibility fo r


p remium and Insure rs shall wa i ve any right of set-off or
c o u n t e rclaim against the Contract Party(ies) except in
respect of outstanding premium in respect of the
E q u i p m e n t.

3 . 5 Upon payment of any loss or claim to or on behalf of any


Contract Party(ies), I n s u re rs shall to the extent and in
respect of such payment be thereupon subrogated to all
legal and equitable rights of the Contract Parties
i n d e m n i fied here by (but not against any Contract Party) .
I n s u re rs shall not exe rcise such rights without the consent
of those indemnifi e d , s u ch consent not to be unre a s o n ably
w i t h h e l d . At the expense of Insure rs such Contra c t
Pa rty(ies) shall do all things re a s o n ably necessar y to assist
the Insure rs to exe rcise said ri g h t s .

3 . 6 Except in respect of any provision for Cancellation or


Automatic Te rmination specified in the Policy or any

147
E n d o rsement there o f, c over provided by this Endors e m e n t
m ay only be cancelled or materi a l ly altered in a manner
a d ve rse to the Contract Party(ies) by the giving of not
less than T h i rty (30) days (but 7 days or such lesser peri o d
as may be customari ly ava i l able in respect of War and A l l i e d
Pe rils Risks) notice in writing to the Appointed Bro k e r.
Notice shall be deemed to commence from the date such
notice is gi ven by the Insure rs . S u ch notice will NOT,
h oweve r, be gi ven at normal ex p i r y date of the Policy or
a ny endors e m e n t .

EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE


TERMS OF THIS ENDORSEMENT: -

1. THE CONTRACT PA RTY(IES) ARE COVERED BY THE


POLICY SUBJECT TO ALL TERMS, CONDITIONS,
L I M I TATIONS, WARRANTIES, EXCLUSIONS AND
C A N C E L L ATION PROVISIONS THEREOF.

2. THE POLICY SHALL NOT BE VARIED BY ANY


PROVISIONS CONTAINED IN THE CONTRACT(S)
WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR
AMENDMENT TO THE POLICY.

148
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT

1. Equipment:
2. Policy Deductible a p p l i c able to physical damage to the
Equipment (Insert all applicable Policy Deductibl e s )
HULL: US$ e a ch and eve ry loss (ex cluding To t a l
L o s s / A rra n ged Total Loss/Constru c t i ve Total Loss).
S PA R E S : U S $ e a ch and eve r y loss but in respect of
i n gestion whilst Spare Engines Running the Hull All Risks
D e d u c t i bles apply.
3. ( a ) Contract Party(ies)
A N D, (b) in respect of Legal Liability Insura n c e s .
4. Contract(s) Lease A greement betwe e n
and
5. E ffective Date
6. Additional Pre m i u m US$100 the receipt of
w h i ch is here by ack n ow l e d ge d .
7. Appointed Insurance Bro k e r
This endorsement does not:
a. I n c o r p o rate the Contract into the policy.
b. P rovide cove rage to the Contract Pa rties in the event of the
repossession of the equipment.

Cut through clause applicable to all Reinsurers certified


h e re u n d e r
“The Reinsure rs here by agree (at the request and with the
consent of the Reinsured) that in the event of any valid cl a i m
a rising hereunder the Reinsure rs shall in lieu of payment to the
R e i n s u red its successors in interest and assigns pay to the
p e rson(s) named as loss payee(s) under the ori ginal insura n c e

149
e ffected by the Insured that portion of any loss for which the
R e i n s u re rs would otherwise be liable to pay the Reinsure d
(subject to proof of loss) it being understood and agreed that
a ny such payment shall fully disch a rge and release Reinsure rs
f rom any and all further liability in connection with such cl a i m .

The Reinsure rs re s e rve the right to set off against any cl a i m


p ayable hereunder in accordance with this clause any
outstanding premiums due on this re i n s u ra n c e .

Payment shall be made under this re i n s u rance notwithstanding


(i) any bankru p t c y, i n s o l ve n c y, liquidation or dissolution of the
R e i n s u re d , and/or (ii) that the Reinsured has made no pay m e n t
under the ori ginal insurance policies.

It is a condition that the provisions of this clause shall not


o p e rate in contravention of the law s , statutes or decrees of the
G ove rnment of the countr y of domicile of the Reinsure d .”

Several Liability Notice (LSW 1001)


( This clause will always be included if Lloy d ’s underwri t e rs
p a rticipate in the ri s k )

The subscribing re i n s u re rs ’ o bligations under contracts of


re i n s u rance to which they subscribe are seve ral and not joint
and are limited solely to the extent of their individual
s u b s c ri p t i o n s . The subscribing re i n s u re rs are not re s p o n s i ble fo r
the subscription of any co-subscribing re i n s u rer who for any
reason does not satisfy all or part of its obligations LSW 1001
( re i n s u rance) Seve ral Liability Notice.

DIRECTOR SIGNAT U R E S :

150
Appendix C
Sample ‘Broker’s Letter of Undertaking’
In addition to requiring brokers to issue certificates,Banks/lessors need
to formalise the obligations of the insurance broker. This is done by a
‘Brokers Letter of Undertaking’. The following is a sample (i.e. a
suggested format that the Bank/lessor will request from brokers) that
can be incorporated into the lease insurance covenants.This letter can
be amended, as appropriate, if the broker is arranging reinsurance, as
opposed to direct insurance.

To :

Date:

Dear Sirs ,

I n s u re d :

A i rc raft Ty p e : with serial nu m b e r / re gi s t ra t i o n

We confi rm that, as Insurance Bro ke rs , we have effe c t e d


i n s u rance for the account of the Insured cove ring airc ra f t
o p e rated by them, for the risks detailed in the attach e d
C e rt i ficate of Insurance (dated )

151
P u r suant to instructions re c e i ved from the Insured and in
c o n s i d e ration of your approving ours e l ves as the Insura n c e
B ro ker for such insura n c e , we undert a ke as fo l l ows in
connection with the Insure d ’s policy arra n gements (under
w h i ch the A i rc raft identified ab ove is insure d ) , but only in
relation to your interest(s) in the A i rc ra f t :

1 In relation to the Hull, S p a res and Hull War Risks insura n c e ,


to hold the insurance slips and the benefit of those
i n s u rances to your order in accordance with the loss
p ayable provision re fe renced in the said Cert i ficate of
I n s u ra n c e , but subject always to our re q u i rements to
o p e rate the Fleet Policy in so far as it relates to any other
a i rc raft insured there u n d e r.

2. To advise yo u , p ro m p t ly :

2.1 of the receipt by us of any notice of cancellation or


m a t e rial ch a n ge in the insura n c e ;
and
2 . 2 if any premiums are not paid to us in accordance with
the accounting pro c e d u res that exist between the
I n s u red and ours e l ves befo re we notify Insure rs of
s u ch non-payment of pre m i u m s ;
and
2 . 3 upon application from yo u , of the premium pay m e n t
situation;
and

152
2 . 4 if we cease to be Insurance Bro ke r s to the Insure d .

3. Fo l l owing a written application re c e i ved from you not later


than one month befo re ex p i r y of these insurances to notify
you within fo u rteen days of the receipt of such application
in the event of our not having re c e i ved re n ewa l
i n s t ructions from the Insure d .

The ab ove undertakings are gi ven subject to:

a) our continuing appointment for the time being as


I n s u rance Bro ke rs to the Insure d ;
and
b) all claims and re t u rn premiums being collected
t h rough ours e l ves as Insurance Bro ke rs ;
and
c) our lien, if any, on the said Insurance for pre m i u m s
due in respect of the A i rc ra f t .

This letter shall be gove rned by English Law.

Yo u rs fa i t h f u l ly,

D i rector

153
Appendix D
Aviation Insurance
Wordings and Clauses
Larger, more sophisticated airlines tend to have ‘manuscript’ policy
wordings that are tailored according to their needs. These wordings
have evolved from the standard AV1B/AVIC, AV16/AV20 wordings.
Section One of this book provides descriptions of the insurance
coverage usually provided for aircraft operators.

Policies issued by local companies are normally based on,or similar to,
the normal London wordings, even if they are issued in another
language.

A full description of wordings and clauses will run to hundreds of pages


and is contained in reference publications that are generally available.
Below are selected clauses of specific relevance to aircraft finance.

PREMIUM PAYMENT CLAUSE – AVN 6A

1) It is understood and agreed that the premium due at the inception


of this Policy shall be payable in the fo l l owing instalments:

2) In the event of a claim hereunder which exceeds the instalments


of premium paid on this Po l i c y, the instalments of premium then
outstanding shall become payable fo rt h w i t h .

3) Notwithstanding any cancellation provision contained within the


Po l i c y, in the event that an instalment of premium is not paid by

154
its due date Insure rs shall have the right to terminate the cove r
a ffo rded by the Policy to the Insured and any other part y ( i e s )
p rotected there by, whether by endorsement or otherwise, by the
giving of not less than T h i rty (30) days notice in writing to the
Appointed Bro ke r. Notice shall be deemed to commence from the
date such notice is gi ven by the Insure rs .

AVN 6A (1.10.96)

Author’s Note
The authors endorse the use of AVN 6A. However, we stro n g l y
caution against the use of AVN 5A. In the event that insurers insist
upon AVN 5A, specific safeguards should be taken to ensure that
coverage provided for the bank/lessor is not subject to the
automatic cancellation pro v i s i o n .

155
AVN 5A DEFERRED PREMIUM CLAUSE

It is here by understood and agreed that the premium shall be paid in


the fo l l owing instalments:-

N eve rtheless it is further understood and agreed that:-

Notwithstanding any provision as to notice of cancellation contained in


this Po l i c y, it is a condition that in the event of any instalment not
being paid by its due date the cover affo rded by this Policy shall be
deemed to have ceased at midnight of such due date.

In the event of a claim hereunder which exceeds the instalments of


p remium paid on this Policy the instalments of premium then
outstanding shall become payable fo rt h w i t h .

AVN 5A (9.10.74)

156
PERSONAL INJURY EXTENSION (AVN60)

The insurance provided by this Policy extends to include the Named


I n s u re d ’s legal liability for damages sustained by any person arising out
of one or more of the fo l l owing offences committed during the Po l i c y
p e ri o d .

1. False arre s t : re s t ra i n t , detention or impri s o n m e n t .

2. Malicious pro s e c u t i o n .

3. W rongful entry, eviction or other invasion of the right of pri va t e


o c c u p a n c y.

4. I n a d ve rtent discrimination with respect to withholding or refusal of


t ra n s p o rtation except with respect to ove r b o o k i n g .

5. The publication or utterance of a libel or slander or of other


d e fa m a t o ry or disparaging material in violation of an individual’s
right of pri vacy except publication or utterance in the course of
or related to adve rt i s i n g , b roadcasting or telecasting activities
conducted by or on behalf of the Named Insure d .

6. Incidental medical malpractice error or mistake by a phy s i c i a n ,


s u rge o n , nu rs e , medical technician or other person perfo rm i n g
medical services but only for or on behalf of the Insured in the
p rovision of emergency medical re l i e f.

The fo l l owing additional ex clusions shall apply to the Insura n c e


p rovided by this ex t e n s i o n : -

(a) l i ability assumed by the Named Insured under any contract or


agre e m e n t .

(b) p e rsonal injury arising out of the wilful violations of penal


statute or ordinance committed by or with the know l e d ge or
consent of the Named Insure d .

(c) p e rsonal injury arising out of offence 5 ab ove ,

157
(i) if the fi rst injurious publication or utterance of the same
or similar material was made prior to the effe c t i ve date
of this insura n c e .

(ii) if such publication or utterance was made by or at the


d i rection of the Insured with the know l e d ge of the fa l s e
n a t u re there o f.

(d) l i ability for personal injury sustained by any person dire c t ly


or indire c t ly related to the past, p resent or potential
e m p l oyment of such person by the Insure d .

The limit of liability applicable to Pe rsonal Injury claims shall be


. . . . . . . . . . . . . .a ny one offence and in the ag gregate during the Po l i c y
p e riod being within the ove rall Policy limit and not in addition
t h e re t o .

It is understood and agreed that, except as specifi c a l ly provided in the


fo re going to the contra ry, this extension in cove rage is only applicabl e
w h e re cove rage is provided in accordance with Clause AVN 59.

AVN 60 (19.12.85)

158
AV57A(USA)
D.O.T. 14 CFR PART 205
(HEREINAFTER CALLED “PART 205”)
AIRCRAFT ACCIDENT LIABILITY INSURANCE

IT IS UNDERSTOOD AND AGREED T H AT: -

1. The policy to which this endorsement is attached is here by


amended to provide cove rage in compliance with the provisions of
Pa rt 205.

2. S u ch cove rage shall be within the limits of liability in the Po l i c y


and not in addition to or in excess there o f.

3. S u ch cove rage shall continue until cancelled by Insure rs or their


a u t h o rised re p re s e n t a t i ve giving the appro p riate notice.

4. Unless the policy otherwise provides the fo l l owing ex clusions not


p rohibited by the provisions of Pa rt 205 shall apply : -

(i) War Exclusions Clause AVN48B paragraphs (a) and (b) or


e q u i valent cl a u s e ( s ) .

(ii) Noise and Pollution and Other Pe rils Exclusion Clause


AVN46B or equivalent cl a u s e ( s ) .

( i i i ) Aviation Radioactive Contamination Exclusion Clause AV N 3 8 B


or equivalent cl a u s e ( s ) .

( i v ) B o d i ly injury to or sick n e s s , disease or death of any employe e


a rising out of and in the course of his/her employ m e n t .

(v) I n j u ry to or destruction of pro p e rty ow n e d , re n t e d , l e a s e d ,


loaned to or occupied or used by the Insure d .

5. If the Insure rs are called upon to provide cove rage to the Insure d
in compliance with Pa rt 205 including the defence and legal costs
associated therewith and if by reason of the term s ,c o n d i t i o n s ,
limitations and ex clusions of the Policy such cove rage would not

159
h ave been provided except for this endorsement then the Insure d
will re i m b u rse the Insure rs for such payments made in prov i d i n g
c ove rage under Pa rt 205.

6. The term s , c o n d i t i o n s , limitations and ex clusions of the Po l i c y


shall apply to claims made under the Policy which (a) are in
excess of the limits specified in Pa rt 205 or (b) are not gove rn e d
by the provisions of Pa rt 205.

