The airline industry is facing losses reported to be as high as US$13 billion as one of the many consequences of war in Ukraine. The majority of the losses arise because aircraft leased to Russian airlines by non-Russian leasing companies remain stranded in Russia. The extent to which those losses will be covered by insurance will doubtless lead to disputes between the aircraft lessors and their insurers as the parties assess the unprecedented circumstances that have given rise to those losses.
The likelihood of disputes is crudely illustrated by the difference between the value of the claims already notified to insurers and insurers' own views of their liability. It has been reported that Dubai Aerospace Enterprise and AerCap alone have notified insurance claims of US$1billion and US$3.5 billion respectively, with many other lessors likely to have notified claims. However, John Neal, CEO of Lloyds, told Bloomberg towards the end of March 2022 that insurers' liability was limited to around 10-15% of the asset value of the planes stranded in Russia. Given the value of those planes is estimated at between US$10-13 billion, there is a considerable gulf between the value of the claims and insurers' views of their own exposure.
Background
The situation has arisen as a result of the sanctions introduced following Russia's invasion of Ukraine. As part of those sanctions, aircraft lessors were required to end their lease agreements with Russian airlines by 28 March 2022. The lessors face the considerable challenge of retrieving their planes from Russia. Even if the planes can be retrieved, the lessors would also need the maintenance and other records for each aircraft: these are usually stored by the airlines themselves and are crucial for the continued operation of an aircraft.
As an example of the difficulties faced by the lessors, the Times reported on 2 March 2022 that SMBC sought to ground an aircraft leased to Aeroflot by requesting that the Bermuda Civil Aviation Authority revoke the plane's registration. The aircraft landed in Cairo where the intention was that the Egyptian authorities would detain the aircraft allowing SMBC to retake possession. It appears that Aeroflot ignored the revocation of the registration and flew the plane back to Moscow without an airworthiness certificate and without insurance.
Aircraft in Russia
On 25 April 2022, the IBA reported that only 32 aircraft managed by non-Russian lessors had left Russia since the invasion of Ukraine with over 400 remaining in the country. The IBA also reported that it had identified that nearly 300 of those aircraft had been active during the third week of April. That is despite the suspension of airworthiness certificates by Aviation Authorities in Ireland and Bermuda (where many of the leased aircraft are registered) which would ordinarily have grounded the aircraft.
On 14 March 2022, Putin signed into law a bill to "ensure the uninterrupted functioning of activities in the field of civil aviation". That law permitted Russian airlines to place the aircraft on Russia's aircraft register so they can be used on domestic flights. It is contrary to international aviation law, which requires that aircraft can only be re-registered with the express permission of the owner and following the provision of proof of deregistration from the previous registry. On 20 April 2022, the IBA reported that its intelligence revealed that 171 aircraft belonging to non-Russian lessors had been reregistered and were being operated by the following Russian airlines: Ural Airlines, Nordwind Airlines, Rossiya, Smartavia and Aeroflot. A further consequence of the continued use of the aircraft is that it will increase the depreciation in value of the aircraft because sanctions prevent spare parts from reaching the operators.
It is not yet clear whether Russia considers it now owns these aircraft. The Insurance Journal reported on 11 May 2022 instances where private Russian airlines lessees had contacted lessors seeking to reassure them that they have not stolen the planes. However, the Kremlin's responses to international sanctions continue to harden, with laws being proposed that would permit the Russian state to seize company assets in Russia that are 25% owned by countries Putin considers "unfriendly". The reality is that if the Russian state wants to use the aircraft, there is little that will stop it doing so.
Policy response
Insurers' response to the claims made will obviously vary depending on the types of cover in place, the specific terms of cover and the structure of the insurance programmes purchased. Insurance can be issued directly to the airlines with a lessor's interest noted and/or the lessor may have their own insurance. The insurance structure may depend on the insuring obligations in the leasing agreements and how the interests of the lessors are required to be protected under the insurance. On top of that lies the issue of whether the sanctions preventing insurance of Russian airlines will impact claims.
Policyholders and their insurers are having to grapple with a highly complex and unusual fact pattern, which may lead to a number of different triggers for cover which will vary depending on what has happened to each of the aircraft. For example, Aeroflot's flight from Cairo to Moscow will raise very different coverage points to those aircraft that remain in Russia which, in turn, may have different issues depending on whether or not they have been registered to the Russian registry and flown domestically. Even if the aircraft are returned, lessors will be looking to their insurance to cover the considerable costs involved in ensuring the aircraft meet the necessarily stringent safety regulations, especially if they have been flown in Russia without the necessary maintenance.
There may also be a debate about whether the claims fall to general hull all risk policies or to specific war risks policies and which clauses within such policies respond. Establishing what has actually happened to each aircraft (has it been appropriated, seized or detained by Russia or subject to the wrongful exercise of control by the crew or operator) and how that fits with the specific covers provided by the relevant policy will be key to assessing coverage. All of which could change depending on further action taken by the Kremlin and/or the airlines in Russia. As with the lengthy insurance litigation that resulted from the invasion of Kuwait in 1990 and Iraq's seizure of 15 aircraft belonging to Kuwait Airways, it is likely that aggregation language will be critical as lessors seek to maximise their recovery under their insurance and insurers seek to minimise the payments.
In AIG's recent Q1 financial results conference call its CEO Peter Zaffino mentioned some of the above and more when addressing the company's exposure to aviation claims. Mr Zaffino focused on the unknowns stating "we don't know whether or to what extent actual losses have occurred or when they occurred, given the uncertainties surrounding the location and condition of aircraft and other equipment as well as the timing of their potential return to lessors, nor do we know if efforts have been undertaken by lessors to mitigate any damages."
Given the sums at stake, it is likely that the coverage issues identified above will take time to resolve and policyholders should be engaging with their insurers to try to minimise the likelihood of disputes where possible.
In a situation where billions of pounds worth of Russian assets are secured in various jurisdictions around the world, insurers will be considering the potential for subrogated claims. Lessors should also be looking at their own claims in the event that they are unable to recover all their losses under their insurance.