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Airport Insurance Coverage and Risk Management Practices (2011)

Chapter: CHAPTER FOUR Coverage Selection

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Page 19
Suggested Citation:"CHAPTER FOUR Coverage Selection." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Page 19
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Suggested Citation:"CHAPTER FOUR Coverage Selection." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Page 20
Page 21
Suggested Citation:"CHAPTER FOUR Coverage Selection." National Academies of Sciences, Engineering, and Medicine. 2011. Airport Insurance Coverage and Risk Management Practices. Washington, DC: The National Academies Press. doi: 10.17226/14611.
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Page 21

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17 CHAPTER FOUR COVERAGE SELECTION Several differences emerged in the types of coverage selected by each size classification. First, medium air- port operators do not purchase workers’ compensation or employment liability coverage, as do their large and small airport operator counterparts. Also of note is that small air- port operators do not report the purchase of insurance for construction outside of the few respondents who purchase builders’ risk policies. Other disparities among respondents include that large airport operators do not report the pur- chase of pollution liability at the same rate as smaller air- port operators, and medium airport operators do not report the purchase of auto liability coverage as frequently as their large and small counterparts. Despite these differences, a majority of airport operators regardless of size did confirm the purchase of property, gen- eral liability, and business interruption coverage. INSURANCE FOR CONSTRUCTION Thirteen of 17 respondents purchase coverage for construc- tion activities on their airport. Of those, seven procure builders’ risk coverage, and four participate in an owner- controlled insurance program (OCIP). All but one of the large airport operator respondents confirmed the purchase of builders’ risk coverage. Three large airport operators buy contractors’ pollution liability. Another three have an OCIP. Three of six medium airport operator respondents are undergoing construction. Of these, two participate in an OCIP that includes coverage for builders’ risk. One addi- tional medium airport operator reported that implementa- tion of an OCIP is under consideration at this time. Three of seven small airport operators indicated the pur- chase of insurance for construction. Of those that do, some buy builders’ risk insurance, whereas others indicated that insurance is purchased through project contractors. Survey instrument results illustrate that both large and medium airport classifications are actively involved in con- struction programs; therefore, a large percentage purchase construction coverage to provide for any potential pro- PROPERTY AND LIABILITY INSURANCE All airport operator respondents purchase property and gen- eral liability insurance, and all but one of 19 purchase cov- erage for business interruption. Fourteen of 19 respondents purchase both crime and employment practices liability, and well over half of respondent airport operators purchase build- ers’ risk, workers’ compensation, commercial auto coverage, and coverage for public officials’ errors and omissions. The breakdown of buying practices looks much the same for large airport operators. All stated that they purchase property, business interruption, general liability, and crime policies. All but one large airport operator confirmed the purchase of builders’ risk insurance, and four of six also buy workers’ compensation, auto liability, public officials’ errors and omissions, and employment practices liability. The survey did not specifically inquire about purchase of certain types of catastrophic loss coverages such as earth- quake and coastal windstorm. Because relatively few of the airport operators surveyed are in locations where such cov- erage is a concern, it would be difficult to obtain meaningful data concerning such coverage in this survey. All medium airport operator respondents indicated that they purchase property insurance. Three of six medium respondents buy coverage for builders’ risk, crime, employ- ment liability, and pollution. One medium airport operator reported the purchase of workers’ compensation insurance, and one reported the purchase of excess workers’ compensa- tion coverage. Purchasing habits of smaller airport operators show that these facilities are coverage-heavy and that small airport operators tend to purchase a wide variety of coverage types. Again, all small airport operators surveyed carry property insurance. All small airport operator respondents also indi- cated the purchase of business interruption, general liability, workers’ compensation, and employment practices liability. All but one carry coverage for auto liability. Five of seven small airport operator respondents purchase crime, fiduciary liability, public officials’ errors and omission, and directors’ and officers’ liability coverage. Three of seven small opera- tor respondents also buy builders’ risk, professional liability, and pollution coverage.

