Flying illegally – the impact on insurance coverageThe Swiss perspectiveAviation Law Afternoon Workshop

Laurent Chassot & Lars Gerspacher25 March 2014

Synopsis

• When is a flight illegal? – L. Chassot

• What is the impact on insurance coverage? – L. Gerspacher

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The concept of illegal flights accordingto EBAA

“As a general principle any flight which breaks the current rules is to be considered as an illegal flight. In substance though, the Association distinguishes between six main categories:

1. Illegal charter: EU operator/TCO flies commercially without valid AOC; EU operator with a valid AOC undertaking an invalid non-commercial operation

2. Tax evasion: EU operator avoids VAT & associated duties on purchase of goods and services such as fuel and handling costs

3. Lacking traffic rights: Third Country Operator (TCO) undertakes commercial air transport without appropriate traffic right

4. Defective certification: EU operator not fully maintaining EU safety requirements (EG Part-CAT and Part-NCC) as defined in Operating Manual and Certificates

5. Illegal goods & services: EU operator/TCO transports illegal goods, also persons or goods without proper declaration over borders or provides illegal services through flight operations

6. Non-compliant operations: EU operator does not comply with EU regulations and requirements during flight (airworthiness non-compliance)”.

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Statistics - EBAA

• In 2012, it has been estimated that 6-8% of all business aviation flights in Europe were illegal

• ie more than 45,000 movements a year

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Illegal flights in insurance policies

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Samples

Commercial flights: the obligation to hold an operating licence• EC Regulation No 1008/2008 on common rules for the operation

of air services in the Community, Art 3(1):– “No undertaking established in the Community shall be permitted to

carry by air passengers, mail and/or cargo for remuneration and/or hire unless it has been granted the appropriate operating licence.”

• The authority granting the operating licence is the competent authority in the Member State (also Switzerland) where the carrier has its principal place of business

• The conditions to obtain an operating licence are set out in Art 4 Reg 1008/2008:– AOC– nationality requirements– financial fitness– sufficient insurance coverage

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The obligation to hold an AOC

• The Air Operator Certificate is a prerequisite for obtainingan operating licence (Art 4(b) Reg 1008/2008)

• “‘air operator certificate (AOC)’ means a certificate delivered to an undertaking confirming that the operator has the professional ability and organisation to ensure the safety of operations specified in the certificate, as provided in the relevant provisions of Community or national law, as applicable”

• The obligation to hold an AOC for commercial operations is set out in Art 8(2) of the EC Regulation No 216/2008 (“Basic Regulation”)

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What is a “commercial operation”?

• Art 3(i) Reg 216/2008– “‘commercial operation’ shall mean any operation of an aircraft,

in return for remuneration or other valuable consideration, which is available to the public or, when not made available to the public, which is performed under a contract between an operator and a customer, where the latter has no control over the operator”

• 2 cumulative criteria:– remuneration (or other valuable consideration)– public or based on a contract (except if the client has control

over the operator)

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Commercial flights according to Swissdomestic law

Art 100 Aviation Ordinance (LFV/OSAv)

“Flights are deemed commercial:

a. If they give rise to remuneration in any form, which must cover more than the cost for leasing the aircraft and of fuel, as well as airport and air navigation charges, and

b. If an undetermined number of people may access them.”

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Swiss interpretation of commercial operation

• Art 3(i) Reg 216/2008 in the light of Art 100 LFV/OSAv

• => Remuneration = profit making (yield exceeding lease,fuel costs and airport/ANS charges)

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Why do some operators favour privateoperations?• Fulfilling the requirements applicable to commercial

operations (EU-OPS) may be quite onerous for smalleroperators while flying private offers more flexibility:– No financial reporting to CAA– Organisation: no operations manual, postholders– No flight time limitations– Access to smaller aerodromes– Cabotage is possible

• The difference between commercial and private operationswill soon be relativised by the entry into force of the new regime regarding complex motor-powered aircraft. It willresult in the partial application of EU-OPS regulations to such aircraft, even if privately operated (PART-NCC).

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How to keep it private (but still to makemoney)?

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Enforcement in case of illegal flights

• Ramp checks

• If infringement, FOCA initiates criminal/administrative proceedings and may– fine the operator up to CHF 40,000 (Art 91 Aviation Act, “AA”)– withdraw the pilots’ licences or the operating licence (if the

operator holds one…) (Art 92 AA)

• However, much more serious is a possible denial of insurance coverage…

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Insurance related provisions in aviation

• Every owner of an aircraft needs to be covered for its liability that arises from the (commercial or non-commercial) use of an aircraft; Art. 70 of the Federal Aviation Act (“FAA”).

