The following materials contain a high level description of potential insurance claims and other claims that may be available to a foreign owner, lessor or financier of aircraft stranded in Russia. These observations are a general overview, and application to any particular case would require a detailed analysis of the specific facts of the case, including a review of the relevant insurance and reinsurance policies.
Background Summary
Following Russia's actions in Ukraine in February 2022, the US, UK and EU quickly implemented a broad range of sanctions packages against Russia and Russian entities, which have continued to develop over the last several months. These sanctions include, among other things, the closure of US, UK and EU airspace to Russian-operated aircraft, and a prohibition on UK and EU entities (or anyone within the UK and EU) leasing aircraft to Russian entities.1 UK and EU sanctions also prohibit certain ancillary activities, including the provision of funds, financial services, and brokering services, in relation to these prohibited activities, as well as the provision of insurance or reinsurance to Russian entities or providing insurance coverage for aircraft for use in Russia.2
In response, Russia issued a decree on March 11, 2022, pursuant to which Russia (a) prohibited the export of aircraft currently operated in Russia, (b) continued to recognize as valid airworthiness certificates and related documents issued by foreign aviation administrations in respect of Russian-operated aircraft, including those expiring after March 1, 2022 for the period up to September 1, 2022 (which was subsequently extended to December 31, 2022), and (c) allowed domestic Russian airlines to re-register aircraft on the Russian register without first deregistering the aircraft from their existing state of registration. Typically foreign-owned aircraft operated by Russian carriers have been registered in Bermuda or Ireland.
Russia's actions described above are likely to contravene its obligations under the Chicago Convention (which covers aircraft registration) and other international aviation conventions to which Russia is a party. The ICAO Council, established pursuant to the Chicago Convention, has called on Russia to immediately cease such infractions.3 Interested parties should consider what (if any) consequences there are if Russia is determined to have failed to honor its obligations under the Chicago Convention and other relevant international treaties.
Industry estimates are that as of February 2022 approximately 500 foreign-owned aircraft remained in Russia, with a market value greater than $10 billion.4 It remains unclear how and when foreign owned aircraft trapped in Russia can be repossessed. Even if individual Russian airlines want to cooperate with foreign owners or financing parties seeking repossession, the obstacles put in place by the Russian authorities, combined with Western sanctions, make recovery of aircraft located in Russia extremely challenging.
Airline Primary Insurance
The first level of insurance coverage for any aircraft is the primary insurance carried by the airline/operator. This coverage will typically consist of the following:
- Hull All Risks ("Hull All Risks") – covers loss or damage to an aircraft while flying or on the ground for an agreed value. Pursuant to AVN 48B (War, Hijacking and Other Perils Exclusion Clause), claims caused by certain events, including war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government, are excluded from Hull All Risks coverage.
- Hull War and Allied Perils Risks ("Hull War Risks") – writes back in, on a limited basis, cover for losses that were excluded from the Hull All Risks insurance pursuant to AVN 48B, other than losses arising out of a hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter (for which no insurance cover is available in today's market). The write-back for Hull War Risks follows LSW 555D policy form.
- Aircraft Third Party Legal Liability ("Liability") – covers general third-party liability of the airline, including indemnity obligations it may have as lessee under its leases. Liability cover is also subject to the AVN 48B exclusion, and write-backs are available under AVN52.
Further exclusions apply to all insurances and should be reviewed in the context of the particular circumstances.
The Hull All Risks and Hull War Risks insurances are often separately arranged by the insurance broker and will be subject to a 50/50 sharing clause pursuant to AVS 103. AVS 103 states that if there is a total loss to an insured aircraft and the insured has a valid claim under the Hull All Risks or Hull War Risks policies but it cannot be resolved as to which policy is liable within 21 days, each group of insurers (without prejudice to their liability) will advance to the insured 50% of the agreed value.
