Insurers, reinsurers square up over billion dollar aircraft losses
Nothing better illustrates the complexities in 21st Century non-life insurance than the looming battle between Russia-based airline operators, Western aircraft lessors and their respective insurers and reinsurers. Today’s opening one-liner was inspired by a 30-minute presentation to the Norton Rose Fulbright 2024 Insurance Seminar. In it, an insurance law expert discussed a developing aviation lessor insurance claims debacle.
Deciphering ‘war and other perils’ exclusions
Tim Ingham, a litigation and dispute resolution consultant at Norton Rose Fulbright LLP, flew out to Johannesburg to describe the difficulties in interpreting how war and other perils exclusions might apply to Operator Insurance policies and lessors’ Contingent and Possessed Insurance covers in the context of the Russia-Ukraine War. The presentation promised “a real life example of how much trouble the insurance industry can find itself in through geopolitical issues or conflict” under three key points.
The first, was that the complexity and size of aviation insurance claims emerging following the Russia-Ukraine conflict were not what the underwriters had anticipated; the second was that there were unexpected complications in relation to how aviation insurance claims had developed since Russia’s incursion into Ukraine; and the third was that the triggering of war and other perils exclusions was anything but straightforward. Before the war and other perils explainer could get off the ground, Ingham guided the audience through some aircraft ownership and aviation insurance basics.
Most Russian airline operators lease their aircraft rather than purchasing them outright, and the lessors are often large finance houses domiciled in Ireland, the United Kingdom (UK) and the United States (US). The primary insurance taken out by Russian airline operators is Operator’s Insurance which contains a range of different insurance covers including all risks cover on their aircraft hulls and cover for liabilities arising from the use of said aircraft.
“Any airline has to take out Operator Insurance, and a term on each of the leases of such aircraft will be that the airline operator must obtain additional insurance for the lessor in relation to the lessor’s rights and interests,” Ingham said. Lessors, meanwhile, take out Contingent and Possessed Insurance with the former coming into play when an airline’s primary insurance policy does not adequately respond to a claim, and the latter for cover when an aircraft is in its possession or when the lessor has physical control over the aircraft.
Approximately USD200 billion at stake
The audience was then reminded of the timeline of the Russia-Ukraine incursion and events consequent. Russia invaded Ukraine on 24 February 2022. Soon after this incursion, the European Union, UK and US issued sanctions against Russia. “The foreign owners of these leased aircraft had to issue notices of cancellation of the leases of said aircraft [and] the termination of a lease contract [usually] requires the return of the aircraft,” Ingham explained.
Two years these such termination and recall notices were issued, it is estimated there were still over 600 leased aircraft in Russia. And many of the aircraft were still flying, having had their registrations moved from the Bermudan to the Russian registry. With around USD200 billion at stake, lessors began considering the various insurance coverages on these airplanes to potentially recoup their losses. According to Ingham, the big ‘surprise’ was that the lessors were considering claims against both policies.
“You would not expect the Contingent and Possessed cover to be called upon when normal Operator Policies would be in play; but the operator policies are [mostly] written by Russian insurers and then reinsured into the international markets,” he said. Overall, there were around 10 Operator Policies and 40 Contingent and Possessed policies in play. To further complicate matters, both the Operator Policies and lessors’ insurance contain a war and other perils exclusion.
If the war and other perils exclusion is triggered, then the coverage on these policies is excluded and shifted to a separate policy written by the war insurance market, though these policies only cover the aircraft hull. And this, dear reader, is where things become really complicated because figuring out whether or not a war or other perils exclusion applies turns out to be a bit of a crapshoot. The insurance law expert shared the six conditions that could trigger the war exclusions, before highlighting difficulties in the three that were most likely to succeed.
War makes way for other perils
Issues include that the aircraft were not in the conflict zone; that the aircraft were not destroyed and, in many cases, still being flown around; that there were sanctions in force etc. “It is all about proximate cause,” said Ingham. “We have war, sanctions, decision to terminate leases, and aircraft not being brought back … so war as proximate cause is considered a bit too far away”. It was felt the war exclusion was unlikely to be triggered, especially in Ireland and England.
That left other perils such as ‘actions of a sovereign power’ or ‘confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition for the title by or under the order of any government’. It was not, however, clear that these ‘other perils’ would come into play either. Midway through 2024, it appeared that most lessors were leaning towards a war loss, but where the claims eventually end up will be the subject of “significant, high value and very expensive litigation”.
Arguments will likely centre on why the aircraft were not returned, with the primary and war sections of the insurance market arguing different sides. Ingham said the all risks market across both Operator Policies and lessors Contingent and Possessed cover were arguing there was a tacit order by the Russian government to the airlines to retain the aircraft; the war market was countering that the airlines wanted to retain the aircraft and sought the help of the Russian government to achieve same. Similar arguments were offered following resolutions put in place by that government to block the export of airplanes unless exemptions were obtained.
“You have two markets, all risks insurers and the war risk insurers basically arguing flipsides of the same factual situation … a real life example of how difficult it can be to see whether or not an exclusion or BREAK war exclusion or a war and other perils exclusion may actually be triggered or not,” Ingham said. He said he was aware of seven actions to be heard in England, seven in Ireland and at least 17 in the US. He concluded his presentation by throwing another curveball, asking whether a physical loss had actually occurred?
Geopolitical complications
Covers for aircraft hulls are in respect of physical loss or damage, and since these aircraft are not blown up and are still operating it could be a difficult claim to make. “The lessors are arguing that they have been irretrievably deprived of the aircraft and that amounts to a physical loss; and [both the primary and war insurance markets] are countering that the Russian government set up a pot of USD4 billion dollars to buy some of the aircraft, for which the lessors have had title to sell,” Ingham said.
And that, dear reader, is a pared-down version of “how geopolitical tensions, war and conflicts can cause a mighty mess for the insurance industry”.
Writer’s thoughts:
South African insurers and insurance brokers are less exposed to the Russia-Ukraine conflict than most but that does mean they are immune from war and other perils exclusions. Have you or your clients been on the wrong side of a war exclusion clause or similar? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
