Civil Aviation (Carriers' Liability) Amendment Regulations 1998 (No. 1) 1998 No. 256
EXPLANATORY STATEMENT
STATUTORY RULES 1998 No. 256
Issued by the authority of the Minister for Transport and Regional Development
Civil Aviation (Carrier's Liability) Act 1959
Civil Aviation (Carriers' Liability) Amendment Regulations 1998
Part IVA of the Civil Aviation (Carriers' Liability) Act 1959 (Carriers' Liability Act) imposes a requirement that carriers of passengers under the Act are to be insured against liability to passengers for death or personal injury. Section 41 D of the Carriers' Liability Act provides that the insurance coverage may not be affected by any warranty or exclusion in the contract of insurance, except as prescribed by regulations. Section 43 of the Act provides that the governor-general may make regulations prescribing all matters which are required or permitted to be prescribed by the Act.
Subregulation 9(1) of the Civil Aviation (Carriers' Liability) Regulations (Carriers' Liability Regulations) permits contracts of insurance to exclude liability by adopting certain standard exclusion clauses used by the Australian and international aviation insurance industries. The standard exclusion clauses are listed in subregulation 9(2), and the texts of those exclusion clauses appear in the note to the regulations.
The Civil Aviation (Carriers' Liability) Amendment Regulations 1998 (the regulations) add a new standard exclusion clause to those permitted by regulation 9 of the Carriers' Liability Regulations. The new exclusion clause, "Date Recognition Exclusion Clause" or "AVN 2000", excludes liability for any loss or damage incurred as a result of computer software or hardware failing to recognise a particular date, or to change dates. The exclusion clause is intended to address the problem that computer systems may fail to recognise the year 2000 (Year 2000 bug), satellite-based navigation systems may also have difficulty recognising the change from 21 August 1999 to 22 August 1999.
The standard exclusion clause AVN 2000 will only be permitted in contracts of insurance until 20 August 1999; thereafter, insurers will either have to provide comprehensive carriers' liability insurance, or refuse to provide insurance. The inclusion of the clause now is intended to permit the issue of insurance certificates under subsection 41C(7) of the Carriers' Liability Act to carriers who have insurance contracts containing AVN 2000, as without the amendment such contracts would not be acceptable and those carriers could not carry passengers. As the clause is accepted internationally, particularly in the United States' and European markets, its inclusion in Australian carriers' liability contracts of insurance is inevitable. Without the inclusion of the clause, most of Australia's fleet of passenger-carrying aircraft would be grounded
Over the next year the government, insurers, and the aviation industry will work towards ensuring that those affected by the Year 2000 bug adequately address the problem. Because of the concerns over passenger safety, a carrier who is not regarded as Year 2000 compliant by 20 August 1999 will not be provided with carriers' liability insurance, and hence will not be permitted to carry passengers.
Details of the proposed regulations appear in the attachment.
The Regulations commenced on gazettal except for regulation. 6 which will commence on 20 August 1999.
Attachment
NOTES ON CLAUSES
Clause 1 - Citation
The name of the regulation,; is the Civil Aviation (Carriers' Liability) Amendment Regulations 1998 (No. 1).
Clause 2 - Commencement
This clause provides that regulation 6 will commence on 20 August 1999, and the remainder of the regulations will commence on gazettal. Clause 6 of the regulation provides for the repeal of paragraph 9(2)(d) of the Carriers' Liability Regulations, which paragraph is inserted by clause 5.5 of these regulations with effect from the date of gazettal. That is, paragraph 9(2)(d) of the Carriers' Liability Regulations will have a life only from the date of gazattal of the regulations to 20 August 1999.
Clause 3 - Amendment
This clause provides that the Carriers' Liability Regulations are amended as set out in these regulations.
Clause 4 - Regulation 1 (Citation)
This clause changes the name of the Carriers' Liability Regulations to the Civil Aviation (Carriers' Liability) Regulation 1991, in accordance with current policies in relation to the citation of delegated legislation.
Clause 5 - Regulation 9 (Prescribed exclusions of insurer's liability)
This clause amends regulation 9 of the Carriers' Liability Regulations, Subclauses 5.1 to 5.4 inclusive simply make cosmetic changes to the wording of paragraphs 9(2)(a) to 9(2)(c) of the Carriers' Liability Regulations.
