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By CYRIL TUOHY, managing editor of Risk & Insurance®

"To my right, a mother shrieks in hysteria, her panic rising above the din. Ahead, a young man with curly brown hair and an easy smile walks about, helping to affix oxygen masks. Behind me, a woman's tears streams down her face as the shock sets in.

This is Southwest Flight 812."

--From The Blue Muse blog, by Shawna Malvini-Redden

These were the immediate thoughts of blogger Malvini-Redden, scribbled within hours of the roof rupturing on a Southwest Airlines 737-300 aircraft at 36,000 feet on April 1, over the desert of Yuma, Ariz.

It was no April Fools joke.

Only minor injuries to a flight attendant and to at least one passenger were reported, the airline said. Southwest was able to send another plane from Phoenix to pick up the 118 passengers in Yuma and then fly on to Sacramento, Calif., the destination of the original flight.

With no reports of serious injuries, no third-party liability issues for the marketplace are apparent, said Charles Cederroth, a long-time aviation broker with Aon.

Standard airline hull coverage will respond to the physical damaged sustained by the aircraft--a six-foot-long tear in the ceiling above the overhead bins--Cederroth said. So it's all pretty cut and dry from an insurance standpoint.

NOW FOR THE ISSUES ...

Now come the more vexing issues surrounding business interruption and so-called loss of use, which are not included in standard aviation insurance policies. Standard policies also don't compensate airlines for flight rescheduling and the subsequent inspections.

On April 2, the airline announced it would inspect Boeing 737 jets for "skin fatigue," and on Sunday, April 3, two days after the incident, it announced it had inspected 19 of its 79 planes scheduled for extra inspection.

The inspections caused the airline to cancel about 300 flights, the airline also said.

"That means that neither the additional costs the airline incurred inspecting its fleet nor the revenue lost due to flight cancellations would be covered under the standard aviation policies," said Cederroth, in an interview with Risk & Insurance®.

Skin fatigue sets in when the passenger cabin goes through thousand of pressurization and depressurization cycles that stem from the takeoffs and landings. The Southwest jet that suffered the damage had logged 39,781 cycles (a cycle being one takeoff and one landing), the FAA said.

"Prior to the event regarding Flight 812, we were in compliance with the FAA-mandated and Boeing-recommended structural inspection requirements for that aircraft," said Mike Van de Ven, Southwest's executive vice president and chief operating officer, in a statement on the airline's website. "What we saw with Flight 812 was a new and unknown issue."

The aircraft manufacturer, in this case Boeing Co., has liability coverage for the grounding of aircraft as part of its aviation product liability policies, Cederroth said.

In the Southwest 812 incident, no aircraft was grounded by the Federal Aviation Administration. The FAA chose instead on April 4 to order extra inspections to early-model 737 aircraft, of which there are about 175 in operation worldwide. Of that 175 total, 80 are U.S. registered, most of which are operated by Southwest, the FAA said.

"In this case, the FAA required an increase in the frequency of inspection of certain high-cycle aircraft models," Cederroth said. "So, there is no coverage response from a manufacturer perspective."

Chartis, CV Starr, ACE, Allianz, Munich Re and Swiss Re are among the larger underwriters in the aviation marketplace. Specialized aviation pools include Global Aerospace and U.S. Aircraft Insurance Group.

April 12, 2011

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