[Senate Report 109-223]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                                 SENATE
 2d Session                                                     109-223
_______________________________________________________________________

                                     

                                                       Calendar No. 377
 
                           WAR RISK INSURANCE

                               __________

                              R E P O R T

                                 of the

           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                                   on

                                S. 1102



                                     

        DATE deg.March 27, 2006.--Ordered to be printed


       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
                       one hundred ninth congress
                             second session

                     TED STEVENS, Alaska, Chairman
                 DANIEL K. INOUYE, Hawaii, Co-Chairman
JOHN McCAIN, Arizona                 JOHN D. ROCKEFELLER IV, West 
CONRAD BURNS, Montana                    Virginia
TRENT LOTT, Mississippi              JOHN F. KERRY, Massachusetts
KAY BAILEY HUTCHISON, Texas          BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine              BARBARA BOXER, California
GORDON H. SMITH, Oregon              BILL NELSON, Florida
JOHN ENSIGN, Nevada                  MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire        E. BENJAMIN NELSON, Nebraska
JIM DeMINT, South Carolina           MARK PRYOR, Arkansas
DAVID VITTER, Louisiana
                    Lisa Sutherland, Staff Director
             Christine Drager Kurth, Deputy Staff Director
                      Ken Nahigian, Chief Counsel
     Margaret Cummisky, Democratic Staff Director and Chief Counsel
 Samuel Whitehorn, Democratic Deputy Staff Director and General Counsel


                                                       Calendar No. 377
109th Congress                                                   Report
                                 SENATE
 2d Session                                                     109-223

======================================================================




                           WAR RISK INSURANCE

                                _______
                                

                 March 27, 2006.--Ordered to be printed

                                _______
                                

       Mr. Stevens, from the Committee on Commerce, Science, and 
                Transportation, submitted the following

                              R E P O R T

                         [To accompany S. 1102]

    The Committee on Commerce, Science, and Transportation, to 
which was referred the bill (S. 1102) to extend the aviation 
war risk insurance program for 3 years, having considered the 
same, reports favorably thereon without amendment and 
recommends that the bill do pass.

                          Purpose of the Bill

  The measure would extend the authority of the Secretary of 
Transportation (Secretary) to issue war risk insurance policies 
to air carriers. Additionally, the measure would extend the 
Secretary's authority to certify that an air carrier is a 
victim of an act of terrorism and shall not be liable for 
losses suffered by third parties. The measure also extends the 
Secretary's authority to certify immunity from punitive damages 
that exceed $100,000,000. The measure would extend the 
Secretary's authority through December 31, 2008.