Full terms of insurance cover are set out in an insurance policy, which are typically not shared with aircraft owners, lessors and financing parties. The aircraft finance industry instead relies on short-form insurance certificates provided to the relevant parties that summarize key terms of the policy, such as airframe, engines, agreed value, policy limits, loss payee, names of additional insureds and relevant endorsements. Such insurance certificates nearly universally incorporate the endorsement AVN 67B (or its successor AVN 67C), which requires that any payment under the Hull All Risks and Hull War Risks policies that relates to a total loss of an aircraft be paid to the "Contract Parties" set forth in the insurance certificate.
Russian law requires that Russian air carriers arrange for all such primary insurance coverage to be issued by domestic Russian insurers under Russian law-governed insurance policies.
Insurance policies (whether primary, reinsurance or contingent/possessed) may be subject to an aggregate limit per policy year for all claims under a particular policy (including fleet policies). This limit applies to all aircraft covered by the policy (i.e., not per lessor with respect to primary insurance), and if the limit is exceeded, the excess is uninsured. It is untested how the available insurance proceeds would need to be shared in such a scenario.
Reinsurance
Lessors and financing parties contractually require Russian air carriers to have their primary insurance (including the Hull All Risks, Hull War Risks and Liability insurance coverage) reinsured in the London market and/or other international aviation insurance markets. The required level of reinsurance for Russian aircraft is typically 90% of the value of the insurance policy. Since January 1, 2017, Russian insurers have been obliged to reinsure 10% of their insured liability domestically with the Russian National Reinsurance Company ("RNRC"). Owners, lessors and financing parties presumably have rights under the RNRC policy, so interested parties should consider whether claims should be made against RNRC.
As with the primary insurance, reinsurance cover is set out in a reinsurance policy, but it is customary for interested parties to rely on short-form reinsurance certificates. Reinsurance policies (and the related reinsurance certificates) are commonly governed by either English or New York law and require disputes to be settled by arbitration.5
The reinsurance certificate may include an express cut-through clause pursuant to which the reinsurers agree to pay the reinsurance proceeds directly to the "Contract Parties" named in the reinsurance certificate rather than the reinsured (i.e., the primary insurer). In addition (or as an alternative), the reinsurance policy may include AVN 109 (Cut-Through Endorsement), which requires that reinsurance proceeds be paid directly to the "Contract Parties". Either an express cut-through clause or an AVN 109 endorsement, combined with the AVN 67B or AVN 67C endorsement, enables the Contract Parties, which are not otherwise in privity with the reinsurers, to have direct rights against the reinsurers under the reinsurance policies. One important caveat, however, is that cut-through clauses (including AVN 109) typically state that direct payment to the "Contract Parties" is subject to compliance with local law. It is unclear whether cut-through clauses would contravene Russian law.
In response to the Western sanctions, as of March 14, 2022, the reinsurance rules in Russia were amended to prohibit Russian insurance companies from reinsuring their risks with reinsurance companies registered in the so-called "unfriendly states" or controlled by entities from the so-called "unfriendly states"6 unless a special permit is obtained from the Central Bank of Russia.
Claims Against Reinsurers and Reinsurers' Defenses
In order to make a claim against insurers and reinsurers for a total loss of an aircraft, owners, lessors and financing parties will need to first show that a total loss of the aircraft has actually occurred. Claims would likely be based on total loss resulting from theft or confiscation, nationalization, seizure, restraint, detention or requisition of title to or use of an aircraft by the Russian government, although claimants are generally careful to pursue all theories of recovery under the reinsurance. Claims may also be based on constructive or agreed total loss, depending on the particular circumstances of each aircraft.
