[House Report 105-244]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-244
_______________________________________________________________________


 
             AVIATION INSURANCE REAUTHORIZATION ACT OF 1997

                                _______
                                

 September 4, 1997.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

_______________________________________________________________________


   Mr. Shuster, from the Committee on Transportation, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2036]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Transportation and Infrastructure, to whom 
was referred the bill (H.R. 2036) to amend chapter 443 of title 
49, United States Code, to extend the authorization of the 
aviation insurance program, and for other purposes, having 
considered the same, report favorably thereon without amendment 
and recommend that the bill do pass.

                                 Report

    Aircraft insurance is, of course, essential to any airline 
operation. However, commercial insurance companies will often 
not insure flights to high risk areas such as countries at war 
or on the verge of war. In many cases, these flights are 
required to further the foreign policy or national security of 
the United States. For example, in Operation Desert Shield and 
Desert Storm, commercial airlines were needed to ferry troops 
and equipment to the Middle East.
    To ensure that flights to high risk areas can operate when 
needed, Chapter 443 of Title 49 of the U.S. Code authorizes the 
Secretary of Transportation to provide war-risk insurance and 
reinsurance to commercial airlines.
    Before such insurance can be issued, two tests must be 
satisfied. First, the Secretary must find that the airline 
cannot acquire the insurance from a commercial insurance 
company on reasonable terms (Section 44302(a)(2)). Secondly, 
the President must find that providing the war-risk insurance 
is necessary to carry out the Nation's foreign policy 
(44302(b)). The war risk insurance may be provided for only 60 
days unless the President determines that an extension is 
needed (Section 44306(b)). FAA rules governing this program can 
be found at 14 CFR Part 198.
    The war risk insurance program offers both a premium and a 
nonpremium policy. Under the premium policy, insurance is 
provided to U.S. or foreign airlines for commercial scheduled 
or charter service. It can be used only for international 
flights. A premium is paid by the airline to the Federal 
Aviation Administration (FAA) for the coverage just as in a 
normal insurance arrangement. Premium insurance was provided 
during the Vietnam War and 37 times after Iraq invaded Kuwait.
    The nonpremium policy is issued to airlines operating under 
contract to a government agency, usually either the State or 
Defense Department. It can cover either domestic or 
international flights. Although no premium is paid by the 
airline under this policy, airlines must pay a one-time binder 
fee of $200 per aircraft (FAA recently proposed to increase 
this to $550 (62 F.R. 19008, April 17, 1997)). In the event of 
a loss, the contracting government agency (usually either State 
or Defense) would have to indemnify the FAA for any claims it 
had to pay to the airline.
    Both premium and nonpremium insurance will cover both hull 
loss (the destruction of the aircraft) and liability (injury, 
death, or damage to property).
    According to the FAA, it has paid $151,000 in claims under 
the nonpremium insurance program. It has never paid a claim 
under the premium insurance program.
    Premiums paid for coverage, the binder fee, and any sums 
appropriated support a revolving fund which is used to defray 
the cost of operating the war risk program. At the end of March 
1997, the revolving fund had a balance of $65.2 million. The 
cost of administering the program in 1995 was $475,000. 
However, the fund could be bankrupted by the crash of a large 
aircraft covered by war risk insurance.
    The war risk insurance program was first authorized in 
1951. Insurance was provided under this program in the early 
1970s in the aftermath of attacks by Palestinian terrorists, 
and also during the final days of the Vietnam war. Since 1975, 
nonpremium war risk insurance has been activated over 5,000 
times in the following cases.
        Period and place of activation                 Number of flights

