How is a Plane Insured?

How is a Plane Insured?

Aircraft insurance is a specialized form of coverage tailored to the aviation industry, encompassing risks associated with operating aircraft. It typically includes two primary components: hull insurance and liability insurance, with additional coverage for passengers and third parties. Below is an overview based on general aviation insurance practices and specific details related to the Air India Flight AI171 crash on June 12, 2025.

1. Hull Insurance

Definition: Covers physical damage to the aircraft itself, whether on the ground or in flight. This includes damage from accidents, crashes, fire, theft, vandalism, or natural disasters.

Types:

All-Risk Ground and Flight: Comprehensive coverage for the aircraft while in motion or stationary.

Ground Risk Hull (Not in Motion): Covers damage when the aircraft is stationary, e.g., in a hangar.

Deductibles: Typically 5–10% of the insured value, or a fixed amount agreed upon in the policy.

Valuation: The aircraft's insured value is often based on an "agreed value" set at policy inception, reflecting market value, age, and condition. For modern jetliners like the Boeing 787-8 Dreamliner (involved in AI171), this can range from $75–85 million for hull coverage alone.

AI171 Context: The Boeing 787-8 Dreamliner in the AI171 crash was a total loss, with an estimated hull value of $75–85 million. Experts suggest the hull claim could be around ₹400–750 crore ($48–90 million), though initial estimates cited up to ₹2,500 crore ($300 million).

2. Liability Insurance

Definition: Protects against financial losses due to bodily injury or property damage caused by the aircraft to third parties or passengers. It is often mandatory in most countries.

Types:

Public (Third-Party) Liability: Covers damage to property (e.g., buildings, vehicles) or injury/death to people outside the aircraft. Minimum limits vary by country and aircraft size, often $1–5 million per incident for commercial aircraft.

Passenger Liability: Covers injury or death of passengers on board. This is often sold on a "per-seat" basis, with limits per passenger (e.g., $100,000–$300,000).

Combined Single Limit (CSL): Combines public and passenger liability into a single limit per occurrence, offering flexibility in claim payouts. For large commercial aircraft, CSL limits can range from $500 million to over $1 billion per incident.

Regulatory Requirements:

In the U.S., for large passenger carriers, minimum passenger liability is $300,000 per passenger and $300,000 × 75% of passenger seats per occurrence. Third-party liability for large aircraft requires at least $300,000 per person and $20 million per occurrence.

In India, under the Montreal Convention of 1999 (to which India is a signatory since 2009), airlines are liable for up to 128,821 Special Drawing Rights (SDR) per passenger (approx. $171,000 or ₹1.4 crore as of October 2024) for death or injury, with no upper limit if the airline is proven negligent.

AI171 Context: The AI171 crash involved 242 passengers and crew, with significant third-party damage due to the crash into a residential area (Meghani Nagar, Ahmedabad). Total liability claims (passenger and third-party) are estimated at ₹1,000–1,500 crore ($120–180 million). Passenger liability alone could exceed ₹300 crore (242 × ₹1.4 crore per passenger under the Montreal Convention). Third-party claims for ground casualties and property damage (e.g., medical hostel building) will further inflate costs.

3. Passenger Insurance

Airline-Provided Coverage: Airlines include passenger liability coverage in their insurance policies, with compensation mandated by international agreements like the Montreal Convention. This is built into ticket prices and does not require separate passenger action.

Personal Travel Insurance: Passengers may purchase additional travel insurance for benefits like medical expenses, trip disruptions, or baggage loss. These policies supplement airline-provided compensation but are separate from the airline's liability.

AI171 Context: Under the Montreal Convention, Air India is obligated to pay up to ₹1.4 crore ($171,000) per deceased or injured passenger, with potential for higher amounts if negligence is proven. Tata Group, Air India's parent company, announced ₹1 crore ($120,000) compensation per victim's family, which is lower than the Montreal Convention minimum, suggesting additional claims may be pursued. Personal travel insurance held by passengers could provide further benefits, but specific details are unavailable.

4. Other Coverages

Hull War Risk: Covers losses from terrorism, sabotage, or war-like events. This may be relevant if investigations into AI171 uncover such causes.

Baggage and Cargo Liability: Covers loss or damage to passenger baggage or cargo, included in airline policies.

In-Flight Medical Emergencies: Limited coverage for first-aid or emergency landing costs under public liability.

Liability Amounts and Figures

General Figures:

Hull Insurance: For a Boeing 787-8, $75–85 million (₹600–700 crore). Large fleets may be insured for billions (e.g., Air India's fleet reportedly insured for $20 billion).

Liability Limits:

Public liability: $1–5 million per incident for smaller aircraft; $500 million–$1 billion for large commercial jets.

Passenger liability: $100,000–$300,000 per passenger (U.S. regulations) or $171,000 (₹1.4 crore) under Montreal Convention.