• Every owner (and every financier) is advised to insure hull and engines.

• Exclusion and condition precedent clauses are very common in respect of illegal flights for both hull and liability insurance.

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Insurance related provisions in aviation

• Examples:– Hull insurance

“The following claims are excluded from the insurance cover, subject to the provisions of aviation law

losses resulting from the wilful use of the insured aircraft without the required licences, ratings or certificates for members of the aircrew or the insured aircraft itself. However, the obligation to indemnify the policyholder shall remain in effect if such use occurred without the policyholder’s and fault.”

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Insurance related provisions in aviation

• Examples:– Liability insurance

"No cover shall apply

if, at the time of the loss event, the aircraft's condition did not comply with the statutory provisions and official regulations regarding keeping and operation of aircraft and/or where any official licences required had not been issued;

if, at the time of the loss event, the operator was not fully licensed according to the legal requirements;

[…]"

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Insurance related provisions in aviation

• Non-commercial operation– Art. 123 section 1 Federal Aviation Ordinance (FAO): liability

insurance covering third party damages on the ground– Art. 125 FAO: Minimum cover for third party damages (limits are in

line with Art. 7 EC Reg. 785/2004)– Art. 132a FAO: Minimum cover for passengers (in line with Art. 6

[1] EC Reg. 785/2004):

“For liability in respect of passengers, the minimum insurance cover shall be 250 000 SDRs per passenger. However, in respect of non-commercial operations by aircraft with a MTOM of 2 700 kg or less, Member States may set a lower level of minimum insurance cover, provided that such cover is at least 100 000 SDRs per passenger.”

• Commercial operation (in addition to the above):– Art. 106 (1) and (2) FAO: Minimum insurance cover for passengers,

baggage and cargo (limits in line with EC Reg. 785/2004 Art. 6)

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The role of the injuredin general

• Art. 60 of the Insurance Contract Act (ICA) gives the injured party a pledge on the insurance proceeds of the assured against its insurer.

• The insurer could raise any defences that it has under the insurance policy against the injured.

• The claim of the injured is not better than the claim of the assured.

• Road traffic accidents on:

Direct claim of the injured against the liability insurer (Art. 65 [1] of the Road Traffic Act); insurer cannot invoke any defence that it would have against the assured.

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The role of the injuredin aviation liability matters

• The injured as a third party on the ground:– No direct claim of the injured against the insurer but a pledge on

the insurance proceeds of the owner against its insurer (Art. 131 [2] FAO).

– Right of the owner to require the insurer to indemnify the injured in full (Art. 131 [1] FAO).

– Insurer not entitled to invoke any defences it would have against the insured or the policyholder (Art. 131 [1] FAO).

– Result is similar to the road traffic matters but without a direct claim against the insurer.

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The role of the injuredin aviation liability matters

• The injured as passenger (commercial or non-commercial)– Art. 132a FAO refers to Art. 131 FAO, i.e. the above applies

• The injured as passengers, baggage or cargo owner against the (commercial) air carrier:– Art. 137 FAO refers to Art. 106 FAO which contains the limits of

Art. 6 EC Reg. 785/2004 – No reference to Art. 131 FAO.

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Hull insurance

• No similar protection of third parties (such as financiers) by law.

• Only Art. 57 ICA: If the aircraft is mortgaged, the financier as mortagee becomes a loss payee in accordance with Art. 57 ICA.

• But again, the mortagee is not better protected. The claim of the mortgagee derives from the claim of insured against the insurer.

• Policy needs to provide for the protection (i.e. exclusion of certain defences towards the loss payees), such as AVN67B.

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How do these clauses work in practice?

• Firstly, it needs to be examined whether the exclusion/condition precedent clause deals with “illegal flights”.

• Note: An AOC is issued to the Operator and not the aircraft or the pilots.

• Secondly, the clause needs to be qualified as– an exclusion clause in the sense of Art. 33 ICA; or– a condition precedent in the sense of Art. 29 and/or 45 ICA.

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How do these clauses work in practice?

• Exclusions:– Insurer can exclude certain risks from the cover (Art. 33 ICA

applies). – The requirements of negligence and causation are not required.– Article 33 ICA requires that the exclusion is unambiguous and

ambiguous terms in the insurance policy are interpreted against the insurer.

– Difference between conditions precedent and exclusions of coverage: whether or not the clause requires a certain behaviour from the assured. If the answer is yes, a clause is rather deemed a condition precedent.

– The duty of the assured to keep the aircraft's condition in compliance with the statutory provisions and official regulations is rather a condition precedent.

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How do these clauses work in practice?

