The aviation industry is highly regulated. Exclusions in aviation insurance policies relating to violation of such regulation have raised special issues.
The standard aviation insurance policy is constructed much like other liability policies. Declarations are stated, an insuring agreement is included, and conditions, definitions, and exclusions are provided. Each of these sections contains provisions similar to provisions in other liability policies. However, each section also is likely to contain provisions that are unique to the aviation industry.
Exclusions in an aviation insurance policy most likely will state that coverage is not provided if the insured aircraft is operated without a proper airworthiness certificate or is operated outside of parameters set by regulations. Exclusions also are likely to be included to bar coverage if the aircraft is operated by a pilot who is unlicensed or not licensed to operate the particular type of aircraft or by a pilot whose medical clearance has not been properly maintained.
The fact that almost every facet of the aviation industry is regulated has led some courts to conclude that an aviation insurance policy exclusion barring coverage if an aircraft is operated in violation of a regulation could tend to make any coverage under the policy illusory. Investigations of aviation accidents are likely to disclose a violation of some regulation. However, courts may be reluctant to deny coverage for what may be considered a technical violation of a regulation unless there is no room for doubt or ambiguity in the exclusion of coverage stated in the policy.
If an exclusion is shown by the insurer to be clear and unambiguous, many courts will uphold a denial of coverage even if a causal relationship is not shown between the violation of a regulation described in the exclusion and the occurrence leading to the loss for which indemnity is sought. Some courts will, however, impute a requirement of proximate cause if there is some ambiguity in the exclusion or some basis, such as a statutory provision, for concluding that coverage is warranted despite existence of regulatory violations that did not cause the accident raising the claim.
Air carriers are required to maintain certain insurance coverage. See, for example, 49 U.S.C.S. ¤ 41112. Policies issued to carriers providing such coverage may not by exclusion or otherwise bar coverage of liability to third parties. As a result, operation of an aircraft in violation of safety or other regulatory requirements may not be a basis for denial of coverage required under regulations issued by the Secretary of Transportation pursuant to the statute. While insurers may look to the carriers for reimbursement of funds paid to third parties for coverage of incidents that otherwise would have been excluded, the exclusions may not operate to leave third parties without recourse.
After September 11th, 2001, terrorism exclusions were added to property and general liability policies. Rates in the property and casualty market rose greatly. The Terrorism Risk Insurance Act, effective November 26, 2002, established a program within the Department of the Treasury under which the federal government shares the risk of loss from future terrorist attacks with the insurance industry. All insurers–direct, surplus lines, and alien–that write primary and/or excess property/casualty insurance for U.S. risks, including aviation and shipping, are required to participate in the program; make coverage available for terrorism losses in all of their property/casualty coverages; and offer coverage in a manner that does not differ materially regarding terms, amounts or other limitations of coverage offered for acts other than terrorism.