AVN 57A (USA) 1.10.96

160
50/50 PROVISIONAL CLAIMS SETTLEMENT CLAUSE (AVS103)

WHEREAS the Insured has in full fo rce and effe c t

A) a “Hull All Risks” policy which inter alia contains the Wa r, H i j a ck i n g


and Other Pe rils Exclusion Clause (AVN 48B)/the Common Nort h
A m e rican Airline War Exclusion Clause, a n d

B) a “Hull War Risks” policy which inter alia cove rs certain of the
risks ex cluded by AVN 48B/the Common North A m e rican A i r l i n e
War Exclusion Clause in A) ab ove

N OW IT IS HEREBY UNDERSTOOD AND AGREED T H AT

in the event of loss of or damage to an airc raft identified on the


s chedule of airc raft fo rming part of this policy and where
agreement is re a ched between the “Hull All Risks” I n s u re rs and the
“Hull War Risks” I n s u re rs that the Insured has a valid claim under
one or other policy where neve rtheless it cannot be re s o l ve d
within 21 days from the date of occurrence as to which policy is
l i abl e ,e a ch of the afo rementioned groups of insure rs agre e ,
WITHOUT PREJUDICE to their liab i l i t y, to advance to the Insure d
50% of such amount as may be mu t u a l ly agreed between them
until such time as final settlement of the claim is agre e d

P ROVIDED A LWAYS T H AT

(i) the “Hull All Risks” and “Hull War Risks” placing slips are identically
e n d o rsed with this provisional claims settlement cl a u s e

(ii) within 12 months of the advance being made all Insure rs specifi e d
in (i) ab ove agree to re fer the matter to arbitration in London in
a c c o rdance with the Statutor y provision for arbitration for the
time being in fo rc e

(iii) once the arbitration decision has been conveyed to the parties
concerned, the “Hull All Risks” Insurers as the case may be shall repay
the amount advanced by the other group of Insurers together with
interest for the period concerned which is to be calculated using the
London Clearing Banks’ Base Rate

161
( i v ) if the “Hull All Risks” and “Hull War Risks” policies contain diffe ri n g
amounts payabl e , the advance will not exceed the lesser of the
amounts invo l ve d . In the event of Co-insurance or risks invo l v i n g
u n i n s u red pro p o rt i o n ( s ) , the appro p riate adjustment will be made.

AVS 103 (12.10.83)

Sample ‘Orphan Engine’ Clause


It is understood and agreed that in the event of any engine the subject
of a lease or finance agreement being installed on an airc raft insure d
h e reunder the agreed value of such airc raft is automatically incre a s e d
by the agreed value of such engine for the period it is installed subject
to the maximum agreed value any one airc raft (incl u s i ve of such
e n gine[s]) not exceeding US$ . In the event of a
claim payable on the basis of a total loss the Insure rs shall be entitled
to the benefit of salvage in respect of the re m oved engi n e .

162
NOISE AND POLLUTION AND OTHER PERILS
EXCLUSION CLAUSE (AVN46B)

1. This Policy does not cover claims dire c t ly or indire c t ly occasioned


by, happening through or in consequence of:-

(a) noise (whether audible to the human ear or not), v i b ra t i o n ,


sonic boom and any phenomena associated therew i t h ,

(b) pollution and contamination of any kind whatsoeve r,

(c) e l e c t rical and electro m agnetic interfe re n c e ,

(d) i n t e r fe rence with the use of pro p e rt y ;

unless caused by or resulting in a crash fi re explosion or


collision or a re c o rded in-f light emergency causing ab n o rm a l
a i rc raft opera t i o n .

2. With respect to any provision in the Policy concerning any duty of


I n s u re rs to investigate or defend cl a i m s , s u ch provision shall not
a p p ly and Insure rs shall not be re q u i red to defe n d

(a) Claims ex cluded by Pa ragraph 1 or

(b) a claim or claims cove red by the Policy when combined with
a ny claims ex cluded by Pa ragraph 1 (re fe rred to below as
“Combined Claims”).

3. In respect of any Combined Claims, I n s u re rs shall (subject to pro o f


of loss and the limits of the Policy) re i m b u rse the Insured for that
p o rtion of the fo l l owing items which may be allocated to the
claims cove red by the Po l i c y :

(i) d a m ages awa rded against the Insured and

(ii) d e fence fees and expenses incurred by the Insure d .

163
4. Nothing herein shall ove rride any ra d i o a c t i ve contamination or
other ex clusion clause attached to or fo rming part of this Po l i c y.

AVN 46B (12.1.72)

164
NUCLEAR RISKS EXCLUSION CLAUSE (AVN38B).

(1) This Policy does not cove r

(i) loss or destruction of or damage to any pro p e rty whatsoeve r


or any loss or expense whatsoever resulting or ari s i n g
t h e re f rom or any consequential loss

(ii) a ny legal liability of whatsoever nature

directly or indirectly caused or contributed to by or arising from:

(a) the ra d i o a c t i ve ,t ox i c , ex p l o s i ve or other hazard o u s


p ro p e rties of any ex p l o s i ve nu clear assembly or nu cl e a r
component there o f ;

(b) the ra d i o a c t i ve pro p e rties of, or a combination of ra d i o a c t i ve


p ro p e rties with tox i c , ex p l o s i ve or other hazard o u s
p ro p e rties of, a ny other ra d i o a c t i ve material in the course of
c a rri age as cargo , i n cluding storage or handling incidental
t h e re t o ;

(c) ionising radiations or contamination by radioactivity fro m , o r


the tox i c , ex p l o s i ve or other hazardous pro p e rties of, a ny
ra d i o a c t i ve source whatsoeve r.

(2) It is understood and agreed that such ra d i o a c t i ve material or


ra d i o a c t i ve source in paragraph (1)(b) and (c) ab ove shall not
i n cl u d e :

(i) depleted uranium and natural uranium in any fo rm ;

(ii) radioisotopes which have re a ched the final stage of


fab rication so as to be usable for any scientifi c , m e d i c a l ,
agri c u l t u ra l , c o m m e rc i a l , educational or industrial purpose.

(3) This Po l i c y, h oweve r, does not cover loss of or destruction of or


d a m age to any pro p e rty or any consequential loss or any legal
l i ability of whatsoever nature with respect to which :

165
(i) the Insured under this Policy is also an insured or an
additional insured under any other insurance policy, i n cl u d i n g
a ny nu clear energy liability policy; o r

(ii) a ny person or organization is re q u i red to maintain fi n a n c i a l


p rotection pursuant to legislation in any country ; o r

( i i i ) the Insured under this Policy is, or had this Policy not been
issued would be, entitled to indemnification from any
gove rnment or agency there o f.

(4) L o s s ,d e s t ru c t i o n , d a m age , expense or legal liability in respect of


the nu clear risks not ex cluded by reason of paragraph (2) shall
(subject to all other term s , c o n d i t i o n s , l i m i t a t i o n s , wa rranties and
ex clusions of this Policy) be cove re d , p rovided that:

(i) in the case of any claim in respect of ra d i o a c t i ve material in


the course of carri age as cargo , i n cluding storage or handling
incidental there t o , s u ch carri age shall in all respects have
complied with the full International Civil Av i a t i o n
O rganisation “ Te chnical Instructions for the Safe Tra n s p o rt of
D a n ge rous Goods by A i r ” , unless the carri age shall have been
subject to any more re s t ri c t i ve legi s l a t i o n , when it shall in all
respects have complied with such legi s l a t i o n ;

(ii) this Policy shall only apply to an incident happening during the
p e riod of this Policy and where any claim by the Insured ag a i n s t
the Insure rs or by any claimant against the Insured arising out of
s u ch incident shall have been made within three ye a rs after the
date there o f ;

( i i i ) in the case of any claim for the loss of or destruction of or


d a m age to or loss of use of an airc raft caused by or
c o n t ributed to by ra d i o a c t i ve contamination, the level of such
contamination shall have exceeded the maximum perm i s s i bl e
l evel set out in the fo l l owing scale:-

166
Emitter M a x i mum perm i s s i ble leve l
of non-fi xed ra d i o a c t i ve

(IAEA Health and


S a fety Regulations) s u r face contamination
(Ave raged over 300 cm 2)

B e t a , gamma and low Not exceeding 4


t oxicity alpha emitters B e q u e re l s / c m 2
( 1 0 m i c ro c u ri e s / c m 2 )
-4

All other emitters Not exceeding 0.4


B e q u e re l s / c m 2
( 1 0- 5 m i c ro c u ri e s / c m 2 )

( i v ) the cover affo rded here by may be cancelled at any time by


the Insure rs giving seven day s ’ notice of cancellation.

AVN 38B (22.7.96)

167
WAR,HI-JACKING AND OTHER PERILS EXCLUSION CLAUSE (AVN48B)

This Policy does not cover claims caused by

(a) Wa r, i nva s i o n , acts of fo reign enemies, hostilities (whether war be


d e cl a red or not), civil wa r, re b e l l i o n , revo l u t i o n , i n s u rre c t i o n ,
m a rtial law, m i l i t a ry or usurped power or attempts at usurpation of
p owe r.

(b) A ny hostile detonation of any weapon of war employing atomic or


nu clear fission and/or fusion or other like reaction or ra d i o a c t i ve
fo rce or matter.

(c) S t ri ke s , ri o t s , civil commotions or labour disturbances.

(d) A ny act of one or more pers o n s , whether or not agents of a


s ove reign Powe r, for political or terro rist purposes and whether
the loss or damage resulting there f rom is accidental or intentional.

(e) A ny malicious act or act of sab o t age .

(f) C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n ,
a p p ro p ri a t i o n , requisition for title or use by or under the order of
a ny Gove rnment (whether civil military or de facto) or public or
local authori t y.

(g) H i j a cking or any unlawful seizure or wrongful exe rcise of contro l


of the A i rc raft or crew in flight (including any attempt at such
s e i z u re or control) made by any person or persons on board the
a i rc raft acting without the consent of the Insure d .

F u rt h e rm o re this policy does not cover claims arising whilst the A i rc ra f t


is outside the control of the Insured by reason of any of the ab ove peri l s .
The A i rc raft shall be deemed to have been re s t o red to the control of the
I n s u red on the safe re t u rn of the A i rc raft to the Insured at an airfield not
ex cluded by the ge o graphical limits of this Po l i c y, and entire ly suitabl e
for the operation of the A i rc raft (such safe re t u rn shall re q u i re that the
A i rc raft be parked with engines shut down and under no dure s s ) .

AVN 48B (26.8.71)

168
WAR ‘WRITEBACK’ CLAUSE

Extended Coverage Endorsement (Aviation Liabilities) AV N . 5 2 C

1. WHEREAS the Policy of which this Endorsement fo rms part


i n cludes the Wa r, H i - Ja cking and Other Pe rils Exclusion Clause
(Clause AV N. 4 8 B ) , IN CONSIDERATION of an Additional Pre m i u m
of ........... , it is here by understood and agreed that with effe c t
f rom ................. , all sub-paragraphs other than ................. o f
Clause AV N.48B fo rming part of this Policy are deleted SUBJECT TO
all terms and conditions of this Endors e m e n t .

2. EXCLUSION applicable only to any cover extended in respect of


the deletion of sub-paragraph (a) of Clause AV N. 4 8 B

C over shall not include liability for damage to any fo rm of


p ro p e rty on the ground situated outside Canada and the United
States of A m e rica unless caused by or arising out of the use of
a i rc ra f t .

3. AU TO M ATIC T E R M I NAT I O N

To the extent provided below, c over extended by this Endors e m e n t


shall T E R M I NATE AU TO M AT I C A L LY in the fo l l owing circ u m s t a n c e s :

(i) All cover


– upon the outbreak of war (whether there be a decl a ra t i o n
of war or not) between any two or more of the fo l l ow i n g
S t a t e s , n a m e ly, Fra n c e , the Pe o p l e ’s Republic of China, t h e
Russian Fe d e ra t i o n , the United Kingdom, the United States of
A m e ri c a

(ii) Any cover extended in respect of the deletion of sub-


paragraph (a) of Clause AV N . 4 8 B
– upon the hostile detonation of any weapon of war employ i n g
atomic or nu clear fission and/or fusion or other like re a c t i o n
or ra d i o a c t i ve fo rce or matter where s o ever or whensoeve r
s u ch detonation may occur and whether or not the Insure d
A i rc raft may be invo l ve d

169
( i i i ) All cover in respect of any of the Insured Airc r a f t
requisitioned for either title or use
– upon such re q u i s i t i o n

P ROVIDED T H AT if an Insured A i rc raft is in the air when (i), (ii) or (iii)


o c c u rs , then the cover provided by this Endorsement (unless otherwise
c a n c e l l e d , t e rminated or suspended) shall continue in respect of such
an A i rc raft until completion of its fi rst landing thereafter and any
p a s s e n ge rs have disembarke d .

4. REVIEW AND CANCELLAT I O N

(a) Review of Premium and/or Geographical Limits (7


days)
I n s u re rs may gi ve notice to rev i ew premium and/or
ge o graphical limits – such notice to become effe c t i ve on the
ex p i ry of seven days from 23.59 hours GMT on the day on
w h i ch notice is gi ve n .

(b) Limited Cancellation (48 hours)


Fo l l owing a hostile detonation as specified in 3. (ii) ab ove ,
I n s u re rs may gi ve notice of cancellation of one or more part s
of the cover provided by paragraph 1. of this Endorsement by
re fe rence to sub-paragraphs (c), ( d ) , ( e ) , (f) and/or (g) of
Clause AV N.48B – such notice to become effe c t i ve on the
ex p i ry of fo rty-eight hours from 23.59 hours G. M . T. on the
d ay on which notice is gi ve n .

(c) Cancellation (7 days)


The cover provided by this Endorsement may be cancelled by
either Insure rs or the Insured giving notice to become
e ffe c t i ve on the ex p i ry of seven days from 23.59 hours GMT
on the day on which such notice is gi ve n .

(d) Notices
All notices re fe rred to herein shall be in wri t i n g .