Even if owners, lessors and financing parties can show that a total loss of the aircraft has occurred, reinsurers may have a defense against paying claims as a result of the termination of the reinsurance policies pursuant to AVN 111(R) (Sanctions and Embargo Clause). AVN 111(R) provides that "if, by virtue of any law or regulation which is applicable to a Reinsurer at the inception of this Policy or becomes applicable at any time thereafter, providing coverage to the Reinsured is or would be unlawful because it breaches an embargo or sanction, that Reinsurer shall provide no coverage and have no liability whatsoever…" For UK and EU reinsurers, if affected reinsurance policies were not cancelled or terminated by March 8, 20227 and February 26, 2022, respectively, the coverage provided under them nonetheless ceased to be effective to the extent it would infringe the sanctions (subject to the wind-down periods provided for under the UK and EU sanctions regimes).8 AVN 111(R) is a standard aviation market reinsurance provision, and a version of AVN 111(R) is usually included in policies. However, the absence of an AVN 111(R) provision in a particular reinsurance contract would not prevent the application of the UK and EU sanctions prohibiting reinsurance for the benefit of Russian carriers. Notwithstanding the implementation of the sanctions prohibiting insurance or reinsurance for the benefit of Russian carriers, some reinsurers still opted to serve notices of termination or cancellation of the policies.
Under AVN 67B and AVN 67C, it is not yet settled (anywhere in the world) whether continuing coverage under AVN 67B or AVN 67C creates a separate policy (or separate right to make a claim) in favor of the owner, lessor and financing parties or whether coverage is contingent upon the underlying reinsurance policy with the Russian insurer still being in place. It is therefore uncertain whether AVN 111(R) prohibits the payment of reinsurance claims by EU reinsurers to (non-Russian) owners, lessors and financing parties when the policies reinsured insurance provided by Russian insurers to Russian carriers. We are not aware of any legal precedent for how an AVN 67B or AVN 67C clause works when the underlying payment to the reinsured would be prohibited by AVN 111(R).
Lessor Contingent and Possessed Insurance
Most aircraft leasing companies maintain their own contingent insurance and possessed insurance policies, which provide additional insurance coverage for their aircraft in certain circumstances. Both contingent insurance and possessed insurance policies will cover a lessor's aircraft for Hull All Risks and Hull War Risks coverage, similar to an airline's primary insurance. Lessor policies are often governed by English law but other choices of law are also possible.
Contingent insurance provides insurance coverage where an airline/operator has failed to adequately insure an aircraft, or where the airline/operator's insurer does not pay the aircraft owner after a valid claim is made for reasons other than the insolvency of such insurer.
Possessed insurance provides insurance coverage where an aircraft is in the possession of the lessor or in the process of being repossessed.
Numerous aircraft leasing companies have filed claims against their insurers under such policies, but resolution of these claims is unclear as this point. Outcome of claims may depend on the individual fact patterns, including the status of the relevant aircraft, the terms of the underlying policies, the actions taken by the relevant parties to seek repossession and actions of the Russian government to prevent return of aircraft and to reregister aircraft in violation of applicable treaties.
Claims under lessor policies would not be payable to extent that the reinsurance or primary insurance has paid out or the Russian carriers have satisfied a direct claim. Where an overlap of insurance cover arises, English law prevents an insured from recovering the full amount of the loss from more than one policy. Subject to any specific clauses to the contrary contained in a particular policy, the insured is entitled to claim its full loss from whichever insurer it chooses but will not be able to recover more than the amount necessary to indemnify it against the losses.
There was some concern that contingent and possessed insurance may now be at risk given EU insurers' coverage has ceased as a result of implemented sanctions. However, guidance published by the European Commission indicates that insurance and reinsurance of aircraft is not considered "for a person in Russia or for use in Russia", where such insurance or reinsurance is provided for the benefit of a non-Russian owner and not for the benefit of the actual user or operator of the aircraft.9 Corresponding guidance has also been published by the UK.10 This is understood to apply in circumstances where aircraft remain in Russia against the will of the non-Russian owner and despite the non-Russian owner's demand for their return. Therefore, it appears there are not currently any sanctions which would prohibit UK or EU insurers from providing and making payments under existing contingent or possessed insurance on aircraft in possession of Russian carriers.11
With respect to claims made under contingent Hull War Risks policies, aircraft are not usually fully insured but are insured for 'exposures', therefore the loss would be capped at an aggregate amount as opposed to the total loss for each aircraft. On the other hand, claims made under standard contingent Hull All Risks policies would, if successful, offer loss coverage for each individual aircraft at the agreed value as opposed to an aggregate (and capped) loss.
