[Senate Report 109-223]
[From the U.S. Government Publishing Office]
109th Congress Report
SENATE
2d Session 109-223
_______________________________________________________________________
Calendar No. 377
WAR RISK INSURANCE
__________
R E P O R T
of the
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
on
S. 1102
DATE deg.March 27, 2006.--Ordered to be printed
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
one hundred ninth congress
second session
TED STEVENS, Alaska, Chairman
DANIEL K. INOUYE, Hawaii, Co-Chairman
JOHN McCAIN, Arizona JOHN D. ROCKEFELLER IV, West
CONRAD BURNS, Montana Virginia
TRENT LOTT, Mississippi JOHN F. KERRY, Massachusetts
KAY BAILEY HUTCHISON, Texas BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine BARBARA BOXER, California
GORDON H. SMITH, Oregon BILL NELSON, Florida
JOHN ENSIGN, Nevada MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire E. BENJAMIN NELSON, Nebraska
JIM DeMINT, South Carolina MARK PRYOR, Arkansas
DAVID VITTER, Louisiana
Lisa Sutherland, Staff Director
Christine Drager Kurth, Deputy Staff Director
Ken Nahigian, Chief Counsel
Margaret Cummisky, Democratic Staff Director and Chief Counsel
Samuel Whitehorn, Democratic Deputy Staff Director and General Counsel
Calendar No. 377
109th Congress Report
SENATE
2d Session 109-223
======================================================================
WAR RISK INSURANCE
_______
March 27, 2006.--Ordered to be printed
_______
Mr. Stevens, from the Committee on Commerce, Science, and
Transportation, submitted the following
R E P O R T
[To accompany S. 1102]
The Committee on Commerce, Science, and Transportation, to
which was referred the bill (S. 1102) to extend the aviation
war risk insurance program for 3 years, having considered the
same, reports favorably thereon without amendment and
recommends that the bill do pass.
Purpose of the Bill
The measure would extend the authority of the Secretary of
Transportation (Secretary) to issue war risk insurance policies
to air carriers. Additionally, the measure would extend the
Secretary's authority to certify that an air carrier is a
victim of an act of terrorism and shall not be liable for
losses suffered by third parties. The measure also extends the
Secretary's authority to certify immunity from punitive damages
that exceed $100,000,000. The measure would extend the
Secretary's authority through December 31, 2008.
Background and Needs
Aviation war risk insurance provides coverage for acts of
violence against airlines such as terrorism, hijackings, and
sabotage. War risk coverage benefits apply to airlines, persons
on the ground, and property where such third parties suffer
losses that result from acts of violence against an airline.
Airlines cannot operate without war risk insurance. Aircraft
loan and lease agreements typically require airlines to obtain
and maintain such insurance. Additionally, some foreign
countries require that airlines have war risk insurance as a
condition to operate in their airspace or at their airports.
Air carriers have traditionally provided some degree of
insurance self-coverage, but they are reliant on the larger
insurance and reinsurance markets to provide catastrophic
coverage.
On September 22, 2001, Congress enacted H.R. 2926, the
September 11th Victim Compensation Fund of 2001 (P.L. 107-42)
that authorized the Federal Aviation Administration (FAA) to
issue insurance for both domestic and international commercial
air carrier operations. Previously, FAA authority was limited
to international operations. P.L. 107-42 also enacted a
$100,000,000 act-of-terrorism liability limitation for U.S.
airlines with respect to damage to people and property on the
ground. Airlines remained fully responsible for passenger
liability. Beginning on September 24, 2001, the FAA began
issuing war risk insurance. It continued to do so for 60-day
periods thereafter.
In H.R. 5005 the Homeland Security Act of 2002 (P.L. 107-
296), Congress concluded that continued short-term
administrative extensions of the FAA-issued policies were
unsatisfactory and instructed the FAA to provide war-risk
coverage through August 31, 2003, with the discretion to extend
the coverage through December 31, 2003.
In H.R. 1559, the Emergency Wartime Supplemental
Appropriations Act of 2003 (P.L. 108-11), Congress extended
each of those dates by one year to August 31, 2004, and
December 31, 2004. Congress also extended the $100,000,000 act-
of-terrorism liability cap.
In H.R. 2115, Vision 100--Century of Aviation Reauthorization
Act (P.L. 108-176), Congress amended section 44310 to allow the
Department of Transportation (DOT) to provide war risk
insurance to a U.S. aircraft manufacturer for loss of an
aircraft of a U.S. airliner in excess of $50,000,000 or in
excess of the manufacturer's primary insurance. The
manufacturer program was extended and made effective until
March 30, 2008.
