[Federal Register Volume 63, Number 54 (Friday, March 20, 1998)]
[Rules and Regulations]
[Pages 13734-13740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7275]



[[Page 13733]]

_______________________________________________________________________

Part III





Department of Transportation





_______________________________________________________________________



Federal Aviation Administration



_______________________________________________________________________



14 CFR Part 198



Aviation Insurance; Final Rule

  Federal Register / Vol. 63, No. 54 / Friday, March 20, 1998 / Rules 
and Regulations  

[[Page 13734]]



DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 198

[Docket No. 28893; Amdt. No. 198-4]
RIN 2120-AF23


Aviation Insurance

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Final rule.

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SUMMARY: This document revises Title 14, Code of Federal Regulations 
(CFR), part 198, to reflect statutory authority to issue non-premium 
insurance for certain types of flight operations and ground support 
activities essential to such flights; explain when insurance policies 
are in force and when they are in standby status; revise the process 
for amending insurance policies; increase the amount of the binder for 
non-premium insurance coverage; clarify that consistent with commercial 
aviation insurance practice, not only aircraft, but other insurable 
items may be insured; and clarify that the Presidential approval 
required for the issuance of non-premium insurance is demonstrated by 
the standing Presidential approval of the interagency indemnification 
agreement.
    The intent of this final rule is to improve the efficiency of FAA's 
Aviation Insurance Program (Program); explain Program procedures; 
conform certain Program procedures to commercial aviation insurance 
industry practice; and offset incurred administration costs resulting 
from the increased frequency of utilization of the Program. The changes 
allow the Program to be more responsive to the aviation industry when 
commercial coverage cannot be obtained on reasonable terms, and the 
insurance coverage may be provided by the Program.
EFFECTIVE DATE: April 20, 1998.

FOR FURTHER INFORMATION CONTACT: Eleanor Eilenberg, Office of Aviation 
Policy and Plans, APO-3, Federal Aviation Administration, 800 
Independence Avenue, SW., Washington, DC 20591, telephone (202) 267-
3090.

SUPPLEMENTARY INFORMATION:

Availability of Final Rules

    An electronic copy of this document may be downloaded using a modem 
and suitable communications software from the FAA regulations section 
of the Fedworld electronic bulletin board service (telephone: 703-321-
3339), or the FAA's Aviation Rulemaking Advisory Committee Bulletin 
Board service (telephone: 800-FAA-ARAC).
    Internet users may reach the FAA's web page at http://www.faa.gov 
or the Federal Register webpage at http://www.access.gpo.gov/NARA/
index.html for access to recently published rulemaking documents.
    Any person may obtain a copy of this final rule by submitting a 
request to the Federal Aviation Administration, Office of Rulemaking, 
ARM-1, 800 Independence Avenue, SW., Washington, DC 20591, or by 
calling (202) 267-9680. Communications must identify the amendment 
number or docket number of this final rule.
    Persons interested in being placed on the mailing list for future 
Notices of Proposed Rulemaking and Final Rules should request from the 
above office a copy of Advisory Circular No. 11-2A, Notice of Proposed 
Rulemaking Distribution System, that describes the application 
procedure.

Small Entity Inquiries

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) requires the FAA to report inquiries from small entities 
concerning information on, and advice about, compliance with statutes 
and regulations within the FAA's jurisdiction, including interpretation 
and application of the law to specific sets of facts supplied by a 
small entity.
    If you are a small entity and have a question, contact your local 
FAA official. If you do not know how to contact your local FAA 
official, you may contact Charlene Brown, Program Analyst Staff, Office 
of Rulemaking, ARM-27, Federal Aviation Administration, 800 
Independence Avenue, SW., Washington, DC 20591, 1-800-551-1594. 
Internet users can find additional information on SBREFA in the ``Quick 
Jump'' section of the FAA's web page at http://www.faa.gov and may send 
electronic inquiries to the following Internet address: 9-AWA-
[email protected].

Background

    In 1951, Congress amended the Civil Aeronautics Act of 1938 by 
adding a new Title XIII which authorized the Secretary of Commerce, 
with the approval of the President, to provide aviation war risk 
insurance adequate to meet the needs of U.S. air commerce and the 
federal government. This insurance could only be issued when the 
Secretary of Commerce found that war risk insurance was commercially 
unavailable on reasonable terms and conditions.
    The war risk insurance program was established to provide the 
insurance necessary to enable air commerce to continue in the event of 
war. This was needed because of several factors: commercial war risk 
insurance policies contained automatic cancellation clauses in the even 
of major war; the geographical coverage of commercial war risk 
insurance could be restricted upon reasonable notice to air carriers; 
and rates for commercial war risk insurance could be raised without 
limit upon reasonable notice to air carriers.
    The Aviation Insurance Program was incorporated into Title XIII of 
the Federal Aviation Act of 1958. Statutory responsibility for the 
Program was subsequently transferred to the Department of 
Transportation (DOT), at the time of its creation in 1967. The 
Secretary of Transportation (Secretary) later delegated this authority 
to the Administrator of the FAA (49 CFR 1.47(b)).
    The definition of war risk in Title XIII was that traditionally 
employed by commercial underwriters and, as a matter of policy, the FAA 
had always conservatively interpreted the definition. In the early 
1970's, this definition led to uncertainty about the extent of the 
Administrator's statutory authority to provide insurance against loss 
or damage arising from, for example, undeclared wars, hijackings, and 
terrorist acts. Because of a combination of the progressive exclusion 
of these new risks from commercial all risk policies, and the failure 
of the traditional definition of war risk to cover these risks, a 
potential gap in insurance coverage occurred, with the possibility of 
abrupt termination of important air services in emergency situations.
    In recognition of the fact that the Administrator needed broad 
insurance authority in extraordinary circumstances to insure air 
services determined to be in the national interest, Congress amended 
Title XIII on November 9, 1997. These amendments, included in Public 
Law (Pub. L.) 95-163, removed from Title XIII all references to risk 
categories. They authorized the Administrator to provide insurance 
against loss or damage due to any risk arising from operations of 
aircraft in foreign air commerce or between two points outside the 
United States deemed by the President to be in the foreign policy 
interests of the United States. However, such insurance could only be 
issued if commercial insurance for those operations was not available 
on reasonable terms and conditions. The January 15, 1986 amendment to 
part 198

