Air India to pay $2.5m more as premium to its insurer Marsh

Written by Kumud Das | Mumbai | Updated: Dec 1 2009, 05:23am hrs
National Aviation Company of India Ltd (Nacil), which is waiting for a government bailout seems to be in a catch 22 situation over the issue of repairing one of its aircrafts which met an accident on September 4 while taking off for a Middle East destination.

Industry sources point out though it is now around three months when the Air Indias air craft VT-ESM was damaged extensively by fire, the company is not repairing the aircraft though the entire repair cost will be borne by the insurers led by New India Assurance.

Sources say, Air India will have to pay high additional premium over what it has already paid during its 2009-10 renewal of its policy on October 1, in case the insurance claim for the damage amount exceeds around $ 12 million.

Air India is already paying a hefty leasing charge of over Rs 3 crore every month for the damaged aircraft.

The fact that Nacil has to pay additional amount for its renewal has come to light much after the renewal deal was completed by October 1, though the accident and any consequent claim out of that was known much before the final deal was placed in the London market.

Nacils renewal deal, which had seen much controversy, the way it was awarded to a consortium led by Reliance General was completed in the London aviation market at the original tender price of $24.23 million. In an unprecedented move, the broker to Nacil deal, Marsh has gone ahead and has signed another deal quietly with the London-based reinsurers to pay additional premium of $2.15 million, in case the claim out of the damaged aircraft VT-ESM exceeds $ 12 million after 13 days of the original deal.

However, commenting on the separate deal to pay the extra premium to the reinsurer, Marsh said it conducts its business with highest level of integrity and in compliance with laws.

``We as part of our professional conduct do not discuss client issues with media. We can confirm, we have done this business with good professional standards, said Sanjay Kedia , chief executive officer, Marsh India from Germany.

However, various professional estimates done by surveyors show the repairing cost of the damaged aircraft will be around $ 17- $20 million, which is much more than the stipulated amount agreed between Marsh and London-based reinsurers for triggering payment of the additional premium.

Going by the new arrangement, the moment Nacil repairs its aircraft and avails the insurance claim, it has to simultaneously pay the additional premium to the reinsurers.

Replying to FEs queries Jitendra Bhargava, executive director, Nacil who confirmed about the Marsh deal with the London-based reinsurers said Nacil has its own reasons for not repairing the aircraft, though it is paying leasing charges every month.

``We are yet to decide, what to do with the damaged aircraft. It can no more be redeployed for flying overseas as we are now using new aircrafts in these sectors and the aircraft is too big for domestic sector. Also we cannot sell it now with good price as the aviation market is down with global recession. If we cannot redeploy the aircraft profitably then what is use of repairing it in a hurry he argued.

However industry sources point out that the agreement for additional premium in case of the claim payment is matter of inefficient placement of the original AI deal by its insurers and broker.

Air India as a part its 2008-09 insurance policy can recover the entire cost of repair from the insurance and reinsurance companies, which are also ready to write the claim cheque.

In fact, AI can claim a maximum of $ 70 million for repairing any of its aircrafts. But Air India whose way of handling of 2009-10 renewal has been subject to massive controversy from the beginning has its own compulsion for not availing this money from the insurers and utilising it for repairing the aircraft, said industry sources.