Malaysia Airlines: Beyond the Montreal Convention

While top-level insurance issues may be relatively straightforward and dealt with expeditiously around the downing of Malaysia Airlines Flight 17, there could be long-lasting political, legal, and economic ramifications, experts told Advisen.

The Boeing 777 was shot down over Ukraine on July 17, allegedly by pro-Russia separatists.

“You can expect that Malaysia Airlines will do everything they can as quickly as they can to help victims’ families,” said Brian Alexander, a military-trained pilot and aviation attorney with the law firm Kreindler & Kreindler, which specializes in aviation and terrorism cases.

Agreed David McMahon, managing partner of the San Francisco office of Barger & Wolen, specializing in marine, aviation and large business and commercial litigation, “Family members of the 298 victims can expect quick resolution in terms of initial payments, the liability for which will be governed by the Montreal Convention.”

The Montreal Convention calls for compensation for each victim of an aviation accident in the amount of about $170,000 (a figure arrived at by averaging various currencies).

“While some lawyers have criticized it as ‘treaty legislation’ it assures a measure of certainty when accidents occur in a jurisdiction where there isn’t a sophisticated tort system,” said McMahon. He noted that the incident would fall under the U.S. Supreme Court’s definition of an accident, and that while the U.S. Supreme Court’s ruling wouldn’t be binding in other countries, “most jurisdictions would look to that as a common-sense definition of the term.”

Damage to the aircraft itself would be covered under Malyasia Airline’s hull policy (often called “hull/war”). Atrium Underwriting Group Ltd is the leader for the hull insurance. Allianz SE said it is the lead hull and liability reinsurer for the jet.

More complex liability questions could take longer to resolve. For example, there is the question of whether Malaysia Airlines has liability over the flight path for the Kuala Lumpur-bound jet.

“Legally, families have a chance with that,” said McMahon. “Some air carriers did change their routes to avoid this area completely.” Among the airlines reportedly altering flight paths to avoid the region are Deutsche Lufthansa AG, Air France-KLM, and OAO Aeroflot.

“Because their responsibility is singular – to keep passengers safe from point A to Point B – if they took a risk that they ought not to have, that could have implications,” added Alexander. “You have to cull all the information that was available prior to the accident to see what was known. “ He said the in most jurisdictions, the yardstick will be, “what did others do?”

Culpability could extend beyond the airline, as could the possibility for additional compensation.

“Beyond the question of fundamental responsibility the airline has in an act of terror or war, there is a vast combination of possible culpability. Things are never what they first appear to be,” Alexander said. “The scenario to keep in mind for comparison is the Lockerbie case.”

He noted that in the Lockerbie case, (in which a bomb exploded on Pan Am flight 103 on Dec. 21, 1988, over Lockerbie Scotland, killing all on board and 11 people on the ground) there were not only tangential issues around the airline allowing the bomb to get on board, but that years later the focus shifted to the terrorists and state-sponsored terror.

His firm negotiated a $2.7 billion settlement from Libya in claims arising from the Lockerbie bombing and is currently in litigation with the sponsors of al-Qaeda in 9/11 litigation.

“A similar issue could come to light in the case of MH-17,” he said. “We were able to avail ourselves to a remedy that didn’t even arise until well after the crash that allowed us to pursue remedies against the terrorists. Some legal remedies that don’t exist could be created in the international community to address the families’ losses.”

Another factor that could add complexity to the case is the worldwide outrage directed toward Russia and the intense pressure being brought to bear from both external and internal sources. “This is such a horrific event that there could be some benefit to the victims’ loved ones at least in terms of getting answers,” said McMahon.

He also speculated that internal pressure from Russia’s oligarchs who fear economic reprisals could force the government to offer up a scapegoat as well as offer additional financial compensation. In the case of the Lockerbie bombing, former Libya dictator Muammar Gaddafi eventually paid compensation to victims’ families.

The effect the individual event will have on the insurance market is unclear.

“In marine and aviation insurance the risk is so large that it is widely spread out, so it will likely have little impact on either the hull or liability market,” McMahon added. “While this event was tragic, the events that become truly problematic from a business perspective are ones caused by things like a faulty component.”

However, the market for hull could be affected because this is just one of several incidents affecting aircraft this year. Within the last few weeks, there have been claims resulting from the shelling of Libya’s main airport a week ago that damaged some 20 planes, and the Taliban has waged two fatal attacks on the Karachi airport in Pakistan.

One group that could see its insurance premiums go up is US commercial pilots who fly internationally. Commercial pilots who fly domestically don’t pay any additional life insurance fees for their aviation risk because of their level of expertise, and domestic flights are generally considered safe, according to independent life insurance agent Liran Hirschkorn.

“For a US commercial pilot, the question of whether you will pay an additional fee for the aviation risk depends on where you fly,” he said, citing a case of a pilot who was paying an additional $10,000 a year on his $500,000 life insurance policy because of the risks associated with his travel route.