[[Page 13735]]

reflected the 1997 amendments to Title XIII.
    Between 1975 and 1990 there was little use of the insurance 
authority. In 1983 and 1984, the FAA insured, without premium, about 50 
military charter flights from the United States to Central America. 
Otherwise, commercial insurance for flights to most areas of the world 
was available. Since 1990, the Aviation Insurance Program has been used 
much more than in the 1975-1990 period, but air carriers can usually 
still obtain commercial insurance.
    Since 1990, the Aviation Insurance Program has been mostly used to 
provide insurance for civil aircraft chartered by the military. The 
Department of Defense (DOD) under the National Airlift Policy relies on 
civil air carriers to meet its airlift requirements. Under the Civil 
Reserve Air Fleet (CRAF) program, the DOD contractually obligates 
airlines to provide aircraft and flight crews to meet mobilization 
transport requirements in exchange for shares of peacetime DOD 
transport business. This saves the DOD the expense of purchasing, 
operating, and maintaining a large standby transport aircraft fleet. 
Although the CRAF program is available, the DOD usually can meet its 
transport requirements with aircraft and crews volunteered by the CRAF 
airlines, without formal activation of the program; and, in fact, the 
CRAF has been activated only once in its history--the partial CRAF 
activation of 1990-91, during Operation Desert Shield/Storm.
    Gaps between the FAA and commercial insurance coverage were 
highlighted during Operation Desert Shield/Storm as a result of the 
CRAF activation and the long post-Vietnam hiatus in Aviation Insurance 
Program activity. Two such gaps could not be closed without new 
legislation. The more significant was the inability to cover domestic 
CRAF flight segments. Most of the airlines' commercial hull or 
liability war risk insurance policies excluded coverage of all CRAF 
flights; while, by law, FAA-issued, non-premium insurance could cover 
only international flight segments. Thus, the airlines had to rely on 
direct indemnification from the DOD for coverage of CRAF domestic 
flight segments (e.g., ferry flights to a military base to pick up 
troops and supplies destined for the theater of operations). In 
addition, flights transporting armed forces and military materiel on 
behalf of, and pursuant to an agreement between, the U.S. Government 
and a foreign government, but not operated under a U.S. Government 
contract, could not be covered by non-premium insurance. Title IV of 
the Airport and Airway Safety, Capacity, Noise Improvement, and 
Intermodal Transportation Act of 1992, Pub. L. 102-581, gave the FAA 
the authority to provide non-premium insurance coverage for these two 
previously uncoverable categories of flights, as well as for goods and 
services (e.g., spares support, refueling) in direct support of such 
flights. The FAA filled other coverage gaps by adopting new procedures 
and policies involving the revision of its insurance policies to cover, 
e.g., the costs of search and rescue attempts for an aircraft; and the 
development of endorsements to these policies to meet the specific 
needs of DOD contract carriers.
    In 1994, Congress recodified the Federal Aviation Act, including 
the Aviation Insurance Program's provisions, without substantive 
change, into Title 49, United States Code. The Program's provisions 
were incorporated into Chapter 443 of that Title.
    In 1997, Congress reauthorized the Aviation Insurance Program and 
amended Chapter 443. The insurance amendments, included in the Aviation 
Insurance Reauthorization Act of 1997, Pub. L. 105-137, stated that 
aircraft hull may be insured for reasonable value as determined by the 
Secretary in accordance with reasonable commercial aviation insurance 
business practice. They also stated that the Presidential approval of 
the standing interagency indemnification agreement between the DOT and 
other U.S. Government agencies, constitutes the necessary 
determination, for non-premium insurance, that continuation of the 
aircraft operation is necessary to carry out U.S. foreign policy. The 
amendments also authorized the Secretary to use binding arbitration of 
claims, and pay awards under such arbitration; and extended the 
Program's authorization until December 31, 1998.