                          Background and Needs

  Aviation war risk insurance provides coverage for acts of 
violence against airlines such as terrorism, hijackings, and 
sabotage. War risk coverage benefits apply to airlines, persons 
on the ground, and property where such third parties suffer 
losses that result from acts of violence against an airline.
  Airlines cannot operate without war risk insurance. Aircraft 
loan and lease agreements typically require airlines to obtain 
and maintain such insurance. Additionally, some foreign 
countries require that airlines have war risk insurance as a 
condition to operate in their airspace or at their airports. 
Air carriers have traditionally provided some degree of 
insurance self-coverage, but they are reliant on the larger 
insurance and reinsurance markets to provide catastrophic 
coverage.
  On September 22, 2001, Congress enacted H.R. 2926, the 
September 11th Victim Compensation Fund of 2001 (P.L. 107-42) 
that authorized the Federal Aviation Administration (FAA) to 
issue insurance for both domestic and international commercial 
air carrier operations. Previously, FAA authority was limited 
to international operations. P.L. 107-42 also enacted a 
$100,000,000 act-of-terrorism liability limitation for U.S. 
airlines with respect to damage to people and property on the 
ground. Airlines remained fully responsible for passenger 
liability. Beginning on September 24, 2001, the FAA began 
issuing war risk insurance. It continued to do so for 60-day 
periods thereafter.
  In H.R. 5005 the Homeland Security Act of 2002 (P.L. 107-
296), Congress concluded that continued short-term 
administrative extensions of the FAA-issued policies were 
unsatisfactory and instructed the FAA to provide war-risk 
coverage through August 31, 2003, with the discretion to extend 
the coverage through December 31, 2003.
  In H.R. 1559, the Emergency Wartime Supplemental 
Appropriations Act of 2003 (P.L. 108-11), Congress extended 
each of those dates by one year to August 31, 2004, and 
December 31, 2004. Congress also extended the $100,000,000 act-
of-terrorism liability cap.
  In H.R. 2115, Vision 100--Century of Aviation Reauthorization 
Act (P.L. 108-176), Congress amended section 44310 to allow the 
Department of Transportation (DOT) to provide war risk 
insurance to a U.S. aircraft manufacturer for loss of an 
aircraft of a U.S. airliner in excess of $50,000,000 or in 
excess of the manufacturer's primary insurance. The 
manufacturer program was extended and made effective until 
March 30, 2008.
  In H.R. 4818, the Consolidated Appropriations Act of 2005 
(P.L. 108-447), Congress continued a mandatory extension of the 
war risk insurance program, and eliminated expansion of the 
program to aircraft manufacturers and associated entities. The 
agreement extended existing terms and conditions of the program 
for one year, until August 31, 2005, with the Secretary given 
the option of extending it until December 31, 2005. Under that 
option, the Secretary continues to have the authority to extend 
war risk insurance to aircraft manufacturers at his discretion.
  On November 18, 2005, Congress passed H.R. 3058 the 
Transportation, Treasury, the Judiciary, Housing and Urban 
Development, and related agencies Appropriations bill of 2006 
(P.L. 109-115). H.R. 3058 extended the terms and conditions of 
the aviation war risk insurance program, along with the 
limitation on air carrier liability for third party claims 
arising out of acts of terrorism to August 31, 2006. H.R. 3058 
also includes an option for the Secretary to further extend the 
program until December 31, 2006.
  Since the terrorist attacks of September 11, 2001, the 
commercial insurance market has not provided war risk coverage 
with terms that commercial air carriers deem financially 
reasonable or bearable. Market analysis suggests that 
commercial air carriers can currently only obtain commercial 
insurance coverage at several times current premiums with far 
less favorable terms. Industry data suggests a return to the 
commercial market to obtain war risk insurance could cost U.S. 
airlines $600,000,000 to $700,000,000 in premiums annually 
compared with the current cost of $140,000,000 provided by the 
U.S. DOT. Since its inception, the FAA's war risk program has 
saved the struggling U.S. air carrier industry hundreds of 
millions in annual expenses and produced a net benefit to the 
Federal Treasury.
  The Committee recognizes U.S. that airlines continue to 
represent the prime aviation target for acts of foreign-based 
terrorism and the commercial market for aviation war risk 
insurance remains insecure. The Committee also recognizes the 
private aviation insurance market is highly specialized. While 
aviation war risk insurance coverage is now generally available 
from private insurers, premium rates continue to remain 
unreasonably high. Also, commercial hull insurance coverage for 
occurrences involving weapons of mass destruction is now being 
withdrawn from the market.
  The Congress is providing for a temporary extension of the 
existing program because coverage currently available is only 
available at rates that remain unreasonably high.
  The Committee encourages DOT to identify and evaluate methods 
for a gradual reintroduction to the commercial insurance market 
and to provide annual reports to the Committee on the 
availability of reasonably priced war risk insurance.

                          Legislative History

  The bill, S. 1102, was ordered to be reported without 
amendment favorably to the Senate by voice vote on November 17, 
2005, in the presence of a quorum.

                            Estimated Costs

  In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 403 of the 
Congressional Budget Act of 1974, the Committee provides the 
following cost estimate, prepared by the Congressional Budget 
Office:

                                                  January 10, 2006.
Hon. Ted Stevens,
Chairman, Committee on Commerce, Science, and Transportation,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1102, a bill to 
extend the aviation war risk insurance program for three years.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Megan 
Carroll.
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.
S. 1102--A bill to extend the aviation war risk insurance program for 
        three years
    Summary: S. 1102 would extend, through December 31, 2008, 
the Federal Aviation Administration's (FAA's) authority to 
offer insurance to air carriers and certain manufacturers 
against liability arising from losses caused by terrorist 
events. CBO estimates that enacting S. 1102 would increase 
direct spending by $710 million over the 2007-2015 period. 
Enacting the bill would not affect revenues.
    S. 1102 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1102 is shown in the following table. 
The costs of this legislation fall within budget function 400 
(transportation).