Clause 5.5 inserts the 'Mate Recognition Exclusion Clause', or "AVN 2000" into subregulation 9(2) of the Carriers' Liability Regulations. This subregulation lists the standard exclusion clauses which are permissible in carriers' liability contracts of insurance. The new exclusion clause excludes liability for any loss or damage incurred as a result of computer software or hardware failing to recognise a particular date, or to change dates. The exclusion clause is intended to address the problem that computer systems may fail to recognise the year 2000 (Year 2000 bug); satellite-based navigation systems may also have difficulty recognising the change from 21 August 1999 to 22 August 1999.
The standard exclusion clause AVN 2000 will only be permitted in contracts of insurance until 20 August 1999; thereafter, insurers will either have to provide comprehensive carriers' liability insurance, or refuse to provide insurance. The inclusion of the clause now is intended to permit the issue of insurance certificates under subsection 4 1C(7) of the Carriers' Liability Act to carriers who have insurance contracts containing AVN 2000, as without the amendment such contracts would not be acceptable and those carriers could not carry passengers. As the clause is accepted internationally, particularly in the United States' and European markets, its inclusion in Australian carriers' liability contracts of insurance is inevitable. Without the inclusion of the clause, most of Australia's fleet of passenger-carrying aircraft would be grounded.
The note at the end of clause 5 provides for the addition of the text of AVN 2000 to the notes at the end of the Carriers' Liability Regulations.
Clause 6 - Regulation 9 (Prescribed exclusions of insurer's liability)
This clause repeals paragraph 9(2)(d) of the Carriers' Liability Regulations, with effect from 20 August 1999 (see clause 2).
REGULATORY IMPACT STATEMENT
CIVIL AVIATION (CARRIERS' LIABILITY) AMENDMENT REGULATIONS 1998 (No.1)
PROBLEM
Problem
Aviation insurers throughout most of the world market have recently moved almost unilaterally to introduce a new exclusion clause ("Date Recognition Exclusion Clause" or "AVN 2000") into their policies covering aviation operators. The exclusion has the effect of removing the insurees liability for compensation, where the accident has occurred as a result of the failure of an operator's computer systems or other avionics, systems, Lloyd's, the largest insurer in the market, took the lead despite a request from the Australian Government that it take into consideration that the exclusion clause conflicts with Australian legislated requirements that operators carrying passengers must hold non-voidable passenger liability insurance, under the national compulsory carriers' passenger liability insurance scheme. (A small number of standard, Lloyd, exclusions are allowed under the legislation, such as for nuclear contamination or war).
At this stage, it is expected that once an operator satisfies the insurer, through questionnaires and other measures, that he or she is Y2K compliant, then the insurer will "write back" the cover to include coverage of accidents due to Y2K events.
The Australian compulsory carriers' passenger liability scheme is administered by the Civil Aviation Safety Authority (CASA). It has recently come to the attention of CASA delegates that several Australian insurers have followed London's lead and have been issuing contracts with the exclusion clause since 1 July 1998. The delegates consider, on legal advice, that the inclusion of AVN 2000 in an insurance contract would exclude an insurees liability to compensate an operator, and hence passengers, for injury or death in the event of an accident caused by the failure of an operator's computer systems or avionics to recognise changes in date.
Contracts of insurance containing this exclusion therefore do not meet the requirements of an "acceptable contract of insurance" under Part IVA of the Civil Aviation (Carriers' Liability) Act (the Act), which requires that operators carrying farepaying passengers hold mandatory non-voidable passenger death or injury liability insurance.
Knowledge of the inclusion of the clause in a contract would prevent CASA delegates from issuing an operator a Certificate of Compliance under the scheme, so that he or she can continue to carry fare-paying passengers.
CASA delegates have no option, under the relevant legislation but to reject these contracts.
In addition, within a week or two, CASA Will have little option, under the legislation and the Regulations as they now stand, to start revoking Certificates of Compliance where they have been granted (until recently without CASA's knowledge) on the basis of contracts of insurance containing AVN 2000.
This could have the effect of grounding a large part of the Australian commercial fleet for some time, while operators attempt to prove their Y2K compliance to their insurers, and regain their insurance. According to our advice, many smaller operators have not started implementing their Y2K compliance. The two major domestic carriers have not completed their compliance programs. In addition, there could be considerable fallout from foreign governments where foreign carders are affected.
