Travellers Checks. Foreword from Peter Kalis, Chairman, K&LNG LLP LAWYERS TO THE TRAVEL AND LEISURE INDUSTRY.

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1 LAWYERS TO THE TRAVEL AND LEISURE INDUSTRY Spring 2005 Travellers Checks On 1 January 2005 our firm became Kirkpatrick & Lockhart Nicholson Graham LLP. The new firm is committed to developing the Travel & Leisure Industry Group on a worldwide basis. As an example of that commitment we are delighted that the foreword to Travellers' Checks Spring 2005 was written by Peter Kalis, our firm s Chairman. Foreword from Peter Kalis, Chairman, K&LNG LLP For years, readers of this bulletin have learned about the legal challenges facing the Travel & Leisure Industry and, importantly, about how to meet those challenges. The solicitors of Nicholson Graham & Jones have always understood that clients have a right to expect their lawyers to couple knowledge of an industry with knowledge of the law. "Travellers' Checks" has been loaded with learned legal insights, to be sure, but has always presented them in a crisp, readable and practical way so that business clients can make sound decisions. To my great delight, Nicholson Graham & Jones and its leading Travel & Leisure Industry Group are now my colleagues in Kirkpatrick & Lockhart Nicholson Graham LLP. We have joined forces in an international law firm of nearly 1,000 lawyers. Our London office can now call upon colleagues and resources in the United States from Boston, New York, and Miami on the East Coast to San Francisco and Los Angeles on the West Coast. As you have found in London, our US-based lawyers know your industry and have abundant experience meeting the industry's legal challenges. The creation of an international law firm is especially fitting for clients drawn from an industry whose strength derives from travel, often across national boundaries. Your legal advisors and their firms should be aligned with you and your businesses, and now we are. Our business is to meet your expectations and legal requirements, and we now believe that we are better positioned to do so. It is my great honour to serve as the Chairman of K&LNG. I am an American who was educated in England and whose father was born in Greece. I know that the world is becoming smaller - it has been the story of my family's life in a lot of ways. Your industry is vital to the emerging global family. You make it possible for us to explore our world, to enjoy it and to create the ties that bind across many cultures. What a pleasure and an honour it is to serve as your legal advisors. As a law firm, we span eight time zones, and our reach is global. Because we are committed to your success, I fervently hope that we have the opportunity to serve you throughout the world. Peter J. Kalis Welcome to the Spring Edition. The tsunami in the Indian Ocean and the devastation it has caused marks a sad beginning to The effects will be felt for years to come by many and our thoughts are with all those affected. From an industry perspective, in the main emergency procedures worked well and clients were given every assistance possible. Our lead article was written by our American colleagues and addresses some of the financial issues arising from the tsunami and the potential availability of insurance to cover economic loss. Contents Foreword 1 Tsunami-Related Financial Losses 2 CAA issues ATOL Protection 4 Guidance EasyCar (UK) Limited V The Office 6 of Fair Trading IATA - New Rules 7 Pressure Increase for Passenger 8 protection Corporate Killing - Update 8 Who to contact 8

2 Travellers Checks Tsunami-Related Financial Losses: Checklist of selected Insurance Coverage Considerations The tsunami that swept through the Indian Ocean on December 26th has caused widespread loss of life, suffering and damage to livelihood. Our sympathies are extended to all those affected. Among the hardest hit businesses are the hotels and resorts located throughout the region and for many the financial impact will be felt for years. Given these significant financial losses, affected businesses should consider the availability of insurance, and in particular the role of business interruption insurance. Many hotels and resorts, particularly those owned by companies that operate properties throughout the world, are likely to have broadly-worded policies that cover the types of business interruption losses arising from the tsunami disaster. We thought it would be helpful to highlight the steps that businesses can take to protect themselves against economic damage. The following checklist of business interruption considerations is a general overview of selected issues that are relevant to such claims: Identifying Possible Coverage Business interruption coverage typically is included as part of firstparty property insurance, covering the assets of the insured entity and is often broadly written. Business interruption coverage generally covers the insured's loss of earnings or revenue resulting from property damage caused by an insured peril. Such coverage also often includes: "extra expense" coverage, which generally promises coverage for certain extra expenses the insured incurred as a result of an insured event. "civil authority" coverage, which generally promises coverage for losses arising from an order of a governmental authority that interferes with normal business operations. "defence" coverage, which generally promises coverage for defence costs incurred with respect to claims alleging that the insured is responsible for damage to covered property of others. "ingress and egress" coverage, which generally promises coverage when access to a business premises is blocked for a time. "service interruption" cover, which generally promises coverage when electric or other power supplies and services are interrupted. "claim preparation" coverage, which generally promises coverage for the costs associated with compiling and certifying a claim. Presenting a Claim Most policies identify specific procedures that should be followed in presenting a business interruption claim (notice, proof of loss etc.) and some of these procedures may have timing deadlines associated with them. Accordingly, an insured experiencing a loss potentially covered by a business 2 SPRING 2005

