The last few weeks have seen unparalleled meltdowns in airline service: complete default by three small airlines, a new bankruptcy filing from a fourth, and massive systemwide delays and flight cancellations on several major lines due to safety inspections. As a result, lots of you have emailed in to ask about whether you should buy travel insurance to avoid such problems in the future. My quick answer is to highlight the basic facts of travel insurance: It protects your money but not your trip. And if you can get your money back, anyhow, you don't need additional insurance.
Airline financial failure
Financial default or failure of a supplier—including an airline—falls under the coverage of trip-cancellation insurance (TCI). Most, but not all, TCI includes financial failure as a "covered" reason for cancellation. However, I found some qualifications and exceptions that might be important.
- No TCI covers financial failure of the source from which you buy the insurance. Thus, you should always buy TCI from an independent agency, not from a cruise line, tour operator, or airline.
- Some bare-bones minimum-cost TCI policies do not cover financial failure at all.
- Access America covers financial failure, but this coverage applies only to a specific "white list" of companies. That list, as currently posted, includes only 14 airlines, worldwide, and it did not include Aloha, ATA, or Skybus. It also appears woefully outdated.
- Travelex Insurance covers only "unforeseen" failures, a limitation that could potentially cause arguments, given the widespread press and industry speculation of other potential airline failures.
- Most policies establish time limits—coverage applies only if you buy the TCI shortly after your initial payment and a minimum time before failure is announced.
When you look at options, make sure the TCI covers "financial failure" or "default," not just "bankruptcy." They're not the same. Many airlines have continued to fly while bankrupt, on the one hand, and, on the other, many tour operators have failed without ever filing for bankruptcy.
Many travel insurance policies provide benefits in the event of extended airline delays as special coverages, different from TCI, but often bundled with TCI policies. Typical benefits include $100 to $500 a day to cover expenses if baggage is delayed or lost, up to $2,500 for lost baggage, and $500 to $1,000 to cover accommodations and other expenses in the event of an extended delay or missed connection. These coverages are typically limited to the more expensive "gold plated" policies, but you can add them as options to some less expensive policies.