The insurers have made it clear that the operators' options are guarantee Y2K compliance or no insurance. This would involve at least one of the major domestic carriers and all its regional subsidiaries, and some of the 50 foreign carriers operating to Australia.
Insurers have proposed the exclusion as a result of their expectations of a high level of exposure to claims in a major air accident where some computer systems may not be able to recognise dates in the year 2000 ("Y2K bug"), or other dates. Once operators can assure insurers they are Y2K compliant, the cover for Y2K Will be "written back" into the policies.
Problems for the aviation industry are likely to start from 21 August 1999, when it is expected that satellite-based global positioning systems may begin to fail. The insurers also consider the risk uninsurable as it is a well-known problem, and hence non-fortuitous for the purposes of insurability and a problem that can be addressed by compliance measures.
Other overseas aviation insurers have followed the London market's lead by introducing a Y2K exclusion clause in their contracts. These include US and Canadian insurers, whose operators are subject to compulsory non-voidable passenger liability insurance requirements that are nearly identical to Australian requirements.
If the impasse between the industries is not resolved in the very near future, and its own concerns about its legal responsibilities and liabilities are not met, CASA has indicated that in less then probably ten days it will have no option but to act in such a way that a large part of the Australian commercial fleet will be grounded until such time that they each prove their Y2K compliance.
Australian aviation insurance is a small and specialised area of business. Many are subsidiaries of overseas companies are or reliant on them for reinsurance. Australia is not in a position to go against the trend of the world market.
Government Action
Given the urgency and seriousness of the problem, only the Government can provide the temporary solution at such short notice covering off the interests of all parties as far as possible and satisfying the legal requirements. The solution will give the industries time, in consultation with the Department, to develop and implement long-term solutions.
The action is at the request of the major Australian aviation insurer and CASA. Both major domestic carriers support the action.
Months of negotiation among insurers world-wide is required, and considerable consultation with the aviation industry. More definite knowledge about the affects of the Y2K bug beyond 2000 is also required.
A number of options for long-term solutions to the problem include CASA's proposed Y2K education program for all AOC holders and Y2K compliance measures proposed by the insurers, as they come up for renewal over the next year.
OBJECTIVES
Objectives
In the short term, the Government's action is to ensure that for the immediate future air operators can meet both the commercial demands of their insurers, and the compulsory insurance requirements of Australian legislation. This will ensure that there is no wide-spread and long-term disruption to Australian commercial air services, or to foreign carriers serving the Australian market.
The short-term objective offered allows the parties the considerable lead-time needed to consider the problem further among themselves and to develop and implement long-term objectives.
The long-term solution is a matter of public safety, both for the travelling and nontravelling public.
Policy/Regulations
The Government's policy on the need for passengers or their relatives to be compensated, as far as possible, for death or injury resulting from an air accident dates back to 1993, when the non-voidable passenger insurance requirement was developed, closely modelled on long-standing US and Canadian legislation which the insurance industry was familiar with. It is reflected in the Civil Aviation (Carriers' Liability) Act (the Act) and Regulations. Part IVA of the Act and its Regulations (relating to the compulsory passenger insurance requirement and its link to the issue of an Air Operators Certificate is administered on behalf of the Minister by the Civil Aviation Safety Authority (CASA).
OPTIONS
Options
Non regulatory options being considered are all long-term solutions. They include CASA's proposed Y2K education program for all AOC holders and Y2K compliance measures proposed by the insurers, as they come up for renewal over the next year. The "write back" option offered by the insurers is expected, at this stage, to restore the situation to its current settings.
Constraints
Given that CASA should really be acting, under the law, in the next few days to revoke large numbers of AM, unless it has the comfort of the proposed amendment, using the above options at this stage is unrealistic. Months of negotiation among insurers world-wide is required, and considerable further consultation with the aviation industry. More definite knowledge about the effects of the Y2K bug beyond 2000 is also required.
IMPACT ANALYSIS
1. The following groups will be affected: the aviation insurance industry (a small, specialised business in Australia, often dependent on overseas markets for reinsurance) in Australia and oversees, and the aviation industry in Australia (including foreign carriers operating in the market). In addition, CASA. The same industries will be affected by the solutions. By extension, aviation consumers and the general public, and Commonwealth and State Governments.
2. The option is a minor amendment to the existing Regulations, which will allow CASA to continue to administer them without massive disruption to the aviation industry.