3 interruption policy should promptly: property damage. collect its loss information; evaluate the information in light of the policy wording; and present it to the insurer in a timely and coverage-promoting manner. It is sometimes advisable to retain forensic accountants to assist in preparing and certifying a claim, since the costs associated with such an effort are often covered. If purported deadlines have passed, the insured's pursuit of an insurance claim is not necessarily foreclosed. The insurer may have to show it was prejudiced by an insured's failure to meet a timing deadline before coverage will be forfeited on this basis. Common Insurer Responses Insurers may raise any number of issues in response to a business interruption claim: Did the alleged loss of income or extra expense arise out of damage to "insured property"? It is not always necessary that the relevant "property damage" occurred to property belonging to the insured. Many policies explicitly or implicitly also promise coverage when a supplier or, depending on the policy language, any other entity incurs property damage that results in an interruption of the insured's business. This is sometimes known as "contingent business interruption" coverage and is often very broad. Similarly, there may be arguments for coverage where travel cancellations were due to civil disorders, inaccessible roads and closed airports, as opposed to Was the damage to insured property caused by an "insured peril"? Many first-party property policies are written on a "all risk" basis, meaning that virtually any cause of property damage is within the scope of the policy, except for those that are stated in the exclusions. Sometimes policies contain particular provisions promising coverage for particular events (including orders of civil authority). Accordingly, although some policies may expressly exclude damage caused by "floods", some broadly worded policies may provide avenues to coverage through, for example, "civil authority" and "ingress/egress" coverage. There could also be disputes about whether the damage was a result of "earthquake" or "earth movement", which may or may not be covered under certain first-party policies. Did an "interruption" of business result? Generally there may be a claim any time an insured's income is adversely affected by an insured event. Was the interruption necessary? The insured could question whether the claimed interruption is the result of a routine business decision as opposed to a "necessary" interruption under the circumstances. Does the loss meet requirements the policy may have regarding duration of the interruption? Some policies have language limiting coverage to interruptions that extend for longer than a specified period of time. An insured should consider whether any such time frame specified in its policy is appropriate in light of its business. How long is the allowed "recovery period"? Policies sometimes include provisions specifying that the policy will only cover loss of income and related expenses for a specified period of time after an insured event occurs. This time frame typically should be tied to the time it would take the insured, employing reasonable mitigation efforts, to resume normal business operations under the circumstances. How many "occurrences" are implicated by the alleged loss? Many policies have "per occurrence" deductibles or other self-insurance features that may reduce the amount of coverage available depending on how the "number of occurrences" issue is addressed. The issue can also impact the amount of per- SPRING

4 Travellers Checks occurrence policy limits that may be available to the insured. In the case of a claim resulting from loss of income or extra expenses associated with the loss of electrical power or other services, did the interruption result from damage by an insured peril to property of the provider of the service? Some policies purport to exclude business interruption coverage arising from interruptions in electrical service (assuming the interruption is the controlling "cause" of the loss). Other policies have language explicitly promising time element coverage for losses arising out of service interruptions but purport to require that the interruption resulted from damage to property of the service provider. In such a case, the circumstances and cause of the interruption, including whether the circumstances and cause can be classified as resulting from damage to property of the service provider, may be critical to the availability of coverage. Policy language in this context varies considerably and an insured must review carefully its own policy to assess the availability of