Despite Protection, Airlines Face Lawsuits for Millions in Damages

Even with Congress limiting the legal liability of American Airlines and United Airlines in the wake of this month’s terrorist bombings, the air carriers will still face a flood of costly lawsuits.

If no restrictions had been made, American and United would have faced a substantial risk of bankruptcy, said Robert Rabin, a professor at Stanford Law School. “It’s a national catastrophe. It’s not the time to go about blaming a particular industry,” he said.

The closest case study of the byzantine nature of claims filed over terrorist attacks relates to the bombing of Pan Am Flight 103 over Lockerbie, Scotland, in 1988. That crash killed 270 people.

In 1996, after eight years of painstaking legal proceedings, victims’ families and their lawyers recovered some $500 million from Pan Am’s insurers--the largest overall air crash settlement in history. In 1991, Pan Am went out of business, partly as a result of the disaster.

To protect UAL Corp. and AMR Corp.--parent companies of United Airlines and American Airlines--Congress on Friday enacted a measure to limit the airlines’ liability. The federal government will determine later who will pay for costs related to ground casualties and property damage, leaving the two airlines liable only for damages related to passenger deaths.

The protections were folded into a larger bailout measure for the ailing airline industry. The government also agreed to provide air carriers with “war risk insurance” on domestic flights for 180 days. Typically, such coverage is available only on international flights.

American and United carry about $1.5 billion each in liability coverage, with a $500-million deductible, according to analysts.

So far the total liability for “business interruption” and property damage from the World Trade Center and Pentagon attacks has been estimated at $42 billion by Milliman, an insurance industry consulting firm. Vast costs for death and injury benefits and post-traumatic stress claims by rescue workers and witnesses would add to that figure. Hurricane Andrew in 1992 was the costliest disaster in U.S. history, with about $20 billion in damages.

Friday’s legislation is not without precedent, according to Rabin and other legal experts.

During the London Blitz in World War II, the British government compensated property owners regardless of whether they had insurance coverage. The bombing by the Nazis was considered a shared liability of society as a whole.

“Did [the airlines] suffer from anything of their own doing, or did they suffer because they are American targets? It seems overwhelmingly to be the latter,” said Tom Campbell, a former congressman from Silicon Valley and a professor at Stanford Law School. “It’s more just and fair that the financial cost be spread across all Americans.”

No lawsuits have yet been filed over the recent terrorist attacks, partly because the Assn. of Trial Lawyers of America called for an unprecedented moratorium on civil suits. The pause is expected to last up to several months. It was proposed to allow relief efforts and damage assessments to go forward unimpeded by a flood of legal actions.

But eventually, United and American and their insurance carriers will face that flood. And they will not be the only defendants.

The Pan Am-Lockerbie case took years to conclude, partly because of lengthy pretrial discovery that involved investigations in several countries. The case went to trial in April 1992, and 3 1/2 months later Pan Am was judged guilty of “willful misconduct” for insecure procedures that allowed a bomb to be smuggled on board. The verdict was sustained on appeal in 1995 and it took an additional year to settle the hundreds of cases with Pan Am’s insurers.

“It’s a whole new world since Lockerbie,” said Lee S. Kreindler, a New York attorney who served as lead counsel for all 225 victims’ families who sued in the Lockerbie case. “We now have a federal statute that permits suits against terrorist countries [or their agents] who are on the State Department list.”

Kreindler was referring to seven nations, including Iraq and Libya, designated by the U.S. as harboring or supporting terrorism.

The statute allows punitive damages to be collected from terrorists or their supporters.

In 1996, Kreindler’s firm sued Libya in U.S. District Court in New York. Relatives of victims of the Lockerbie attack are asking for billions of dollars in punitive damages--allowed under the federal statute that permits suits against terrorist states.

The conviction earlier this year of a Libyan intelligence officer in the Lockerbie bombing greatly strengthened the plaintiffs’ case.

Kreindler believes that Libya has billions of dollars in assets frozen in this country. If the plaintiffs are successful, those assets could be seized. Alternately, he said, some of the judgment might be obtained from the U.S. government, which would then attempt to recover the funds from the Libyan government. A ruling on the case is expected later this year.