Bills Digest No. 48 2002-03
Insurance and Aviation Liability Legislation Amendment
This Digest was prepared for debate. It reflects the legislation as
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Contact Officer & Copyright Details
Insurance and Aviation Liability
Legislation Amendment Bill 2002
25 September 2002
House: House of Representatives
Portfolio: Transport and Regional
Royal Assent, apart
from items 1-4 of Schedule 1 which are taken to have commenced at
the same time as Schedule 4 of the Aviation Legislation
Amendment Act (No.1) 1998.
The purpose of the Bill is to:
- assist the aviation industry in obtaining access to
international war risk insurance
- exempt passive owners of aircraft, such as lessors and
financiers, from liability for injury and damage to third parties
on the ground, and
- correct a technical error in the Civil Aviation (Carriers
Liability) Act 1959.
War risk insurance is insurance covering losses
arising from acts of war, including acts of terrorism, strikes,
riots and sabotage. Following the 11 September 2001 terrorist
events in the United States, existing aviation third party war risk
insurance(1) was withdrawn from the global marketplace.
To ensure continuity of airline operations, the Australian
Government, like governments in many other countries, agreed to
provide third party war, terrorist and hijacking indemnity cover
for damage on the ground to airlines, airports and other service
and facilities providers.(2) The Commonwealth indemnity
covers the gap between the insurance available in the market and
the level of insurance held prior to 11 September events and
recipients of the Commonwealth indemnity are required to hold
commercial war risk insurance to the extent it is available. The
Commonwealth indemnity is currently being extended at three monthly
intervals until such time as a more permanent solution is found.
The Government has recently announced its intention to charge for
this cover, although details of the charging are still to be
Aviation war risk insurance is provided by
international insurance companies and in accordance with
international industry practice, such insurance contracts normally
include a seven day cancellation clause. This enables insurers to
decrease or remove the cover in the event of a further catastrophe
such as another terrorist attack.
According to the Bill's Explanatory Memorandum
commercial third party war risk insurance is slowly becoming
available again. However the international insurance companies
providing this cover are only prepared to do so if the insurance
contract contains a cancellation or variation clause that enables
them to decrease or completely remove the cover in the event of
further acts of terrorism. In the Australian context, this
requirement conflicts with provisions of the Insurance Contracts
Act (IC Act) and this is creating difficulties for the Australian
aviation industry in obtaining access to the new third party war
The IC Act limits the insurer's right to cancel
a contract of general insurance to certain grounds set out in the
Act. In particular, section 53 of the IC Act states that a clause
in an insurance contract that permits an insurer to vary the
contract to the prejudice of any other person is void. Section 63
of the IC Act prohibits the cancellation of insurance unless the
insured has failed to comply with the duty of utmost good faith, or
has engaged in non-disclosure, misrepresentation or fraud.
The IC Act does however contain some exemptions
to this non-cancellation/variation regime and section 9 of the Act
lists the types of contracts excluded from the operation of the
Act. Significantly and of relevance to this Bill, subsection 9(3)
excludes from the non-cancellation regime contracts of insurance
against the risk of the loss of an aircraft, or damage to the hull
of an aircraft, as a result of war. It is of interest that while
war risk insurance cover for aircraft is already excluded
from the operation of the IC Act, third party cover for the related
on-the ground war risk was not included in this initial
exemption. Aviation and insurance representatives have advised the
Department of Transport and Regional Services that many
underwriters in the international insurance market who are once
again offering war risk cover are unwilling to provide cover to
Australian firms.(4) Presumably this is due to the
non-cancellation regime in the IC Act.
The amendments to the IC Act proposed in the
Bill are a response to this problem and are intended to remove
impediments to the Australian aviation industry gaining full access
to the international insurance market for third party war risk
insurance. The Bill proposes to exclude aviation third party war
risk insurance from the non-cancellation regime in the IC Act.
