Long arbitration and legal proceedings for lessors and re/insurers of aircraft stranded in Russia
According to a recent DBRS Morningstar report, the risk of a prolonged Russian invasion of Ukraine will further complicate the settlement of aircraft rental insurance claims that would take years to settle, with experts saying it would require legal proceedings. and complex arbitration.
More than 500 planes and engines are stuck in Russia after the US, UK and EU passed a number of sanctions against the Russian government and Russian entities.
As part of these sanctions, NATO airspace was closed to aircraft operated by Russia. At the same time, Western governments have banned the provision of aviation insurance and reinsurance for any aircraft intended for use in Russia, among other key financial services.
In response to these sanctions, the Russian government banned the repatriation of aircraft assets to international donors, who were forced to terminate their leases and demand the return of the aircraft in March 2022.
The inability to recover these assets from Russia has triggered claims under several primary and conditional aircraft and engine insurance policies, with an estimated total value of between $10 billion and $15 billion, according to the report.
These insurance policies include Hull All Risks, which covers loss or damage to aircraft in flight or on the ground, but excludes claims caused by war.
Extended protection can be purchased under Hull War and Allied Perils Risk insurance on a limited basis. DBRS Morningstar noted that aircraft lessors are more likely to claim under these policies.
Lessors also generally require airlines to take out primary insurance policies with certain specific coverages, as well as to be named as the beneficiary.
DBRS Morningstar explained, “There is uncertainty about whether lessors can claim primary policies, as policies were typically provided by Russian insurance companies, and current sanctions prohibit lessors from receiving payments from entities. domiciled in Russia. An additional complication is that domestically provided aircraft insurance in Russia is primarily reinsured through Lloyd’s of London market and other international insurance companies.
“This structure requires lessors to claim principal insurance cover directly from reinsurers, as some of these reinsurance policies may include a ‘cut’ clause whereby reinsurers agree to pay reinsurance proceeds directly to ‘parties’. contracts” rather than to the reinsured (the insurance company).
According to the agency, given the complexity of the insurance policies involved, the monetary value of the claims and the prospect of prolonged sanctions against Russia, the settlement of these claims will depend on lengthy arbitration and litigation proceedings.
Marcos Alvarez, senior vice president and global head of insurance, said, “DBRS Morningstar expects that the ultimate resolution of aircraft lease claims arising from aircraft confiscation will require resolution through complex litigation and arbitration. This is not unexpected for the most complicated claims. For example, claims following the 9/11 terrorist attacks took nearly 16 years to settle.
He continued: “This is further compounded by the blending of exposures of reinsurers participating in primary insurance policies taken out by Russian airlines, with those of insurers and reinsurers providing cover to lessors’ conditional policies.”
The agency stressed that in the event the claims are deemed valid, total losses for the aviation insurance industry should remain manageable despite what would become the largest aviation loss in history.
The report concludes that, like previous major claims in insurance history, the aviation insurance market will go through a period of profound transformation, particularly in the war risk segment, which will require reassessment. concentration limits for the repossession and nationalization of aircraft.