Direct Claims against Russian Carriers
In addition to making claims against insurers, reinsurers and contingent/possessed insurers, aircraft owners, lessors and financing parties may also pursue direct claims against the Russian air carriers. These claims may include a claim for the tort of conversion of the owner's property. The aircraft leases were required to be terminated under UK and EU sanctions, although it is unclear whether certain provisions in the leases that are expressly stated to survive termination (such as indemnities and obligation to return the aircraft) would survive the legally mandated termination.
Owners, lessors and financing parties may also have contract claims that survive termination of the lease or other relevant contract. Aircraft operating leases typically require the payment by the lessee to the lessor of an agreed value in the event of a total loss of the aircraft. The total loss provisions of a lease will likely be triggered as a result of the Russian government's prohibition on exporting the aircraft.
If an insurer (contingent or otherwise) or reinsurer makes a payment under a policy, they may have the right to be subrogated to the rights of the aircraft owners, lessors and financing parties and pursue any direct claims against the Russian carrier. Under AVN 67B and AVN 67C, insurers or reinsurers have the right to be subrogated to the rights of the Contract Parties to the extent of any payment under the policy, but may not exercise such right without the consent of those indemnified (such consent not to be unreasonably withheld).
The location of assets of Russian insurers and Russian carriers that could be attached to satisfy a claim will also be relevant, particularly assets located outside of Russia. Russian entities have tried to limit the exposure of their assets outside of Russia to the extent feasible.
Claims against Russian Insurers
Some aircraft lessors have made claims against primary insurers in Russia. Recovery on these claims is not expected in the near to medium term. Some claims have also been made by lessors against reinsurers prior to February 26, 2022 but these claims have not yet been settled and questions on coverage remain.
Claims against primary Russian insurers are likely to be pursued ultimately by whichever entity bears the economic loss for the value of the aircraft (owners, lessors, contingent insurers, reinsurers, etc.) or anyone who may purchase such claims.
Enforcement of claims against Russian parties would likely necessitate initiating proceedings before courts in the Russian Federation, which would be costly, time consuming and at risk of geo-political interference given the extensive legislation and guidelines passed in Russia since February 2022 restricting the repossession or redelivery of foreign owned aircraft. In that regard, English and New York law judgments have not generally been recognized in Russia. However, foreign arbitration awards have historically been enforced in Russia.
In any case, voluntary payments from Russian insurers to foreign parties are unlikely to be forthcoming. The practicalities of any payments are also problematic, due to export controls implemented in Russia, sanctions and an inability to transfer funds abroad.
Owners, lessors and financing parties could evaluate whether they have claims against the Russian state under applicable investment treaties or otherwise for the decrees issued and actions taken to prevent the return of aircraft leased to Russian carriers. These claims could potentially be based on theories such as direct, indirect and creeping expropriation and arbitrary and discriminatory treatment. Insurance companies that pay claims could evaluate whether they have claims against the Russian government as well.
General Observations
The magnitude of aggregate claims against insurers and reinsurers is unclear. Worst case scenario estimates are in the range of $10 billion to $15 billion.12 The ultimate amount of claims will depend to some extent on future developments in the Russia/Ukraine situation.
The extent of further individual risk sharing by members of reinsurance syndicates or issuers of lessor contingent and possessed policies is not known.
The uncertainty on the total value and number of claims may deter individual insurers from paying claims. In addition, the cumulative losses that may be borne by a particular insurer may also impact its decision to pay a claim or resist payment.
Some commentators have argued for a UK/EU governmental solution (but substantial hurdles exist).
The exact terms of a particular policy, the adherence to procedural requirements by the claimant and the precise facts surrounding a particular aircraft will be critically important. Interested parties should also consider the implications of a contractual assignment of insurance/reinsurance rights. These assignments are often required by financing parties as a condition to funding loans, particularly in transactions governed by English law.
Some litigation finance companies have expressed interest in funding aviation insurance claims. The litigation finance companies sometimes get others to share in the funding of a claim. There has been some suggestion that certain insurance claims have started to trade. While most policies require consent of the insurers to assign rights under the policy, interested parties should consider whether such restrictions are enforceable under applicable law.