1983-1984, to Honduras............................................    50
August 17, 1990 to May 24, 1991, to the Middle East. (Operation 
    Desert Shield/Storm).......................................... 5,000
January 11, 1991, Department of State flight from Oman to 
    Frankfurt.....................................................     1
January 11 to April 14, 1993, to Kuwait (Operation Desert Caravan)    20
December 8, 1992 to early 1994, to Mogadishu and Kisimayo, Somalia 
    (Operation Restore Hope)......................................   155
February 28, March 2, and April 7, 1994, to Tbilisi, Georgia......     3
September to October 1994, to Haiti (Operation Uphold Democracy)..    32
April 15 to September 30, 1996, to Tuzla Bosnia (Operation Joint 
    Endeavor).....................................................   111

    The program has been reauthorized 10 times and is now 
scheduled to expire on September 30 of this year.
    In the past, the reauthorization of the war risk program 
has been relatively routine and was often accomplished without 
any changes or even the need for holding a hearing. However, as 
a result of the experience gained during the Persian Gulf War, 
new issues were raised that needed to be addressed.
    When the program was last reauthorized in 1992 (Title IV of 
P.L. 102-581, 106 Stat. 4897), the insurance coverage was 
expanded to cover certain domestic flights and also flights 
being operated pursuant to an agreement between the U.S. 
government and a foreign government. In addition, the 
legislation directed GAO to review the administration of the 
war risk insurance program during the Persian Gulf War to 
determine whether its efficiency could be improved. GAO 
submitted its report in July 1994. It found the following 
problems with the war-risk insurance program:
          There is not enough money in the FAA's insurance fund 
        to cover the loss of even one large aircraft.
          Since there is not enough money in the fund, there 
        could be delays in reimbursement to airlines while the 
        FAA sought a supplemental appropriation from Congress 
        to make up the difference between the value of the 
        damaged plane and the amount in the fund.
          Because of the potential delays in reimbursement and 
        the financial hardship that would cause, the airlines 
        have been increasingly reluctant to provide service to 
        the U.S. government for military airlift operations.
          The war risk insurance policy does not cover 
        everything that a commercial policy covers such as 
        search and rescue, wreckage removal, or extortion.
          There is ambiguity in the law as to whether a 
        presidential determination is required before non-
        premium insurance can be issued.
          FAA does not maintain current commercial policies in 
        its files and therefore cannot be sure they are 
        providing the proper amount of hull and liability 
        coverage in the war risk policies.
    As a result of the findings, GAO made the following 
recommendations to Congress:
          Provide a mechanism to ensure that there are 
        sufficient funds available to reimburse airlines for 
        losses that exceed the amount in FAA's insurance fund.
          Clarify whether a presidential determination is 
        needed before non-premium insurance can be issued and 
        for each subsequent 60-day extension.
    In addition, GAO also made the following recommendations to 
FAA:
          Revise the FAA's premium war risk policies to make 
        them more consistent with commercial policies.
          Require airlines to submit copies of their current 
        commercial policies as a condition for obtaining war 
        risk coverage from the FAA.
    FAA has changed its policies and procedures to address the 
GAO's concerns.
    Congress partially addressed GAO's concerns in Section 9514 
of Title 10 of the U.S. Code, that was added by last year's 
Defense Department Reauthorization Act (P.L. 104-201). This 
section provides a mechanism to reimburse airlines in most 
cases. It directed the Secretary of Defense to indemnify the 
FAA for any claims paid by the war risk insurance fund within 
30 days of DOT's determination that it owes an airline money 
for damage to an aircraft.
    This ensures that airlines will receive prompt payment for 
loses when they conduct flights on behalf of the Defense 
Department. These constitute the bulk of the flights covered by 
the war risk insurance program. However, in those limited cases 
where flights are conducted for the State Department or for 
some other purpose, the airlines still have no assurance they 
will be paid in a timely fashion. This can pose significant 
problems for a relatively small airline with few planes in its 
fleet where the unreimbursed loss of even one aircraft can have 
a dramatic effect on its business.
    The reported bill addresses this problem by permitting FAA 
to borrow money from the Federal treasury in order to reimburse 
airlines for their loss. FAA could then seek a supplemental 
appropriation in order to pay off the debt or replenish the 
fund. Importantly, the airline would not have to endure an 
unreimbursed loss while the supplemental appropriation winds 
its way through Congress.
    The reported bill also makes other changes suggested by the 
Administration or GAO and described in the section-by-section 
summary below.
    Related to the issue of war risk insurance is the Civil 
Reserve Air Fleet (CRAF) Program. Airlines performing flights 
for the Department of Defense (DOD) under CRAF are insured 
under the war-risk program. DOD has an indemnity agreement with 
DOT, whereby FAA extends war risk insurance to airlines without 
a premium with the understanding that any losses resulting from 
insurance claims will be reimbursed by DOD within 30 days as 
explained above.
    The CRAF program arose out of the experience of World War 
II and the Berlin Airlift where the problems of a massive 
military mobilization were first encountered. In 1951, 
President Truman issued Executive Order 10219 directing that a 
plan be established for the utilization of the nation's 
civilian airlines during a national emergency.
     The CRAF program is a voluntary one. Its purpose is to 
provide civil aircraft to augment DOD's military airlift 
capability. Without it, the military would have to keep many 
more aircraft in reserve. Currently, about 30 airlines have 
contracted with the Military Airlift Command (MAC) to provide 
more than 900 aircraft for the CRAF program. In return for 
agreeing to make their aircraft available during an emergency, 
DOD gives these airlines preference when it selects carriers 
for commercial peacetime flights.
     Until the Persian Gulf War, CRAF had never been utilized. 
Activation during that war did not necessitate calling up all 
the aircraft that had agreed to participate. If that had 
happened, it probably would have caused many civilian flights 
to be canceled. As it happened, a drop in civilian traffic 
meant that there were aircraft available for the limited CRAF 
that was needed. The general consensus seems to be that the 
CRAF program worked well. A hearing of our Investigations and 
Oversight Subcommittee in October 1990 found no major problems 
with CRAF.

