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A recent slew of insolvent airlines in Australia and the Pacific has left thousands of Kiwi travellers in the lurch and out of pocket. In many cases, it was not clear if travel insurance would cover expenses or booking replacement flights.

While liquidators Ernst & Young appointed by the Vanuatu government on May 10 said that passengers would be rebooked once operations resumed, a week on and flights are still grounded.

As of Monday, there were still 53 New Zealanders registered as being in Vanuatu having to make their way back on alternative airlines.

New Zealand’s Ministry of Foreign Affairs and Trade (Mfat) told affected travellers to seek updated flight information from their travel agent or airline and “also contact your travel insurance provider to see what insurance cover may apply in these circumstances”.

However, it was noted that insolvency events are often not covered by travel insurance.

Trying to work out airlines to avoid is not a practical solution.

As Hemingway observed, there are two ways airlines go bust: “Gradually, then suddenly.”

Sixty thousand passengers were caught up in the collapse of Australian budget carrier Bonza, earlier this month.

International airline agreements such as the Montreal Convention - which requires carriers to provide replacement flights and compensation in the case of delay and disruption - only apply in certain circumstances.

While there have been efforts to protect customers against airline insolvency, so far the best Montreal is saying is carriers “may be required” to maintain adequate insurance to cover obligations to passengers. This depends on which country or state it is headquartered in.

• Hundreds of passengers stranded as Pacific airline enters voluntary administration
• Air Vanuatu files for bankruptcy protection after cancelling more than 20 flights

A carrier may still be set to fly tens of thousands of passengers the day before they file for bankruptcy. Or the day of, in some cases. This means costs to passengers and airlines liable to get them from A to B can be enormous.

This is why so few insurers are willing to cover large bailouts for failing airlines.

While some high street insurers do offer cover, particularly some underwritten by Allianz Australia, there is no hard and fast rule as to what insurers will provide in the case of carrier insolvency.

What can travellers do if an airline goes bust?

Off the back of the recent airline groundings, the New Zealand Insurance Council says there has been an increased interest.

“We know the uncertainty around airlines that have collapsed such as Air Vanuatu has been stressful for those travelling with those carriers,” said NZIC chief executive Kris Faafoi.

“Most insurance policies do not usually provide cover for the collapse or liquidation of an airline.”

In the cases where insolvency cover is offered, it’s worth checking the small print. While some prepaid travel may be insured, many policies will only cover cancelled flights, but not the expenses of being trapped in Port Vila for a week.

“If you’re unsure whether the wording in your policy applies to you then you should submit a claim with your insurer,” said Faafoi.

“The costs of accommodation or buying new flights to get back home are also unlikely to be covered.”

Southern Cross says it is very clear on its obligations in the case of airline insolvency: it cannot pay out on costs associated with an “error, default, or financial collapse of a service provider”

“A comprehensive travel insurance policy will offer cover for many things,” says Southern Cross chief executive Jo McCauley.

“However, most travel insurers will not offer cover for the insolvency of airlines and other travel suppliers.”

While there is cover providing for claims for personal possessions to emergency travel, a large-scale bankruptcy of an airline or would expose them to too much risk and lead to higher premiums for all travellers.

“It would simply make insurance unaffordable.”

An Air Vanuatu Boeing 737-800 on the Tarmac at Bauerfield International Airport, Port Vila. Photo / Courtney Whitaker

Insurers that currently offer insolvency cover

According to Compare Travel Insurance, there are some circumstances when policy providers will pay out, in the event of airline failure.

• QBE Insurance Australia - will pay up to an applicable limit for trips cancelled because of the failure of a business, such as an airline, tour operator, hotel or car rental.
• STA Travel, underwritten by Allianz Australia - will pay if you have to re-arrange or cancel travel due to the insolvency of a Travel Services Provider.
• Webjet, underwritten by Allianz Australia - will cover cancelled, or altered travel plans because of the provider’s insolvency. Payouts include the non-refundable portion of prepaid travel, reasonable expenses from travel delays and even the value of lost airmiles or loyalty points.

Even if your policy does not cover the costs of flights that never arrive - there are still ways to protect yourself.

Natalie Ball, director of Compare Travel Insurance, advises to book travel on a credit card.

“If you aren’t covered by insurance, you could be entitled to a ‘chargeback’ through your credit card company if you pay for a service and don’t end up receiving the product or service,” she told trade publication Insurance Business.

While insolvency may mean an airline no longer is required to fulfil some obligations, consumer rights mean travellers are entitled to a refund of goods or services that fail to show up. You’re within your rights to ask for your money back via your credit issuer or bank.