time element coverage arising out of service interruption. Evaluating and Challenging Insurer Positions The validity of any defences to coverage raised by insurers may well vary from country to country, due to different courts' approaches to coverage issues presented by business interruption claims. It is not always clear which country's law will apply to a coverage dispute in the absence of a specific choice-of-law provision. Furthermore, the applicability of these potential defences will depend a great deal on the specific language used in the policy. Sometimes insurers seek to limit the insured's right to challenge an insurers coverage determination in court by specifying an appraisal and arbitration procedure in the policy. On 4 March 2005 the Civil Aviation Authority ("CAA") published new consumer protection guidelines ("CAA Guidance") for travel agents who put together and sell "dynamic packages" or "split contracts". There has been an explosion in the number of travel agents offering their own packages rather than booking their customers with licensed tour operators. Many of these agent-constructed packages are not financially protected and this will now change. The CAA Guidance makes it clear that in the majority of cases these sales need to be protected by an Air Travel Organisers' Licence ("ATOL") to comply with the Package Travel, Package Holidays and Package Tours Regulations ("the Package Travel Regulations"). As a consequence some travel firms will need to apply for licences for the first time, whilst some existing ATOL holders will need to increase the size of their bonded licence authorisations. The CAA Guidance has been issued to clarify the change in the ATOL Regulations in Autumn 2003, which followed an industry wide consultation on the application and scope of revised ATOL Regulations. The revised Regulations incorporated the definition of a package used in the Package Travel Regulations which derives from Our thanks to James R. Segerdahl and Heath B. Monesmith of the Pittsburgh office for writing this article. CAA issues ATOL Protection Guidance the EC Directive on package travel, package holidays and package tours. The Package Travel Regulations define a "package" as: "Package means the prearranged combination of at least two of the following components when sold or offered for sale at an inclusive price and when the service covers a period of more than 24 hours or includes overnight accommodation: a) transport; b) accommodation; c) other tourist services not ancillary to transport and accommodation and i) submission of separate accounts for different components shall not cause the arrangements to be other than a package; ii)the fact that the combination is arranged at the request of the consumer and in accordance with his specific instructions whether modified or not shall not of itself cause it to be treated as other than pre-arranged." In 2003, many split-package sales were caught by the definition of "package" and needed to provide financial protection. However, with rapid changes in travel sales methods it 4 SPRING 2005

5 became clear that more detailed guidance was needed for travel agents. The question of whether an ATOL is required for any individual transaction will depend upon the particular facts of the transaction. However, the CAA's Guidance gives the following examples of situations where an ATOL would be required: A travel agent sells an ATOL package, but if the ATOL holder's documentation is not provided to the customer, then the agent will be seen as the contracting party and will need their own ATOL. A similar position will occur if an agent marks up the ATOL holder's sale price and documents the transaction as his own. If travel facilities are advertised by an agent in a brochure, a shop window display, on Teletext, in a newspaper advertisement or on a website, and it is clear that these can be combined to form a package, or the agent offers to provide individual package quotations based on an advertised range of options, then such packages require ATOL cover. However if these facilities were offered and sold by the agent on behalf of a single ATOL holding tour operator, then the agent would not need its own ATOL. If an agent offers a customer a choice of travel facilities, including a flight, their resulting sale will be a package requiring the agent to hold an ATOL. However, this will not be the case where the travel facilities in question all form part of a package sold by the travel agent on behalf of a single ATOL holder. If a customer requests a flight and accommodation and/or other tourist services to a particular resort or destination and asks an agent for details of suitable arrangements and the agent provides information on a combination of services, rather than a package from an ATOL holder, then this is a package under the PTR and the agent will need to hold an ATOL. In some instances, a customer may have been offered an ATOL protected package, but asks the agent whether there is a cheaper alternative; if the agent decides to offer an alternative that he has selected himself, rather than a package from another ATOL holder, then the agent will need his own ATOL. Following the 2003 ATOL Regulations amendment, if an agent puts together a package utilising a scheduled flight, provided to the customer on a "ticket provider" basis, (i.e. the customer paid for the flight and received a valid ticket for travel immediately in return), then the package will require