Nepal is preparing to introduce mandatory aviation liability insurance requirements for domestic airlines under proposed legislation that would establish statutory minimum coverage levels and significantly increase passenger compensation limits.

The Kathmandu Post reported that the draft bill, currently under review by the Ministry of Law, would require carriers to maintain minimum levels of third-party liability insurance based on aircraft weight while expanding compensation obligations for passenger injuries, fatalities, baggage losses and flight disruptions. The proposal represents a notable shift in Nepal’s domestic aviation market, where no equivalent statutory liability thresholds currently exist in codified legislation.

Under the draft, aircraft weighing up to 10,000 kilograms would be required to carry at least US$25 million in third-party liability cover. The minimum requirement would increase to US$35 million for aircraft weighing between 10,001 and 35,000 kilograms and US$60 million for aircraft above that threshold. The legislation would also raise compensation for passenger death or serious injury to a maximum of US$100,000 per person, compared with the current domestic minimum of US$20,000. Existing compensation for crew members is approximately US$40,000.

Nepal is a signatory to the Montreal Convention 1999, which governs airline liability in international operations. However, the convention does not apply to domestic flights, and the proposed legislation would create a more structured liability framework for Nepal’s internal aviation market. The proposed coverage thresholds are likely to increase reliance on international reinsurance capacity. Aviation risks across South Asia are commonly ceded to overseas reinsurers because domestic insurance markets typically have limited capacity to absorb large losses independently.

The importance of reinsurance has been demonstrated across the region. The June 2025 Air India crash generated estimated insurance claims approaching US$475 million, roughly three times India’s annual aviation insurance premium pool. Although Nepal’s aviation market is substantially smaller, the loss illustrates how a single aviation event can exceed local market capacity without access to significant reinsurance support.

India’s aviation framework requires operators to maintain insurance covering passengers, crew, baggage, cargo, aircraft hull losses and third-party liability under the Carriage by Air Act, 1972. However, it does not prescribe specific statutory minimum levels of third-party liability cover. Nepal’s proposal would therefore introduce a more prescriptive approach to minimum coverage requirements for domestic operators.

Passenger claims and airline obligations

The bill would also establish compensation rules covering baggage, cargo, and flight disruptions. Airlines would be liable for checked baggage losses or damage up to US$20 per kilogram, subject to a maximum payout of US$5,000. Cabin baggage claims would be capped at US$400, while cargo compensation would follow a similar per-kilogram calculation unless a higher value had been declared before shipment. Under the proposal, airlines would be required to notify passengers of schedule changes at least three hours before departure. Passengers affected by overbooking would be entitled to alternative transportation, a seat on another carrier or a full refund.

The draft also outlines circumstances under which airlines could be exempt from liability, including disruptions caused by severe weather, natural disasters, air traffic service failures and government-imposed security restrictions. Carriers could also avoid liability where injuries result from a passenger’s gross negligence or a documented pre-existing medical condition. Passengers would have 60 days to file claims, while those disputing an airline's decision would have 35 days to pursue legal action after a claim is rejected. Compensation limits would be reviewed every 10 years and adjusted for inflation and market conditions.

Safety concerns remain part of the backdrop

The insurance reforms are being considered against a backdrop of ongoing scrutiny of Nepal’s aviation oversight framework. In its June 2026 update to the EU Air Safety List, the European Commission maintained its ban on all airlines certified in Nepal from operating within European Union airspace, citing concerns over safety oversight by the Civil Aviation Authority of Nepal (CAAN). CAAN’s Aviation Safety Report recorded 579 aviation occurrences in 2023, up from 513 a year earlier. These included four accidents, 21 serious incidents and 554 incidents. A January 2025 study published in the NPRC Journal of Multidisciplinary Research found that 14 of 34 aeroplane accidents recorded over a 14-year period resulted in fatalities for everyone on board. The study identified Nepal’s mountainous terrain and weather conditions as recurring contributing factors.

The aviation bill was initially released for public consultation in July 2025 before progress stalled following a change of government. According to Indu Ghimire, joint secretary at the Ministry of Culture, Tourism and Civil Aviation, the proposal has since been revised and returned for legal review. “We have revised the draft and resubmitted it to the law ministry under the new government. Once the law ministry clears the draft, it will be presented to the Cabinet before being tabled in Parliament,” Ghimire said, as reported by The Kathmandu Post.

The timeline for parliamentary consideration remains uncertain. If enacted, the legislation would establish Nepal’s first codified minimum insurance requirements for domestic aviation operators while introducing higher liability and compensation obligations across the sector.