                       Section-by-Section Summary

    Section 1 is the short title.
    Section 2 was requested by the Administration by a letter 
from DOT Secretary Slater dated April 30, 1997. It authorizes 
the Secretary to be guided by reasonable business practices of 
the commercial aviation insurance industry when determining the 
amount for which an aircraft should be insured. This change is 
intended to recognize that there may be instances in which an 
aircraft's market value is not the appropriate basis for 
determining the amount of insurance. For example, this occurs 
in the case of leased or mortgaged aircraft when the lessor or 
mortgagor requires a specified amount of insurance in the lease 
or mortgage agreement. As the market values of aircraft 
fluctuate, the specified amount may sometimes be different than 
the market value of the aircraft.
    Section 3 was also requested by the Administration. It 
states that the President's signature of the indemnification 
agreement between the DOT Secretary and the head of another 
U.S. government agency will constitute the required finding 
under section 44302(b) that the flight is necessary to carry 
out the foreign policy of the United States.
    Section 4 authorizes FAA to borrow money from the Federal 
treasury to pay a claim resulting from the loss of an aircraft 
covered by war risk insurance. Before exercising this 
authority, the FAA would first have to notify Congress of its 
plans and the amount of money involved and wait 25 days. This 
borrowing authority is needed because the amount in the FAA's 
insurance fund is not enough to cover a major aircraft 
accident. This provision would not affect the amount of money 
for which the government is liable, only the timing of the 
reimbursement to the airline.
    Section 5 permits a war risk insurance policy to provide 
for binding arbitration of a dispute between FAA and the 
commercial insurer over what part of a loss each is responsible 
for. This is consistent with the September 27, 1996 memo from 
Deputy Assistant Attorney General Richard L. Shiffrin to FAA 
Chief Counsel Nicholas G. Garaufis.
    Section 6 extends the program for 5 years.

