UK Ruling on Stranded Planes: What It Means for Aviation Insurance Claims

The aviation industry is no stranger to turbulence, but the legal battles surrounding stranded planes in the wake of geopolitical events have introduced a new level of complexity. A recent UK High Court ruling is poised to significantly impact aviation insurance claims, potentially reshaping how insurers assess and cover war risks. With nearly $10 billion worth of jets trapped in Russia alone following the Ukraine invasion, this decision has far-reaching implications for airlines, lessors, and the insurance market.

The Core of the Ruling

In a landmark decision, the UK High Court sided with aircraft lessors, determining that losses stemming from the Russian government’s export ban in March 2022 are recoverable under war risk insurance policies. This ruling addresses a critical question: who bears the financial burden when state actions prevent the retrieval of leased aircraft?

The case, AerCap Ireland Ltd v AIG Europe SA and others, involved a group of lessors including AerCap, Dubai Aerospace Enterprise (DAE), and Merx Aviation, who sought to recover losses from insurers such as AIG, Lloyd’s, Chubb, and Swiss Re after their aircraft were stranded in Russia. The lessors argued that the Russian government’s actions constituted a “loss” under their war risk policies.

Judge Christopher Butcher agreed, clarifying that the export ban was the direct cause of the losses, making them recoverable under war risk coverage, but not under broader all-risk policies. The court also confirmed that neither EU nor US sanctions prevented insurers from paying out these claims. AerCap, the world’s largest aircraft lessor, is set to recover over $1 billion from its war risk insurers.

War Risk vs. All-Risk Policies: A Decisive Distinction

The court’s decision hinged on the distinction between war risk and all-risk insurance policies. All-risk policies generally cover losses resulting from any cause except those specifically excluded, while war risk policies cover losses directly resulting from acts of war or hostile government actions.

The ruling clarifies that government-imposed export bans fall under war risk, a crucial distinction that could save aviation companies millions. This determination shields all-risk insurers from liability in similar situations, focusing responsibility on war risk underwriters.

Implications for Aviation Insurance Claims

This ruling sets a legal precedent with several key implications:

Redefined Liability: The decision clarifies that geopolitical risks, specifically government actions during conflicts, fall under war-risk policies. This redefines liability frameworks and prompts insurers to account for geopolitical events as primary triggers for war-risk coverage.
Increased Demand for War Risk Insurance: Airlines and lessors, now acutely aware of the potential for government actions to trigger coverage, are likely to prioritize war-risk underwriting. This surge in demand could strain traditional insurers’ capacity and potentially lead to higher premiums.
Potential for ILS Growth: The defined parameters of geopolitical liability allow Insurance-Linked Securities (ILS) managers to model risks more accurately. By securitizing aviation war-risk policies, ILS managers can offer investors exposure to structured products tied to defined geopolitical triggers, potentially attracting capital to ILS funds with exposure to aviation assets.
Impact on Reinsurance: Reinsurers, who provide coverage to primary insurers, also face potential credit implications. Analysts at Morningstar DBRS warn that the ruling could expose insurance and reinsurance companies to billions of dollars in cumulative liabilities. This may lead to more limited contingent coverage or higher premiums for war-related endorsements.
Global Ramifications: While this is a UK court decision, it is expected to influence courts and tribunals globally, especially in jurisdictions applying common law principles. Aircraft lessors operating in other jurisdictions may gain leverage in ongoing disputes. Similar proceedings are underway in Ireland and the US.

Potential Challenges and Future Considerations

Despite the clarity the ruling provides, challenges remain:

Appeals: Fidelis Insurance Group has already expressed disappointment with the High Court’s decision and is reviewing all options, including a possible appeal. An appeal could prolong the uncertainty and delay payouts.
Policy Language: The case highlights the importance of clear and precise policy language. Insurers may need to tighten definitions and exclusions around political and sovereign risks to avoid future disputes.
Geographic Exposure: Some insurers may withdraw from offering contingent war risk coverage for leased aircraft or limit geographic exposure, citing capacity constraints and increased pricing in aviation re/insurance.
Valuation Disputes: Even with the ruling, disputes over the actual value of the stranded aircraft could arise, potentially leading to further litigation.

Advice for Aviation Businesses

In light of this ruling, aviation businesses should take the following steps:

Review Insurance Policies: Carefully review existing insurance policies, particularly the terms and conditions related to war risk and all-risk coverage. Ensure a clear understanding of what is covered and what is excluded.
Assess Risk Exposure: Evaluate potential exposure to geopolitical risks and government actions that could lead to aircraft stranding. Consider the regions where operations are most vulnerable.
Engage with Insurers: Discuss the ruling with insurers and seek clarification on how it affects coverage. Negotiate policy terms to ensure adequate protection against war risks.
Consider ILS Options: Explore the potential of using Insurance-Linked Securities (ILS) to manage aviation war risks. ILS can provide additional capacity and tailored coverage solutions.
Seek Legal Counsel: Consult with aviation insurance lawyers to understand legal rights and obligations. Ensure compliance with all applicable laws and regulations.

Conclusion

The UK High Court’s ruling on stranded planes marks a turning point in aviation insurance. By clarifying the scope of war risk policies, the decision provides a framework for resolving claims related to geopolitical events. While challenges and uncertainties remain, aviation businesses can mitigate risks by carefully reviewing their insurance coverage, engaging with insurers, and seeking expert legal advice. This ruling underscores the importance of adapting to the evolving landscape of aviation insurance and proactively managing potential risks.