AVN 52C (12.11.92)

170
AIRCRAFT FINANCIAL INTEREST ENDORSEMENT (AVN28B)

It is noted that the P a r t y named in the Schedule hereto has a fi n a n c i a l


i n t e rest in the A i rc r a f t under the A g re e m e n t. A c c o rd i n g ly, w i t h
respect to losses occurring during the period from the E ffective Date
of this Endorsement until the ex p i ry of the Insurance or until the
s a t i s faction of the obligations under the A gre e m e n t ,w h i ch ever shall
fi rst occur, in respect of the interest of the P a r t y and in considera t i o n
of an Additional Pre m i u m IT IS UNDERSTOOD AND AGREED T H AT:

1. The insurance affo rded by this Policy for loss of or physical damage
to the insure d A i rcraft shall not be invalidated as re g a rds the intere s t
of the Party by any act or omission by the Insured which results in a
b re a ch of any term , condition or wa rranty of the Policy PROV I D E D
T H AT the P a r t y has not caused, c o n t ributed to or know i n g ly
condoned the said act or omission. N eve rtheless any ch a n ge in title or
ow n e rship of the A i rc r a f t, c o nve rs i o n , embezzlement or secretion by
the Insured in possession of the A i rc r a f t is not cove red here u n d e r.

2. The protection affo rded to the Party by the terms of this


E n d o rsement shall be limited to loss of or physical damage to the
i n s u red A i rcraft and shall not exceed the Original Amount
under the Agreement less any re l evant Policy Deductible a n d
less all m a t u red I n s t a l m e n t s paid or due prior to the accident
giving rise to a loss here u n d e r.

3. The P a r t y shall notify the Insure rs of any increase in hazard which


comes to the P a r t y ’ s attention and if agreed by the Insure rs it
shall be endorsed on the Po l i c y, the P a r t y agreeing to pay any
additional re q u i red premium if the Insured fails to do so on
demand of the Insure rs .

4. If the Insured fails to notify the Insure rs as specified in the Po l i c y


Conditions of any event like ly to gi ve rise to a claim under the
Po l i c y, the P a r t y shall do so immediately he becomes awa re of the
event in fo rm and manner as pre s c ribed by the Po l i c y.

171
5. Upon payment of any loss or claim to the P a r t y, I n s u re rs shall to
the extent and in respect of such payment be subrogated to all
legal and equitable rights of the P a r t y.
At the expense of Insure rs the Party shall do whatever is
n e c e s s a ry to assist the Insure rs to exe rcise such ri g h t s .

6. Except in respect of any provision for Cancellation or Au t o m a t i c


Te rmination specified in the Policy or any endorsement there o f,
c over provided by this Endorsement may only be cancelled by
I n s u re rs giving not less than T h i rty (30) days notice in writing to
the Appointed Bro k e r. Notice shall be deemed to commence
f rom the date such notice is gi ven by the Insure rs . In the event of
cancellation for non-payment of pre m i u m , the P a r t y shall have the
option to pay all outstanding premiums in respect of the A i rc r a f t
within the notice peri o d .

EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS OF


THIS ENDORSEMENT THE FINANCIAL INTEREST OF THE PA RT Y I S
C OVERED BY THE POLICY FOR LOSS OF OR PHYSICAL DA M AGE TO
THE INSURED A I R C R A F T O N LY SUBJECT TO ALL T E R M S ,C O N D I T I O N S ,
L I M I TAT I O N S , WA R R A N T I E S , EXCLUSIONS AND CANCELLAT I O N
P ROVISIONS T H E R E O F.

172
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT

1. A i rc ra f t :
R e gi s t ra t i o n :

2. Pa rty (enter the name of the Pa rty having a financial intere s t ) :

3. A greement (enter identifying details and date):

4. The Ori ginal Amount under the A gre e m e n t :

Payable in Instalments of

the last Instalment being due

The amount outstanding at the Effe c t i ve Date of this Endors e m e n t :

5. Policy Deductibl e :

6. Additional Pre m i u m :

7. Appointed Bro ke r :

AVN28B 17.10.1996

173
AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT AVN67B

It is noted that the Contract Party(ies) have an interest in respect of the


Equipment under the Contract(s).Accordingly, with respect to losses
occurring during the period from the Effective Date until the expiry of the
Insurance or until the expiry or agreed termination of the Contract(s) or
until the obligations under the Contract(s) are terminated by any action of
the Insured or the Contract Party(ies), whichever shall first occur, in
respect of the said interest of the Contract Party(ies) and in consideration
of the Additional Premium it is confirmed that the Insurance afforded by
the Policy is in full force and effect and it is further agreed that the following
provisions are specifically endorsed to the Policy:-

1. Under the Hull and Aircraft Spares Insurances


1 . 1 In respect of any claim on E q u i p m e n t that becomes payable on
the basis of a Total Loss, settlement (net of any re l evant P o l i c y
D e d u c t i b l e) shall be made to, or to the order of the C o n t r a c t
P a r t y ( i e s ). In respect of any other cl a i m , settlement (nett of any
re l evant Policy Deductible) shall be made with such party(ies) as
m ay be necessary to repair the E q u i p m e n t unless otherwise
agreed after consultation between the Insure rs and the Insure d
a n d , w h e re necessary under the terms of the C o n t r a c t ( s ), t h e
Contract Party(ies).

S u ch payments shall only be made provided they are in


compliance with all applicable laws and re g u l a t i o n s .

1.2 I n s u re rs shall be entitled to the benefit of salvage in respect of any


p ro p e rty for which a claims settlement has been made.

2. Under the Legal Liability Insurance


2 . 1 Subject to the provisions of this Endors e m e n t , the Insurance shall
o p e rate in all respects as if a separate Policy had been issued
c ove ring each party insured here u n d e r, but this provision shall not
o p e rate to include any claim how s o ever arising in respect of loss
or damage to the E q u i p m e n t i n s u red under the Hull or Spare s
I n s u rance of the Insure d . Notwithstanding the fo re going the total

174
l i ability of Insure rs in respect of any and all Insureds shall not
exceed the limits of liability stated in the Po l i c y.

2.2 The Insurance provided hereunder shall be pri m a ry and without


right of contribution from any other insurance which may be
ava i l able to the Contract Party(ies).

2.3 This Endorsement does not provide cove rage for the C o n t r a c t
P a r t y ( i e s ) with respect to claims arising out of their legal liab i l i t y
as manu fa c t u re r, re p a i re r, or servicing agent of the E q u i p m e n t.

3. Under ALL Insurances


3.1 The Contract Party(ies) are included as Additional Insured(s).

3.2 The cover affo rded to each Contract Party by the Policy in
a c c o rdance with this Endorsement shall not be invalidated by any
act or omission (including misre p resentation and non-discl o s u re )
of any other person or party which results in a bre a ch of any term ,
condition or wa rranty of the Policy PROVIDED T H AT the C o n t r a c t
Party so protected has not caused, c o n t ributed to or know i n g ly
condoned the said act or omission.

3.3 The provisions of this Endorsement apply to the C o n t r a c t


P a r t y ( i e s ) s o l e ly in their capacity as fi n a n c i e rs(s)/lessor(s) in the
i d e n t i fied Contract(s) and not in any other capacity. K n ow l e d ge
that any Contract Party m ay have or acquire or actions that it
m ay take or fail to take in that other capacity (pursuant to any
other contract or otherwise) shall not be considered as
i nvalidating the cover affo rded by this Endors e m e n t .

3.4 T h e Contract Party(ies) shall have no responsibility for pre m i u m


and Insure rs shall wa i ve any right of set-off or countercl a i m
against the Contract Party(ies) except in respect of outstanding
p remium in respect of the E q u i p m e n t.

175
3.5 Upon payment of any loss or claim to or on behalf of any
Contract Party(ies), I n s u re rs shall to the extent and in respect of
s u ch payment be thereupon subrogated to all legal and equitabl e
rights of the Contract Party(ies) i n d e m n i fied here by (but not
against any Contract Party) . I n s u re rs shall not exe rcise such
rights without the consent of those indemnifi e d , s u ch consent not
to be unre a s o n ably withheld. At the expense of Insure rs such
Contract Party(ies) shall do all things re a s o n ably necessary to
assist the Insure rs to exe rcise said ri g h t s .

3.6 Except in respect of any provision for Cancellation or Au t o m a t i c


Te rmination specified in the Policy or any endorsement there o f,
c over provided by this Endorsement may only be cancelled or
m a t e ri a l ly altered in a manner adve rse to the Contract Party(ies)
by the giving of not less than T h i rty (30) days notice in writing to
the Appointed Bro k e r. Notice shall be deemed to commence
f rom the date such notice is gi ven by the Insure rs .S u ch notice will
N OT, h oweve r, be gi ven at normal ex p i ry date of the Policy or any
e n d o rs e m e n t .

EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE TERMS


OF THIS ENDORSEMENT: -

1. THE CONTRACT PA RTY(IES) ARE COVERED BY THE POLICY


SUBJECT TO ALL TERMS, CONDITIONS, LIMITAT I O N S ,
WARRANTIES, EXCLUSIONS AND CANCELLATION PROVISIONS
T H E R E O F.

2. THE POLICY SHALL NOT BE VARIED BY ANY PROVISIONS


C O N TAINED IN THE CONTRACT(S) WHICH PURPORT TO
S E RVE AS AN ENDORSEMENT OR AMENDMENT TO THE
P O L I C Y.

176
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT

1. E q u i p m e n t (Specify details of any airc ra f t , e n gines or spares to be


c ove re d ) :

2. Policy Deductible a p p l i c able to physical damage to the


E q u i p m e n t ( i n s e rt all applicable Policy deductibl e s ) :

3. (a) Contract Party(ies).

AND (b), in addition, in respect of Legal Liability Insura n c e s :

4. C o n t r a c t ( s ):

5. E ffective date (being the date that the E q u i p m e n t a t t a ches to


the Policy or a specific date there a f t e r ) :

6. Additional Pre m i u m :

7. Appointed Bro k e r :

177
AIRLINE FINANCE/LEASE CONTRACT ENDORSEMENT (AVN 67B HULL WAR)

It is noted that the Contract Party(ies) h ave an interest in respect of


the E q u i p m e n t under the C o n t r a c t ( s ). A c c o rd i n g ly, with respect to
losses occurring during the period from the E ffective Date until the
ex p i ry of the Insurance or until the ex p i ry or agreed termination of the
Co n t r a c t ( s ) or until the obligations under the C o n t r a c t ( s ) a re
t e rminated by any action of the Insured or the Contract Party(ies),
w h i ch ever shall fi rst occur, in respect of the said interest of the
Contract Party(ies) and in consideration of the Additional Pre m i u m
it is confi rmed that the Insurance affo rded by the Policy is in full fo rc e
and effect and it is further agreed that the fo l l owing provisions are
s p e c i fi c a l ly endorsed to the Po l i c y : -

1. In respect of any claim on Equipment that becomes payable on


the basis of a Total Loss, settlement (net of any re l evant P o l i c y
D e d u c t i b l e) shall be made to, or to the order of the C o n t r a c t
P a r t y ( i e s ). In respect of any other cl a i m , settlement (net of any
re l evant Policy Deductible) shall be made with such party(ies) as
m ay be necessary to repair the Equipment unless otherwise
agreed after consultation between the Insure rs and the Insure d
a n d , w h e re necessary under the terms of the C o n t r a c t ( s ), t h e
Contract Party(ies).

S u ch payments shall only be made provided they are in


compliance with all applicable laws and re g u l a t i o n s .

2. I n s u re rs shall be entitled to the benefit of salvage in respect of any


p ro p e rty for which a claims settlement has been made.

3. The Contract Party(ies) a re included as Additional Insure d ( s ) .

4. The provisions of this Endorsement apply to the C o n t r a c t


P a r t y ( i e s ) s o l e ly in their capacity as financier(s)/lessor(s) in the
i d e n t i fied C o n t r a c t ( s ) and not in any other capacity. K n ow l e d ge
that any Contract Party m ay have or acquire or actions that it
m ay take or fail to take in that other capacity (pursuant to any

178
other contract or otherwise) shall not be considered as
i nvalidating the cover affo rded by this Endors e m e n t .

5. The cover affo rded to each Contract Party by the Policy in


a c c o rdance with this Endorsement shall not be invalidated by any
act or omission (including misre p resentation and non-discl o s u re )
of any other person or party which results in a bre a ch of any term ,
condition or wa rranty of the Policy PROVIDED T H AT the C o n t r a c t
P a r t y so protected has not caused, c o n t ributed to or know i n g ly
condoned the said act or omission.

6. The Contract Party(ies) shall have no responsibility for pre m i u m


and Insure rs shall wa i ve any right of set-off or countercl a i m
against the Contract Party(ies), except in respect of outstanding
p remium in respect of the E q u i p m e n t.

7. Upon payment of any loss or claim to or on behalf of any


Contract Party(ies), I n s u re rs shall to the extent and in respect of
s u ch payment be thereupon subrogated to all legal and equitabl e
rights of the Contract Party(ies) i n d e m n i fied here by (but not
against any Contract Party) . I n s u re rs shall not exe rcise such
rights without the consent of those indemnifi e d ,s u ch consent not
to be unre a s o n ably withheld. At the expense of Insure rs , s u ch
Contract Party(ies) shall do all things re a s o n ably necessary to
assist the Insure rs to exe rcise said ri g h t s .

8. Except in respect of any provision for Cancellation or Au t o m a t i c


Te rmination specified in the Policy or any endorsement there o f,
c over provided by this Endorsement may only be cancelled or
m a t e ri a l ly altered in a manner adve rse to the Contract Party(ies)
by the giving of Seven (7) days (or such lesser period as may be
c u s t o m a ri ly ava i l able) notice in writing to the Appointed Bro k e r.
Notice shall be deemed to commence from the date such notice is
gi ven by the Insure rs .S u ch notice will NOT however be gi ven at
n o rmal ex p i ration date of the Policy or any endors e m e n t .

179
EXCEPT AS SPECIFICALLY VARIED OR PROVIDED BY THE
TERMS OF THIS ENDORSEMENT: -

1. THE CONTRACT PA RTY(IES) ARE COVERED BY THE


POLICY SUBJECT TO ALL TERMS, CONDITIONS,
L I M I TATIONS, WARRANTIES, EXCLUSIONS AND
C A N C E L L ATION PROVISIONS THEREOF.

2. THE POLICY SHALL NOT BE VARIED BY ANY


PROVISIONS CONTAINED IN THE CONTRACT(S)
WHICH PURPORT TO SERVE AS AN ENDORSEMENT OR
AMENDMENT TO THE POLICY.