to be covered by an ATOL. If an agent advertises that he can provide tailor-made holiday arrangements or he can provide dynamic packages, then he will need an ATOL to cover the majority of such sales. However if all the facilities were offered and sold by the agent on behalf of a single ATOL holder, an ATOL would not be required. If an agent has taken commitments or contracts with a supplier for any item offered as part of an air package, then the package will require ATOL cover. In summary the CAA's Guidance advises that travel firms which sell air package arrangements which they have constructed themselves will, in the majority of cases, need to hold an ATOL to protect these sales. From the agent's perspective this means that if they have selected specific travel components, or they offered for sale travel facilities including a flight, then the resultant sale will usually be a package and needs to be protected financially. SPRING

6 Travellers Checks... travel firms which sell air package arrangements which they have constructed themselves will, Easycar (UK) Limited v the Office Fair Trading Are car hire contracts subject to the distance selling regulations? in the majority of cases, need to hold an ATOL... Travel agents who are therefore selling package arrangements now have a number of options open to them: They can offer air packages as retail agents of ATOL holders, including the new and growing number of dynamic packaging systems marketed to agents by ATOL holders. This option has the added re-assurance that an ATOL holder takes overall responsibility for the complete package and its performance; or They can get their own ATOL and put together their own packages using different suppliers, and take overall responsibility for these sales; or They can continue retailing packages for tour operators in the traditional manner." The CAA is to carry out increased monitoring of agents to ensure they are complying with the revised ATOL Regulations. Failure to comply is a criminal offence. The maximum penalty on summary conviction is 5,000 and on conviction on indictment to a fine or imprisonment for a term not exceeding two years or both. The new rules are expected to come into force by early summer and we will be reporting on them. EasyCar carries on business exclusively over the internet. Its terms and conditions give customers a right to cancel once they have booked, but without any right to a refund save in the event of unforeseeable or otherwise exceptional circumstances, such as serous illness or disaster. Following various consumer complaints, the UK's Office of Fair Trading (OFT) issued a claim against easycar seeking an injunction to require it to comply with the Consumer Protection (Distance Selling) Regulations 2000 (the "Regulations") which aim to protect consumers who enter into contracts other than face to face with the supplier. The Regulations provide that having entered into such contracts, consumers must have seven working days to change their mind without any penalty being incurred. However the Regulations also provide that this right does not apply to, "contracts for the provision of, transport, services, where the supplier undertakes, when the contract is concluded, to provide these services on a specific date or within a specific period". The OFT's claim has now been referred to the European Court for an assessment of the European Directive on which the Regulations are based. The issue at stake being whether the hiring out of cars can be described as the provision of a transport service. The Advocate General of the European Court compared the losses that would be suffered by easycar in comparison with other providers of accommodation, transport and leisure services. The main consequence for easycar would be that one of its cars might remain in the car hire pool (still available for other consumers) whereas losses for hoteliers or passenger transport companies would tend to include wasted employee time and a greater difficulty in re-selling the capacity. 6 SPRING 2005

7 This argument was strengthened by the fact that in the case of easycar, consumers paid a supplement if they wished the car to be cleaned and/or filled with fuel - in the event of a cancellation, no such investment would have been made. Since under EC law any exception to a consumer protection measure should be narrowly interpreted, it followed that according to the Advocate General, it was not appropriate to regard car hire as a transport service and accordingly consumers of such services would be entitled to benefit from the seven day "cooling off" period under the Regulations. Comment It remains to be seen if the Court will agree with the AG's Opinion. It is likely that it will, given the Court's general preference to give consumers the maximum benefit of EC legislation. The case will have implications for other car hire operators who may have used similarly worded terms and conditions with their customers.... it was not appropriate to regard car hire as a transport service and consumers of such services would be entitled to IATA - New Rules The international body which regulates air fares, IATA, has decided that travel agents in one country will be allowed to issue tickets in another. IATA is removing restrictions that forbid travel agents in one country issuing tickets in another if that means savings for their clients. These new relaxed rules should reduce air fares and plane tickets are expected to become