[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.
* * * * * * *