180
SCHEDULE IDENTIFYING TERMS USED IN THIS ENDORSEMENT

1. E q u i p m e n t (Specify details of any airc ra f t , e n gines or spares to be


c ove re d ) :

2. Policy Deductible a p p l i c able to physical damage to the E q u i p m e n t


( I n s e rt all applicable Policy deductibl e s ) :

3. Contract Party(ies):

4. Contract(s):

5. E ffective Date (being the date that the E q u i p m e n t a t t a ches to


the Policy or a specific date there a f t e r ) :

6. Additional Pre m i u m :

7. Appointed Bro k e r :

AVN 67B (Hull Wa r )

28.9.94

181
Aviation Hull War Wording (LSW 555B)
The following wording is almost always used to cover war and
‘allied perils’.

AVIATION HULL “WAR AND ALLIED PERILS” POLICY

SECTION ONE:- LOSS OF OR DAMAGE TO AIRCRAFT


Subject to the term s , conditions and limitations set out below, t h i s
Policy cove rs loss of or damage to the A i rc raft nominated in the
S chedule against claims ex cluded from the Insure d ’s Hull “All Risks”
Policy as caused by :

(a) Wa r, i nva s i o n , acts of fo reign enemies, hostilities (whether war be


d e cl a red or not), civil wa r, re b e l l i o n , revo l u t i o n , i n s u rre c t i o n ,
m a rtial law, m i l i t a ry or usurped power or attempts at usurpation of
p owe r.

(b) S t ri ke s , ri o t s , civil commotions or labour disturbances.

(c) A ny act of one or more pers o n s , whether or not agents of a


s ove reign powe r, for political or terro rist purposes and whether
the loss or damage resulting there f rom is accidental or intentional.

(d) A ny malicious act or act of sab o t age .

(e) C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n ,
a p p ro p ri a t i o n , re q u i s i t i o n , for the title or use by or under the
o rder of any Gove rnment (whether civil militar y or de facto) or
p u blic or local authori t y.

182
(f) H i - j a cking or any unlawful seizure or wrongful exe rcise of contro l
of the A i rc raft or crew in flight (including any attempt at such
s e i z u re or control) made by any person or persons on board the
A i rc raft acting without the consent of the Insure d .

F u rt h e rm o re this Policy cove rs claims ex cluded from the Hull Po l i c y


f rom occurrences whilst the A i rc raft is outside the control of the
I n s u red by reason of any of the ab ove peri l s . The A i rc raft shall be
deemed to have been re s t o red to the control of the Insured on the safe
re t u rn of the A i rc raft to the Insured at an airfield not ex cluded by the
ge o graphical limits of this Po l i c y, and entire ly suitable for the opera t i o n
of the A i rc raft (such safe re t u rn shall re q u i re that the A i rc raft be parke d
with engines shut down and under no dure s s ) .

SECTION TWO:- EXTORTION AND HI-JACK EXPENSES


1. This Policy will also indemnify the Insured subject to the term s ,
c o n d i t i o n s , ex clusions and limitations set out below, and up to the
limit stated in the Sch e d u l e , for 90% of any payment pro p e r ly made
in respect of:

(a) t h reats against any A i rc raft described in the Schedule or its


p a s s e n ge rs or crew made during the currency of this Po l i c y.

(b) ex t ra expenses necessari ly incurred fo l l owing confi s c a t i o n ,


e t c e t e ra (as Section One clause (e)) or hi-jack i n g , e t c e t e ra (as
Section One clause (f)) of any A i rc raft described in the
S ch e d u l e .

2. No cover will be provided under this Section of the Policy in any


t e rri t o ry where such insurance is not law f u l , and the Insured is at
all times re s p o n s i ble for ensuring that no arra n gements of any kind
a re made which are not permitted by the proper authori t i e s .

183
SECTION THREE:- GENERAL EXCLUSIONS
This insurance ex cludes loss, d a m age or ex p e n s e

1. caused by one or any combinations of any of the fo l l ow i n g : -

(a) War (whether there be a decl a ration of war or not) betwe e n


a ny of the fo l l owing States: United Kingdom, United States of
A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n , the Pe o p l e ’s
R e p u blic of China; n eve rt h e l e s s , if any A i rc raft is in the air
when an outbreak of such war occurs , this ex clusion shall not
a p p ly in respect of such A i rc raft until the said A i rc raft has
completed its fi rst landing there a f t e r ;

(b) C o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n ,
a p p ro p ri a t i o n , requisition for title or use by or under the
a u t h o rity of the Gove rnment(s) named in the Sch e d u l e , or any
p u blic or local authority under its juri s d i c t i o n ;

(c) A ny debt, fa i l u re to provide bond or security or any other


financial cause under court order or otherwise;

(d) The repossession or attempted repossession of the A i rc raft by


a ny title holder, or arising out of any contractual agre e m e n t
to which any Insured protected under this Policy may be
p a rt y ;

(e) D e l ay, loss of use, or except as specifi c a l ly provided in


Section Two any other consequential loss: whether fo l l ow i n g
upon loss of or damage to the A i rc raft or otherwise.

2. d i re c t ly or indire c t ly arising out of any detonation of any we a p o n


of war employing atomic or nu clear fission and/or fusion or other
l i ke reaction or ra d i o a c t i ve fo rce or matter, whether hostile or
otherwise;

184
SECTION FOUR:- GENERAL CONDITIONS
1. This Policy is subject to the same wa rra n t i e s , t e rms and conditions
( except as re g a rds the pre m i u m , the obligations to investigate and
d e fe n d , the re n ewal agreement (if any ) , the amount of deductibl e
or self insurance provision where applicable AND EXCEPT A S
OT H E RWISE PROVIDED HEREIN) as are contained in or may be
added to the Insure d ’s Hull “All Risks” Po l i c y.

2. Should there be any Material Change in the nature or area of the


I n s u re d ’s opera t i o n s , the Insured shall gi ve immediate notice of
s u ch Change to the Insure rs ; no claim arising subsequent to a
M a t e rial Change over which the Insured had control shall be
re c ove rable hereunder unless such ch a n ge has been accepted by
the Insure rs .

“ M a t e rial Change ” shall be understood to mean any ch a n ge in the


o p e ration of the Insured which might re a s o n ably be re g a rded by
the Insure rs as increasing their risk in degree or fre q u e n c y, o r
reducing possibilities of re c ove ry or subro g a t i o n .

3. The due observance and fulfilment of the term s , p rov i s i o n s ,


conditions and endorsements of this Policy shall be conditions
p recedent to any liability of the Insure rs to make any pay m e n t
under this Po l i c y : in particular the Insured should use all
re a s o n able effo rts to ensure that he complies and continues to
c o m p ly with the laws (local or otherwise) of any country within
whose jurisdiction the A i rc raft may be, and to obtain all perm i t s
n e c e s s a ry for the lawful operation of the A i rc ra f t .

4. Subject always to the provisions of Section Fi ve , and the Sch e d u l e ,


I n s u re rs hereon agree to fo l l ow the Hull “All Risks” Policy in
respect of Bre a ch of Wa rranty Cove r, Hold Harmless A gre e m e n t s
and Wa i ve rs of Subro g a t i o n .

185
SECTION FIVE:- CANCELLATION, REVISION AND AUTOMAT I C
T E R M I N AT I O N
Amendment of 1 . ( a ) I n s u re rs may gi ve notice effe c t i ve on
Te rms or the ex p i ry of 7 days from midnight
Cancellation G. M . T. on the day on which notice is
i s s u e d , to rev i ew the rate of premium
and/or the ge o graphical limits. In the
event of the rev i ew of the rate of
p remium and/or ge o graphical limits not
being accepted by the Insured then at
the ex p i ry of the said 7 day s , this Po l i c y
shall become cancelled at that date.

Automatic Review (b) Notwithstanding 1.(a) ab ove , this Policy


of Te rms or is subject to automatic rev i ew by
Cancellation I n s u re rs of the rate of premium and/or
conditions and/or ge o graphical limits
e ffe c t i ve on the ex p i r y of 7 days from
the time of any hostile detonation of
a ny weapon of war employing atomic or
nu clear fission and/or fusion or other
l i ke reaction or ra d i o a c t i ve fo rce or
matter where s o ever or whensoever such
detonation may occur and whether or
not the insured A i rc raft may be dire c t ly
a ffe c t e d . In the event of the rev i ew of
the rate of premium and/or conditions
and/or ge o graphical limits not being
accepted by the Insured then at the
ex p i r y of the said 7 day s , this Po l i c y
shall become cancelled at that date.

Cancellation by (c) This insurance may be cancelled by the


Notice I n s u re rs or the Insured giving notice
not less than 7 days prior to the end of
e a ch period of 3 months from inception.

186
Au t o m a t i c 2. Whether or not such notice of
Te rm i n a t i o n cancellation has been gi ven this
i n s u rance shall T E R M I NATE
AU TO M AT I C A L LY

Upon the outbreak of war (whether there


be a decl a ration of war or not) between
a ny of the fo l l owing States, n a m e ly, The
United Kingdom, United States of
A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n ,
the Pe o p l e ’s Republic of China.

P ROVIDED T H AT if the A i rc raft is in the


air when such outbreak of war occurs
then this insura n c e , subject to its terms
and conditions and provided not
otherwise cancelled, t e rminated or
suspended will be continued in respect
of such A i rc raft until the said A i rc raft
has completed its fi rst landing there a f t e r.

187
THE SCHEDULE

Policy Number:
I n s u re d :
A d d ress of Insure d :
Additional Insure d ( s ) :
Ap p roved Lienholder(s) for Bre a ch Of Wa rranty pro t e c t i o n :
A i rc raft here by insure d :
M a nu fa c t u re r Model R e gi s t ra t i o n A greed Va l u e

G e o graphical Limitations:
E x cluding Confi s c a t i o n , e t c e t e ra by Gove rnment(s) of:
Pe riod of Po l i c y :
F ro m :
To :
Both days incl u s i ve
E x t o r tion and Hi-Ja ck Expenses
Limit of Po l i c y :
90% of any one loss and in all
( WARRANTED REMAINING 10% UNINSURED).

P re m i u m
Immediate notice of ch a n ges in risk or of circumstances like ly to gi ve
rise to a loss hereunder to be communicated to:

Dated in LONDON the

LSW 555

188
Appendix E

Specimen Policy Wordings for


Specialist Bank/Lessor Insurances

LSW610A
CONTINGENT AIRCRAFT HULL (INCLUDING SPARES AND
EQUIPMENT) AND CONTINGENT LIABILITY INSURANCE POLICY

Policy No:

POLICY SCHEDULE

Item 1. Name and Address of the Insure d :


Item 2. Policy Period:
Fro m :
To :

Item 3. Limits of Insurers’ Liability:


( a ) Section One – Hull and Spares and Equipment Cove rage

1. Hull M a x i mum “stipulated loss va l u e ”


. . . . . . . . . . . . . . . a ny one airc ra f t

2. S p a res and M a x i mum any one sending . . . . . . . . . . . . . . . .


Equipment M a x i mum any one location ................

189
(b) Section Two – Liability Cove rage

Combined single limit (“bodily injury ” / “ p ro p e rty damage ” )


. . . . . . . . . . . . . . . . . . . . . . . . a ny one “ o c c u rre n c e ” ,b u t

1. the limit set fo rth ab ove shall apply separa t e ly in respect of


“ o c c u rre n c e s ” happening whilst the Insured has a fi n a n c i a l
i n t e rest in the airc ra f t ;

2. the limit set fo rth ab ove shall apply in the ag gregate in re s p e c t


of all “ o c c u rre n c e s ” in any one annual period of insura n c e
happening after the Insure d ’s financial interest in the airc raft or
s p a res and equipment has ceased.

Item 4. Geographical Limits:

Item 5. P re m i u m :
The premium to be paid to the Insure rs in respect of this Policy is as
fo l l ow s :

(a) For Section One – Hull and Spares and Equipment Cove rage

(b) For Section Two – Liability Cove rage

Item 6. A d d ress for Notices:


All notices pursuant to the terms and conditions of this Policy shall be
gi ven to:

Dated in London:

190
SCHEDULE OF AIRCRAFT

Ty p e Registration Stipulated Loss Value at Operator


inception here o f

SCHEDULE OF SPARES AND EQUIPMENT

Value of Spares and Equipment Package at Operator


inception here o f

SECTION ONE – HULL AND SPARES AND EQUIPMENT COVERAGE

1. Hull Coverage
This Section One cove rs “ a i rc ra f t ” in which the Insured has a
financial interest (as per the Schedule of A i rc raft herein) against all
risks of loss or damage how s o ever occasioned, except as
h e reinafter ex cl u d e d , sustained during the Policy Pe ri o d .

2. Exclusions
This Section One does not cove r : -

(a) M e chanical bre a k d own (which in this ex clusion shall mean


m e chanical bre a k d ow n , we a r, t e a r, d e t e ri o ra t i o n , d e fects and
fa i l u re s , but shall not mean items lost ove r b o a rd ) , h oweve r
the Insure rs will pay for any resultant loss of or damage to
the “ a i rc ra f t ”f rom mechanical bre a k d ow n . For the purposes
of this ex clusion each propulsion unit shall be re g a rded as a
complete unit, and shall consist of the engine and the
a n c i l l a ries necessar y for its operation as a propulsion unit,
and mechanical bre a k d own and the consequences there o f
within such a propulsion unit are not cove re d .

191
(b) Loss of use, d e p re c i a t i o n , or any other loss which may re s u l t
f rom loss or damage which is cove red by this Po l i c y.

(c) Loss or damage as set out in the WA R ,H I - JACKING A N D


OTHER PERILS EXCLUSION CLAUSE (AV I ATION) attached to
this Po l i c y.

(d) Loss or damage as set out in the NUCLEAR RISKS EXCLUSION


C L AUSE attached to this Po l i c y.

(e) Loss or damage which is re c ove rable as a claim from the


“ p rincipal policy”.

(f) Loss or damage which is not re c ove rable (in whole or in part )
as a claim from the “ p rincipal policy” by reason of the
i n s o l vency of an insurer or insure rs .

3. Stipulated Loss Value – Total Loss


( a ) In the event of a claim adjustable on the basis of a total loss
the Insure rs will pay the “stipulated loss va l u e ” of the
“ a i rc ra f t ” at the date of loss, less the value of any maintenance
fund which has accrued to the “ a i rc ra f t ” and which is
ava i l able to the Insure d . In the event that such pay m e n t
re p resents the entire interest in the “ a i rc ra f t ” the Insure rs
m ay elect to take the “ a i rc ra f t ”( t o gether with all documents
of re c o rd re gi s t ration and title thereto) as salvage .W h e re
s u ch payment re p resents a partial interest then Insure rs shall
be entitled to negotiate their salvage rights with any other
p a rty at intere s t .