----------------------------------------------------------------------------------------------------------------
                                                    By fiscal years, in millions of dollars--
                               ---------------------------------------------------------------------------------
                                 2006     2007     2008    2009    2010    2011    2012    2013    2014    2015
----------------------------------------------------------------------------------------------------------------
                                           CHANGES IN DIRECT SPENDING

Estimated Budget Authority....       0      -125       5     270     210     140     100      60      30      20
Estimated Outlays.............       0      -125       5     270     210     140     100      60      30      20
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: The FAA offers insurance to air carriers 
and manufacturers of aircraft and aircraft engines against 
liability arising from losses caused by terrorist events. Under 
the Transportation, Treasury, Housing and Urban Development, 
the Judiciary, the District of Columbia, and Independent 
Agencies Appropriations Act, 2006 (Public Law 109-115), the FAA 
already has authority to offer that insurance through December 
31, 2006. S. 1102 would extend the FAA's authority to offer 
terrorism insurance through December 31, 2008. Assuming the 
agency would provide insurance through that date, we estimate 
that the net cost to the federal government would total $710 
million over the 2007-2015 period.
    Currently, the FAA collects premiums from air carriers and 
manufacturers in exchange for insurance coverage. Such premiums 
are recorded as an offset to direct spending in the year that 
they are collected. Based on information from the FAA about 
rates charged for coverage, CBO estimates that under S. 1102, 
the agency would collect about $340 million in additional 
premiums over the 2007-2008 period. CBO expects that the 
potential cost of providing insurance, however, would be much 
greater than premiums collected. CBO estimates that payments 
for expected losses under the FAA insurance program would cost 
nearly $1.1 billion over the 2007-2015 period, with residual 
spending in later years.
    CBO cannot predict how much insured damage terrorists might 
cause to air carriers and aircraft engine manufacturers in any 
specific year. Instead, our estimate of the cost of the 
insurance coverage under S. 1102 represents an expected value 
of payments from the program--a weighted average that reflects 
the probabilities of various outcomes, from zero damages up to 
very large damages due to possible future terrorist attacks. 
The expected value can be thought of as the amount of an 
insurance premium that would be necessary to just offset the 
risk of providing this insurance; indeed, our estimate of the 
expected cost for S. 1102 is based on actual premiums for 
terrorism insurance that have been paid by non-U.S. air 
carriers that must purchase such insurance from the private 
sector. Our estimate also takes into account differences in 
costs faced by private insurance firms that are not borne by 
the federal government. While this cost estimate reflects CBO' 
s best judgment on the basis of available information, costs 
are a function of inherently unpredictable future terrorist 
attacks. As such, actual costs could fall anywhere within an 
extremely broad range.
    Intergovernmental and private-sector impact: S. 1102 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal Costs: Megan Carroll. Impact 
on State, Local, and Tribal Governments: Sarah Puro. Impact on 
the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                      Regulatory Impact Statement

  Because S. 1102 does not create any new programs, the 
legislation would have no additional regulatory impact, and 
would result in no additional reporting requirements. The 
legislation would have no further effect on the number or types 
of individuals and businesses regulated, the economic impact of 
such regulation, the personal privacy of affected individuals, 
or the paperwork required from such individuals and businesses.