The Russian actions in Ukraine and the resulting sanctions and insurance claims are likely to have a significant impact on future aviation insurance rates and terms. This is already being seen as policies come up for renewal.
There have been a few successful repossessions of foreign owned aircraft outside of Russia, and the Russian government has advised Russian operators not to operate foreign owned aircraft on international routes other than to "friendly countries" to limit the risk of potential repossession/enforcement actions. In addition, at least two Russian airlines have petitioned the Russian government to allow them to return aircraft to foreign lessors in certain limited circumstances.13
Denied claims, or delays to the payment of claims, could have a significant impact on certain lessors and, perhaps, financial institutions. In some cases, this could impact the viability of lessors that are less well funded.
Even relatively conservative estimates of insurance claims totaling $10 billion would be by far the largest annual claims in the history of aviation insurance. Since aviation insurance exposure is more concentrated among insurers than business-interruption and event-cancellation insurance, there is concern that some Lloyd's underwriters could suffer above-average losses, which would make their credit profiles vulnerable to further large losses or external shocks.
There is some indication that owners, lessors and financing parties have struggled to appoint English counsel in the London market to pursue potential insurance claims, due to English firms being either conflicted (and therefore unable to act) or, unwilling to act against insurers and reinsurers for reputational and relationship reasons.
Publicly Reported Insurance Claims
AerCap submitted an insurance claim of $3.5 billion under its $5 billion all risks policy, in relation to aircraft and engines remaining in Russia.14 In addition, for the three months ended March 31, 2022, AerCap booked a $2.7 billion pre-tax net charge to their earnings on more than 100 aircraft it owns that are stranded in Russia.15
DAE wrote off $576.5 million relating to 19 aircraft in Russia for the three month period ending March 31, 2022 and has reportedly filed insurance claims of $1 billion under certain insurance policies.16
Air Lease Corp has written off $802 million in connection with 21 owned aircraft and 6 managed aircraft stuck in Russia, and is pursuing insurance claims related to such aircraft.17
1 See Regulations 22 to 25 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the "UK Regulations") which among other things prohibit the export aircraft to Russia, making aircraft available to Russian entities, and supplying or delivering aircraft from a third country to a place in Russia, which covers the sale or leasing of aircraft to Russian entities. Similar prohibitions are set out in Article 3c of Regulation 2022/328 adopted by the European Union on February 25, 2022, which took effect on February 26, 2022 (the "EU Regulations").
2 See Article 3c(2) to 3c(4) of the EU Regulations; and Regulations 27 to 29A of the UK Regulations. These also contain prohibitions relating to the provision of technical assistance relating to aircraft.
3 ICAO Council reviews dual registration of commercial aircraft by Russian Federation, ICAO, https://www.icao.int/Newsroom/Pages/ICAO-Council-reviews-dual-registration-of-commercial-aircraft-by-Russian-Federation.aspx
4 Ukraine Crisis Puts Spotlight on Russia's Leased Aircraft, AirFinance Journal, https://www.airfinancejournal.com/articles/3586407/ukraine-crisis-puts-spotlight-on-russias-leased-aircraft
5 Margo on Aviation Insurance, §26.55.
6 These include foreign states which are acting in an "unfriendly" manner. In other words, states that that have issued sanctions and other restrictive measures in relation to Russian companies and individuals. The term "unfriendly" is used in the relevant regulations and shall not be read as reflecting the position of White & Case. In accordance with the Order of the Government of the Russian Federation No. 430-p dated March 5, 2022, as of the date hereof the list of "unfriendly states" includes Australia, Albania, Andorra, United Kingdom (including Jersey (the crown possession of the British Crown) and the overseas controlled territories – Anguilla, British Virgin Islands, Gibraltar), Member States of the European Union, Iceland, Canada, Liechtenstein, Micronesia, Monaco, New Zealand, Norway, Republic of Korea, San Marino, North Macedonia, Singapore, United States of America, Taiwan (China), Ukraine, Montenegro, Switzerland and Japan.