(b) A total loss may be decl a red under this Po l i c y, at the option of
the Insure d , in the event that the cost of repair of the damage
t o gether with the cost of salvage and/or tra n s p o rt from the
place of the accident to the place of repair and re t u rn to
s e rvice be estimated at 75% or more of the agreed value on the
“ p rincipal policy”.

192
4. Cost of Repair – Partial Loss
With respect to partial loss the Insure rs will pay for the “ i n s u re d
p ro p o rt i o n ” of re p a i rs less any applicable deductible as set fo rth in
clause 5.

The cost of re p a i rs to the “ a i rc ra f t ” shall include the cost of


t ra n s p o rtation of pers o n n e l ,m a t e ri a l s , tools and equipment re q u i re d
to effect the re p a i rs to and from the place where the “ a i rc ra f t ” is to
be re p a i red and/or the cost of tra n s p o rting the “ a i rc ra f t ” or damage d
p a rts to and/or from the place where the re p a i rs are to be carri e d
o u t . Tra n s p o rtation shall be by the most practical means, be it by
s u r face or by air.

I n s u re rs will in addition pay

(a) for necessary test flights and the cost of obtaining


reinstatement of the cert i ficate of airwo rt h i n e s s ;

(b) for the re t u rn of the “ a i rc ra f t ” to its home airport or the


n e a rest airport to the place where the loss occurred suitabl e
for the operation of the “ a i rc ra f t ” , w h i ch ever is the most
p ra c t i c abl e .

In no event shall the amount due with respect of any loss cove re d
by this clause 4. exceed the “stipulated loss va l u e ” of the “ a i rc ra f t ”
less the amount of the applicable deductibl e .

5. Deductibles
The deductible to be borne by the Insured in respect of each loss
w h i ch becomes payable under clause 4. of this Section One is:-

(a) the “ i n s u red pro p o rt i o n ” of the maximum deductibl e


p e rmitted under the “ p rincipal policy” p u rsuant to the
p rovisions of the “lease agre e m e n t ” , o r

193
(b) the “ i n s u red pro p o rt i o n ” of the fo l l owing amounts, w h i ch eve r
is the gre a t e r.

A i rcraft Ty p e Deductible Amount

N eve rtheless in the event of an incident arising hereon involving the


application of more than one deductible only one deductible shall apply
being the highest deductible applicable to the incident. This deductibl e
shall be applied as an ag gregate deductible for all losses arising out of
that incident.

6. No Abandonment
In the event of loss or damage the Insured may not abandon the
d a m aged “ a i rc ra f t ” to the Insure rs .

7. Definitions
1. “A i rc ra f t ”i n cludes the propulsion system and equipment
u s u a l ly installed in or on the airc ra f t ,

(a) while installed in or on the airc ra f t ;

(b) while tempora ri ly re m oved from the airc raft prior to


being re - i n s t a l l e d ;

(c) while re m oved from the airc raft for replacement until such
time as installation of the replacement item has
commenced at which time the replacement item shall be
c o n s i d e red a part of the airc ra f t ;

also tools and equipment in the airc raft which have been
s p e c i a l ly designed for the airc raft and which are ord i n a ri ly
c a rried there i n .

2. “ I n s u red pro p o rt i o n ” shall mean the amount of the Insure d ’s


i n t e rest at the time of any loss, and accord i n g ly,

194
(a) w h e re the Insure d ’s interest in the “ a i rc ra f t ” is an entire
i n t e rest then the “ i n s u red pro p o rt i o n ” h e reon shall be
100%,

(b) w h e re the Insure d ’s interest in the “ a i rc ra f t ” is a part i a l


i n t e rest then the “ i n s u red pro p o rt i o n ” h e reon shall be
s u ch pro p o rtion as the Insure d ’s interest in the “ a i rc ra f t ”
b e a rs to the total interest in the “ a i rc ra f t ” .

In the event that the Insured is obl i ged to incur costs or


m a ke supplementary payments re l a t i ve to the interests not
i n s u red here by in order to ach i eve repair of the “ a i rc ra f t ”
then this policy will indemnify the Insured for such amounts
subject to the Insured pre s e rving and pursuing any ri g h t s
and/or liens against such other interests for the benefit of
I n s u re rs to the extent of any such costs or payment made.

3. “Stipulated loss va l u e ” shall mean the quantum of the


I n s u re d ’s interest in the “ a i rc ra f t ” as set fo rth in the “ l e a s e
agre e m e n t ” with the Opera t o r, and shall ex clude any loadings
w h i ch may be imposed by the terms of the “lease agre e m e n t ”
for the purposes of establishing the agreed value to be
i n s u red by the Opera t o r.

8. Disappearance
If any “ a i rc ra f t ” is missing and not re p o rted for a period of thirt y
(30) days subsequent to take off then in the absence of any
evidence that Exclusion 2.(c) of this Section One applies the
“ a i rc ra f t ” shall be deemed to have been lost due to a peril cove re d
by this Section One.

9. Supplementary Payments
To the extent that re c ove ry is not ava i l able from the “ p ri n c i p a l
p o l i c y ” this Section One also cove rs the “ i n s u red pro p o rt i o n ” o f : -

(a) the cost of dismantling the “ a i rc ra f t ” in the event of the


“ a i rc ra f t ”t h rough fo rce majeure or error in judgement hav i n g

195
alighted in any place from which it is unable to take off ag a i n
t o gether with the cost of tra n s p o rt from the place of
alighting to the nearest suitable aero d rome and the cost of
re a s s e m bling there even if no damage has been sustained,

( b ) s u e , l abour and travel costs and expenses and salvage ch a rge d


and expenses incurred on behalf of the Insured in or ab o u t
the defe n c e ,s a fe t y, p re s e rvation and re c ove ry of the “ a i rc ra f t ”
and also such ex t ra o rd i n a ry sacri fice and ex p e n d i t u re which
is vo l u n t a ri ly and re a s o n ably made or incurred in time of
p e ril for the purpose of pre s e rving the “ a i rc ra f t ” .

The Insure rs will indemnify the Insured for costs, ch a rges and
expenses incurred under this clause 9. in addition to any
other amounts which may be payable under this Section One.

1 0 . Additions and Deletions


( a ) The insurance affo rded by this Section One is automatically
extended to include at pro rata additional premium furt h e r
“ a i rc ra f t ” as described in clause 1. of this Section One which
a re added during the Policy Pe riod provided that the
“stipulated loss va l u e ” of such airc raft does not ex c e e d
. . . . . . . . . . . . . . . . . . . . . . . . . . . . a ny one “ a i rc ra f t ” .

(b) “A i rc ra f t ” in which the Insure d ’s financial interest ceases shall


be deleted from this Policy and the Insured shall be entitled
to a pro rata re t u rn of pre m i u m .

(c) Notice of the addition or deletion of any “ a i rc ra f t ” under the


p rovisions of paragraphs 10.(a) and 10.(b) re s p e c t i ve ly shall
be gi ven to Insure rs or their re p re s e n t a t i ves as soon as
p ra c t i c able and shall be taken into account in the fi n a l
adjustment of the premium at the ex p i ry of the Policy Pe ri o d .

H owever no account shall be taken for premium adjustment


purposes of the deletion of any “ a i rc ra f t ” the subject of a cl a i m
under this Section One settled on the basis of a total loss.

196
1 1 . S p a res and Equipment Coverage
This Section One also cove rs “ s p a re s ” and “ e q u i p m e n t ” (as per the
S chedule of Spares and Equipment herein) being pro p e rty in
w h i ch the Insured has a financial interest against all risks of loss
or damage how s o ever occasioned, except as hereinafter ex cl u d e d ,
sustained during the Policy Pe ri o d .

(a) Additional Exclusions applicable to Spares and Equipment


C ove rage

This clause 11. does not cove r : -

1. Loss of or damage to pro p e rty occurring at any time


after the “commencement of the operation of fitting it
t o ” or placing it on board an airc raft to fo rm part of an
a i rc ra f t .

2. Loss of or damage to pro p e rty which has been “ d e t a ch e d


f ro m ” an airc raft and which is intended to be re fitted to
the airc raft and not to be replaced by other pro p e rt y.

3. Loss of or damage to pro p e rty which may be sustained


whilst the same is under any process and dire c t ly
resulting there f ro m .

4. P ro p e rty carried in an airc raft as a spare parts kit.

5. P ro p e rty fitted to or fo rming part of an airc raft for the


o p e ration of the airc ra f t .

6. M y s t e rious disappearance or unexplained loss or


s h o rt age disclosed upon taking inve n t o r y.

( b ) Limit of liability applicable to Spares and Equipment


C ove rage

197
The “ i n s u red pro p o rt i o n ” of the cost of repair or the cost of
re p l a c e m e n t , w h i ch ever shall be the least amount, or any
p re d e t e rmined value agreed by Insure rs in respect of any one
item of pro p e rty subject to the limit of the Insure rs ’l i ab i l i t y
as set fo rth in the Policy Sch e d u l e .

(c) D e d u c t i ble applicable to Spares and Equipment Cove rage

The deductible to be borne by the Insured in respect of each


loss shall be the “ i n s u red pro p o rt i o n ”o f
................................., but

1. claims for loss or damage caused by fi re , w i n d ,t o rn a d o ,


c y clone and/or f lood shall be paid in full;

2. in the event of a claim for damage arising in respect of


an airc raft engine whilst undergoing test running such
claim shall be subject to the “ i n s u red pro p o rt i o n ” of the
a p p l i c able deductible amount for the type of airc raft in
w h i ch such engine is norm a l ly installed.

(d) D e finitions applicable to Spares and Equipment Cove rage

1. “ S p a re s ” shall mean spare engi n e s , s p a re part s ,


components and equipment destined to be fitted to or
h aving been detached from airc ra f t .

2. “ E q u i p m e n t ” shall mean ground support equipment


( i n cluding mobile equipment and unlicensed ve h i cles) fo r
use in connection with airc ra f t .

3. “commencement of the operation of fitting it to” s h a l l


mean from the moment the part ceases to be in contact
with the ground or the tro l l ey/stand on which it is
located when the process of fitting it to the airc raft is
commenced.

198
4. “ d e t a ched fro m ” shall mean from the moment such part
is in contact with the ground or the tro l l ey/stand on
w h i ch it is to be located when the process of re m ov i n g
it from the airc raft is completed and it is totally
disconnected from the airc ra f t , and until the moment
the replacement part is deemed to fo rm part of the
a i rc raft as defined in paragraph 11.(d) 3. ab ove .

SECTION TWO LIABILITY COVERAGE

1. Bodily injury and Property Damage Liability Coverage


Subject always to the limits of Insure rs ’ l i ability as set fo rth in the
Policy Schedule the Insure rs will pay on behalf of the “ i n s u re d ” a l l
sums which the “ i n s u re d ” shall become legally obligated to pay as
d a m ages arising from “ b o d i ly injury ” and/or “ p ro p e rty damage ”
caused by an “ o c c u rre n c e ” i nvolving airc ra f t , s p a res or equipment
in which the Insured has/or has had a financial intere s t .

2. Exclusions
This Section Two does not cove r : -

(a) L i ability dire c t ly assumed by the “ i n s u re d ” under any contra c t


or agreement (other than as provided for under clause 4. o f
the General Policy Conditions) unless such liability wo u l d
h ave attached to the “ i n s u re d ” even in the absence of such
c o n t ract or agre e m e n t .

(b) L i ability arising under any employe rs ’ l i ab i l i t y, wo rk m e n s ’


compensation or other similar enactment.

(c) L i ability for “ p ro p e rty damage ” to pro p e rty owned by, re n t e d


t o , leased to, loaned to or occupied by the “ i n s u re d ” .

199
(d) L i ability arising fro m

1. illegal or criminal activities or dishonest acts alleged or


otherwise committed by or at the direction of or with
the know l e d ge and consent of the management or
d i re c t o rs and offi c e rs of the “ i n s u re d ” ;

2. a ny fi d u c i a ry re s p o n s i b i l i t y.

(e) Liability for claims as set out in the NOISE AND POLLUTION AND
OTHER PERILS EXCLUSION CLAUSE attached to this Policy.

(f) L i ability for claims as set out in the WA R , H I - JACKING A N D


OTHER PERILS EXCLUSION CLAUSE (AV I ATION) attached to
this Po l i c y.

(g) L i ability for claims as set out in the NUCLEAR RISKS


EXCLUSION CLAUSE attached to this Po l i c y.

(h) L i ability for which indemnity can be obtained as a claim on


the “ p rincipal policy”.

3. Defence, Settlement and Supplementary Payments


In the event that the “ p rincipal policy” does not make a timely
response to a claim with respect to the insurance affo rded under
this Section Two then Insure rs shall have the right to make such
e n q u i ries as may be appro p riate as re g a rds the status of
n e gotiations on the “ p rincipal policy”, and thereafter shall (if they
deem it in the “ i n s u re d ’s ” i n t e re s t )

(a) d e fend in the name of and on behalf of the “ i n s u re d ”a ny suit


or other proceedings against the “ i n s u re d ” , even if any of the
allegations thereof are gro u n d l e s s , false or fra u d u l e n t , but the
I n s u re rs shall have the right to make such inve s t i g a t i o n ,
n e gotiation and settlement of any claim or suit as they deem
ex p e d i e n t ;

200
(b) p ay all premiums on bonds to release attachments for an
amount not in excess of the applicable limit of the Insure rs ’
l i ability and all premiums on appeal bonds re q u i red in any
s u ch defended suit, but without any obligation to apply for or
f u rnish any such bonds;

( c ) p ay all costs taxed against the “ i n s u re d ” in any such suit or


p roceedings and all interest accruing after entry of judge m e n t
until the Insure rs have paid, t e n d e red or deposited in court ,
s u ch part of such judgement as does not exceed the
a p p l i c able limit of the Insure rs ’ l i ab i l i t y ; p rovided that in the
event of the amount of such judgement exceeding the
a p p l i c able limit of the Insure rs ’ l i ab i l i t y, the Insure rs shall
o n ly be liable to pay for that pro p o rtion of the said costs and
i n t e rest which the applicable limit of the Insure rs ’ l i ab i l i t y
b e a rs to the amount of such judge m e n t ;

(d) p ay all expenses incurred by the Insure rs for inve s t i g a t i o n ,


adjustment and defe n c e , and re i m b u rse the “ i n s u re d ” for all
re a s o n able ex p e n s e s , other than loss of earn i n g s , i n c u rred at
the Insure rs ’ re q u e s t ;

(e) p ay all costs and expenses necessari ly incurred by the


“ i n s u re d ”a rising out of any public enquiry or similar
p roceedings called to investigate an “ o c c u rre n c e ” to which
the insurance applies.