                      Section-by-Section Analysis

Section 1. Extension of airline war risk policies and terrorism 
        coverage
  This section would amend section 44302(f) of title 49, United 
States Code, to extend through August 31, 2008, the coverage 
provided by any war risk insurance policy that DOT has 
currently issued to U.S. civil aircraft. The Secretary would be 
authorized to further extend the coverage through December 31, 
2008.
  This section would also amend 44303(b) of title 49, United 
States Code, to extend through December 31, 2008, the authority 
of the Secretary to certify that an air carrier has been a 
victim of a terrorist act, and thus, not responsible for losses 
suffered by third parties in excess of $100,000,000 in total 
for all claims arising out of such an act. In addition, no 
punitive damages may be awarded against an air carrier or the 
Federal Government under this provision, and the Federal 
Government would be responsible for any liability in amounts 
that exceed $100,000,000, for any claims arising as the result 
of a terrorist act against an air carrier covered under the 
DOT's policy.

                        Changes in Existing Law

  In compliance with paragraph 12 of rule XXVI of the Standing 
Rules of the Senate, 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 material is printed 
in italic, existing law in which no change is proposed is shown 
in roman):

                       [TITLE 49--TRANSPORTATION]

                   [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) Subject to subsection (c) 
of this section and section 44305(a) of this title, the 
Secretary of Transportation may provide insurance and 
reinsurance against loss or damage arising out of any risk from 
the operation of an American aircraft or foreign-flag aircraft.
  (2) An aircraft may be insured or reinsured for not more than 
its reasonable value 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.
  (b) Reimbursement of Insurance Cost Increases.--
          (1) In general.--The Secretary may reimburse an air 
        carrier for the increase in the cost of insurance, with 
        respect to a premium for coverage ending before October 
        1, 2002, against loss or damage arising out of any risk 
        from the operation of an American aircraft over the 
        insurance premium that was in effect for a comparable 
        operation during the period beginning September 4, 
        2001, and ending September 10, 2001, as the Secretary 
        may determine. Such reimbursement is subject to 
        subsections (a)(2), (c), and (d) of this section and to 
        section 44303.
          (2) Payment from revolving fund.--A reimbursement 
        under this subsection shall be paid from the revolving 
        fund established by section 44307.
          (3) Further conditions.--The Secretary may impose 
        such further conditions on insurance for which the 
        increase in premium is subject to reimbursement under 
        this subsection as the Secretary may deem appropriate 
        in the interest of air commerce.
          (4) Termination of authority.--The authority to 
        reimburse air carriers under this subsection shall 
        expire 180 days after the date of enactment of this 
        paragraph.
  (c) Presidential Approval.--The Secretary may provide 
insurance or reinsurance under subsection (a) of this section, 
or reimburse an air carrier under subsection (b) of this 
section, only with the approval of the President. The President 
may approve the insurance or reinsurance or the reimbursement 
only after deciding that the continued operation of the 
American aircraft or foreign-flag aircraft to be insured or 
reinsured is necessary in the interest of air commerce or 
national security or to carry out the foreign policy of the 
United States Government.
  (d) Consultation.--The President may require the Secretary to 
consult with interested departments, agencies, and 
instrumentalities of the Government before providing insurance 
or reinsurance or reimbursing an air carrier under this 
chapter.
  (e) Additional Insurance.--With the approval of the 
Secretary, a person having an insurable interest in an aircraft 
may insure with other underwriters in an amount that is more 
than the amount insured with the Secretary. However, the 
Secretary may not benefit from the additional insurance. This 
subsection does not prevent the Secretary from making contracts 
of coinsurance.
  (f) Extension of Policies.--
          (1) In general.--The Secretary shall extend through 
        [August 31, 2005, and may extend through December 31, 
        2005,] August 31, 2008, and shall extend through 
        December 31, 2008, the termination date of any 
        insurance policy that the Department of Transportation 
        issued to an air carrier under subsection (a) and that 
        is in effect on the date of enactment of this 
        subsection on no less favorable terms to the air 
        carrier than existed on June 19, 2002; except that the 
        Secretary shall amend the insurance policy, subject to 
        such terms and conditions as the Secretary may 
        prescribe, to add coverage for losses or injuries to 
        aircraft hulls, passengers, and crew at the limits 
        carried by air carriers for such losses and injuries as 
        of such date of enactment and at an additional premium 
        comparable to the premium charged for third-party 
        casualty coverage under such policy.
          (2) Special rules.--Notwithstanding paragraph (1)--
                  (A) in no event shall the total premium paid 
                by the air carrier for the policy, as amended, 
                be more than twice the premium that the air 
                carrier was paying to the Department of 
                Transportation for its third party policy as of 
                June 19, 2002; and
                  (B) the coverage in such policy shall begin 
                with the first dollar of any covered loss that 
                is incurred.
  (g) Aircraft Manufacturers.--
          (1) In general.--The Secretary may provide to an 
        aircraft manufacturer insurance for loss or damage 
        resulting from operation of an aircraft by an air 
        carrier and involving war or terrorism.
          (2) Amount.--Insurance provided by the Secretary 
        under this subsection shall be for loss or damage in 
        excess of the greater of the amount of available 
        primary insurance or $50,000,000.
          (3) Terms and conditions.--Insurance provided by the 
        Secretary under this subsection shall be subject to the 
        terms and conditions set forth in this chapter and such 
        other terms and conditions as the Secretary may 
        prescribe.

