March 19, 2014 10:38 a.m. ET
HONG KONG—Insurers say some initial payments have been made on policies covering Malaysia Airlines 3786.KU -2.08% Malaysian Airline System Bhd Malaysia RM0.23 -0.01 -2.08% March 20, 2014 5:00 pm Volume : 18.11M P/E Ratio N/A Market Cap RM3.93 Billion Dividend Yield N/A Rev. per Employee N/A 03/20/14 The 10-Point: Gerard Baker on ... 03/20/14 Critical Satellite Data Was De... 03/20/14 Satellites Spot Possible Debri... More quote details and news » Flight 370, even as the search for the missing flight continues.
The payments have come from the airline's reinsurers, not from passengers' individual life insurance policies, and don't signify that the reinsurers or the airline believe the passengers are dead. Rather, the payments are the result of regulations that require a quick processing of initial funds for families of passengers in the event of an aviation disaster.
Under international law known as the Montreal Convention, ratified by Malaysia, Malaysia Airlines is required to make some advance payment to families of the passengers. Because of this law, airliners usually require clauses in their insurance contracts that trigger an advance of funds following an incident.
"The policy is designed to help family or friends to fund immediate needs linked to the incident, such as travel and accommodation" said Joseph Wheeler, an aviation lawyer at the law firm Shine, based in Brisbane, Australia.
While families receive some initial compensation to cover costs linked to transportation and such, a final payout wouldn't occur until it was determined that Malaysia Airlines Flight 370 is destroyed, with no survivors. Even then, the size of any payment could involve legal wrangling.
To begin the reinsurance-payment process, a group of insurers lodge money into an external fund that is administered by lawyers.
That fund can make some initial payments to the passengers' families, but it stops short of accepting full liability.
German insurer Allianz 1163.KU +0.19% Allianz Malaysia Bhd Malaysia RM10.42 +0.02 +0.19% March 20, 2014 4:27 pm Volume : 17,600 P/E Ratio 6.97 Market Cap RM1.73 Billion Dividend Yield 0.62% Rev. per Employee N/A More quote details and news » Global Corporate & Speciality said Tuesday that it was the lead reinsurer of the Malaysia Airlines plane and as such has made some initial payments along with other reinsurers, though it gave no details on the size of any payments.
"This is in agreement with the insurance broker, Willis, and is in line with normal market practice and our contractual obligations where an aircraft is reported as missing," the company said in a statement. Willis declined to comment.
For private insurance contracts taken out by the passengers, any payment remains to be determined.
"Since the disappearance of Malaysia Airlines Flight MH370 is still under investigation, insurance companies cannot make any compensation to their beneficiaries at this stage," a representative for the Hong Kong Federation of insurers said.
In the case of Air France Flight 447, which crashed in 2009 killing all 228 aboard, some claims were resolved within a year after investigators conclud ed the plane was lost.
"If the aircraft cannot be found, there has to be a line in the sand in relation to search and rescue," Mr. Wheeler said.
Among the insurers of passengers on the Malaysia flight, AXA Affin General Insurance Berhad said it has identified six passengers whom it had insured.
"We continue to pray for the safe return of all passengers and crews on board the flight," the company said in an emailed response to queries.
AIA BhD said it covered some passengers but wouldn't provide numbers. Allianz Malaysia Bhd said the company has identified four passengers who are policyholders.
In China, home to the bulk of missing passengers, many family members said the unresolved fate of the plane makes it too soon to think about insurance.
"Who could think about insurance and compensation at this moment?" said one relative whose cousin was on Flight 370.
Insurers and lawyers have sought out family members of the passengers at the M etropark Lido Hotel.
China has asked its insurers to be ready.
The day Flight 370 disappeared, the China Insurance Regulatory Commission issued an urgent directive to all insurers to set up 24-hour emergency centers, get in touch with the families of passengers and prepare to provide payments.
Liu Peng, an insurance agent for Taiping Life Insurance Co., said none of the passengers on the plane were customers of the insurer. Still, Mr. Liu said, it isn't clear what kind of policies would apply under the current ambiguous circumstances.
Ping An Insurance said it has 38 clients confirmed on the plane and is verifying if 15 more were also on the missing flight. The insurance policies cover both life and property and casualty insurance products. The company said it has "prepared to hand out compensations right away if the worst scenario happens."
China Life confirmed it has 30 clients on the plane and it has 71 insurance policies related to the missing flight.
Another complication: While the so called hull loss and liability reinsurance policy is led by Allianz, Lloyd's insurer Atrium is the lead for Malaysia Airlines' separate policy covering the risk from terrorism.
That means if investigators conclude the plane was downed by an act of terrorism, a legal spat could brew over which insurers are responsible.
"This has the potential to be the largest aviation war claim since Sept. 11, 2001," said Dennis Sugrue, a director of insurance ratings at S&P.
—Celine Fernandez, Yang Jie and Olivia Geng contributed to this article.
Write to Enda Curran at enda.curran@wsj.com
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