Aviation Insurance Program

    Chapter 443 authorizes the Secretary of Transportation, subject to 
approval by the President, to provide aviation insurance coverage for 
American aircraft or foreign-flag aircraft operations, deemed necessary 
to carry out the foreign policy of the United States, for which 
commercial insurance is unavailable on reasonable terms. This is a 
discretionary program. Insurance may be issued in two forms--non-
premium and premium.
    Non-premium insurance has been issued for American aircraft under 
contract to any U.S. Government department or agency which has an 
indemnity agreement with the DOT. Applicants currently pay a one-time 
binder fee of $200 per aircraft for non-premium insurance. This fee has 
not been adjusted since 1975.
    The FAA's historical interpretation of Chapter 443, confirmed by 
the 1997 legislative authority, has been that the Presidential approval 
required for the issuance of non-premium insurance is demonstrated by 
the standing Presidential approval of the indemnity agreement between 
the DOT and the other U.S. Government agencies.
    In order to minimize the time needed to provide non-premium 
insurance coverage, upon receipt of the application from the carrier, 
the FAA issues the carrier a standby non-premium policy which lists 
that carrier's registered aircraft. Actual coverage for operations of 
these aircraft commences upon formal activation notice from the FAA 
which details the conditions and limits of the activated policy.
    Premium insuance has been issued for American aircraft or foreign-
flag aircraft for regular commercial scheduled or charter service. The 
U.S. Government assumes the financial liability for claims in exchange 
for a premium. The Presidential approval required for premium insurance 
must be separately obtained for a period of not more than 60 days. The 
Presidential approval may be renewed for additional 60 days periods if 
so approved before each additional period. Under certain circumstances, 
this renewal authority has been and may be delegated to the Secretary. 
As a general policy, premium insurance will not be issued for a U.S. 
Government department or agency; whereas such a department or agency 
may request non-premium insurance.
    Non-premium insurance and premium insurance do not necessarily 
differ in risks covered for any given flight. The differences are in 
the categories of flights which may be covered and in the approval 
process. As noted earlier in this document, wholly domestic flights may 
be covered byr non-premium insurance, whereas premium insurance may 
cover only flights between a U.S. point and a foreign point or between 
two foreign points. Presidential approval is specific to flights within 
the scope of each request for premium insurance; it is generic to all 
non-premium flights for agencies which have completed an 
indemnification agreement with the DOT.
    Two basic types of coverage are offered under the FAA's Aviation 
Insurance Program--hull and liability.

[[Page 13736]]

    Hull insurance covers the loss of or damage to an aircraft hull. 
Under the 1997 legislative authority, coverage may not exceed the 
reasonable value of the aircraft as determined by the Secretary in 
accordance with reasonable commercial aviation insurance business 
practice.
    Liability insurance covers bodily injury or death; personal injury; 
damage to or loss of property, including cargo, baggage, and personal 
effects. Coverage may not exceed the registered limits of liability on 
file with the FAA or the corresponding commercial coverage in effect on 
the date of loss.

The NPRM

    The FAA published Notice No. 97-5, on April 17, 1997 (62 FR 19008) 
and a correction notice on April 22, 1997 (62 FR 19530) requesting 
comments. The NPRM contained an overview of the recent experience of 
the FAA's Aviation Insurance Program. In sum, during Operation Desert 
Shield/Storm, the FAA issued non-premium war risk insurance for over 
5,000 flights, and premium war risk insurance for 36 flights. The FAA 
has also issued non-premium insurance for flights supporting recent 
humanitarian and peacekeeping operations, including 1992-94 flights to 
and from Somalia, 1994 flights into Haiti, and, starting in April 1996, 
troop rotation flights between Tuzla, Bosnia, and Germany.
    Coverage gaps and the air carriers' dependence on FAA-issued 
insurance caused Congress, the air carrier industry, and the FAA to 
review the Program's statutory authority, in 1992. Title IV of the 
Airport and Airway Safety, Capacity, Noise Improvement, and Intermodal 
Transportation Act of 1992, Pub. L. 102-581, gave the FAA the expanded 
authority to issue non-premium insurance for two previously uncoverable 
categories of flights, as well as for goods and services in direct 
support of such flights.
    The FAA has addressed other coverage gaps by adopting new 
procedures and policies, including revising the FAA insurance policies 
and developing new endorsements for those policies.
    As more fully described later in this document, this final rule 
improves the Program's efficiency, explains Program procedures, 
reflects the expanded statutory authority to insure certain flights, 
increases the amount of the binder fee to offset incurred 
administration costs resulting from increased frequency of utilization 
of the Program in the last five years, and conforms Program practice to 
the commercial practice of insuring other insurable items. This final 
rule does not compromise the basic premise that the FAA has broad 
discretion and judgment to determine the acceptable level of risk to be 
insured against under a given set of circumstances, and the policies 
and procedures to be followed in the administration of the Aviation 
Insurance Program.