In H.R. 4818, the Consolidated Appropriations Act of 2005
(P.L. 108-447), Congress continued a mandatory extension of the
war risk insurance program, and eliminated expansion of the
program to aircraft manufacturers and associated entities. The
agreement extended existing terms and conditions of the program
for one year, until August 31, 2005, with the Secretary given
the option of extending it until December 31, 2005. Under that
option, the Secretary continues to have the authority to extend
war risk insurance to aircraft manufacturers at his discretion.
On November 18, 2005, Congress passed H.R. 3058 the
Transportation, Treasury, the Judiciary, Housing and Urban
Development, and related agencies Appropriations bill of 2006
(P.L. 109-115). H.R. 3058 extended the terms and conditions of
the aviation war risk insurance program, along with the
limitation on air carrier liability for third party claims
arising out of acts of terrorism to August 31, 2006. H.R. 3058
also includes an option for the Secretary to further extend the
program until December 31, 2006.
Since the terrorist attacks of September 11, 2001, the
commercial insurance market has not provided war risk coverage
with terms that commercial air carriers deem financially
reasonable or bearable. Market analysis suggests that
commercial air carriers can currently only obtain commercial
insurance coverage at several times current premiums with far
less favorable terms. Industry data suggests a return to the
commercial market to obtain war risk insurance could cost U.S.
airlines $600,000,000 to $700,000,000 in premiums annually
compared with the current cost of $140,000,000 provided by the
U.S. DOT. Since its inception, the FAA's war risk program has
saved the struggling U.S. air carrier industry hundreds of
millions in annual expenses and produced a net benefit to the
Federal Treasury.
The Committee recognizes U.S. that airlines continue to
represent the prime aviation target for acts of foreign-based
terrorism and the commercial market for aviation war risk
insurance remains insecure. The Committee also recognizes the
private aviation insurance market is highly specialized. While
aviation war risk insurance coverage is now generally available
from private insurers, premium rates continue to remain
unreasonably high. Also, commercial hull insurance coverage for
occurrences involving weapons of mass destruction is now being
withdrawn from the market.
The Congress is providing for a temporary extension of the
existing program because coverage currently available is only
available at rates that remain unreasonably high.
The Committee encourages DOT to identify and evaluate methods
for a gradual reintroduction to the commercial insurance market
and to provide annual reports to the Committee on the
availability of reasonably priced war risk insurance.
Legislative History
The bill, S. 1102, was ordered to be reported without
amendment favorably to the Senate by voice vote on November 17,
2005, in the presence of a quorum.
Estimated Costs
In accordance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate and section 403 of the
Congressional Budget Act of 1974, the Committee provides the
following cost estimate, prepared by the Congressional Budget
Office:
January 10, 2006.
Hon. Ted Stevens,
Chairman, Committee on Commerce, Science, and Transportation,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 1102, a bill to
extend the aviation war risk insurance program for three years.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Megan
Carroll.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.
S. 1102--A bill to extend the aviation war risk insurance program for
three years
Summary: S. 1102 would extend, through December 31, 2008,
the Federal Aviation Administration's (FAA's) authority to
offer insurance to air carriers and certain manufacturers
against liability arising from losses caused by terrorist
events. CBO estimates that enacting S. 1102 would increase
direct spending by $710 million over the 2007-2015 period.
Enacting the bill would not affect revenues.
S. 1102 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 1102 is shown in the following table.
The costs of this legislation fall within budget function 400
(transportation).
----------------------------------------------------------------------------------------------------------------
By fiscal years, in millions of dollars--
---------------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
----------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
Estimated Budget Authority.... 0 -125 5 270 210 140 100 60 30 20
Estimated Outlays............. 0 -125 5 270 210 140 100 60 30 20
----------------------------------------------------------------------------------------------------------------
Basis of estimate: The FAA offers insurance to air carriers
and manufacturers of aircraft and aircraft engines against
liability arising from losses caused by terrorist events. Under
the Transportation, Treasury, Housing and Urban Development,
the Judiciary, the District of Columbia, and Independent
Agencies Appropriations Act, 2006 (Public Law 109-115), the FAA
already has authority to offer that insurance through December
31, 2006. S. 1102 would extend the FAA's authority to offer
terrorism insurance through December 31, 2008. Assuming the
agency would provide insurance through that date, we estimate
that the net cost to the federal government would total $710
million over the 2007-2015 period.
Currently, the FAA collects premiums from air carriers and
manufacturers in exchange for insurance coverage. Such premiums
are recorded as an offset to direct spending in the year that
they are collected. Based on information from the FAA about
rates charged for coverage, CBO estimates that under S. 1102,
the agency would collect about $340 million in additional
premiums over the 2007-2008 period. CBO expects that the
potential cost of providing insurance, however, would be much
greater than premiums collected. CBO estimates that payments
for expected losses under the FAA insurance program would cost
nearly $1.1 billion over the 2007-2015 period, with residual
spending in later years.