• Conditions precedent:– prescribe obligations an assured has to comply with – an insurer can deny coverage if the requirements of Art. 45 (1) ICA

or 29 ICA are met.

• Risk related conditions precedent (Article 29 ICA):– Have the purpose to either diminish the risk of the occurrence of an

insured event or aim at preventing the aggravation of a risk that could lead to an insured event.

– The insurer may not, as a matter of mandatory law, deny coverage, unless the breach of that specific condition precedent caused the damage.

– If the breach of a condition precedent has no impact on the risk then it may be difficult to invoke a condition precedent clause because it may lack causation.

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How do these clauses work in practice?

• Contractual conditions precedent (risk related conditions precedent and other; Article 45 paragraph 1 ICA):

“If it was agreed, that the assured or the beneficiary suffered a disadvantage due to the violation of a condition precedent, such disadvantage shall have no effect, if the violation according to the circumstances is not to be considered as being the fault of the assured or the beneficiary.”

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How do these clauses work in practice?

• Risk-related condition precedent? – Authorisations and permits have the purpose of controlling and

securing a certain position that needs to meet legal requirements. – The AOC states that the operator has the professional ability and

organisation to ensure safe operations, i.e. the existence of an AOC serves the purpose to diminish risks that could lead to accidents.

– Clauses excluding/prohibiting illegal flights are rather conditions precedent in the sense of article 29 ICA.

– Result: • If the missing AOC did not have had any impact on the loss, then it may

be difficult for insurer to invoke a condition precedent.• If the insurer covers claims of passengers up to 250’000 SDR

irrespective of the use of the aircraft commercially or non-commercially then the breach of the condition precedent may not have caused a higher indemnity of the insurers, i.e. the missing AOC may lack causation.

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Examples

• Hull insurance

“The following claims are excluded from the insurance cover, subject to the provisions of aviation law

losses resulting from the wilful use of the insured aircraft without the required licences, ratings or certificates for members of the aircrew or the insured aircraft itself. However, the obligation to indemnify the policyholder shall remain in effect if such use occurred without the policyholder’s and fault.”

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Examples

• Hull insurance

"Insurance will only be provided, if

at the time of the loss event, the aircraft did comply with all statutory provisions and official regulations regarding keeping and operation of aircraft and/or where any required official licences had been issued;

at the time of the loss event, the pilot(s) had the required licences and necessary authorisations or weather clearances. The duty to indemnify the Insured shall remain if the aircraft was flown without the Insured’s knowledge, consent or negligence."

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Examples

• Liability insurance

"Exclusions

No cover shall apply

if, at the time of the loss event, the aircraft's condition did not comply with the statutory provisions and official regulations regarding keeping and operation of aircraft and/or where any official licences required had not been issued;

if, at the time of the loss event, the operator was not fully licensed according to the legal requirements;

if, at the time of the loss event, the pilot(s) of the aircraft did not have the required licences, necessary authorisations or certificates;

[…]"

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Examples

• Hull insurance

"The following claims are excluded from the insurance cover, subject to the provisions of aviation law

losses resulting from the wilful use of the insured aircraft without the required licences, ratings or certificates for members of the aircrew or the insured aircraft itself. However, the obligation to indemnify the policyholder shall remain in effect if such use occurred without the policyholder’s and fault."

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Examples

• Liability insurance

Exclusions

Subject to special provisions under aviation law, insurance coverage does not include claims

– if the insured aircraft is used intentionally but without the officially prescribed licenses and permits for crew members or the insured aircraft;

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Examples

• Hull insurance

Exclusions

Subject to the special provisions of aviation law, the insurance does not cover

– loss resulting from the intentional use of the insured aircraft without the required licenses and permits for crew members or the insured aircraft itself. However, the obligation to indemnify the policyholder remains in effect if the policyholder was unaware, had no intention, and was not culpable in the aircraft being used without the required licenses and permits;

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Examples

• AVN94:

The cover afforded to each Insured by the Policy shall not be invalidated by any act or omission which results in a breach of any air navigation or airworthiness orders or requirements issued by any competent authority affecting the safe operation of the Aircraft provided that the Insured so protected has not caused, contributed to or knowingly condoned the said act or omission. Any Insured who has caused, contributed to or knowingly condoned the said act or omission shall not be entitled to indemnity under the Policy.

Except as specifically varied by this clause, all other terms, conditions, limitations, warranties, exclusions and cancellation provisions of the Policy apply.

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Thank you for you attention!

Dr Laurent ChassotAvocat, LLM air & space law (McGill)chassot@gbf-legal.ch

Lars GerspacherRechtsanwalt, LLM maritime law (Southampton)gerspacher@gbf-legal.ch

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