Discussion of Comments

    On April 17, 1997 the FAA published an NPRM. Two commenters 
responded to the NPRM--the National Air Carrier Association (NACA) and 
American Airlines, Inc. (American).
    NACA concurred with all the changes that the FAA proposed to part 
198. However, NACA suggested that the rulemaking be delayed until 
Congress reauthorizes chapter 443, on the theory that potential 
amendments to Chapter 443 would require additional changes to part 198. 
Because a related suggesion was among the comments made by American, 
the FAA addresses the NACA suggestion in the response to American's 
comments, below.
    American's first comment is a suggestion that section 198.3 should 
contain clarifying language indicating that Chapter 443 coverage is 
effective for the entire period of activation. This suggestion is 
related to subsequent comments that the section's deactivation 
provisions are overbroad, and should be deleted or modified according 
to language that American proposes. The FAA addresses these comments 
together.
    American proposes that section 198.3, paragraph (b), should be 
revised to reflect the language ``have been [met] at the time of 
issuance,'' so that it is clear that the conditions listed in (b)(1) 
through (3) for issuance of a non-premium standby policy are conditions 
precedent to issuance, not ongoing conditions. Thus, American asserts, 
a change in any of such conditions would not invalidate insurance 
coverage-especially in mid-flight-until formal deactivation procedures 
have been followed or the carrier completes the flight or series of 
flights to which the activated coverage applies. American has also 
proposed detailed, modifying language for paragraphs (c) through a new 
(e), to limit the alleged overbroadness of the deactivation provisions; 
alternately, it suggests that paragraphs (b) through (d) should be 
deleted and included in the FAA policies.
    The FAA does not agree with the majority of these comments. If the 
Administrator were to find, subsequent to activation, that commercial 
insurance had become available on reasonable terms, activated insurance 
coverage would not be in compliance with a statutory condition. 
However, the FAA would not deactivate such coverage without written 
notice to the operator. It should be noted that the regulation 
provides, in paragraph (d), for written deactivation notification by 
the FAA to the aircraft operator; and that the details of such notice 
of deactivation/termination are articulated in the FAA policies. In 
addition, to address the concern that coverage not be invalidated in 
mid-flight, the FAA is willing to add an appropriate provision in the 
policies. That provision will state that coverage will remain in force 
until the insured aircraft has completed the contracted flight by 
making a safe return at an airfield not excluded by the geographical 
limits of the operator's commercial policy. The FAA believes that such 
specific language belongs in the FAA policies, not in the regulations.
    In light of the foregoing, this final rule does not adopt the 
above-described proposed addition to section 198.3(b), nor the 
additional modifying details relating to paragraphs (c) through 
proposed new (e). The FAA also does not adopt the alternate suggestion 
to delete paragraphs (b) through (d) from the regulation; nor does the 
FAA adopt, in full, in the FAA policies, American's modifying language 
for these paragraphs.
    However, the FAA agrees with comments that paragraphs (a) and (b) 
of section 198.3 should refer to an insurance policy's being 
``issued,'' not its being ``made available''; and that paragraph (a) 
should be modified to clarify, with regard to premium insurance, which 
of the requirements of section 198.1 must be met. This final rule 
reflects these changes. In addition to changes recommended by American, 
the FAA has added conforming language to section 198.3(c)(2).
    American's second comment is that the FAA should withdraw the 
clarifying language in section 198.3(b)(2), regarding the Presidential 
approval required for issuance of non-premium insurance, because the 
GAO has disagreed with the FAA's interpretation in a recent 
reauthorization hearing, and recent history shows a Presidential 
determination was made for 1994 humanitarian relief air services to 
Haiti. American acknowledges that Congress may ratify the FAA's 
interpretation by amending Chapter 443 in accordance with the FAA's 
approach.
    The FAA does not accept American's suggestion to withdraw the 
referenced language because Congress has confirmed the FAA's historical 
interpretation that the Presidential

[[Page 13737]]