CBO cannot predict how much insured damage terrorists might
cause to air carriers and aircraft engine manufacturers in any
specific year. Instead, our estimate of the cost of the
insurance coverage under S. 1102 represents an expected value
of payments from the program--a weighted average that reflects
the probabilities of various outcomes, from zero damages up to
very large damages due to possible future terrorist attacks.
The expected value can be thought of as the amount of an
insurance premium that would be necessary to just offset the
risk of providing this insurance; indeed, our estimate of the
expected cost for S. 1102 is based on actual premiums for
terrorism insurance that have been paid by non-U.S. air
carriers that must purchase such insurance from the private
sector. Our estimate also takes into account differences in
costs faced by private insurance firms that are not borne by
the federal government. While this cost estimate reflects CBO'
s best judgment on the basis of available information, costs
are a function of inherently unpredictable future terrorist
attacks. As such, actual costs could fall anywhere within an
extremely broad range.
Intergovernmental and private-sector impact: S. 1102
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Federal Costs: Megan Carroll. Impact
on State, Local, and Tribal Governments: Sarah Puro. Impact on
the Private Sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
Regulatory Impact Statement
Because S. 1102 does not create any new programs, the
legislation would have no additional regulatory impact, and
would result in no additional reporting requirements. The
legislation would have no further effect on the number or types
of individuals and businesses regulated, the economic impact of
such regulation, the personal privacy of affected individuals,
or the paperwork required from such individuals and businesses.
Section-by-Section Analysis
Section 1. Extension of airline war risk policies and terrorism
coverage
This section would amend section 44302(f) of title 49, United
States Code, to extend through August 31, 2008, the coverage
provided by any war risk insurance policy that DOT has
currently issued to U.S. civil aircraft. The Secretary would be
authorized to further extend the coverage through December 31,
2008.
This section would also amend 44303(b) of title 49, United
States Code, to extend through December 31, 2008, the authority
of the Secretary to certify that an air carrier has been a
victim of a terrorist act, and thus, not responsible for losses
suffered by third parties in excess of $100,000,000 in total
for all claims arising out of such an act. In addition, no
punitive damages may be awarded against an air carrier or the
Federal Government under this provision, and the Federal
Government would be responsible for any liability in amounts
that exceed $100,000,000, for any claims arising as the result
of a terrorist act against an air carrier covered under the
DOT's policy.
Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the Standing
Rules of the Senate, changes in existing law made by the bill,
as reported, are shown as follows (existing law proposed to be
omitted is enclosed in black brackets, new material is printed
in italic, existing law in which no change is proposed is shown
in roman):
[TITLE 49--TRANSPORTATION]
[SUBTITLE VII--AVIATION PROGRAMS]
[PART A--AIR COMMERCE AND SAFETY]
SUBPART III--SAFETY
CHAPTER 443--INSURANCE
Sec. 44302. General authority
(a) Insurance and Reinsurance.--(1) Subject to subsection (c)
of this section and section 44305(a) of this title, the
Secretary of Transportation may provide insurance and
reinsurance against loss or damage arising out of any risk from
the operation of an American aircraft or foreign-flag aircraft.
(2) An aircraft may be insured or reinsured for not more than
its reasonable value as determined by the Secretary in
accordance with reasonable business practices in the commercial
aviation insurance industry. Insurance or reinsurance may be
provided only when the Secretary decides that the insurance
cannot be obtained on reasonable terms from an insurance
carrier.
(b) Reimbursement of Insurance Cost Increases.--
(1) In general.--The Secretary may reimburse an air
carrier for the increase in the cost of insurance, with
respect to a premium for coverage ending before October
1, 2002, against loss or damage arising out of any risk
from the operation of an American aircraft over the
insurance premium that was in effect for a comparable
operation during the period beginning September 4,
2001, and ending September 10, 2001, as the Secretary
may determine. Such reimbursement is subject to
subsections (a)(2), (c), and (d) of this section and to
section 44303.
(2) Payment from revolving fund.--A reimbursement
under this subsection shall be paid from the revolving
fund established by section 44307.
(3) Further conditions.--The Secretary may impose
such further conditions on insurance for which the
increase in premium is subject to reimbursement under
this subsection as the Secretary may deem appropriate
in the interest of air commerce.
(4) Termination of authority.--The authority to
reimburse air carriers under this subsection shall
expire 180 days after the date of enactment of this
paragraph.
(c) Presidential Approval.--The Secretary may provide
insurance or reinsurance under subsection (a) of this section,
or reimburse an air carrier under subsection (b) of this
section, only with the approval of the President. The President
may approve the insurance or reinsurance or the reimbursement
only after deciding that the continued operation of the
American aircraft or foreign-flag aircraft to be insured or
reinsured is necessary in the interest of air commerce or
national security or to carry out the foreign policy of the
United States Government.