Damage by Aircraft Act
1999 and liability
The Damage by Aircraft Act (DA Act) came into
force in November 2000, its purpose being to reform the regime of
liability of aircraft operators for injury, loss, damage or
destruction caused to persons or property on the ground. The DA Act
introduced a regime of strict and unlimited liability for injury
and damage caused by aircraft coming within the jurisdiction of
Australia. Strict liability means that the airline is subject to
liability without the plaintiff(5) proving fault and
unlimited liability means that compensation to the parties must be
at an adequate level. Of significance to this Bill, subsection
10(2) of the DA Act currently provides that operators and owners of
the aircraft are held to be jointly and severally liable in respect
of the injury or damage caused. There is no definition of 'owner'
in the Act and it is generally recognised that 'passive owners'
such as financiers or lessors would also be caught by the joint and
several liability obligations imposed by subsection 10(2).
The Explanatory Memorandum states that since 11
September 2001, concerns have been raised by lessors and financiers
about their potential liability in the event of an aircraft causing
third party damage.(6) It has been pointed out that
Australia is one of only four countries(7) that impose
liability on passive lessor owners and international lessors have
suggested that this liability could threaten operations into
Australia by foreign carriers. The amendment to the DA Act proposed
by the Bill is a response these concerns and is intended to remove
liability for aircraft owners who are lessors and financiers.
Items 1-4of Schedule 1 correct
a technical error in the Civil Aviation (Carriers' Liability)
Act. Items 3-4 modify the definition of
Australian international carrier in paragraphs 11A(2)(b) and
21A(2)(b) in this Act by clarifying that charter operators are only
Australian international carriers if they are Australian persons.
Item 2 inserts a definition of Australian person
into section 5. It is written in the same terms as the definition
of Australian person in the Air Navigation Act 1920.
As stated above, subsection 10(2) of the DA Act
provides that operators and owners of the aircraft are held to be
jointly and severally liable in respect of the injury, or damage
caused to third parties.
Item 5 of Schedule 1 inserts
proposed subsection 10(2A) into the Act and
provides an exemption from liability for the owner of the aircraft
where the owner:
- did not have an active role in the operation of the aircraft,
- there were leasing or financial arrangements in place under
which a person other than the financier or lessor had exclusive
right to use the aircraft.
Section 9 of the Act lists the types of contracts excluded from
the operation of the IC Act. Item 6 of Schedule 1
inserts proposed subsection 9(4) to provide that
sections 53 and 63 of the IC Act (that deal with cancellation and
variation of a contract(8)) do not apply to prescribed
insurance provisions providing cover for war or terrorism risk.
Passage of this provision would need to be followed by a regulation
prescribing aviation third party war and terrorism risk cover.
According to the Explanatory Memorandum the provision has been
drafted in this way to provide scope to extend this treatment to
other types of war or terrorism insurance if
The proposed amendments in the Bill are only
small measures aimed at assisting the aviation industry in
obtaining third party war risk insurance after the events of 11
September 2001. The Commonwealth Government fully acknowledges that
a longer-term solution needs to be found(10) and in this
regard it is relying heavily on international initiatives being
developed by the International Civil Aviation Organization and
major insurance brokers.(11) In the interim, the
Government is continuing to assist the aviation industry by
providing a subsidised indemnity scheme.
- Aviation third party war risk insurance covers third parties on
the ground who suffer death, personal injury, or property damage
from aircraft involved in the war or terrorist activities.
- Prime Minister, Press Release, 'Government supports
airline industry against terrorism', 22 September 2001. A copy of
the relevant criteria announced by the Government at the time is at
Attachment A in the Bill's Explanatory Memorandum.
- Explanatory Memorandum, p. 5.
- ibid., p. 6.
- ie the person or person's family suffering the injury.
- Explanatory Memorandum, p. 6.
- The others being Greece, Norway and Denmark.
- Section 53 of the IC Act states that a clause in an insurance
contract that permits an insurer to vary the contract to the
prejudice of any other person is void. Section 63 of the IC Act
prohibits the cancellation of insurance unless the insured has
failed to comply with the duty of utmost good faith, or has engaged
in non-disclosure, misrepresentation or fraud.
- Explanatory Memorandum, p. 9.
- ibid., p. 5.
- John Anderson, Press Release, 'Australia supports
international solution for war risk insurance', 10 May 2002.
Mary Anne Neilsen
15 October 2002
Bills Digest Service
Information and Research Services
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