approval required for the issuance of non-premium insurance is 
demonstrated by the standing approval of the interagency 
indemnification agreement.
    American's third comment is threefold. First, American suggests 
that the FAA should delete the section 198.3 (b)(3) requirement for 
carriers to submit current and updated commercial policies, because the 
requirement implies an ongoing condition which could invalidate 
activated insurance. Next, American suggests that the requirement is 
unnecessary, all the FAA needs is the amount of a carriers's commercial 
insurance, and the fact that the requirement does not apply to premium 
insurance highlights the FAA's lack of need for the actual policies. 
Third, American questions the regulations' lack of an assurance of 
confidentiality to protect a carrier's proprietary or competitive 
interests; and suggests that the FAA only require the carrier to 
provide confidentially the amount of its commercial insurance.
    It is not the FAA's intent that the requirement to submit 
commercial policies and endorsements to the FAA constitute a continuing 
condition that could invalidate activated coverage. It should be noted 
that section 198.3 (c)(2) does not reference submission of the 
commercial policies and endorsements.
    The FAA disagrees with the comment that submission of the 
commercial policies and endorsements is unnecessary. The FAA needs such 
documents in order to verify the commercial coverages that an air 
carrier had in place prior to insurance becoming unavailable. It should 
also be noted that the CRAF or Airlift Services Contract between the 
DOD and each air carrier requires the carrier to supply the FAA with a 
complete copy of its current hull and comprehensive liability 
commercial insurance policies. In addition, one of the GAO's 
recommendations to the Secretary of Transportation, in the 1994 Report 
to Congress, ``Aviation Insurance: Federal Insurance Program Needs 
Improvements to Ensure Success,'' was that the FAA should require 
airlines to submit copies of their current commercial war-risk policies 
and any subsequent revisions, as a condition for obtaining non-premium 
(and premium) insurance; and periodically verify the information 
submitted by the airlines. Finally, as to the requirement's 
applicability to premium insurance, the FAA notes that when a request 
for premium insurance is made, the FAA requires very specific 
information from the operator, which would normally include submission 
of the commercial policy. However, because of the unique nature of 
premium requests, the FAA's specific information needs cannot be 
catalogued, in advance in this rulemaking.
    In light of the foregoing, the FAA does not adopt the suggestion to 
only require submission of the amount of a carrier's commercial 
insurance. However, the FAA notes that 5 U.S.C. 552(b)(4) allows an 
agency to not release to the public matters obtained from a person that 
are confidential commercial or financial information. To the extent 
that the commercial policies and endorsements qualify for such 
protection, the FAA will protect them to the fullest extent of the law.
    American's fourth comment is a suggested revision of paragraph (c) 
of section 198.9, limiting the evidence carriers are required to submit 
to the FAA that commercial insurance is not available on reasonable 
terms, only to evidence requested by the FAA. The FAA does not believe 
that the revision would hinder the FAA's ability to obtain the need 
information, and therefore adopts the suggestion. This final rule 
incorporates language similar to American's suggested language, but 
does not adopt the word ``reasonable'' (as in ``upon reasonable request 
by the FAA''). By statute and delegation, the FAA has both the 
authority and responsibility to administer the Aviation Insurance 
Program. The FAA has the discretion to determine the pertinent 
information required in the particular circumstances presented. The FAA 
is also concerned that a debate over the ``reasonableness'' of the 
request would delay the issuance or activation of insurance.
    American's fifth comment is a suggested revision that the FAA also 
accepts, to replace the ten-day notice requirement in section 198.11 
with language which better reflects business needs and practices. This 
final rule incorporates this change.
    American's sixth and final comment is twofold. First, American 
suggests that it is advisable for the FAA to postpone adopting a final 
regulation until Congress has reauthorized Chapter 443, as the 
reauthorization legislation may warrant further changes to the 
regulation. Second, the FAA should also revise the proposed rule based 
on the comments on Notice No. 97-5, and issue a new notice of proposed 
rulemaking for further comment. NACA has made a similar suggestion to 
American's point on delaying until the reauthorization of Chapter 443 
is finalized. These comments are addressed together, below.
    The FAA does not agree that the proposed regulation needs further 
changes based on the reauthorization legislation. As previously noted 
in this document, that legislation contains four amendments to Chapter 
443: (1) Authority that aircraft hull may be insured for reasonable 
value as determined by the Secretary in accordance with reasonable 
commercial aviation insurance business practice; (2) authority that 
Presidential approval of the standing interagency indemnification 
agreement constitutes the necessary Presidential determination for non-
premium insurance; (3) authorization for the Secretary to use binding 
arbitration of claims, and pay awards under such arbitration; and (4) 
an extension of the Program until December 31, 1998.
    These provisions do not conflict, nor are they inconsistent, with 
this final rule. First, the FAA notes that binding arbitration is not a 
subject of this rulemaking. Second, the Presidential determination 
authority, as discussed above, confirms the FAA's historical 
interpretation. Third, the FAA does not believe that section 198.7 
conflicts, or is inconsistent, with the legislative authority on 
insuring aircraft hull. This is so because section 198.7 permits the 
FAA to determine that an aircraft is insured at its reasonable value in 
accordance with reasonable commercial aviation insurance business 
practice, which is the legislative authority.
    The FAA also does not agree that it needs to issue a new notice of 
proposed rulemaking for further comment. The FAA has revised the 
regulation in response to the comments on Notice No. 97-5.

Analysis of the Rule as Adopted

Section 198.1

    Section 198.1 sets forth editorial changes reflecting language used 
in the 1994 recodification of the Federal Aviation Act.
    Section 198.1(b) is amended to reflect the expanded operations 
covered under the Aviation Insurance Program. This amendment includes, 
as eligible operations, those in domestic air commerce, if non-premium 
insurance is sought.

Section 198.3

    Section 198.3(b) is amended to reflect the expanded authority to 
cover flights operated pursuant to an agreement between the United 
States and a foreign government. The section also reflects the FAA's 
historical interpretation of Chapter 443 that the Presidential approval 
required for the issuance of non-premium insurance is demonstrated by 
the standing

[[Page 13738]]

Presidential approval of the indemnity agreement between DOT and 
another U.S. Government department or agency. In addition, the section 
contains a requirement for that aircraft operator to place on file with 
the FAA a current copy of its commercial insurance policy or policies 
as well as policy endorsements. This section also explains when FAA 
policies are in standby status and when they are in force.

Section 198.5

    Section 198.5 sets forth editorial changes reflecting language used 
in the 1994 recodification of the Federal Aviation Act, and also 
clarifies that any other insurable item may be insured if eligible for 
insurance under Section 198.1.

Section 198.7

    Section 198.7 sets forth editorial changes reflecting language used 
in the 1994 recodification of the Federal Aviation Act; and deletes 
previous language requiring the agency on whose behalf contract air 
services are to be performed to approve revisions of the non-premium 
policy.

Section 198.9

    Section 198.9 is revised in order to provide flexibility to 
applicants for insurance. It provides for the FAA office administering 
the Aviation Insurance Program to give guidance and necessary forms to 
applicants for insurance, and removes Appendix A from the regulations. 
It also adds a requirement that an applicant for premium or non-premium 
insurance must, upon request by the FAA, provide evidence to the FAA of 
the unavailability of commercial insurance, as well as contains a 
provision specifying that the standby non-premium policy only provides 
actual coverage when formally activated by the FAA.