(d) Consultation.--The President may require the Secretary to
consult with interested departments, agencies, and
instrumentalities of the Government before providing insurance
or reinsurance or reimbursing an air carrier under this
chapter.
(e) Additional Insurance.--With the approval of the
Secretary, a person having an insurable interest in an aircraft
may insure with other underwriters in an amount that is more
than the amount insured with the Secretary. However, the
Secretary may not benefit from the additional insurance. This
subsection does not prevent the Secretary from making contracts
of coinsurance.
(f) Extension of Policies.--
(1) In general.--The Secretary shall extend through
[August 31, 2005, and may extend through December 31,
2005,] August 31, 2008, and shall extend through
December 31, 2008, the termination date of any
insurance policy that the Department of Transportation
issued to an air carrier under subsection (a) and that
is in effect on the date of enactment of this
subsection on no less favorable terms to the air
carrier than existed on June 19, 2002; except that the
Secretary shall amend the insurance policy, subject to
such terms and conditions as the Secretary may
prescribe, to add coverage for losses or injuries to
aircraft hulls, passengers, and crew at the limits
carried by air carriers for such losses and injuries as
of such date of enactment and at an additional premium
comparable to the premium charged for third-party
casualty coverage under such policy.
(2) Special rules.--Notwithstanding paragraph (1)--
(A) in no event shall the total premium paid
by the air carrier for the policy, as amended,
be more than twice the premium that the air
carrier was paying to the Department of
Transportation for its third party policy as of
June 19, 2002; and
(B) the coverage in such policy shall begin
with the first dollar of any covered loss that
is incurred.
(g) Aircraft Manufacturers.--
(1) In general.--The Secretary may provide to an
aircraft manufacturer insurance for loss or damage
resulting from operation of an aircraft by an air
carrier and involving war or terrorism.
(2) Amount.--Insurance provided by the Secretary
under this subsection shall be for loss or damage in
excess of the greater of the amount of available
primary insurance or $50,000,000.
(3) Terms and conditions.--Insurance provided by the
Secretary under this subsection shall be subject to the
terms and conditions set forth in this chapter and such
other terms and conditions as the Secretary may
prescribe.
Sec. 44303. Coverage
(a) In General.--The Secretary of Transportation may provide
insurance and reinsurance, or reimburse insurance costs, as
authorized under section 44302 of this title for the following:
(1) an American aircraft or foreign-flag aircraft
engaged in aircraft operations the President decides
are necessary in the interest of air commerce or
national security or to carry out the foreign policy of
the United States Government.
(2) property transported or to be transported on
aircraft referred to in clause (1) of this section,
including--
(A) shipments by express or registered mail;
(B) property owned by citizens or residents
of the United States;
(C) property--
(i) imported to, or exported from,
the United States; and
(ii) bought or sold by a citizen or
resident of the United States under a
contract putting the risk of loss or
obligation to provide insurance against
risk of loss on the citizen or
resident; and
(D) property transported between--
(i) a place in a State or the
District of Columbia and a place in a
territory or possession of the United
States;
(ii) a place in a territory or
possession of the United States and a
place in another territory or
possession of the United States; or
(iii) 2 places in the same territory
or possession of the United States.
(3) the personal effects and baggage of officers and
members of the crew of an aircraft referred to in
clause (1) of this section and of other individuals
employed or transported on that aircraft.
(4) officers and members of the crew of an aircraft
referred to in clause (1) of this section and other
individuals employed or transported on that aircraft
against loss of life, injury, or detention.
(5) statutory or contractual obligations or other
liabilities, customarily covered by insurance, of an
aircraft referred to in clause (1) of this section or
of the owner or operator of that aircraft.
(6) loss or damage of an aircraft manufacturer
resulting from operation of an aircraft by an air
carrier and involving war or terrorism.
(b) Air Carrier Liability for Third Party Claims Arising Out
of Acts of Terrorism.--For acts of terrorism committed on or to
an air carrier during the period beginning on September 22,
2001, and ending on [December 31, 2005,] December 31, 2008, the
Secretary may certify that the air carrier was a victim of an
act of terrorism and in the Secretary's judgment, based on the
Secretary's analysis and conclusions regarding the facts and
circumstances of each case, shall not be responsible for losses
suffered by third parties (as referred to in section
205.5(b)(1) of title 14, Code of Federal Regulations) that
exceed $100,000,000, in the aggregate, for all claims by such
parties arising out of such act. If the Secretary so certifies,
the air carrier shall not be liable for an amount that exceeds
$100,000,000, in the aggregate, for all claims by such parties
arising out of such act, and the Government shall be
responsible for any liability above such amount. No punitive
damages may be awarded against an air carrier (or the
Government taking responsibility for an air carrier under this
subsection) under a cause of action arising out of such act.
The Secretary may extend the provisions of this subsection to
an aircraft manufacturer (as defined in section 44301) of the
aircraft of the air carrier involved.