substantially cheaper. In many cases, buying two single tickets to and from one destination will be cheaper than a return ticket. The liberalisation of the rules, which should knock several hundred pounds off the price of many tickets, has been prompted by the growing volume of ticket sales on the internet. IATA has acknowledged that in the internet age, identifying the country in which customers book their tickets online is almost impossible. It has therefore decided that air fares should no longer be based on the country of sale. Until now, travel agents in one country could not issue tickets in another, even though that would have meant savings for their customers, simply because people usually pay less for tickets issued in their own countries. To ensure that passengers would not undercut the price of a return trip. One-way fares from their destination back home would never be less than the fare in the reverse direction. By scrapping this rule, IATA has effectively allowed the price of a oneway business class ticket from Hong Kong to London to fall from 2,600 to 1,900, fare experts say. Similarly, a business one-way ticket from Sao Paulo, Brazil to London will drop from 3,300 to 1,300. First-class and business travellers will save the most, with economy travellers not seeing much difference. Economy class travellers in Britain are unlikely to benefit from a substantial drop in prices as the holiday market is one of the cheapest in the world, with no-frills airlines competing for business. Flights starting and ending in cities outside the country where the booking was made will become cheaper, too. The new rules will not, however, apply to flights to, from or via Japan. benefit from the seven day "cooling off" period under the Regulations. SPRING

8 Travellers Checks Pressure increase for passenger protection Following the recent collapse of the Polish no-frills airline, Air Polonia, operating out of Stanstead Airport, the consumer organisation, Which?, has joined ABTA and the Federation of Tour Operators ("FTO") in calling for action to be taken by the Government to provide protection for passengers in the event of all airline failures. There were six airline casualties in Europe last year - the Italian carrier, Volare; the Dutch airline, V-Bird; Jet Magic from Ireland; and the UK carriers, Duo and Now and more recently, Air Polonia. At present, scheduled airlines (and this Corporate Killing - Update includes low-fare carriers) do not need to be bonded in contrast with charter airlines and those tour operators providing flights. The real concern arises out of the probability that more airlines will fail in 2005 and holidaymakers will lose money and/or be stranded abroad. The Department of Transport is currently seeking to encourage airlines to voluntarily implement effective interim measures to improve the current levels of consumer protection until new arrangements can be agreed and formally put into place. There appears to be support that the Air Travel Organisers Licence (ATOL) scheme be extended to cover all air travellers and a MORI poll undertaken at the request of the FTO and ABTA concluded that 81% of consumers would agree to pay an additional sum of between 50p and 2 to the cost of airline ticket to protect themselves against failure. We understand that the Government has given an indication that new rules should be in place by the end of The general view is that this is long overdue and that adequate voluntary measures must be put into effect urgently, and certainly before Summer 2005, as other airline failures seem likely. In our Autumn 2004 edition of Travellers Checks we wrote about the Government's plans to introduce a new offence of corporate killing. However, the Government has recently said it would only publish the bill in draft, meaning it has no commitment to turn it into law. Therefore, uncertainty remains as to if and when the Government will introduce the offence of corporate killing. The proposed reforms are part of a drive to modernise the criminal justice system. The offence of "corporate killing" will make it easier to prosecute a company, or other employing organisation, for a homicide offence. Under current laws, the outcome of the case depends on whether or not a director or senior manager of a company can be found liable for manslaughter. This requires evidence of "gross negligence" and without that there is no case against a company. At present, unless a senior manager can be found guilty of manslaughter a company cannot be convicted. The new draft proposals are designed to make the "controlling mind" of the company accountable for manslaughter, by focusing on potentially wider management failings within an organisation. Who to Contact For further information contact Cynthia Barbor cbarbor@klng.com T: +44 (0) Laura Harcombe lharcombe@klng.com T: +44 (0) Kirkpatrick & Lockhart Nicholson Graham LLP 110 Cannon Street London EC4N 6AR T: +44 (0) F: +44 (0) Kirkpatrick & Lockhart Nicholson Graham is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one established in Delaware, USA, and one incorporated in England. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Unless otherwise indicated, the lawyers are not certified by the Texas Board of Legal Specialization. Data Protection Act We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please cgregory@klng.com if you would prefer not to receive this information. 8 SPRING KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.