CSL: $500 million–$1.3 billion per occurrence for major crashes in modern economies, based on historical settlements (e.g., Air France Concorde crash).

Historical Context: Compensation per passenger in major crashes (e.g., in North America, Europe, Japan) ranges from $2.4–4.1 million, implying total insurer costs of $700 million–$1.3 billion for a large-scale crash.

AI171-Specific Figures:

Hull Claim: Estimated at $75–85 million (₹400–750 crore, though initial reports cited up to ₹2,500 crore).

Passenger Liability: 242 passengers × ₹1.4 crore ($171,000) = ₹338 crore ($40 million) minimum under Montreal Convention. Higher amounts possible if negligence is established.

Third-Party Liability: Significant due to ground casualties (294 total deaths, including ground victims) and property damage (e.g., medical hostel). Total liability (passenger + third-party) estimated at ₹1,000–1,500 crore ($120–180 million).

Total Insurance Claims: ₹1,500 crore ($180 million) or more, including hull, passenger, and third-party claims.

How Will Air India Pay, and Which Insurers Are Involved?

1. Payment Process

Air India's Role: Air India, as the operator, is primarily liable for compensation under the Montreal Convention and Indian law. The airline will initially announce interim compensation (e.g., Tata Group's ₹1 crore per victim) and cover medical expenses for survivors or injured ground victims. Final settlements depend on investigation outcomes and legal proceedings, which may take 2–3 years.

Insurance Payouts: Air India's insurers and reinsurers will cover the bulk of claims, with policies structured to spread risk across multiple parties. Indian insurers have limited exposure (estimated at 5–10%), with 90–95% ceded to foreign reinsurers, primarily UK-based.

Claim Settlement:

Hull Claims: Straightforward, based on agreed value ($75–85 million). Paid by insurers/reinsurers after confirming total loss.

Liability Claims: Complex, requiring verification of deceased/injured identities, legal heirs, and accident investigation reports. Passenger claims follow Montreal Convention guidelines; third-party claims involve lawsuits or settlements for ground damage.

Tata Group's Contribution: Tata Group's ₹1 crore per victim (₹242 crore total for 242 victims) is an upfront gesture, but insufficient to meet Montreal Convention obligations (₹338 crore minimum). Additional payouts will come from insurance or Air India's reserves if claims exceed policy limits.

2. Insurers Involved

Primary Insurers:

New India Assurance: Likely the primary insurer for Air India's fleet, as India's largest aviation insurer.

Tata AIG: Given Tata Group's ownership of Air India, Tata AIG has a significant share in insuring Air India's fleet (reportedly $20 billion sum insured, $30 million premium).

Reinsurers:

The majority of risk (90–95%) is ceded to foreign reinsurers, primarily London-based firms, due to the high value of claims. A lead reinsurer typically handles 10–15%, with dozens of others covering 1.5–2% each. Specific reinsurers are not named, but global players like Lloyd's of London, AIG, Global Aerospace, or Munich Re are common in such cases.

Risk Syndication: The insurance is syndicated across multiple insurers/reinsurers to manage exposure. For example, if the hull is valued at $100 million, 10 participants might each cover 10%.

AI171 Context: Indian insurers' exposure is limited to ₹150 crore or less (10% of ₹1,500 crore total claims). UK-based reinsurers will bear the bulk, coordinated by a lead reinsurer.

3. Challenges and Timeline

Investigation Impact: The Directorate General of Civil Aviation (DGCA) and Boeing are investigating the AI171 crash. If negligence (e.g., maintenance issues) or external factors (e.g., terrorism) are found, liability amounts could increase, and hull war risk coverage may apply.

Legal Proceedings: Liability claims, especially for third-party damages, may take 2–3 years due to lawsuits and negotiations. Passenger claims under the Montreal Convention are more straightforward but still require verification.

Premium Impact: The crash is likely to harden aviation insurance rates in India (market valued at ₹900 crore annually), with stricter underwriting for future policies.

Summary of AI171 Insurance Implications

Hull Claim: $75–85 million (₹400–750 crore) for the Boeing 787-8 total loss.

Passenger Liability: Minimum ₹338 crore ($40 million) for 242 passengers at ₹1.4 crore each, potentially higher if negligence is proven.

Third-Party Liability: Significant due to 294 total deaths (including ground victims) and property damage, pushing total claims to ₹1,500 crore ($180 million).

Insurers: New India Assurance and Tata AIG lead domestically, with 90–95% of risk ceded to UK-based reinsurers (e.g., Lloyd's of London, AIG). Indian exposure limited to 5–10%.

Payment: Tata Group's ₹1 crore per victim (₹242 crore total) is interim; insurers will cover the rest, with final settlements taking 2–3 years.

This analysis is based on available data and may evolve as investigations progress.