Section 198.11

    Section 198.11 reflects editorial changes, the inclusion of 
language relating to other insurable items, and the replacement of the 
10-day notice requirement with language reflecting commercial business 
needs and practices.

Section 198.13

    Section 198.13 is revised to reflect the FAA's current 
administrative payment procedures, and reflects generic instructions 
that add greater flexibility to this section.

Section 198.15

    Section 198.15 revises the current $200 binder for non-premium 
insurance, established in 1975, and updates it for the effects of 
inflation by using the annual cumulative Consumer Price Index (CPI) 
rounded to the nearest $25. For example, using the latest annual 
cumulative CPI available (2.851 for 1996), the binder would be $575 
(calculation: $200  x  2.851, rounded to the nearest $25) per aircraft 
or other insurable item. In the future, the binder amount will be 
adjusted annually for newly registered aircraft and other insurable 
items, to reflect future increases in the CPI, rounded to the nearest 
$25. The binder will continue to be a one-time charge, so that once an 
aircraft operator registers an aircraft or other insurable item no 
additional binder charge will be due while the operator continues to 
operate that aircraft or other insurable item. After publication of the 
final rule, the binder set forth in the final rule will be adjusted not 
more frequently than annually, based on changes in the Consumer Price 
Index of All Urban Consumers (CPI) published by the Secretary of Labor. 
The adjusted binders will also be published in the ``Notice'' section 
of the Federal Register. This procedure will permit binder adjustments 
in a timely manner. However, in no event will an adjusted binder exceed 
the FAA's cost for providing a service. The adjusted binders will 
become effective in accordance with the notice which sets forth the 
adjusted binders. The increased binder will apply only to each insured 
carrier's aircraft and other insurable items registered after the 
effective date of this final rule.
    Section 198.15(d) has been added to state the FAA's longstanding 
policy that when an operator acquires an aircraft previously covered 
under another operator's policy, the new operator must register it in 
the same manner as an aircraft not previously covered. The insurance 
registrations are not transferable.

Section 198.17

    Section 198.17 is added to reflect the expanded authority to cover 
goods and services provided in direct support of aircraft operations.

Appendix A to Part 198--Form of Application Named in Section 198.9

    Appendix A is removed in order to simplify the administration of 
the Aviation Insurance Program. The FAA office administering the 
Program will provide forms upon request.

Paperwork Reduction Act

    Information collection requirements in this final rule have been 
previously approved by the Office of Management and Budget (OMB) under 
the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) and have been assigned OMB Control Number 2120-0514.

International Civil Aviation Organization (ICAO) and Joint Aviation 
Regulations (JAR)

    The FAA has determined that a review of the ICAO Standards and 
Recommended Practices and JAR's is not warranted because there are no 
existing comparable rules.

Regulatory Evaluation Summary

    Executive Order 12866 (issued October 4, 1993) established the 
requirement that each agency shall assess both the costs and benefits 
of every regulation and propose or adjust a regulation only upon a 
reasoned determination that the benefits of the intended regulation 
justify its costs. In response to this requirement, and in accordance 
with Department of Transportation policies and procedures, the FAA has 
estimated the anticipated benefits and costs of this rulemaking action. 
In addition to a summary of the regulatory evaluation, this section 
also contains a regulatory flexibility determination required by the 
1980 Regulatory Flexibility Act, an international trade impact 
assessment, and an unfunded mandates determination. (A detailed 
discussion of costs and benefits is contained in the full evaluation in 
the docket for this rule.)
    The final rule will not impose significant additional costs on 
affected air carriers. Through the changes, the FAA will attempt to 
recover from the beneficiaries some of the costs of providing the 
current services. The total cost of administering the program amounted 
to about $375,000 for the 1997 fiscal year (FY97) ending September 
1997. Updating the $200 1975 binder by the latest annual CPI increases 
for 1996 and adjusted to the nearest $25 results in a binder of $575. 
This $575 multiplied by the number of aircraft newly registered per 
annum (estimated at 80), will yield $46,000 after the rule is amended. 
This amounts to 12.3% of FY97 administrative costs.
    Principal benefits of the rule are clarifications of the existing 
program authorities to issue aviation insurance as restated in the 
recodification of the Federal Aviation Act, P.L. 103-272, the expansion 
of the program to include

[[Page 13739]]

provisions of nonpremium insurance to certain domestic segments, and to 
cover operations involving international agreements between the U.S. 
Government and foreign countries or organizations. The expansions in 
program scope reflect new authority created by Congress based on 
requirements identified during the Gulf War. The purpose of this 
legislative change embodied in the current rule is to increase the 
efficiency and flexibility of the program to respond to Defense 
Department requirements for air transportation between points within 
the United States and foreign countries.
    The increase in the binder fee being instituted by the rule 
reflects the real cost of administration as adjusted for inflation. In 
the absence of this change, these administrative costs would be derived 
from the existing Aviation Insurance Revolving Fund to the ultimate 
detriment of current program participants as a whole. The FAA believes 
that the non-premium binder is equitable and justified in that it 
charges individual program participants for administrative costs 
associated with enrolling their aircraft in the program.

