Airlines see bigger insurance costs as Ottawa cancels war-risk program

The federal government is getting out of the aviation-insurance business, despite a plea from Canadian airlines that will see their insurance premiums rise as a result.

Ottawa was pressed into providing aviation insurance almost 15 years ago, following the 9/11 attacks in the United States that within days spooked insurance companies into cancelling their so-called "war risk insurance" policies for air carriers around the world. It marked the first time blanket, global notice had ever been issued by the industry.

Governments stepped in to backstop their airlines by promising taxpayer-supported war-risk coverage, which included paying out third-party liability claims from terrorist attacks and acts of war.

The U.S. ended its war-risk insurance program in December 2014, as has every other country in the world – except Canada, which late last year renewed its government-provided coverage to June 30 this year.

John McKenna

John McKenna, president and CEO of the Air Transport Association of Canada representing 80 airlines and flight training organizations, says airlines face $5 million in new insurance costs each year as a result of Ottawa cancelling its war-risk program. (Ashley Burke/CBC )

Countries have argued that private insurers are again offering the aviation industry affordable premiums for third-party liability in connection with terrorist attacks and wars, meaning there's no longer any need for their citizens to assume aviation-disaster risks.

Last year, Canadian air carriers lobbied Liberal Transport Minister Marc Garneau to keep Canada's system in place, saying that the threat level from terrorism is much lower than for, say, American carriers — and that Ottawa has never had to pay out a claim.

But Garneau on Nov. 16 delivered only a brief reprieve, extending by six months coverage that was to have expired Dec. 31, in order to give enough notice to aviation players about lining up private war-risk insurance.

Transport Canada spokeswoman Natasha Gauthier confirms the program "will not be renewed upon its expiry in June 2016."

No decision made

Lisa Raitt, the previous Conservative transport minister, had been asked in May 2015 to make a decision about whether to end the program in December.

But no decision had been made by Aug. 2, the day the federal election was called, putting the process on hold for three months until the Liberals took office on Nov. 4.

"We did lobby for this program to continue as it has never cost the government a penny in claims," said John McKenna, president and CEO of the Air Transport Association of Canada. "We thought it unfortunate that this should be one of Minister Garneau's first announcements."

Spokesmen for Air Canada and WestJet, Canada's two biggest passenger airlines, told CBC News that they have already secured private war-risk insurance and that the transition will have no impact on their operations.

At this time, all other countries ... have terminated their programs." - Nov. 10 briefing note for Transport Minister Marc Garneau

"Most of our member carriers have already gone ahead with their insurance as of Jan. 1 because there was a disagreement between DOJ (Department of Justice) lawyers and some carrier lawyers as to the interpretation of the extension," said McKenna, who estimates carriers collectively will pay $5 million more in insurance premiums each year.

"Some argued that the extension did not cover third-party owners such as aircraft and engine lessors."

For most of the last 15 years, extensions of Canada's war-risk coverage required a cabinet order. But in 2014, the Harper government enacted a law that allowed the transport minister alone to make the decision.

The same law, the Aviation Industry Indemnity Act, empowered the minister to act quickly in the event of another terrorist act to provide government-backed war-risk insurance should private insurers again back out as they did in 2001.

Covered airports

The program that expires in June, known as the Aviation War Risk Liability Program, also covered airports, the air-traffic-control agency Nav Canada, freight forwarders, and other aviation-industry service providers.

Airlines were required to secure private insurance for the first $150 million in third-party war-risk coverage — which includes wars, civil insurrection and acts of terrorism — while the federal government would cover additional losses up to about $1.5 billion, out of general revenues.

The program "was put in place to provide cost efficient coverage for the Canadian air industry, and to mitigate the competitive advantage U.S. carriers received from the U.S. program," says a Nov. 10 briefing note for Garneau, obtained by CBC News under the Access to Information Act.

lisa raitt transport minister

Then-transport minister Lisa Raitt was asked to make a decision in May 2015 about ending the war-risk program, but the issue was put on hold by the federal election campaign, leaving the matter for Liberal Transport Minister Marc Garneau to decide in November. (Dave Seglins/CBC)

"Since … March 2013, the availability and affordability of aviation war risk insurance has improved from the buyer's perspective, with premium levels dropping between 25 and 30 per cent. … At this time, all other countries that supported their air or insurance industries for the provision of aviation war risk insurance have terminated their programs."

The U.S. paid out three small claims under its war-risk insurance program, in 2009, 2012 and 2014, together worth about $10 million.

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