Sec. 44303. Coverage

  (a) In General.--The Secretary of Transportation may provide 
insurance and reinsurance, or reimburse insurance costs, as 
authorized under section 44302 of this title for the following:
          (1) an American aircraft or foreign-flag aircraft 
        engaged in aircraft operations the President decides 
        are necessary in the interest of air commerce or 
        national security or to carry out the foreign policy of 
        the United States Government.
          (2) property transported or to be transported on 
        aircraft referred to in clause (1) of this section, 
        including--
                  (A) shipments by express or registered mail;
                  (B) property owned by citizens or residents 
                of the United States;
                  (C) property--
                          (i) imported to, or exported from, 
                        the United States; and
                          (ii) bought or sold by a citizen or 
                        resident of the United States under a 
                        contract putting the risk of loss or 
                        obligation to provide insurance against 
                        risk of loss on the citizen or 
                        resident; and
                  (D) property transported between--
                          (i) a place in a State or the 
                        District of Columbia and a place in a 
                        territory or possession of the United 
                        States;
                          (ii) a place in a territory or 
                        possession of the United States and a 
                        place in another territory or 
                        possession of the United States; or
                          (iii) 2 places in the same territory 
                        or possession of the United States.
          (3) the personal effects and baggage of officers and 
        members of the crew of an aircraft referred to in 
        clause (1) of this section and of other individuals 
        employed or transported on that aircraft.
          (4) officers and members of the crew of an aircraft 
        referred to in clause (1) of this section and other 
        individuals employed or transported on that aircraft 
        against loss of life, injury, or detention.
          (5) statutory or contractual obligations or other 
        liabilities, customarily covered by insurance, of an 
        aircraft referred to in clause (1) of this section or 
        of the owner or operator of that aircraft.
          (6) loss or damage of an aircraft manufacturer 
        resulting from operation of an aircraft by an air 
        carrier and involving war or terrorism.
  (b) Air Carrier Liability for Third Party Claims Arising Out 
of Acts of Terrorism.--For acts of terrorism committed on or to 
an air carrier during the period beginning on September 22, 
2001, and ending on [December 31, 2005,] December 31, 2008, the 
Secretary may certify that the air carrier was a victim of an 
act of terrorism and in the Secretary's judgment, based on the 
Secretary's analysis and conclusions regarding the facts and 
circumstances of each case, shall not be responsible for losses 
suffered by third parties (as referred to in section 
205.5(b)(1) of title 14, Code of Federal Regulations) that 
exceed $100,000,000, in the aggregate, for all claims by such 
parties arising out of such act. If the Secretary so certifies, 
the air carrier shall not be liable for an amount that exceeds 
$100,000,000, in the aggregate, for all claims by such parties 
arising out of such act, and the Government shall be 
responsible for any liability above such amount. No punitive 
damages may be awarded against an air carrier (or the 
Government taking responsibility for an air carrier under this 
subsection) under a cause of action arising out of such act. 
The Secretary may extend the provisions of this subsection to 
an aircraft manufacturer (as defined in section 44301) of the 
aircraft of the air carrier involved.

                                  
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