The amounts incurred under this clause 3. ( except settlements of


claims and suits) are payable by the Insure rs in addition to the limits
of liability applicable to this Section Two .

4. Definitions
( a ) The term “ i n s u re d ”m e a n s

1. the Insured as named in Item 1. of the Policy Sch e d u l e ;

201
2. a ny board member, d i re c t o r, o fficer or employee whilst
acting within the scope of his duties on behalf of said
I n s u re d ;

3. if so requested by the Insured named in 1. ab ove at the


time of any claim cove red by Section Two of this Po l i c y
a ny agent dire c t ly or indire c t ly acting on behalf of the
“ i n s u re d ” within the authority delegated to them by the
“ i n s u re d ” ;

4. a ny person or organisation who is re q u i red to be


i n cluded as an Insured under the terms of a contract or
agreement but only to the extent and for the purposes
s p e c i fied in such agreement and provided such contra c t
or agreement has been prev i o u s ly agreed by the Insure rs
or by insure rs under the policy of which this Policy is a
re n ewa l .

In no event shall the term Insured incl u d e

(i) a ny opera t o r, lessee or sub lessee of the airc ra f t ;

(ii) a ny manu fa c t u re r, m a i n t e n a n c e , repair or ove r h a u l


o rg a n i s a t i o n , or supplier of airc raft equipment and
s p a re s .

(b) The term “ b o d i ly injury ” means bodily injury, mental anguish,


f ri g h t , s h o ck , s i ck n e s s , disease or disab i l i t y, i n cluding death at
a ny time resulting there f ro m .

(c) The term “ p ro p e rty damage ” means damage to or loss or


d e s t ruction of tangi ble pro p e rt y, or delay in the perfo rm a n c e
of a contract of carri age caused by an airc raft accident.

(d) The term “ o c c u rre n c e ” means an accident or a continuous or


repeated ex p o s u re to substantially the same ge n e ral harm f u l

202
conditions which results in “ b o d i ly injury ” or “ p ro p e rt y
d a m age ”d u ring the Policy Pe riod which is neither ex p e c t e d
nor intended from the standpoint of the Insure d . All “ b o d i ly
i n j u ry ” or “ p ro p e rty damage ”a rising out of one accident or
s u b s t a n t i a l ly the same ge n e ral conditions shall be deemed to
a rise out of one “ o c c u rre n c e ” .

APPLICABLE TO SECTIONS ONE AND TWO OF THIS POLICY


GENERAL POLICY DEFINITIONS

1. “ P rincipal Po l i c y ” shall mean the policy or policies re q u i red to be


e ffected by the Operator pursuant to the provisions of the “ l e a s e
agre e m e n t ”( i n cl u s i ve of policies such as hull deductibl e
p rotection policies as may be necessary to meet the lease
re q u i re m e n t s ) .

2. “Lease A gre e m e n t ” shall mean the written agreement concl u d e d


b e t ween the Insured (or the Insure d ’s authorised agent) and the
O p e rator where by the operator obtains rights of use and
possession in the “ a i rc ra f t ” , and/or “ s p a re s ” and/or “ e q u i p m e n t ” .

SPECIAL POLICY CONDITIONS

1. It is a condition of this Policy that any “ a i rc ra f t ” , and/or “ s p a re s ”


and/or “ e q u i p m e n t ” to which Section One of this Policy applies,
and any airc raft and/or spares and/or equipment (other than
a i rc raft and/or spares and/or equipment in which the Insure rd ’s
financial interest has ceased) to which Section Two of this Po l i c y
a p p l i e s , shall be subject to a “lease agre e m e n t ” the terms of which
re q u i re the “ p rincipal policy” to be endorsed with the A i r l i n e
Finance/Lease Contract endorsements designated AVN 67A and
AVN 67A (Hull Wa r ) , as appro p ri a t e , or with comparabl e
e n d o rsement language intended to ach i eve a similar purpose, o r

203
with endorsement language notified to and approved by Insure rs
h e re o n .

2. The Insured shall not know i n g ly disclose the existence of this


i n s u rance to the Opera t o r, and shall in all respects act as though
u n i n s u red by this Policy when negotiating or evaluating a
p ro s p e c t i ve lease agre e m e n t .

GENERAL POLICY CONDITIONS

1. Claims – Insured’s Duties


( a ) Upon the Insured becoming awa re of the happening of an
event like ly to gi ve rise to a claim on the “ p rincipal policy”
notice containing part i c u l a rs sufficient to identify the Insure d
and also re a s o n ably obtainable info rmation with respect of the
t i m e , place and circumstances thereof shall be gi ven by or fo r
the Insured to the Insure rs at the address as set fo rth in the
S chedule as soon as re a s o n ably possibl e .T h e reafter furt h e r
notice of developments shall not be re q u i red unless the
I n s u red becomes awa re or suspects that the “ p rincipal policy”
m ay not respond to the cl a i m s , or may delay in the settlement
of a claim to which Section One of this Policy applies.

(b) If a claim is made or a suit is brought against the Insure d ,


then in addition to compliance with the re q u i rements of the
“ p rincipal policy”, the Insured shall immediately copy to the
I n s u re rs eve r y demand, n o t i c e , summons or other pro c e s s
re c e i ved by them or their re p re s e n t a t i ve s .

(c) Fo l l owing the assumption of claims responsibility by Insure rs ,


the Insured shall co-operate with the Insure rs and upon
request will assist in making settlements and in the conduct
of suits; and the Insured shall attend hearings and trials and
assist in securing and giving evidence and obtaining the
attendance of witnesses.

204
(d) The Insured shall render such further info rmation and
assistance as the Insure rs may re a s o n ably re q u i re and shall
not act in any way to the detriment or prejudice of the
i n t e rest of the Insure rs . No admission, o ffe r, p romise or
p ayment shall be made by the Insured without the wri t t e n
consent of the Insure rs .

2. Assignment
This Policy shall not be assigned in whole or in part except with the
consent of the Insurers ve ri fied by endorsement hereon.

3. S u b ro g a t i o n
In the event of any payment under this Po l i c y, the Insure rs may
exe rcise their rights of re c ove ry against any re s p o n s i ble part y, a n d
will advise the “ i n s u re d ” of their intention so to do. H oweve r,
should the “ i n s u re d ” request the Insure rs not to pursue a re c ove ry
then such request will not be unre a s o n ably denied.

4. Contractual Agre e m e n t s
I n s o far as provision may be made under va rious contracts and
agreements entered into by the “ i n s u re d ” re l a t i ve to the fi n a n c i n g
of the “ a i rc ra f t ” re q u i ring hold harmless agre e m e n t s ; wa i ve rs of
s u b ro g a t i o n ; b re a ch of wa rranty prov i s i o n s ; and loss payabl e
clauses it is here by understood and agreed that such re q u i re m e n t s
a re automatically cove red here u n d e r, p rovided alway s : -

(a) that the other parties to the said contracts and agre e m e n t s
h ave no invo l vement in the day to day operation of the
“ a i rc ra f t ” ,

(b) that eve ry endeavour is made to ach i eve the re q u i rements of


the said contracts and agreements on the “ p rincipal policy”
via appro p riate provisions in the “lease agre e m e n t ” .

It being understood and agreed that noting contained in this


condition shall extend the cove rage of this Policy to risks not
otherwise cove red here u n d e r.

205
5. Non-Contribution
It is specifi c a l ly understood and agreed that this Policy does not
c over any loss, d a m age or liability which is re c ove rable as a cl a i m
on the “ p rincipal policy”. F u rt h e rm o re , if at the time of any “ b o d i ly
i n j u ry ” , or “ p ro p e rty damage ” t h e re is or but for the existence of
this Policy would be any other policy of indemnity or insurance in
favour of the “ i n s u re d ” a p p l i c able to such cl a i m , the Insure rs shall
not be liable under this Policy to indemnify the “ i n s u re d ”i n
respect of such claim except for any excess beyond the amount
w h i ch would be payable under such policy of indemnity or
i n s u rance had this Policy not been effe c t e d .

6. Limitation of Liability
E a ch of the Insureds included for cover under Section Two of this
Policy will be considered as a separate person or org a n i s a t i o n , i t
being the intention for this Policy to protect each such person or
o rganisation in the same manner as though a separate policy had
been issued to each , p rovided always that nothing contained in
this Condition 6. shall operate to increase the limits of liab i l i t y
a p p l i c able to Section Two of this Po l i c y. This Condition 6. shall not,
h oweve r, o p e rate to enable claims in respect of loss of or damage
to A i rc raft insured under Section One of this Po l i c y, to be
re c ove red under Section Two of this Po l i c y.

7. Jurisdiction
This Policy shall be construed and gove rned by the laws of
. . . . . . . . . . . . . . . . . . . . . . . . . . . and any dispute or diffe rence between the
I n s u red and the Insure rs shall be submitted to arbitration in
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in accordance with the Statutor y provision fo r
the time being in fo rc e .

206
REPOSSESSION OF LEASED AIRCRAFT
INSURING CONDITIONS – LSW147

INSURING CLAUSE
W h e reas the Insured has entere d into a L ease A greement dated
. . . . . . . . . . . . . . . . . 19 ........ to supply the Les see with the Insu re d
Equipment.

N ow this Policy is to pay the Insured the A greed Value in the event of
the Insured Equipment being lost as a consequence of the occurre n c e
d u ring the period of this Policy of an Insured Pe ri l , subject to the
D e fi n i t i o n s , E x cl u s i o n s , Conditions and Wa rranties below.

DEFINITIONS
1. INSURED PERIL
Means an action taken by, or refusal or fa i l u re by, the Fo re i g n
G ove rn m e n t , b e i n g :

a) C o n fi s c a t i o n ,s e i z u re ,a p p ro p ri a t i o n , expropriation,nationalisation,
restraint, detention or requisition for title or use of the Insured
Equipment by the Foreign Government.

or b) Refusal or fa i l u re of the Fo reign Gove rnment to allow the


I n s u red to exe rcise its rights to repossess the Insured
Equipment in accordance with the terms and conditions of
the Lease A gre e m e n t .

or c) Refusal or fa i l u re of the Fo reign Gove rnment to allow the


I n s u red to re m ove the Insured Equipment from the Fo reign
C o u n t ry fo l l owing the Insure d ’s exe rcise of its rights to
repossess the Insured Equipment in accordance with the terms
and conditions of the Lease A greement (or its mort g age over
the Insured Equipment).

207
or d) Refusal or fa i l u re of the Fo reign Gove rnment to allow
the Insured Equipment to be dere gi s t e red from the
aviation re gister of the Fo reign Country fo l l owing the
I n s u re d ’s exe rcise of its rights to repossess the Insured
Equipment in accordance with the terms and
conditions of the Lease A gre e m e n t .

or e) Refusal or fa i l u re of the Fo reign Gove rn m e n t ,


fo l l owing a compulsory sale or other compulsory
disposal or dive s t i t u re of the Equipment in the Fo reign
C o u n t ry, to allow the Insured to obtain the proceeds
of sale, disposal or dive s t i t u re in United States dollars
or another currency which is fre e ly conve rt i ble into
US dollars in the international ex ch a n ge marke t s ,
fo l l owing Pe rils as per 1. a ) , b) and c) ab ove .

p rovided always that Insure rs hereon shall not be liable for any
loss or damage to the Insured Equipment unless the action by the
Fo reign Gove rnment is effe c t i ve for a period not shorter than the
a p p l i c able Waiting Pe riod specified in the Schedule here t o .

2. INSURED EQU I P M E N T
Means the A i rc raft specified in the Schedule here t o .

This policy also cove rs loss of all or any of the Engines specifi e d
in the Schedule hereto from any of the Insured Pe ri l s
(notwithstanding that the airframe does not suffer any such loss).

This policy also cove rs loss of the technical re c o rds for the airc ra f t
or engines from any of the Insured Pe rils (notwithstanding that the
a i r f rame and engines do not suffer any such loss). In the event of
s u ch loss, I n s u re rs will pay the Insured an amount equal to the costs
i n c u rred by the Insured in reconstituting such technical re c o rds and
c a rrying out any maintenance, ch e cks or re p a i rs necessary to effe c t
the same, but only fo l l owing a loss as per 1. a ) ,b ) , c) and d) ab ove ,
subject to separate schedule limits endorsed here t o .

208
3. FOREIGN COUNTRY
Means

4. LESSEE
Means the entity to which the Insured Equipment has been leased
in the Fo reign Country.

5. FOREIGN GOV E R N M E N T
Means the present or any succeeding gove rnment or gove rn m e n t a l
a u t h o rity (whether civil, m i l i t a ry or de facto) of the Fo re i g n
C o u n t r y, or any defi n able re gion there o f, p rovided that such
gove rning authority exe rcises effe c t i ve exe c u t i ve control there i n ,
and without having re g a rd to the manner of its accession.

6. AGREED VA L U E
Means the amount specified in the Schedule here t o .

I n s u re r ’s maximum total liability shall not in any event exceed the


A greed Value specified for the A i rc raft in the Sch e d u l e .

7. LEASE AG R E E M E N T
Means the contract specified in the Schedule hereto and all support i n g
d o c u m e n t a t i o n , under which the Insured agrees to lease the Insure d
Equipment to the Lessee on terms and conditions seen by Insure rs
h e reon and under which the Insured retains title to the Insure d
Equipment.

8. WAITING PERIOD
Means the period specified in the Schedule here t o , and prior to
the ex p i ry of which Insure rs hereon shall not be liable for any loss
or damage to the Insured Equipment; p rovided that if the Insure d
s a t i s fies Insure rs that there is no re a s o n able prospect of the action
by the Fo reign Gove rnment being reve rsed or cancelled during the
Waiting Pe ri o d ,I n s u re rs will pay the A greed Value to the Insure d
upon being so satisfi e d , notwithstanding that the Waiting Pe ri o d
has not ex p i re d .

209
The Waiting Pe riod shall commence from the date of advice to
I n s u re rs of an event like ly to gi ve rise to a claim under this Po l i c y.

EXCLUSIONS
1. M ATERIAL DEFAU LT BY THE INSURED
E x cluding any loss arising from material default by the Insured (or
a ny sub-age n t , sub- or co-contractor of the Insured) in the
p e r fo rmance of their obligations under the Lease A gre e m e n t .