3. For the aviation insurers, there is a benefit - in the life of the amendment (a potential cost in the long-term - with "write-back"). For the aviation industry, also a benefit - in the life of the amendment. Any cost to operators is not triggered by the amendment to the Regulation, but by the commercial demands of the insurers. The amendment will give the industry breathing space in which to distribute the cost over the year, if it wishes - if they have not already started an Y2K compliance. Note: The aviation industry cannot avoid these costs in any case. Y2K compliance is a public safely concern. The industry must address that concern shortly, regardless of the insurers' actions.
For CASA, there is a benefit of avoiding vicarious liability claims and litigation arising tom accidents relating to Y2K, where the operator was proven to be non-Y2K compliant and the amendment had not been made (CASA has commercial insurance cover for itself and the delegates administering the carriers' liability scheme).
4. If an accident is caused by the year 2000 bug when the proposed amendment is in force, passengers or their relatives will not be compensated through insurance for their death or injury. Aviation businesses may still be sued for damages as a result of these accidents, and would have to bear any costs themselves. In addition, as the proposed amendment to the Regulation will sunset on 20 August 1999, if carders have not demonstrated that they are Y2K compliant by that date they will not be allowed to fly. It should however also be noted in this regard that the amendment, and the exclusion it allows, sunsets before the first known critical date recognition date of 21122 August 1999. It is not expected, on current knowledge, that a date recognition failure will occur of itself, and hence cause an accident, before the 21122 August 1999.
5. The groups identified. under 3 and the public, both travelling and nontravelling will be affected as follows. The year's grace given to the aviation industry by the amendment is expected to see most of the Australian commercial fleet Y2K compliant by August 1999, and with therefore "writeback" in their insurance policies covering Y2K events. This is expected to lessen the chances of air accidents from August 1999, where compensation due to each passenger is $500,000, and damage to third parties and property on the ground can run into millions with even medium sized aircraft. It could also mean that the exclusion proposed could be repealed before the amendment to the Regulation expires on 20 August 1999.
6. The above information was supplied by insurers and CASA, supplemented by publicly available information and some Government information on Y2K problems and avionics.
CONSULTATION
1. The main affected parties are the aviation industry, the insurance industry, and CASA. The travelling public is also affected.
2. CASA and the insurance industry have agreed to, and now urgently request, the amendment. Both major domestic carriers support the amendment.
3. CASA, in its capacity as administrator and general aviation safety regulator, will undertake further consultation with the aviation industry shortly. This would not necessarily be triggered by this amendment - it would have to be done in any case. Most Australian operators are still non-Y2K compliant,
CONCLUSION
1. The option chosen is preferred, as the one requested by the administrator and the insurance industry, while they are offering to develop long-term solutions, and is the only one possible at this stage, given the severe time-constraints and very serious nature of the problem.
2. The non regulatory options discussed under "Options" are all long-term solutions. They require considerable lead-time to develop consensus between the world insurance industry and Australian aviation industry, to the satisfaction of CASA. They are unrealistic given the extreme time-constraints and very serious nature of the problem.
The amendment to the Regulation proposed can be introduced relatively quickly to meet CASA's immediate concerns about the viability of the carriers' liability scheme, and its own vicarious liability in the matter.
As it stands, there is no immediate cost for any business arising from the amendment. However, if any accident occurs as a result of the Y2K bug then passengers and their relatives will not receive any insurance compensation as a result of the amendment. Aviation businesses may be required to pay compensation for any accidents that occur as a result of the Y2K bug out of their own resources rather than through insurance. With regard to the currently expected likelihood of an accident due to Y2K failure before the sunset date of the amendment, please note comments on this issue under Impact Analysis, Point 4.
3. An amendment to the Regulation as proposed is, under the circumstances, the most efficient and effective option.
4. The option preferred was chosen due to the severe time-constraints involved, and the urgency and seriousness of the problem. The Government is not in a position to control the insurance industry, especially the overseas market.
IMPLEMENTATION AND REVIEW
1. The proposed option will be implemented by an amendment to the Regulations as soon as possible.
2. The option is clear and comprehensible to users, and can be repealed before the end of the period, if necessary.
3. The problem is serious and will be monitored constantly, in case Australia has to react again at short notice to overseas developments, and as part of the Government's and Department's Y2K program.
4. The amendment will cease to have force in one year.