Regulatory Flexibility Determination

    The Regulatory Flexibility Act of 1980 (RFA) was enacted by 
Congress to ensure that small entities are not unnecessarily burdened 
by government regulations. The RFA requires agencies to consider the 
impact of rules on small entities, that is, small businesses, nonprofit 
organizations, and local governments. If there is a significant impact 
on a substantial number of small entities, the Agency must prepare a 
Regulatory Flexibility Analysis.
    This proposal will affect Part 121 scheduled operators as well as 
unscheduled operators. Applying the 1996 CPI to the $200 1975 binder, 
the extent of the costs imposed by this rule is a one time cost of $575 
per aircraft for registration. There are 23 small air carriers affected 
by this program with fewer than 1,500 employees. The FAA has determined 
that this binder, to utilize Chapter 443 insurance, will not have a 
substantial adverse economic impact on these entities. Rather, the 
binder costs facilitate program efficiency in general to the benefit of 
participating airlines, including airlines considered small entities. 
All of these air carriers need some form of insurance, because of the 
terms of their contracts with commercial lenders and lessors, to 
participate in the Chapter 443 Aviation Insurance Program and conduct 
certain DOD and DOS contract flights. Without the insurance 
availability, they could not benefit from the DOD and DOS business they 
otherwise obtain.

International Trade Impact

    The Office of Management and Budget directs agencies to assess the 
effects of regulatory changes on international trade. The rule will not 
have any impact on international trade as the registration fee will be 
the same for all carriers, foreign as well as domestic.

Unfunded Mandates Determination

    Title II of the Unfunded Mandates Reform Act of 1995 (the Act), 
enacted as Pub. L. 104-4 on March 22, 1995, requires each Federal 
agency, to the extent permitted by law, to prepare a written assessment 
of the effects of any Federal mandate in a final agency rule that may 
result in the expenditure by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more 
(adjusted annually for inflation) in any one year. Section 204(a) of 
the Act, 2 U.S.C. 1534(a), requires the Federal agency to develop an 
effective process to permit timely input by elected officers (or their 
designees) of State, local, and tribal governments on a ``significant 
intergovernmental mandate.'' A ``significant intergovernmental 
mandate'' under the Act is any provision in a Federal agency regulation 
that will impose an enforceable duty upon State, local, and tribal 
governments, in the aggregate, of $100 million (adjusted annually for 
inflation) in any one year. Section 203 of the Act, 2 U.S.C. 1533, 
which supplements section 204(a), provides that before establishing any 
regulatory requirements that might significantly or uniquely affect 
small governments, the agency shall have developed a plan that, among 
other things, provides for notice to potentially affected small 
governments, if any, and for a meaningful and timely opportunity to 
provide input in the development of regulatory proposals.
    This rule does not contain any Federal intergovernmental mandates 
or private sector mandates.

Significance

    The FAA has determined that this regulation will not be significant 
under Executive Order 12866, Regulatory Planning and Review, issued 
October 4, 1993. This rule is not considered significant under DOT 
Regulatory Policies and Procedures (44 FR 11034, February 16, 1979) and 
DOT Order 2100.5, Policies and Procedures for Simplification, Analysis, 
and Review of Regulations, May 22, 1980. A regulatory evaluation of 
this rule, including a Regulatory Flexibility Determination and 
International Trade Impact Analysis, has been placed in the docket.

List of Subjects in 14 CFR Part 198

    Aircraft, Freight, Reporting and recordkeeping requirements, War 
risk insurance.

The Amendment

    In consideration of the foregoing, the Federal Aviation 
Administration revises 14 CFR part 198 as set forth below:

PART 198--AVIATION INSURANCE

Sec.
198.1  Eligibility of aircraft operation for insurance.
198.3  Basis of insurance.
198.5  Types of insurance coverage available.
198.7  Amount of insurance coverage available.
198.9  Application for insurance.
198.11  Change in status of aircraft.
198.13  Premium insurance--payment of premiums.
198.15  Non-premium insurance--payment of registration binders.
198.17  Ground support and other coverage.

    Authority: 49 U.S.C. 106(g), 40113, 44301-44310; 49 CFR 1.47(b).


Sec. 198.1  Eligibility of aircraft operation for insurance.

    An aircraft operation is eligible for insurance if--
    (a) The President of the United States has determined that the 
continuation of that aircraft operation is necessary to carry out the 
foreign policy of the United States;
    (b) The aircraft operation is--
    (1) In foreign air commerce or between two or more places all of 
which are outside the United States if insurance with premium is south; 
or
    (2) In domestic or foreign air commerce, or between two or more 
places all of which are outside the United States if insurance without 
premium is sought; and
    (c) The Administrator finds that commercial insurance against loss 
or damage arising out of any risk from the aircraft operation cannot be 
obtained on reasonable terms from an insurance carrier.


Sec. 198.3  Basis of insurance.