7 The Russia (Sanctions) (EU Exit) (Amendment) (No.6) Regulations 2022, which introduced the restrictions relating insurance/reinsurance of aircraft, came into force at 5.00 pm on March 8, 2022. Prior, to this, the Russia (Sanctions) (EU Exit) (Amendment) (No.3) Regulations 2022 introduced the various trade prohibitions relating to the export etc. of aircraft.
8 The UK introduced a General Trade Licence which permitted the continued provision of insurance/reinsurance for policies entered into before March 8, 2022, and subject to certain conditions, until March 28, 2022. Article 3c(5) of the EU Regulations also provided a wind-down period so that the prohibitions would not apply to the execution, until March 28, 2022, of contracts concluded before February 26, 2022. A copy of the General Trade Licence is available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1064045/revoked-general-trade-licence-russia-sanctions-aviation-insurance.pdf.
9 Insurance and Reinsurance, Related Provision: Article 3c; Article 3m; Article 3n of Council Regulation 833/2014, Frequently Asked Questions – As of June 2022, https://ec.europa.eu/info/sites/default/files/business_economy_euro/ banking_and_finance/documents/faqs-sanctions-russia-insurance_en.pdf.
10 Russia Sanctions: Guidance, https://www.gov.uk/government/publications/russia-sanctions-guidance/russia-sanctions-guidance.
11 The US Department of the Treasury's Office of Foreign Assets Control ("OFAC") has not provided guidance similar to that issued by the EU and UK regarding contingent or possessed aircraft insurance within the context of US sanctions related to Russia. Under US sanctions, "new investment" in the Russian Federation by a US person is prohibited. Whether the purchase of certain claims, collections, investments, or other interests in insurance or reinsurance policies would be considered prohibited "new investment" by OFAC or otherwise restricted under US sanctions (e.g., due to the involvement of restricted parties or the provision of prohibited services) is a fact-intensive analysis unique to each individual insurance scenario. Transactions involving US Persons or a US nexus in the circumstances discussed in this alert should be examined to ensure full compliance with US sanctions. In addition, both US and non-US parties should consider any potential US export control restrictions regarding activities in connection with certain Russian airlines, or certain aircraft owned, controlled, leased, or chartered by Russian parties, or aircraft otherwise registered in Russia.
12 Insurers Face Substantial Losses from Planes Grounded in Russia, Fitch Ratings, https://www.fitchratings.com/research/insurance/insurers-face-substantial-losses-from-planes-grounded-in-russia-21-03-2022; Insurers' $15B Russia Aviation Puzzle Will Take Years to Solve, S&P Global Market Intelligence, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/insurers-15b-russia-aviation-puzzle-will-take-years-to-solve-69640586.
13 Russian Airlines Ask to Return Planes to Lessors, Simple Flying, https://simpleflying.com/russian-leased-planes-return.
14 Insurers' $15B Russia Aviation Puzzle Will Take Years to Solve, S&P Global Market Intelligence, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/insurers-15b-russia-aviation-puzzle-will-take-years-to-solve-69640586.
15 Form 6-K, AerCap Holdings N.V., https://www.aercap.com/media/3650/interim-report-_first-quarter-2022-financial-results_may-17-2022.pdf.
16 Results from the Three Months Ended March 31, 2022, Dubai Aerospace Enterprise, https://dubaiaerospace.com/wp-content/uploads/2022/05/DAE-Results-for-the-three-months-ended-31-Mar-2022.pdf; Dubai Aerospace Files $1bn Insurance Claim for Aircraft in Russia, Insurance Insider, https://www.insuranceinsider.com/article/ 2a2oyocym5d1l2kg4g4qp/commercial-lines-section/dubai-aerospace-files-1bn-insurance-claim-for-aircraft-in-russia.
17 Form 10-Q, Air Lease Corporation, https://airleasecorp.gcs-web.com/static-files/b152a8e9-74b7-4c3c-83ea-4e2fedf44647
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