Malaysia Airlines Girds for New Insurance Battle
By: Enda Curran (Wall Street Journal) July 2014
HONG KONG—The Malaysia Airlines jetliner crash in Ukraine could spark hundreds of millions of dollars in compensation claims and protracted legal disputes between the airline, insurers, governments and victims’ families, according to aviation-insurance experts.
The range of parties that victims’ families could pursue for compensation complicates the case, as does the difficulty proving who brought down the aircraft in a hotly contested conflict zone.
Malaysia Airlines Flight 17 crashed in the battle-torn region of Donetsk in eastern Ukraine on Thursday en route to Kuala Lumpur from Amsterdam with 298 people on board. U.S. intelligence agencies say the plane was struck by a ground-to-air missile.
The disaster comes just months after Malaysia Airlines Flight 370 is believed to have crashed without trace over the Southern Indian Ocean, leaving insurers to split the costs of the missing airliner as the cause of its disappearance remains unknown.
Those potentially liable to compensate victims’ families in the latest crash include the airline, governments and aviation authorities in Malaysia and Holland—some of which are private—because they permitted a flight over a known war zone, experts say. The Russian or Ukrainian governments also could be liable if investigators find evidence that those behind the crash had state backing.
“This is going to be a very long, convoluted and politically charged compensation case for those families,” said Joseph Wheeler, an aviation lawyer at the law firm Shine Lawyers, based in Brisbane, Australia.
“In terms of a loss this size, you are looking at hundreds of millions,” he said.
Initial compensation to the victims’ families will come from Malaysia Airlines. The amounts payable by airlines is governed by the international aviation agreement known as the Montreal Convention, which caps payouts at about US$170,000 per passenger. The airline is obligated to make these initial payments regardless of whether it is at fault.
“Malaysia Airlines would have a contractual liability—an airline ticket is essentially a contract that the airline will take the passenger from point A to point B alive,” said Mark Dombroff, partner at McKenna Long & Aldridge law firm in the U.S.
While Malaysia Airlines is likely to shoulder blame onto the party that launched the missile, the airline isn’t immune from legal troubles.
“The difficulty facing Malaysia Airlines here is that the passengers could argue that most airlines…knew the Ukraine airspace was a war zone and that two other aircraft had been shot down the previous week,” said Kevin Bartlett, a partner in aviation law at Cooper Grace Ward Lawyers in Brisbane, Australia.
He cited warnings from the U.K. Civil Aviation Authority in June urging airlines to avoid Ukrainian airspace.
“Although MH17 was above the restricted airspace altitude, it could be argued that it should have adopted the same precautions as other operators and avoided the area,” he said.
Governments previously have had to contribute to compensation when civilian aircraft has been shot down by a military-launched missile. In 1988, the U.S. government paid victims after Iran Air Flight 655 was shot down by an American surface-to-air missile.
Airline reinsurance is divided between those insurers that offer a policy covering the loss of passengers and the plane, and a separate policy covering the plane against a malicious act.
German insurer Allianz Global Corporate & Specialty is the lead reinsurer of the Malaysia Airlines plane for its so-calleded hull and liability policy, according to a report from insurance broker Aon PLC, which valued the plane itself at $97.3 million.
“It is much too early to comment on reports of this tragic incident while details are still being confirmed,” Allianz Global Corporate & Specialty said. The company said it “stands by to support our client as fully and quickly as possible.”
London-based specialist insurer Atrium is the lead reinsurer for the airline’s policy that covers the plane against a malicious act, such as terrorism. The company declined to comment.
Victims’ families can pursue lawsuits in any jurisdiction with a link to the downed plane. Those families could receive millions of dollars on the basis of lost earnings and family support, said John Ribbands, an aviation lawyer based in Melbourne, Australia.
Some jurisdictions, such as those in the U.S., are known to award higher compensation payments than others.
“You end up with multijurisdictional options that, as a plaintiff lawyer, you shop around for the best outcome,” he said.
