NEW YORK, Feb 11 (Reuters) - U.S. airlines are planning to set up their own insurance company as a way of covering their big-ticket liability exposures in the wake of Sept. 11, sources said Monday. Airlines have until the middle of March to find insurance for their third-party war liability risks, which the U.S. government agreed to take on after most commercial insurers quit the market in the wake of the Sept. 11 attacks. That government coverage, if it is not extended, lapses around March 20. "They first floated this idea before the crash of American Airlines 587 (in Queens, New York)," said Robert Hartwig at the Insurance Information Institute. "Now we're hearing about it again". The Air Transport Association (ATA), representing U.S. airlines, is working on the plan with insurance broker Marsh, a unit of Marsh & McLennan Cos. Inc. (MMC), according to a report Monday by insurance weekly Business Insurance. Neither the ATA nor Marsh, the world's largest insurance broker, returned calls seeking details. According to the report, Marsh is looking to form a captive insurance company, domiciled in Vermont, to cover airlines' third-party liability war risks, or damage caused by an aircraft on the ground. The airlines would share ownership of the vehicle. Most insurers quit that market and the government stepped in after the unprecedented damage caused by the hijacked aircraft on Sept. 11, which could cost more than $40 billion when claims are settled. Only American International Group Inc. (AIG) has stepped back into the large-scale airline liability market, offering $1 billion of coverage for third-party war and terror damage. That cover has not yet been taken up by any major U.S. airlines. Airlines are hoping the new vehicle, provisionally entitled Equitime, would cover the full $1.5 billion in third-party war liability risk that airlines were accustomed to before Sept. 11 and which they need to satisfy regulations. At present, insurers can buy only $50 million of cover for those risks, with the government standing as a backstop for the rest. Marsh has set up alternative insurance vehicles for corporations when commercial insurance is scarce. Bermuda-based Multi-line insurers ACE Ltd. (ACE) and XL Capital Ltd. (XL) both started life in the mid-1980s as Marsh-designed vehicles to help U.S. firms get around an acute shortage in liability insurance.