Insurers balk at 'dirty bombs' payouts

European planes could be grounded in row over cover for terrorist attacks

Flights could be grounded across Europe as the result of a growing row about insurance against terrorist threats.

Many leading insurers have already told airlines that they are going to exclude damage to aircraft caused by nuclear weapons and so called dirty bombs - chemical explosives that spread radioactive contaminants - set off by terrorists. They are now saying they may also refuse to pay out for death or injury caused to passengers in such an attack.

In this scenario, planes would not be allowed to fly, as the Warsaw convention covering civil aviation requires passengers to be insured under the airline's own cover. The problem emerged earlier this year when a group of London-based insurers, which dominate the aviation market, started withdrawing cover for aircraft "hulls".

This has left several airlines in the position of being liable for the cost of replacing an aircraft damaged in a terrorist attack. This could be as high as £100m and could bankrupt many small airlines.

However, the situation is threatening to get worse. In June, underwriters at Lloyd's of London formed the Aviation Insurance Clauses Group, which is pushing though changes to the wording of standard insurance policies.

One of these proposals involves "war, hijacking and other perils". The current draft would leave insurers not liable for either hulls or passengers in the case of "hostile detonation of any device employing atomic and/or nuclear fission" and the "hostile use of radioactive contamination".

This would mean the insurers were not liable for any damage caused to aircraft by a dirty- bomb attack.

A leading insurer said that this was sheer economic necessity, as a nuclear or dirty bomb at an airport could cause billions of pounds of damage and bankrupt an insurer.

But British Airways is among the airlines that fear they could be grounded if this threat were carried out. "If they stop covering for passengers themselves, we cannot fly without that cover," said a spokeswoman.

The International Air Transport Association and the Association of European Airlines are both lobbying the European Commission to step in to underwrite any cover to keep airlines flying.

The US administration already provides this protection for American airlines. "This is part of the uneven playing field we face across the Atlantic," said a spokesman for a top European airline.