18 gram losses. Both medium and large airport operators also reported experience with OCIPs; however, only large airport operators reported the purchase of contractors’ pollution lia- bility insurance. WAR RISK AND TERRORISM INSURANCE Terrorism insurance in the United States is provided through two principal mechanisms. One is government-sponsored under the Terrorism Risk and Insurance Act (TRIA) and its successors and provides a limited pool of coverage ($100 bil- lion) and requires certain conditions such as a declaration of an act of terrorism, losses of more than $100 million total from the terrorist act, and other requirements. Under TRIA, insurers are “reinsured” by the federal government. “War risk” is excluded under most commercial policies since the terrorist acts of 2001. However, in recent years, it has been possible in the aviation industry to “buy back” the coverage. Doing so provides a less restrictive form of cover- age without the conditions required by TRIA. At the 2009 Airports Council International (ACI) Risk Management Conference, presenter Clayton Hill, Area Vice President for Broker Arthur J. Gallagher, made an effective case for the purchase of war and terrorism coverage, point- ing out, “Serious consideration should be given to obtaining War and Related Perils coverage. This is often under sold and misunderstood as only coverage for acts of war and ter- rorism” (ACI-NA Insurance and Risk Management Confer- ence 2009). However, a liability policy as issued without the war risk endorsement excludes coverage for strikes, riots, civil commotions or labor disputes, and/or any malicious act of sabotage. Labor disturbances do not apply only to airport employees and may extend to assaults by an individual or a group in connection with any of the above acts. Without war and terrorism coverage, these acts may go uncovered. Furthermore, without the war risk endorsement, physical injuries to others resulting from one person’s malicious act may also remain uncovered (ACI-NA Insurance and Risk Management Conference 2009). War risk and terrorism concerns correlate closely to air- port size, although only four of 19 airport operators (all large airport systems) identified the exposure as among their three greatest loss exposure concerns. The larger the airport, the stronger the concern that the facility and its passengers may be targeted. A majority of large airport operator respondents and half of medium respondents do purchase war and terror- ism coverage in some form, whereas a lesser percentage of small airport operators elect this coverage. Of airport opera- tors that do elect coverage, the tendency is toward inclusion in property and liability lines of coverage. Medium and large airport operators tend to purchase war and terrorism cover- age for property. Small airport operators tend to buy war and terrorism coverage for liability lines. Of the 19 total airport operator respondents, 14 indicated purchase of some form of war and terrorism coverage. Ten of 19 purchase the coverage for general liability and 11 of 19 for property. Five of 19 respondents do not purchase any form of terrorism coverage (see Figure 4). A 2009 survey conducted by Airports Council International–North Amer- ica found that 10 of 35 respondents had no form of terrorism liability coverage and 13 of 35 did not purchase the coverage for property insurance. FIGURE 4 Lines of coverage for which airport operators purchase war and terrorism insurance. Numerical axis shows number of airport operators responding. Five of six large airport operator respondents purchase war and terrorism coverage for airport property. Four of the six large operators purchase war and terrorism coverage for general liability lines, and two purchase war and terrorism coverage on builders’ risk policies. Only one large airport operator respondent did not purchase any type of war and terrorism insurance. Three of six medium airport operator respondents pur- chase war and terrorism coverage for property. Only two of the six medium airport operators procure war and terrorism coverage for general liability and builders’ risk policies. One medium airport operator respondent also did not purchase any type of war and terrorism coverage. Two of the seven small airport operators reported that they do not purchase insurance for acts of war and terror- ism. Of those that do, three of five operators purchase war and terrorism coverage for liability, and two operators obtain war and terrorism coverage for property. Although the sur- vey did not explore why a smaller operator would decline to purchase this coverage, one assumption is that smaller air- port operators do not perceive the risk of an event being as likely as do the larger airport operators. Acts of terrorism can be launched from any airport, however.

19 INTERVIEW RESULTS—COVERAGE SELECTION The eight airport operators interviewed were not asked to iden- tify the lines of coverage purchased but to indicate whether any coverage had been added or dropped recently. None had added or dropped any coverage lines. Interviewees were asked specif- ically about two types of insurance: terrorism and construction. Terrorism and War Risk Five of eight operators buy some form of terrorism or war risk insurance for liability and seven purchase coverage for property. Responses as to why the individual operator pur- chases the coverage showed no clear pattern. One operator said the purchase was the result of contractual requirements in leases. Another was concerned about coverage for defense. A third indicated that price was a motivator as the coverage is currently inexpensive. This same operator indicated that the entity would not buy the coverage at 2002 prices. Insurance for Construction Interviewees were asked only about the type of risk financ- ing used for construction activities, not about the actual coverages purchased. Four of the operators had OCIPs. One had participated in a contractor-controlled insurance program (CCIP), and the remaining three used the “tradi- tional” approach, allocating the risk to the contractor or construction manager and relying on indemnity and addi- tional insured status under the contractor’s relevant liabil- ity policies. Three of the airport operators that had used OCIP indi- cated they would use the technique again. A fourth did not answer this question. One “traditional” risk-financing operator said it would use the same technique again, and another that had used the “traditional” method indicated an interest in OCIP. The remaining interviewees did not answer the question.

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 30: Airport Insurance Coverage and Risk Management Practices identifies both the variables that affect insurance purchasing for airport operators and the range of risk management practices that exist among U.S. airports. The report is designed to help airport officials confronted with risk-financing and insurance-purchasing decisions.

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