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MH370 families face huge compensation disparity

Relatives of passengers onboard Malaysia Airlines flight MH370
Rahman Roslan | Getty Images
Relatives of passengers onboard Malaysia Airlines flight MH370

As the search for any wreckage for the missing Malaysia Airlines flight continues, insurance experts have warned of "divergent" compensation claims, with the families of U.S. passengers potentially receiving millions more than their Asian counterparts.

Malaysian Prime Minister Najib Razak said on Monday that Malaysia Airlines Flight 370 - missing for more than two weeks – was lost "beyond any reasonable doubt." New satellite data indicated the plane was probably at the bottom of the southern Indian Ocean, Razak added.

All 239 of the people on the plane – 227 passengers and 12 crew – are assumed to have died.

The airline must pay the families of those on board around $176,000 under a multilateral treaty known as the Montreal Convention, and said it had already given relatives $5,000 per passenger in compensation.

But relatives can also sue for further damages - and it is these further pay-outs that experts warn could vary widely.

(Read more: Malaysia says jet went down in sea, bad weather halts search)

"Compensation for loss of life is vastly different between U.S. passengers and non-U.S. passengers," Terry Rolfe, leader of the aviation practice at Integro Insurance Brokers, told CNBC.

"If the claim is brought in the U.S. courts, it's of significantly more value than if it's brought into any other court. And for U.S. citizens there is no problem getting into the U.S. courts."

Numerous nationalities

There were passengers of 14 different nationalities on board the flight, Malaysia Airlines said, with the majority – 152 – Chinese. There were also 38 passengers from Malaysia, seven were Indonesian, six were from Australian and three Americans were on board, among other nationalities.

Rolfe estimated that an American court could pay out between $8-10 million on a per-passenger basis, but compensation would be a fraction of this outside of the U.S. In China, she estimated relatives would receive less than $1 million per passenger.

Allianz, the main reinsurer for the missing Malaysia Airlines yet, has already started pay out on claims relating to its disappearance, according to Reuters.

The German insurance giant would not comment on financial details, but The Telegraph reported that some $110 million had been placed in an escrow account and Allianz had agreed to make hardship payments to the relatives of those on the fight.

Where claims can be brought

The Montreal Convention dictates that a claim has to be brought in one of five places: where the carrier is domiciled; its main place of business; where the ticket was bought; the destination of the flight or the primary residence of the plaintiff.

"So for the majority of passengers on this flight, this is either China or Malaysia and these countries have very limited views of damages as opposed to America," Illinois-based aviation crash attorney Floyd Wisner told CNBC.

(Read more: How 19th century physics was used to trace missing plane)

"They could evaluate these cases and say a Chinese life is (of) less value than an American life. That's unfair and that's going to cause problems."

Indeed, Wisner said disparate pay-outs could lead to international backlash – especially if the plights of the families continued to be highly publicized.

"I would be raising holy hell if I was a family member of a passenger from one country getting less than someone who happened to be sitting next to me from another country," he said.

Another option open to the families is a class-action lawsuit, which would allow multiple relatives to sue over the same legal grounds.

"In theory, a class action would give the families more clout - because they're acting together rather than just as one person," Mike Burns, a lawyer who specializes in transport insurance at British law firm Weightmans, told CNBC.

"But where there's more clients, there's more money to be made - so a class action lawsuit is of massive financial benefit to the lawyers."

The airline and insurer will want to avoid this by being pro-active, he added, reassuring relatives that their individual claims will be managed swiftly and sensitively.

One reason for the high compensation pay-outs in the U.S., according to New York-based Rolfe, was the sheer number of attorneys and litigators here willing to take on the cases.

"There are a significant numbers of lawyers here who take on these airline cases and they know how to use to court system. They're used to doing it," she said. "And there isn't the same level of attorney or litigation or precedence in the rest of the world."

Same amount per passenger?

Wisner said the airline could pay out between $500-750 million in total compensation to the families, and was likely to have liability insurance to value of around $1 billion.

(Read more: Doomed Malaysia Air flight 'lost beyond doubt')

But he added that the total amount paid out could be reduced by offering one amount per passenger – whatever their nationality.

"They could aim for one standard for all, " he said. "It would be worth trying to avoid this disparate treatment and pay a flat-sum per passenger."

Integro Insurance Brokers' Terry Rolfe, however, said this was unlikely. "The families won't sign off on it if they know they can get a higher pay-out in the U.S. courts," she added.

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