You may have heard about the unfortunate tweet(s) by actor Jason Biggs (and is subsequent apology), which makes reference to the recent troubles of Malaysia Airlines. Our blog today is also about these recent troubles, but on a topic no one would confuse with a joke – insurance claims.
Malaysia Airlines, it turns out, has already had some “unusual insurance claims” in recent years. Writes the New York Times, in addition to claims connected to Flight 370 (which sadly has not yet been found) and the dreadful Flight 17, did you know that “the airline had an unusual claim in 2000 for the total loss of an Airbus A330 traveling in the opposite direction on the same route as Flight 370”? Specifically,
In that case, a canister of a mysterious Chinese shipment destined for Iran broke open near the end of a trip from Beijing to Kuala Lumpur and began leaking, producing a smell that prompted the captain to conduct an emergency evacuation upon landing of all 266 people aboard. A subsequent investigation found that the hold was contaminated beyond cleaning with mercury and other chemicals that may have been precursors for the manufacture of nerve gas.
The Malaysian government ended up digging a large hole in the ground near the airport tarmac and burying the entire plane. Insurers paid a full settlement of $90 million.
Well that's disturbing. Fast forward to the current decade and it seems there are some unusual things about the coverage for Flights 370 and 17, too:
Malaysia Airlines’ two crashes in less than five months are sending tremors through the aviation insurance market — not least because the carrier’s $2.25 billion overall liability policy is mysteriously missing a standard phrase that usually limits insurers’ payments for search-and-rescue costs.…
The absence of a sublimit for search-and-rescue costs means that Malaysia Airlines could seek reimbursement for tens of millions — and potentially hundreds of millions — of dollars in search costs if the Malaysian and Australian governments decide to bill the airline for even part of their considerable expenses in looking for Flight 370, which vanished on March 8. …
The crash of Flight 17 appears to have caught the war risk insurance market particularly by surprise. Insurers often prohibit airlines from flying across dangerous areas, or cancel their policies, but most carriers kept flying over Ukraine until the crash. The number of flights there dropped only 12 percent in the month leading up to it.
“One assumes that if the war risk underwriters thought there was any risk, they would have prohibited airlines from flying or canceled their policies,” said Paul Hayes, head of accidents and insurance at Ascend, an aviation consulting firm in London.
Malaysia Airlines’ war risk policy has a separate, much lower limit than the overall policy for claims for search-and-rescue costs. As in most aviation insurance contracts, a provision caps claims for these costs to a small percentage of the overall value of the policy.
And as for Flight 370, this tragedy has:
[T]riggered a half-payment from [insurer] Atrium under the war risk policy after adjusters concluded that there was a substantial but not ironclad case that the crash may have involved pilot suicide or other criminal action. War risk policies also cover deliberate, malicious acts.…
Insurance adjusters agreed with the Malaysian government there was a strong but not fully proved possibility that Flight 370 was lost because of deliberate action, given that the plane made a series of at least four well-executed turns over the course of an hour before heading south across the Indian Ocean until it apparently ran out of fuel.
It’s unclear what all this is going to mean when it comes to compensating families. U.S. hurricanes seem timid by comparison but of course, they are not. And insurers know that too – especially when it comes to what they owe their policyholders in a state like Louisiana.
If you live there, insurance companies will typically impose a separate “Hurricane Deductible,” which is usually a percentage of the value of someone’s home. Many people are not aware of this deductible because the disclosure to policyholders of this deductible is often terrible.
Now, apparently, Louisiana Insurance Commissioner Jim Donelon is asking State Farm to offer a second hurricane deductible option to policyholders following the implementation of its mandatory five percent deductible.
At a meeting initially requested by State Farm officials to update the Louisiana Department of Insurance of an upcoming rate filing, Donelon asked the company to offer Louisiana policyholders the option to have a two percent hurricane deductible on their homeowner's insurance policies and pay the difference in the premiums if they choose.
"Hurricane deductibles have unfortunately become the norm for coastal states from the Gulf of Mexico all the way up the Atlantic coast to Massachusetts," Donelon said in a statement. "In an effort to ease the potential financial burden on consumers as a result of this higher hurricane deductible, I have asked State Farm to give their policyholders statewide the option to buy back the lower two percent deductible."
Interestingly, Mississippi policyholders have the two percent option, but the company won’t say why it’s discriminating against Louisiana. No doubt, it's about saving money on claims. What else is new?