The mid-air blow out of a plug door on a Boeing 737 Max 9 aircraft during an Alaska Airlines flight between Oregon and California in early 2024, has again put the issue of grounding aviation fleets under scrutiny. According to the US Federal Aviation Authority (FAA)[1], more than 170 aircraft were grounded worldwide for around three weeks, which could have ramifications right across the supply chain[2] and create the potential for significant and complex claims under Grounding Liability Insurance.
According to a statement issued by the FAA[3] at the start of the process, “The FAA is requiring immediate inspections of certain Boeing 737 MAX 9 planes before they can return to flight… Safety will continue to drive our decision-making as we assist the NTSB’s investigation into Alaska Airlines Flight 1282.”
This article has been divided into two parts. Part I looks at how Grounding Liability Insurance has developed over the last few years and how this evolution has changed the scope of coverage. We also discuss what prompted these developments and what it means today for insurers and insureds. In Part II we will examine the future environment for aircraft and engine development and why Grounding Liability Insurance will continue to be a key requirement for a significant number of clients. The second article will also outline the opportunity for insurers, manufacturers and associated aviation organisations to maintain, if not enhance, the risk assessment process associated with grounding liability to ensure that it remains an effective and sustainable insurance product.
Grounding Liability Insurance in its most basic form protects an insured against claims made against them by an aircraft operator for the financial losses suffered after an aircraft type is prohibited from flight operations. The insurance is activated when a recognised airworthiness authority issues an Airworthiness Directive (AD) due to safety concerns. An AD remains in force until the defect, fault or condition with the aircraft type is resolved.
While grounding liability coverage appears on a range of different policies for several types of insured including airports, refuellers, lessors, airlines and maintenance, repair and overhaul (MRO) organisations, and a theoretical exposure exists for any entity performing third-party maintenance, it is mainly aircraft, engine manufacturers and, to a lesser extent, sub-component manufacturers who have the real exposure.
Standard grounding coverage is occurrence-based, meaning that there must be an accident involving bodily injury and/or property damage prior to a grounding order being issued for coverage to be triggered. A small number of insureds also purchase Non-Occurrence Grounding Insurance, which removes the injury and/or property damage threshold, but this typically has much lower limits.
Over the last decade, there have been several grounding events:
As a result of these events, Grounding Liability Insurance has been under increased scrutiny both in terms of the language used to define the coverage and the available limits. We will address the evolution of the limits in more detail in the second part of this article but we will now discuss some of the key language changes and their implications for both insureds and insurers.
Grounding coverage historically required the “complete and continuous withdrawal from all flight operations” to trigger coverage, as shown in this 2017 clause:
“The term “Grounding” means the complete and continuous withdrawal from all flight operations at or about the same time of one or more Aircraft due to an airworthiness directive or mandatory order issued by the Federal Aviation Administration of the United States of America (FAA), the European Aviation Safety Agency (EASA) or any similar civil airworthiness authority, because of an existing, alleged or suspected like defect, fault or condition affecting the safe operation of two or more like Aircraft and which results from an Occurrence.”[10]
This language created challenges for both insurers and insureds in certain scenarios. The words were designed to reflect the severity threshold of the AD, implying that it was only critical, safety of flight ADs that could trigger grounding insurance. However, the implied temporal element to the wording created ambiguity because there was no reference in the language about whether the withdrawal had to apply immediately upon publication of the AD (i.e. before further flight). This complicated the coverage position when an AD allowed a certain number of flight cycles or flying hours or time before the prohibition became effective.
The key challenge comes from the interpretation of “complete and continuous”. A broad interpretation would suggest that there was no requirement for immediate withdrawal before further flight, provided the withdrawal is mandated at some point in the future. In the narrower interpretation though, “complete and continuous” withdrawal required immediate withdrawal, so an AD which allows flights to continue for a period of time could not trigger Grounding Liability Insurance at all. This uncertainty was problematic when an AD permits a very short number of flight cycles before the withdrawal from operations is imposed.
The updated wording that has come to be used is:
Grounding means a withdrawal from all flight operations of a Certified Aircraft imposed by an airworthiness directive or mandatory order which:
The new wording means that ADs stipulating immediate withdrawal before further flight are covered but it also clearly applies to ADs where a certain amount of time is permitted or flights are allowed before an aircraft has to be withdrawn.
In earlier iterations, Grounding Liability Insurance applied in respect of an AD issued by any regulatory authority in respect of the loss of use of aircraft which were subject to the jurisdiction of that authority. This was subsequently amended to include coverage for grounding orders issued by any regulatory authority. This meant that if an aircraft operator removed their aircraft from flight operations following an AD issued in a different country from their own, then Grounding Liability Insurance would apply, irrespective of whether the aircraft was grounded by the local regulatory authority.
With the most recent Grounding Liability Insurance wording, the regulatory authority that can trigger coverage has been restricted to the following:
“Regulatory Authority means the European Aviation Safety Agency (EASA) or the Federal Aviation Administration of the United States of America (FAA) or the civil aviation authority that originally issued the type certificate for the airframe or engines of the affected Aircraft.[12]”
Coverage can effectively be backdated to an earlier AD issued by a different authority or a service bulletin issued by the insured, but only in the event that this is superseded by an AD issued by a regulatory authority (as defined above) and which has exactly the same requirements in terms of the mandated withdrawal.
For insureds, this restricts coverage compared to what was provided previously. From insurers’ perspective, this restriction ensures that grounding orders are issued by the best qualified authority. It also reduces the risk of a “political grounding” where a regulatory authority is motivated to issue a grounding order for reasons other than safety.
While in practise we have seen other authorities react quickly once an order is issued by the first regulatory authority, the current wording has the potential to leave an insured without Grounding Liability Insurance when an individual authority issues a grounding order that is not followed up by identical action from the FAA, EASA or the authority which certified the airframe and engines.
The concept of partial grounding is now well established. It applies to both occurrence and non-occurrence grounding coverage and is triggered in the event that an aircraft is withdrawn from performing certain types of flight operations, depending on how the aircraft are used. For example, an AD could be issued that removes certification for extended-range twin-engine operations performance standards (ETOPS), but the aircraft is still able to conduct flights over land where it can divert to a different airport in the event of an emergency. If the aircraft is only utilised for off-shore operations then it is effectively grounded from its intended purpose of use.
Without the partial grounding extension, a manufacturer is not necessarily indemnified for loss of use claims being made against them by an operator who is no longer able to utilise their aircraft for its intended purpose.
The evolution of grounding language is clear, and the healthy and necessary debate around whether the changes are enhancements or restrictions in coverage will continue. While there are still some challenges inherent in the new language, particularly relating to the inclusion of additional exclusions and how these may be interpreted, our perspective is that the new grounding language generally provides more certainty for all parties in terms of how the policy will respond.
Crucially, the severity threshold has been more clearly defined, and a clear link has been established between the specifications of an AD and the triggering of insurance coverage.
For insurers, it also provides confidence in the scope of coverage being provided and gives them the opportunity to assess more transparently, the adequacy of their premium so that they can continue to deliver a sustainable and vital product.
The additional clarity means that aircraft, engine and component manufacturers are better equipped to make informed judgements about the predictability of coverage and the value of risk transfer as they strive to meet demand for new aircraft orders and to develop new technology and platforms.
In the upcoming second part of this article on Grounding Liability Insurance we provide an overview of the limits of liability. We also trace the historical limits provided by the market to what is currently available, look at how insurers are trying to simplify the loss adjustment process, and examine if the limits will be sufficient to meet changing client requirements.
