Malaysia Airlines' two crashes in less than five months are sending tremors through the aviation insurance market — not least because the carrier's $2.25 billion overall liability policy is mysteriously missing a standard clause that usually limits insurers' payments for search-and-rescue costs.
The looming payments are coming as underwriters face other claims, because of the shelling of Libya's main airport a week ago, with 20 planes damaged, and a pair of deadly Taliban attacks on Karachi's airport in Pakistan.
For just one category of aviation insurance — war risk insurance on the planes — claims for incidents in the last five months now total an estimated $600 million for a sector that collects $65 million a year in premiums.
Airlines have many insurance policies. But the main one is an "all risk" policy that covers most crash-related expenses, including what is usually the biggest: paying for settlements with passengers' next of kin.
Malaysia Airlines' broader policy has a high cap by industry standards — $2.25 billion for each crash — because the carrier operates big Airbus A380s, each configured for 494 passengers, and it wanted ample coverage.
But the policy is unusual in that it does not have a separate limit for search-and-rescue costs — it is limited only by the overall $2.25 billion cap for the policy, three people with knowledge of the policy said. It is unclear why the clause was omitted, they said.
The absence of a separate limit for search-and-rescue costs means that Malaysia Airlines could seek reimbursement for tens of millions — and potentially hundreds of millions — of dollars in search costs if the Malaysian and Australian governments decide to bill the airline for even part of their considerable expenses in looking for Flight 370, which vanished on March 8.
An Australian delegation has been sent to Malaysia to broach the question of sharing costs for the Flight 370 investigation and seeking insurance reimbursement, said people with knowledge of the visit and the insurance policy, who spoke on the condition of anonymity.
By tradition, governments do not seek reimbursement from an airline for search-and-rescue costs. As a result, the airlines do not typically need to ask their insurers to cover these costs; the insurers cover only so-called commercial costs, though their contracts do allow governments to seek reimbursement.
In the case of Flight 370, the Australian government is paying 8 million Australian dollars, or $7.5 million, to commercial contractors for a survey of the floor of the Indian Ocean, and has set aside another 60 million Australian dollars to hire a contractor to tow deep-sea submersibles across 60,000 square kilometers of the ocean floor to look for the missing plane.
Australian officials, Malaysian officials and the lead underwriter of the broad liability policy, Allianz of Germany, all declined to comment, as did the broker who negotiated the insurance policy on Malaysia Airlines' behalf, the London-based Willis Group Holdings.
The crash of Flight 17 appears to have caught the war risk insurance market particularly by surprise. Insurers often prohibit airlines from flying across dangerous areas, or cancel their policies, but most carriers kept flying over Ukraine until the crash. The number of flights there dropped only 12 percent in the month leading up to it.
"One assumes that if the war risk underwriters thought there was any risk, they would have prohibited airlines from flying or canceled their policies," said Paul Hayes, head of accidents and insurance at Ascend, an aviation consulting firm in London.
Malaysia Airlines' war risk policy has a separate, much lower limit than the overall policy for claims for search-and-rescue costs. As in most aviation insurance contracts, a provision caps claims for these costs to a small percentage of the overall value of the policy.