                    Hearings and Legislative History

     The Subcommittee on Aviation held hearings on the issue of 
War Risk Insurance on May 1, 1997. H.R. 2036 was introduced on 
June 25, 1997.
     On July 10, 1997, the Subcommittee on Aviation reported 
the bill, by unanimous voice vote, to the Committee on 
Transportation and Infrastructure. On July 23, 1997 the 
Committee on Transportation and Infrastructure ordered the bill 
reported, without an amendment, by voice vote with a quorum 
present.

            Committee Oversight Findings and Recommendations

     With respect to the requirements of clause 2(l)(3)(A) of 
rule XI of the Rules of House of Representatives, the 
Committee's oversight findings and recommendations are 
reflected in this report.

                     Inflationary Impact Statement

     Pursuant to clause 2(l)(4) of rule XI of the Rules of the 
House of Representatives, the Committee estimates that the 
enactment of H.R. 2036 will have no significant inflationary 
impact on prices and costs in the operation of the national 
economy.

                   Constitutional Authority Statement

     Pursuant to clause (2)(l)(4) of rule XI of the Rules of 
the House of Representatives, committee reports on a bill or 
joint resolution of a public character shall include a 
statement citing the specific powers granted to the Congress in 
the Constitution to enact the measure. The Committee on 
Transportation and Infrastructure finds that Congress has the 
authority to enact this measure pursuant to its powers granted 
under Article I, Section 8 of the Constitution.

                        Costs of the Legislation

     Clause 7 of rule XIII of the Rules of the House of 
Representatives does not apply where a cost estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 403 of the Congressional Budget Act of 
1974 has been timely submitted prior to the filing of the 
report and is included in the report. Such a cost estimate is 
included in this report.

                     Compliance With House Rule XI

    1. With respect to the requirement of clause 2(l)(3)(B) of 
rule XI of the Rules of the House of Representatives, and 
section 308(a) of the Congressional Budget Act of 1974, the 
Committee references the report of the Congressional Budget 
Office included below.
    2. With respect to the requirement of clause 2(l)(3)(D) of 
rule XI of the Rules of the House of Representatives, the 
Committee has received no report of oversight findings and 
recommendations from the Committee on Government Reform and 
Oversight on the subject of H.R. 2036.
    3. With respect to the requirement of clause 2(l)(3)(C) of 
rule XI of the Rules of the House of Representatives and 
section 403 of the Congressional Budget Act of 1974, the 
Committee has received the following cost estimate for H.R. 
2036 from the Director of the Congressional Budget Office.
                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 1, 1997.
Hon. Bud Shuster,
Chairman, Committee on Transportation and Infrastructure, House of 
        Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2036, the Aviation 
Insurance Reauthorization Act of 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Clare 
Doherty.
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

