Russia-Ukraine conflict - Update on aviation insurance claims
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Publications: 04 December 2023
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As the Russia-Ukraine conflict continues, claims under aviation insurance policies have been a key focus, with a flurry of claims recently issued in the English, US, and Irish courts, and secondary market in the trading of claims developing.
We set out below some of the main areas of dispute which we are seeing in the market, together with additional considerations for claims under:
- Russian lessees’ insurance policies, and any reinsurance of those policies (referred to below as “Principal Policies”), the benefits of which are usually assigned to lessors; and
- Lessors’ separate contingent/possessed policies (referred to below as “C/P Policies”), which are usually engaged where (i) a lessee’s Principal Policies do not respond to a claim (contingent cover), or (ii) when the aircraft is in the lessor’s possession or in the course of repossession (possessed cover).
The English Commercial Court has noted the rise in aviation insurance claims resulting from the Russia-Ukraine conflict and is pro-actively exploring what collective case management steps can be taken in respect of these claims and the additional claims which are anticipated. It has recently requested that potentially interested parties contact the Commercial Court by 16 December 2022.
We have market leading transportation disputes and insurance disputes practices. We regularly represent leading lessors and financiers on contentious aviation matters, and policyholders on the full spectrum of insurance disputes.
1. Key areas of dispute under C/P Policies:
Claims under C/P Policies will involve careful scrutiny of key coverage provisions and exclusions in the particular policy wording. However, some or all of the areas of dispute below may arise in a claim under a C/P Policy. As the benefit of Principal Policies is usually assigned to a lessor, some of these areas of dispute may also apply to a claim under those Principal Policies, again dependent on policy wording.
- Whether and when loss of aircraft occurred: A dispute may arise over what the insured must show to prove loss, be that (a) irretrievable deprivation of possession, or (b) a lower test of wrongful deprivation of physical possession in circumstances where recovery is uncertain. Whatever the test, there is likely to be debate around whether aircraft could still be returned (and if so in what condition) and the willingness of Russian lessees to return those aircraft.
- What caused the loss: If the insured is relying on a standard war risks clause like LSW 555D, the insured will need to demonstrate that the loss was caused by one of the insured perils, e.g. confiscation, seizure, etc by or under the order of a government. This may lead to arguments around whether it was the actions of the Russian government or of the Russian lessees (albeit with the encouragement and facilitation of the Russian government) which caused the loss of the aircraft.
- Claims under Principal Policies: Contingent cover under a C/P Policy may only be engaged where the Principal Policies do not respond to a claim. The precise trigger will depend on policy wording (e.g. if a claim is not payable under, or not recoverable as a claim under, the Principal Policies). This leaves scope for debate. What steps a lessor has to take to pursue a claim under the Principal Policies, and any applicable waiting periods, will also depend on policy wording and may affect how quickly a claim can be brought under a C/P Policy.
- Termination of aircraft leases / leasing: Contingent cover may be expressed to apply where the aircraft is the subject of a lease agreement. Where termination has occurred, whether contingent cover is engaged may involve scrutiny of what has been terminated, e.g. the lease or the leasing of the aircraft under that lease. Equally, possessed cover will often apply when the aircraft is in the course of repossession, raising questions as to whether possessed cover applies to an aircraft whose return has been demanded, but which cannot be repossessed.
- Amendments to geographical limits or cancellation: C/P Policies may permit insurers to amend geographical limits or cancel coverage upon notice to the insured. It will be important to consider the effective date of any such notices against the date on which the loss of the aircraft is alleged to have occurred.
- Sanctions: AVN 111 is a standard clause which provides that insurers shall have no liability if providing cover “would be unlawful because it breaches an embargo or sanction”. If AVN 111 has been incorporated into a C/P Policy, there may be debate around whether the provision of cover would be unlawful under EU, UK and/or US sanctions, and if so whether the effect is to cancel or only suspend insurers’ obligations.
2. Additional considerations for C/P Policies:
Those considering claims under a C/P Policy may also need to take some or all of the following into account.
- Governing law: This can impact not only interpretation of policy wording, but also additional defences insurers may run, e.g. based on champerty or non-disclosure.
- Financial limits: C/P Policies usually set out an ‘agreed value’ per aircraft. The schedule of agreed values should be checked to ensure it was up-to-date as at the date of loss. Additional aggregate limits may also apply for a policy year or for a single occurrence. Limits may also differ for different sections of cover, e.g. between ‘all risks’ and ‘war risks’ cover. These differences may influence primary and alternative claims brought under a C/P Policy.
- ‘Total loss only’ cover: C/P Policies may provide for a ‘total loss only’ amount per aircraft in the event of a total loss. This amount is usually less than the agreed value, and may be expressed as in addition to, or instead of, the agreed value. Careful consideration will need to be given to policy wording and whether a claim should be brought for total loss only cover.
3. Additional considerations for Principal Policies:
In addition to some of the considerations for C/P Policies set out above, there may be additional considerations for Principal Policies, such as the below.
- Policy documentation: Lessors may have only been provided with certificates of insurance and reinsurance for the Principal Policies, and not full policy wordings. Key policy terms may therefore be unclear, e.g. governing law, dispute resolution provisions, ‘cut through’ clauses, exclusions, etc.
- Identity of (re)insurers: Russian lessees’ insurance is often underwritten by Russian insurers, which may be subject to Western sanctions. There will also be other obvious practical difficulties in enforcing against Russian insurers. Whilst Russian lessees’ insurance may have been reinsured on the international market, the enforceability of ‘cut through’ clauses or AVN 67B (a standard clause which includes the lessor as an ‘Additional Insured’) may be difficult to assess in the absence of full policy wording (including governing law).