2. LOSS OR DA M AGE DURING WAITING PERIOD


E x cluding loss or damage to the Insured Equipment arising fro m
a ny cause whatsoever prior to the ex p i ry of the Waiting Pe ri o d .

3. WA R
Excluding any loss arising from destruction or physical damage
d i re c t ly or indirectly occasioned by, happening through or in
consequence of war, invasion, acts of foreign enemies, hostilities
(whether war be declared or not), civil war, rebellion, revolution,
insurre c t i o n ,m i l i t a ry or usurped power.

4. NON-COMPLIANCE WITH LAW S


E x cluding any loss arising from any fa i l u re of the Insured to
c o m p ly with the laws of the Fo reign Country in fo rce at inception
of this policy (other than any laws whose purpose is to empowe r
the Fo reign Gove rnment to confi s c a t e , s e i z e , a p p ro p ri a t e ,
ex p ro p ri a t e , n a t i o n a l i s e , re s t ra i n , detain or requisition assets), or of
the Insure d ’s own country.

5. N E C E S S A RY PERMITS
E x cluding any loss arising from any fa i l u re of the Insured to obtain
all permits and authorisations necessary at inception of this policy
and/or make eve ry endeavour re a s o n ably pra c t i c able to keep such
p e rmits and authorisations in fo rce during currency and/or make
eve ry endeavour re a s o n ably pra c t i c able to obtain such new
p e rmits and authorisations as may be stipulated by the Fo re i g n
G ove rnment during curre n c y.

210
CONDITIONS
1. NON-ASSIGNMENT
The Insured shall not (without Insure rs ’p rior written consent)
assign or tra n s fer this Policy or the benefits or obligations there o f
to any other pers o n ,p rovided always that the Insured can, w i t h
the Insure rs ’p rior agre e m e n t , re q u i re any claims pay m e n t s
h e reunder to be made to a named loss paye e , all the Insure d ’s
o bligations under this Policy remaining unaffe c t e d .

2. DUE DILIGENCE
The Insured shall use due diligence and do and concur in doing all
things re a s o n ably pra c t i c able to avoid or diminish any loss here i n
i n s u re d . The Insured shall be deemed to have complied with this
condition including but not limited to if the Insured shall have
acted in accordance with the ex p ress written directions of the
I n s u re rs during the Waiting Pe ri o d .

3. N OTICE OF LOSS
Upon the discove ry of any event like ly to gi ve rise to a claim under
this Po l i c y, the Insured shall within a re a s o n able period there a f t e r
gi ve notice thereof to the Insure rs here o n .

4. ONUS OF PRO O F
In any cl a i m , and/or any action, suit or proceeding to enfo rce a
claim for loss here u n d e r, the burden of proving that the loss is
re c ove rable under this Po l i c y, that no Wa rranty has been bre a ch e d
and that no Exclusion applies shall fall upon the Insure d .

5. COINSURANCE
The Insured shall bear any coinsurance re q u i rement of all losses
h e reunder at their own risk and uninsure d .

6. E X A M I NATION OF THE INSURED


The Insured shall submit to examination under oath, and shall
p roduce for ex a m i n a t i o n , at such re a s o n able place as is designated
by the Insure rs or their re p re s e n t a t i ve , all documents in their
possession or control which relate to the specific matters in

211
q u e s t i o n , and shall permit ex t racts and copies thereof to be made.

The fo re going re q u i rement shall not obl i ge the Insured to pro d u c e


or copy any document, if to do so would constitute a bre a ch by
the Insured of any obligation of confidentiality or a bre a ch of
c o py right or similar ri g h t , until the Insured has obtained re q u i s i t e
consents from third parties to avoid such a bre a ch being
committed.

7. OTHER INSURANCES
This insurance does not cover any loss or damage which at the time
of the happening of such loss or damage is insured by or wo u l d ,b u t
for the existence of this policy, be insured by any other ex i s t i n g
policy or policies except in respect of any excess beyond the
amount which would have been payable under such other policy or
policies had this insurance not been effe c t e d . The insurance of other
ex p o s u res under the Lease A greement in excess of or in addition to
the cove rage provided hereunder shall not be effected by the
I n s u red without the prior approval of Insure rs here o n .

8. S U B RO G AT I O N
The Insured under this Policy shall at the request and at the
expense of the Insure rs do and concur in doing and permit to be
done all such acts and things as may be necessary or re a s o n ably
re q u i red by the Insure rs at any time after the Waiting Pe riod has
commenced for the purpose of enfo rcing any rights and re m e d i e s ,
or of obtaining relief or indemnity from other parties to which the
I n s u re rs shall or would become entitled or subrogated upon their
p aying for any loss under this Po l i c y.

9. R E C OV E R I E S
After payment of a claim here u n d e r, all subsequent salvage and
re c ove ries made by the Insured shall inu re to the benefit of
I n s u re rs . The Insured here by ack n ow l e d ges that it will re c e i ve
s u ch sums re c ove red in trust for Insure rs and that it will pay all
sums upon receipt by it and/or by any person on its behalf to
I n s u re rs .

212
10. NO CANCELLATION AND PREMIUM RETURN
No cancellation and no re t u rn of premium for short intere s t ,
unless specifi c a l ly agreed at inception.

11. HEADINGS
Headings in this Policy are included for convenience of re fe re n c e
o n ly and shall not affect the interpretation of this Po l i c y.

12. G OVERNING LAW AND A R B I T R AT I O N


The constru c t i o n , validity and perfo rmance of this Policy and all
m a t t e rs arising there f rom shall be gove rned by English law and all
disputes which may arise under, out of, in connection with or in
relation to this Policy or to the determination of the amount of loss
h e reunder shall be submitted to arbitration at the London Court of
I n t e rnational A r b i t ration in accordance with its rules at the date of
s u ch submission. The awa rd re n d e red by the arbitrator(s) shall be
final and binding upon all parties and judgement thereon may be
e n t e red in any court having juri s d i c t i o n .

WA R R A N T I E S
1. LEASE AG R E E M E N T
Wa rranted that the Lease A greement is signed by or on behalf of all
n e c e s s a ry parties and is in full fo rce and effect at inception
h e re o f. This wa rranty shall be deemed satisfied (as to the va l i d i t y
and enfo rc e ability of the Lease A greement against the Lessee) by
the terms of the independent legal opinion re fe rred to under
wa rranty 4 below. In addition, it shall not constitute a bre a ch of
this wa rranty if the Insured agrees to wa i ve or defer fulfilment of
a ny conditions precedent or subsequent described in the Lease,
but this qualification shall not apply to those conditions
e nu m e rated under the Material Change wa rranty of this Po l i c y.

2. DISCLOSURE
Wa rranted that at inception hereof the Insured have no know l e d ge
or info rmation of any matter, fact or circumstance which is like ly
to gi ve rise to a loss here u n d e r.

213
3. HULL AND LIABILITIES INSURANCE
Wa rranted that the Lease A greement re q u i res hull and war and
allied perils insurances and liabilities insurances to be maintained
by the lessee throughout the term of the leasing there u n d e r, o n
the terms specified there i n .

4. LEGAL OPINION
Wa rranted that written independent legal opinion of a qualifi e d
l aw yer in the Fo reign Country shall be supplied by the Insured to
I n s u re rs confi rming that the laws of the Fo reign Country in effe c t
at the date it is submitted do not prevent or hinder the Insure d ’s
exe rcise of its rights under the Lease A gre e m e n t . I n s u re rs confi rm
that the opinion of ........................ dated ................ 19 ........
s a t i s fies the wa rranty set fo rth here i n .

5. M ATERIAL CHANGE
Wa rranted that immediate notice of any material ch a n ge in the
Lease A greement shall be gi ven to Insure rs . No claim ari s i n g
subsequent to such ch a n ge shall be re c ove rable hereunder unless
s u ch ch a n ge has been accepted by Insure rs .

The fo l l owing shall constitute material ch a n ge :

1. Te rms of pay m e n t s .
2. E vents of defa u l t .
3. Legal status of lease contract in host country.
4. Uses of insured airc ra f t / ro u t e s .
5. Maintenance prov i s i o n s .
6. Pe riod of agre e m e n t .
7. C ro s s - c o l l a t e ralization prov i s i o n s , if any.
8. Identity of Lessee/Sub-Lessee.
9. I n t e rest ch a n ge in nature of lease.
10. A r b i t ra t i o n / L aw.
11. C h a n ge in insurance re q u i re m e n t .
12. A ny ch a n ge which could re a s o n ably be fo reseen by lessor to
u l t i m a t e ly affect collateral value of the airc ra f t .

214
SCHEDULE

INSURED:

O P E R ATO R :

C O U N T RY OF OPERATO R :

LEASE AG R E E M E N T:

INSURED EQU I P M E N T:

AGREED VA L U E :

PERIOD:

WAITING PERIOD:

215
CONTINGENT WAR INSURANCE

W h e re a s The Insured and the Airline have entered into the A gre e m e n t
in order for the Insured Equipment to be supplied to the A i r l i n e .

A n d the Airline is re q u i re d , under the terms of the A gre e m e n t , t o


maintain in fo rce at all times Hull War and Allied Pe rils Insura n c e
c ove rage (the Pri m a ry Policy) and the specific Reinsurance Po l i c y
t h e re o f, if applicabl e .

INSURED PERILS
N ow in consideration of the premium as described in the Schedule and
subject to the Defi n i t i o n s ,C o n d i t i o n s , Wa rranties and Exclusions contained
h e re i n , this Policy is to pay the Insured the A greed Value as described in
the Sch e d u l e , in the event of the Insured Equipment being lost or damage d
as a consequence of the occurrence during the period of this Po l i c y, of a
Pe ril as described in Section A or Section B below and which would have
otherwise been re c ove red from the A i r l i n e ’s and/or Opera t o r ’s Hull and
Allied Pe rils Insurance Policy and/or specific Reinsurance Policy there o f
subject to the same Te rm s ,D e fi n i t i o n s ,C o n d i t i o n s , Wa rranties and
E x clusions as contained there i n , except as may be specified here i n .

Section (A)
This Section shall automatically attach for a maximum period of 180
d ays from the fi rst occurrence of an Eve n t , as defined here i n ,p rov i d e d
that such Event dire c t ly causes the termination of the A i r l i n e ’s and/or
O p e ra t o r ’s Hull War and Allied Pe rils Insurance Policy and/or specifi c
R e i n s u rance Policy there o f : -

E vent 1. Refusal of the Airline to pay the additional War Risk Pre m i u m
re q u i red by the Hull War Risk Policy Underwri t e rs and/or
s p e c i fic Reinsure rs there o f, o r

E vent 2. Cancellation of the A i r l i n e ’s Hull War Risk Policy by either the


Airline or A i r l i n e ’s War Risks Underwri t e rs and/or specifi c
R e i n s u re rs there o f, o r

216
E vent 3 N o n - re n ewal of the A i r l i n e ’s Hull War Risks Policies and/or
s p e c i fic Reinsurance Policy there o f, o r

E vent 4. An Event of Default under the A gre e m e n t ,p rovided that the


I n s u red under this Policy have exe rcised their Right to
Repossess the Insured Equipment

The Insured undert a kes to notify Underwri t e rs immediately they


become awa re of such an Event taking place.

Section (B)
This Section shall provide Hull War and Allied Pe rils Insurance cove rage
as the Pri m a ry Policy contingent upon the Insured being unable to
re c over their financial interest as described in the Schedule either in
whole or in part under the A i r l i n e ’s Hull War and Allied Pe rils Insura n c e
Policy and/or specific Reinsurance Policy there o f, due to the
implementation of any ground accumulation or ag gregate limits
a p p l i c able there u n d e r.

AGREED VA L U E
The amount specified in the Schedule hereto provided that
U n d e r w ri t e r ’s maximum total liability shall not in any event exceed the
A greed Value specified in the Sch e d u l e .

DEFINITIONS
“A gre e m e n t ” means the contract and all supporting documentation under
w h i ch the Insured agrees to (a) lease the Insured Equipment to the
Airline and under which the Insured retains title to the Insure d
Equipment or (b) lend to the Mort g agor upon the security of the Insure d
Equipment under which the Insured retains rights as Mort g age e .

“ E vent of Defa u l t ” shall have the same meaning as set fo rth in the
A greement between the Insured and the A i r l i n e .

“ D e cl a ration of Defa u l t ” shall have the same meaning as set fo rth in the
A greement between the Insured and the A i r l i n e .

217
“ Fo reign Gove rn m e n t ” shall have the meaning as set fo rth in the
A greement between the Insured and the A i r l i n e .

EXCLUSIONS
1. C O N F I S C ATION BY THE FOREIGN COUNTRY
In the event of actual war cove rage hereon being prov i d e d
subsequent to the cancellation of the Pri m a ry Po l i c y / R e i n s u ra n c e
Po l i c y, c ove rage shall not be provided in respect of direct losses of
c o n fi s c a t i o n , n a t i o n a l i s a t i o n , s e i z u re , re s t ra i n t , d e t e n t i o n ,
a p p ro p ri a t i o n , ex p ro p ri a t i o n , requisition for the title or use
( c o l l e c t i ve ly “ C o n fiscation Pe rils”) by or under the order of the
Fo reign Gove rn m e n t .

2. RADIOACTIVE CONTA M I N AT I O N
This clause shall be paramount and shall ove rride any t h i n g
contained in this insurance inconsistent therew i t h :

In no case shall this insurance cover loss damage liability or


expense dire c t ly or indire c t ly caused by or contributed to by or
a rising fro m :

2.1 ionising radiations from or contamination by ra d i o a c t i v i t y


f rom any nu clear fuel or from any nu clear waste from the
combustion of nu clear fuel.

2.2 the ra d i o a c t i ve , t ox i c , ex p l o s i ve or other hazardous or


contaminating pro p e rties of any nu clear installation, re a c t o r
or other nu clear assembly or nu clear component there o f.

2.3 a ny detonation of any weapon of war employing atomic or


nu clear fission and/or fusion or other like reaction or
ra d i o a c t i ve fo rce or matter whether hostile or otherwise.

3. S PARE EQUIPMENT
E x cluding any loss arising from destruction or physical damage to
S p a re Equipment (spares and/or engines all as more fully descri b e d

218
in the A greement) dire c t ly or indire c t ly occasioned by, h a p p e n i n g
t h rough or in consequence of wa r, i nvasion acts of fo re i g n
e n e m i e s , hostilities (whether war be decl a red or not) civil wa r,
revo l u t i o n ,i n s u rre c t i o n , m i l i t a ry or usurped power (such peri l s
being defined by Section One, p a ragraph (a) of LSW555B wo rd i n g )

H owever this ex clusion does not apply in respect of Spare


Equipment whilst attached to, or loaded on an airc raft or whilst in
t ransit by sea.