               Congressional Budget Office Cost Estimate

H.R. 2036--Aviation Insurance Reauthorization Act of 1997

    H.R. 2036 would amend Title 49 of the U.S. Code to extend 
the authorization of the aviation insurance program and to 
provide the Federal Aviation Administration (FAA) with 
borrowing authority to reimburse airlines for any losses that 
exceed amounts in the aviation insurance fund. Under current 
law, the program will expire on September 30, 1997. Because 
enacting H.R. 2036 could affect direct spending, pay-as-you-go 
procedures would apply, but CBO estimates that enacting the 
bill would probably not have any significant impact on the 
federal budget over the next five years. H.R. 2036 contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act of 1995 and would not affect the 
budgets of state, local, or tribal governments.
    The aviation insurance program provides insurance coverage 
for aircraft operations that are deemed essential to the 
foreign policy interests of the United States when commercial 
insurance is unavailable on reasonable terms. The program is 
financed through the Aviation Insurance Revolving Fund, which 
is supported by premiums paid for coverage (for ``premium 
insurance''), one-time binder fees paid by the airlines (for 
``nonpremium insurance''), appropriated funds, and interest on 
investments in U.S. Treasury securities. From 1959 though March 
1997, the fund accumulated $65 million in revenues and paid out 
a total of $151,000 in claims. Enacting H.R. 2036 would provide 
the FAA with unlimited borrowing authority to be used if 
insurance claims for an aviation disaster exceed amounts in the 
fund, currently $65 million.
    Nonpremium insurance, which accounts for about 99 percent 
of all aviation insurance, is for U.S. airlines that are 
providing contract services for federal agencies that have 
indemnification agreements with the Department of 
Transportation (DOT). Currently only the Department of Defense 
(DoD) and the State Department have such agreements with DOT. 
In the event of a loss, DoD and the State Department would 
reimburse the FAA for the insurance claims it would have to pay 
to the airlines. Since 1975, there have been approximately 
5,400 flights covered by the program.
    Premium insurance is provided to U.S. or foreign airlines 
for regularly scheduled commercial or charter service. Airlines 
pay a premium to the FAA for the coverage, similar to a normal 
insurance policy. Both types of insurance policies cover both 
hull loss and liability.
    Based on information from DOT, CBO estimates that it is 
unlikely that enacting H.R. 2036 would have a significant 
impact on the federal budget over the next five years. The bill 
could affect federal spending if new claims occur from 
extending the insurance program. Moreover, such new spending 
could be very large, particularly if a claim exceeded the 
balance of the trust fund and the FAA had to borrow funds from 
the Treasury, but historical experience suggests that such 
events are very rare.
    According to the FAA, DoD flights comprise a large 
percentage of the flights covered in the aviation insurance 
program. Under current law, DoD is required to repay DOT for 
any loss and to use available operations and maintenance funds 
for the repayment. Assuming that DoD would use its appropriated 
funds to pay the insurance claims, the FAA would not need to 
withdraw any monies from the trust fund or borrow from the 
Treasury. However, in the event that a State Department policy 
or a premium insurance policy was activated and the claim 
exceeded $65 million, the FAA would need to use the borrowing 
authority that H.R. 2036 would provide to pay the carrier. Such 
policies apply to less than 1 percent of insured flights, so 
there is little likelihood of claims on the fund's balances or 
of need for use of the new borrowing authority that H.R. 2036 
would provide. H.R. 2036 authorizes appropriations to repay the 
fund in the event that there are claims that require use of the 
new borrowing authority, but any such funding would represent 
an intragovernmental transfer and thus would have no additional 
budgetary effect after claims were paid from the insurance 
fund.
    The CBO staff contact for this estimate is Clare Doherty. 
The estimate was approved by Robert A. Sunshine, Deputy 
Assistant Director for Budget Analysis.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, 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 matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                      TITLE 49, UNITED STATES CODE

          * * * * * * *

                    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) * * *
  (2) An aircraft may be insured or reinsured for not more than 
its reasonable value [as determined by the Secretary] 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.
          * * * * * * *

Sec. 44305. Insuring United States Government property

  (a) * * *
  (b) Premium Waivers and Indemnification.--With the approval 
required under subsection (a) of this section, the Secretary of 
Transportation may provide the insurance without premium at the 
request of the Secretary of Defense or the head of a 
department, agency, or instrumentality designated by the 
President when the Secretary of Defense or the designated head 
agrees to indemnify the Secretary of Transportation against all 
losses covered by the insurance. The Secretary of Defense and 
any designated head may make indemnity agreements with the 
Secretary of Transportation under this section. If such an 
agreement is countersigned by the President, the agreement 
shall constitute, for purposes of section 44302(b), a 
determination that continuation of the aircraft operations to 
which the agreement applies is necessary to carry out the 
foreign policy of the United States.
          * * * * * * *