    (a) Premium insurance may be issued by the FAA is the requirements 
of Sec. 198.1(a), (b)(1) and (c) are met.
    (b) Subject to Sec. 198.9(c), standby insurance without premium may 
be issued by the FAA if all of the following conditions have been met:
    (1) A department, agency, or instrumentality of the U.S. Government 
seeks performance of air services

[[Page 13740]]

operations, pursuant to a contract of the department, agency, or 
instrumentality; or transportation of military forces or materiel on 
behalf of the United States, pursuant to an agreement between the 
United States and a foreign government.
    (2) Such department, agency, or instrumentality of the U.S. 
Government has agreed in writing to indemnify the Secretary of 
Transportation against all losses covered by such insurance. Such an 
agreement, when countersigned by the President, constitutes a 
determination that the continuation of that aircraft operation is 
necessary to carry out the foreign policy of the United States.
    (3) A current copy of the aircraft operator's applicable commercial 
insurance policy or policies is on file with the FAA, including every 
endorsement making a material change to the policy. Updated copies of 
these policies must be provided upon each renewal of the commercial 
policy. Every subsequent material change by endorsement must be 
promptly provided to the FAA.
    (c) Insurance is activated, placing the insurance in full force, as 
specified by the FAA's written notification to the operator and remains 
in force until such time as either of the following occurs:
    (1) The requirements in Sec. 198.1 are no longer met; or
    (2) In the case of non-premium insurance, an aircraft operation is 
no longer performed under contract to a department, agency, or 
instrumentality of the U.S. Government; or pursuant to an agreement 
between the United States and a foreign government; or the 
Administrator finds that commercial insurance can now be obtained on 
reasonable terms.
    (d) Insurance policies revert to standby status upon written 
notification by the FAA to the aircraft operator. A policy will remain 
in standby status until either--
    (1) The insurance is activated by written notice; or
    (2) The policy is canceled.


Sec. 198.5  Types of insurance coverage available.

    Application may be made for insurance against loss or damage to the 
following persons, property, or interests:
    (a) Aircraft, or insurable items of an aircraft, engaged in 
eligible operations under Sec. 198.1.
    (b) Any individual employed or transported on the aircraft referred 
to in paragraph (a) of this section.
    (c) The baggage of persons referred to in paragraph (b) of this 
section.
    (d) Property transported, or to be transported, on the aircraft 
referred to in paragraph (a) of this section.
    (e) Statutory or contractual obligations, or any other liability, 
of the aircraft referred to in paragraph (a) of this section or of its 
owner or operator, of the nature customarily covered by insurance.


Sec. 198.7  Amount of insurance coverage available.

    (a) For each aircraft or insurable item, the amount insured may not 
exceed the amount for which the applicant has otherwise insured or 
self-insured the aircraft or insurable item against damage or liability 
arising from any risk. In the case of hull insurance, the amount 
insured may not exceed the reasonable value of the aircraft as 
determined by the FAA or its designated agent.
    (b) Policies issued without premium may be revised from time to 
time by the FAA with notice to the insured, to add aircraft or 
insurable items or to amend amounts of coverage if the insured has 
changed the amount by which it has otherwise insured or self-insured 
the aircraft or itself.


Sec. 198.9  Applicant for insurance.

    (a) Application for premium or non-premium insurance must be made 
in accordance with the applicable form supplied by the FAA.
    (b) Each applicant for insurance with the premium under this part 
must submit to the FAA with its application a letter describing in 
detail the operations in which the aircraft is or will be engaged and 
stating the type of insurance coverage being sought and the reason it 
is being sought. The applicant must also submit any other information 
deemed pertinent by the FAA.
    (c) Each applicant for premium or non-premium insurance must, upon 
request by the FAA, submit to the FAA evidence that commercial 
insurance is not available on reasonable terms for each flight or 
ground operation for which insurance is sought. Each aircraft operator 
who has a standby non-premium insurance policy must, upon request by 
the FAA, submit evidence to the FAA that commercial insurance is not 
available on reasonable terms before the FAA activates that policy. The 
adequacy of the evidence submitted is determined solely by the FAA.
    (d) The standby non-premium policy issued to the aircraft operator 
does not provide actual coverage until formally activated by the FAA.


Sec. 198.11  Change in status of aircraft.

    In the event of sale, lease, confiscation, requisition, total loss, 
or other change in the status of an aircraft or insurable items covered 
by insurance under this part, the insured party must notify the office 
administering the Aviation Insurance Program before, or as soon as 
practicable after, the change in status.


Sec. 198.13  Premium insurance--payment of premiums.

    The insured must pay the premium for insurance issued under this 
part within the stated period after receipt of notice that premium 
payment is due and in accordance with the provisions of the applicable 
FAA insurance policy. Premiums must be sent to the FAA, and made 
payable to the FAA.


Sec. 198.15  Non-premium insurance--payment of registration binders.

    (a) The binder for initial registration is $575 for each aircraft 
or insurable item. This binder is adjusted not more frequently than 
annually based on changes in the Consumer Price Index of All Urban 
Consumers published by the Secretary of Labor.
    (b) An application for non-premium insurance must be accompanied by 
the proper binder, payable to the FAA. A binder is not returnable 
unless the application is rejected.
    (c) Requests made after issuance of a non-premium policy for the 
addition of an aircraft or insurable item must be accompanied by the 
binder for each aircraft and insurable item.
    (d) When an operator acquires an aircraft or insurable item that 
was previously covered under an active or standby policy, the new 
operator must register that aircraft or item on its policy and pay the 
binder for each aircraft and insurable item.


Sec. 198.17  Ground support and other coverage.

    An aircraft operator may apply for insurance to cover any risks 
arising from the provision of goods or services directly supporting the 
operation of an aircraft that meets the requirements of Sec. 198.3(b).

    Issued in Washington, DC, March 13, 1998.
Jane F. Garvey.
[FR Doc. 98-7275 Filed 3-19-98; 8:45 am]
BILLING CODE 4910-13-M