4. I N S O LV E N C Y
E x cluding loss damage or expense caused solely by any debt,
fa i l u re to provide bond or security or any other financial cause
under court order or otherwise.

5. FINANCIAL DEFAULT (applicable to Insured Peril Section B only)


E x cluding any loss arising from insolvency and/or financial defa u l t
of the A i r l i n e ’s and/or Opera t o r ’s Hull War and Allied Pe ri l s
I n s u rance Underwri t e rs ’ and/or specific Reinsurance Underwri t e rs
t h e re o f.

GENERAL CONDITIONS
1. DUE DILIGENCE CLAUSE
The Insured undert a kes that they will do and concur in doing all things
re a s o n ably pra c t i c abl e , at all times during the Po l i c y, to avoid or
diminish any loss hereunder and/or to re c over the Insured Equipment
after the occurrence of an Insured Pe ri l , and/or Event (as described in
Section A ) , in each case by taking such action under or in connection
with the A greement as the Insured would take if they did not have the
b e n e fits and protection of this Po l i c y : it being nonetheless agreed that:

i) Upon the occurrence of an Event or Defa u l t , the Insured may in


their sole discretion exe rcise or not exe rcise their rights under the
A greement as the result of such Event or Defa u l t , and

ii) After the exe rcise of such rights the Insured will be obligated to
t a ke only such action to avoid or diminish loss hereunder or to

219
re c over the Insured Equipment or otherwise exe rcise remedies as
m ay be mu t u a l ly agreed upon between the Insure d , the Loss Paye e
s p e c i fied in the Schedule hereto and the Underwri t e rs .

2. S E RVICE OF SUIT CLAUSE (USA) / OVERSEAS JURISDICTION


CLAUSE)
To be inserted dependent upon domicile of Insure d .

3. C A N C E L L AT I O N
Section fi ve (5) of LSW 555B Fo rm – or the equivalent prov i s i o n s
in the A i r l i n e ’s policy – is deleted in its entirety and replaced by
the fo l l ow i n g :

Except in the event of non payment of premium when due and


w h e re shown in Special Condition 3 (iii) as applicable to Insure d
Pe ril Section B only, this Policy shall not be cancelled by either the
U n d e r w ri t e rs or the Insure d , except the Insured may cancel this
Policy to the extent of the Cove rage hereunder with respect to any
I n s u red Equipment for which the A greement has been paid in full,
or if such Insured Equipment has been sold to a third party or
becomes a total loss or constru c t i ve total loss or the A gre e m e n t
n ever becomes effe c t i ve with respect to such Insured Equipment.
If the Policy is so cancelled the Underwri t e rs will allow a re t u rn
p remium in respect of such Insured Equipment calculated at
p ro - ra t a .

In the event of premium not being paid on due date, U n d e r w ri t e rs


a re here by authorised by the Insured to cancel this Policy in
respect of such Insured Equipment at their discre t i o n . S u ch
cancellation may be effected by the Underwri t e rs or the Bro ke rs
giving twenty (30) days notice of intent to cancel by re gi s t e re d
l e t t e r, c able or telex to the Insured as specified in paragraph 1 of
the Sch e d u l e . S u ch cancellation shall take effect at midnight G. M . T.
on the twentieth (30th) day from the date that such notice wa s
re c e i ved by the Insured specified in paragraph 1 of the sch e d u l e
and the Underwri t e rs shall adjust the premium under this policy
p ro - rata tempori s . In the event of the Insured Equipment becoming

220
a loss or partial loss from any Insured Pe ril hereunder any
p remium due and then owing by the Insured shall become payabl e
i m m e d i a t e ly, or the Underwri t e rs shall be entitled to take cre d i t
t h e re o f.

4. HEADINGS
Headings in the Conditions, Wa rranties and Exclusions of this
Policy are included herein for convenience of re fe rence only and
shall not constitute a part of this Po l i c y.

5. NON-ASSIGNMENT
The Insured shall not (without Underwri t e rs ’ p rior wri t t e n
consent) assign or tra n s fer this Policy or the benefits of
o bligations thereof to any other pers o n ,p rovided that the Insure d
can re q u i re any claims payments hereunder to be made to the Loss
Payee (as per the Sch e d u l e ) , all the Insure d ’s obligations under this
Policy remaining unaffe c t e d .

6. NO CANCELLATION AND PREMIUM RETURN


No cancellation and no re t u rn of premium for short intere s t , o t h e r
than as outlined under General Condition 3.

7. GOVERNING LAW AND ARBITRAT I O N


The constru c t i o n , validity and perfo rmance of this Policy and all
m a t t e rs arising there f rom shall be gove rned by English Law and all
disputes which may arise under, out of, in connection with or in
relation to this Policy or to the determination of the amount of loss
h e reunder shall be submitted to arbitration at the London Court of
I n t e rnational A r b i t ration in accordance with its rules at the date of
s u ch submission. The awa rd re n d e red by the arbitrator(s) shall be
final and binding upon all parties and judgement there fo re may be
e n t e red in any court having juri s d i c t i o n .

SPECIAL CONDITIONS
1. ( Ap p l i c able to Insured Pe ril Section A only )
In the event of the occurrence of Section A Events 1-4 during the
p e riod here o n , this policy shall thencefo rth automatically prov i d e

221
180 days of actual war cove rage as the Pri m a ry Policy and/or specifi c
R e i n s u rance Policy thereof and shall not exceed 180 days in all.

2. ( Ap p l i c able to Insured Pe ril Section A only )


P u rsuant to Special Condition 1, in the event of the occurrence of
Section A Events 1-4, this policy shall provide cove rage as per the
P ri m a ry Policy and/or specific Reinsurance Policy thereof but with
the cancellation and rev i ew condition thereon deleted (but alway s
subject to the “Automatic Te rm i n a t i o n ”p rovisions here i n ) .

3. ( Ap p l i c able to Insured Pe ril Section B only )


(i) U n d e r w ri t e rs may gi ve notice effe c t i ve on the ex p i ry of 7 day s
f rom midnight G. M . T. on the day on which notice is issued, t o
rev i ew the rate of premium and/or the ge o graphical limits. In the
event of the rev i ew of the rate of premium and/or ge o gra p h i c a l
limits not being accepted by the Insured then at the ex p i ry of the
said 7 day s , this Policy shall become cancelled at that date.

(ii) Notwithstanding (i) ab ove , this Policy is subject to automatic rev i ew


by Underwri t e rs of the rate of premium and/or conditions and/or
ge o graphical limits effe c t i ve on the ex p i ry of 7 days from the time
of any hostile detonation of any weapon of war employing atomic or
nu clear fission and/or fusion or other like reaction or ra d i o a c t i ve
fo rce or matter where s o ever or whensoever such detonation may
occur and whether or not the insured Insured Equipment may be
d i re c t ly affe c t e d . In the event of the rev i ew of the rate of pre m i u m
and/or conditions and/or ge o graphical limits not being accepted by
the Insured then at ex p i ry of the said 7 day s , this policy shall
become cancelled at that date.

( i i i ) C over provided by Insured Pe ril Section B may be cancelled by the


U n d e r w ri t e rs or the Insured giving notice not less than seven day s
p rior to the end of each period of three months from inception.

( i v ) F u rt h e rm o re ,c ove rage affo rded under this section shall not be


deemed to affo rd greater cove rage to the Insured than such
Amendment of terms and cancellation by Notice provisions imposed.

222
WA R R A N T I E S
1. HULL & LIABILITIES INSURANCE
Wa rranted that the A greement re q u i res war and allied peri l s
i n s u rances to be maintained by the Airline throughout the term
t h e re o f, on the terms specified there i n .

2. RIGHTS AND INTERESTS


Wa rranted that the Insured has endorsed and continues to endors e
their re s p e c t i ve rights and interests on to the Pri m a ry Po l i c y
and/or specific Reinsurance Policy there o f.

A U T O M ATIC TERMINAT I O N
Whether or not such notice of cancellation has been gi ven this
I n s u rance shall T E R M I NATE AU TO M AT I C A L LY.

Upon the outbreak of war (whether there be a decl a ration of war or


not) between any of the fo l l owing States, n a m e ly : the United Kingdom,
United States of A m e ri c a , Fra n c e , the Russian Fe d e ra t i o n , The Pe o p l e ’s
R e p u blic of China.

P ROVIDED T H AT if the Insured Equipment is in the air when such


o u t b reak of war occurs then this Po l i c y, subject to its terms and
conditions and provided not otherwise cancelled, t e rminated or
s u s p e n d e d , will be continued in respect of such Insured Equipment
until the said Insured Equipment has completed its fi rst landing
t h e re a f t e r.

223
CONTINGENT WAR INSURANCE
SCHEDULE

1. INSURED

2. O P E R ATO R

3. INSURED EQU I P M E N T

4. AGREED VA L U E

5. FOREIGN COUNTRY

6. PREMIUM SECTION A

SECTION B

7. LOSS PAY E E

8. POLICY PERIOD

224
INDEX
Word Page
50/50 clause (AVS103) 18,161
A check (scheduled maintenance) 39,41
Additional insured 27,51,65
Aggregate extension 98
Aggregate limit restrictions 17,98
Agreed value 15
Aircraft checks 39,41
Aircraft Financial Interest Endorsement – AVN28B 65
Aircraft recovery costs 12,102
Aircraft regulation 39
Aircraft repossession insurance 79
Aircraft return condition insurance 102
Aircraft service documents 41
Aircraft unavailability insurance 11,85
Airline Finance/Lease Contract Endorsement – AVN67B 51,54,174
Airworthiness 39
Ariel Form 6, 7
Asset value guarantees 106
Automatic termination 18
Aviation hull ‘all risks’insurance 2,89
Aviation hull ‘war and allied perils’insurance 3,95
Aviation insurance wordings and clauses 7
Aviation legal liability insurance 4
AVN28B (Financial Interest Endorsement) 65
AVN38B (nuclear risks exclusion clause) 165
AVN46B (noise and pollution exclusion clause) 163
AVN48B (war exclusion clause) 168
AVN52C (war liability writeback clause)b 169
AVN57A (“Part 205”) 48,159
AVN5A (deferred premium clause) 23,156
AVN67 (lease/finance endorsement) 51
AVN67B (lease/finance endorsement) 51,54,174
AVN67B War (lease/finance endorsement) 53,178
AVN6A (deferred premium clause) 23,154
AVS103 (50/50 clause) 18,161
Betterment 44
Breach of geographical limits 19
Breach of warranty 27,51,90
Breach of warranty endorsement 51,54,65
Breaches of warranties (examples) 90
Broker’s letter of undertaking 29,151
Buy back guarantees 106
C check (scheduled maintenance) 41
Cancellation clauses 18,23
Cancellation for non-payment of premium 23
Care,custody and control insurance (for financiers) 93
Cargo legal liability insurance 4
Certificates of airworthiness 39,41
Certificates of insurance 71,133
Certificates of reinsurance 71,142
Checklist of insurance requirements 71
Civil aviation authorities 39
Claims 42
Collateral deprivation insurance 79
Combined single limit 5
Confiscation by government of registr y 20,79,83
Confiscation/deprivation coverage 79
Contingent hull and liability insurance 89
Contingent hull war risks insurance 95
Continuing indemnity 22
Contracts of carriage for passengers 15
Credit insurance 85,111
Cut through clause 27,32
D Check (scheduled maintenance) 41
D.o.T. 14 CFR Part 205 48,159
Deductible insurance 10
Deferred premiums clause 154,156
Domestic insurers 32
EC 2027 15
Errors and omissions 91
Extended Coverage Endorsement (Aviation Liabilities) – AVN52C 5,169
FAA 39
Foreign object damage/ingestion 10
General legal liability insurance 6
Geographical limits 19,95
Hangarkeepers liability insurance 6
Hull ‘all risks’insurance 6
Hull ‘war risks’insurance 3,95
Hull and liability insurance wordings 7
Hull claims 42
Hull deductible ‘buy down’ 10
IATA Intercarrier Agreement 15,47
IATA/EC 2027 (contracts of car riage) 15,47
Illegal acts 21
Illegal cargoes 21
Indemnities 22
Independent consultants 73
Ingestion/foreign object damage 10
Innocent operator’s coverage 21
Insurance article 119
Insurance covenants 119
Lease covenants 119
Lease payment insurance 85,111
Leased engines 4,17,43,162
Legal liability insurance 4,89
Legal opinions (for repossession insurance) 81
Lessor liability 46
Letter of undertaking 29,151
Liability claims 45
Liability for premiums 29,59
Liability insurance 4,6,89
Liability limits 4,15
Lloyd’s Central Fund 31
Local domestic insurers 32
Loss of use insurance 11,85
Loss payable clauses 27,37
Loss payee 37
LSW147 wording 79,207,
LSW555B airline hull ‘war’ wording 3,207
LSW610A contingent hull and liability wording 89,189
Mechanical breakdown 2,11
Mechanical breakdown insurance 11
Non-payment of premium 23
Notice of cancellation 18,23
Nuclear Risks Exclusion Clause – AVN38B 165
Ongoing products liability insurance 22
Operational interest 52,57
Orphan engine 17,43,162
Orphan engine Clause 162
Partial loss claims 44
Passenger legal liability 4,15
Personal injury 4,157
Personal Injury Extension – AVN60 157
Political risks 79
Premises liability insurance 6,15
Products liability insurance 6
Rating agencies (for insurers) 31
Repatriation insurance (of assets) 79
Repossession delay insurance 85
Repossession expenses insurance 102
Residual value guarantees 106
Residual value insurance 106
Return condition of leased aircraft 102
Revenue stream protection 85,111
RVI 106
Salvage 42
Search and rescue coverage 12
Spare parts 4
Spares ‘all risks’insurance 4
Specimen insurance article 119
Technical records 39,102
Technical records insurance 102
TLO 12,101
Total loss claims 42
Total loss only insurance 12,101
Underwriting security 31
Unearned premium insurance (UPI) 11
United Nations sanctions 96
UPI 11
War ‘writeback’endorsement 4,169
War aggregate extension insurance 98
War cancellation clauses 18,95
War, Hi-jacking and Other Perils Exclusion Clause – AVN48B 168