Sec. 44307. Revolving fund

  (a) Existence, Disbursements, Appropriations, and Deposits.--
(1) There is a revolving fund in the Treasury. The Secretary of 
the Treasury shall disburse from the fund payments to carry out 
this chapter.
  [(2) Necessary amounts to carry out this chapter may be 
appropriated to the fund. The amounts appropriated and other 
amounts received in carrying out this chapter shall be 
deposited in the fund.]
    (2) Authorization of appropriations.--Necessary amounts to 
carry out this chapter, including amounts required to pay the 
interest accrued on, or to repay the principal of, obligations 
issued under subsection (e), may be appropriated to the fund.
    (3) Deposit in fund.--The amounts appropriated and other 
amounts received, including the proceeds of the sale of 
obligations issued under subsection (e), shall be deposited in 
the fund.
          * * * * * * *
  (d) Expenses.--The Secretary of Transportation shall deposit 
annually an amount in the Treasury as miscellaneous receipts to 
cover the expenses the Government incurs when the Secretary of 
Transportation uses appropriated amounts in carrying out this 
chapter. The deposited amount shall equal an amount determined 
by multiplying the average monthly balance of appropriated 
amounts retained in the revolving fund by a percentage that is 
at least the current average rate payable on marketable 
obligations of the Government. The Secretary of the Treasury 
shall determine annually in advance the percentage applied. 
This subsection does not apply to amounts appropriated for 
paying interest accrued on, or for repaying the principal of, 
obligations issued under subsection (e).
  (e) Borrowing.--
          (1) Issuance of obligations.--Subject to the 
        provisions of this subsection, the Administrator of the 
        Federal Aviation Administration may issue and sell such 
        notes or other obligations to the Secretary of the 
        Treasury as the Administrator determines are necessary 
        to provide funds to carry out this chapter.
          (2) Terms and conditions.--Obligations under this 
        subsection shall be issued in the forms and 
        denominations, bearing the maturities, and subject to 
        the terms and conditions that the Secretary of the 
        Treasury may prescribe.
          (3) Notification of congress.--At least 25 days 
        before the Administrator intends to issue and sell a 
        note or other obligation under paragraph (1), the 
        Administrator shall notify, in writing, the Senate and 
        House of Representatives of such intention and the 
        dollar amount of such note or obligation.
          (4) Purchase of obligations.--The Secretary of the 
        Treasury shall purchase any obligations issued under 
        this subsection. For such purpose, the Secretary of the 
        Treasury may use as a public debt transaction the 
        proceeds from the sale of any securities issued under 
        the Second Liberty Bond Act. The purposes for which 
        securities may be issued under such Act are extended to 
        include any purchase of obligations issued under this 
        subsection.
          (5) Resale authority.--The Secretary of the Treasury 
        may sell any obligations issued under this subsection 
        at the times and prices and upon the terms and 
        conditions that the Secretary of the Treasury shall 
        determine.
          (6) Treatment.--All purchases, redemptions, and sales 
        of obligations under this subsection by the Secretary 
        of the Treasury shall be treated as public debt 
        transactions of the United States.

Sec. 44308. Administrative

  (a) * * *
  (b) Issuance of Policies and Disposition of Claims.--(1) The 
Secretary may issue insurance policies to carry out this 
chapter. The Secretary may prescribe the forms, amounts insured 
under the policies, and premiums charged. Any such policy may 
authorize the binding arbitration of claims made thereunder in 
such manner as may be agreed to by the Secretary and any 
commercial insurer that may be responsible for any part of a 
loss to which such policy relates. The Secretary may change an 
amount of insurance or a premium for an existing policy only 
with the consent of the insured.
  (2) For a claim under insurance authorized by this chapter, 
the Secretary may--
          (A) settle and pay the claim made for or against the 
        United States Government; [and]
          (B) pay the amount of a binding arbitration award 
        made under paragraph (1); and
          [(B)] (C) pay the amount of a judgment entered 
        against the Government.
          * * * * * * *

Sec. 44310. Ending effective date

  The authority of the Secretary of Transportation to provide 
insurance and reinsurance under this chapter is not effective 
after September 30, [1997] 2002.
          * * * * * * *

                                
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