According to a recent report by DBRS Morningstar the risk of a prolonged Russian invasion of Ukraine will further complicate the resolution of aircraft leasing insurance claims which would take years to settle, with experts believing that this would require complex arbitration and legal procedures.
More than 500 aircrafts and engines are stranded in Russia after the US, UK and EU enacted a number of sanctions against the Russian government and Russian entities.
As part of these sanctions, the NATO airspace has been closed to Russian-operated aircrafts. At the same time, Western governments have prohibited the provision of aviation insurance and reinsurance for any aircraft for use in Russia, among other key financial services.
In response to these sanctions, the Russian government prohibited the repatriation of aviation assets to international lessors, who were obligated to terminate their leases and demand the return of the aircrafts in March 2022.
The inability of recovering these assets from Russia has triggered claims under multiple primary and contingent insurance policies on aircraft and engines, with a total estimated value between $10 billion and $15 billion, according to the report.
These insurance policies include Hull All Risks (all risk), which covers loss or damage to an aircraft while flying or on the ground, but excludes claims caused by war.
Extended protection can be acquired under Hull War and Allied Perils Risk (war risks) insurance on a limited basis. DBRS Morningstar noted that aircraft lessors are more likely to claim under these policies.
Lessors also usually require airlines to contract primary insurance policies with certain specific coverages, as well as to be named a designated beneficiary.
DBRS Morningstar explained: “There is uncertainty if lessors can claim on primary policies as the policies usually were provided by Russian insurance companies, and current sanctions make it illegal for lessors to receive payments from Russian-domiciled entities. An additional complication is that aircraft insurance provided domestically in Russia is mostly reinsured with the Lloyd’s of London market and other international insurance companies.
“This structure is compelling lessors to claim directly with reinsurers of the primary insurance coverage as some of these reinsurance policies may include a “cut through” clause to which reinsurers agree to pay the reinsurance proceeds directly to the “contract parties” rather than to the reinsured (the insurance company).”
According to the agency, given the complexity of the insurance policies involved, the monetary values of the claims, and the prospects of protracted sanctions on Russia settling these claims will depend on long arbitration and litigation procedures.
Marcos Alvarez, Senior Vice President and Global Head of Insurance, said: “DBRS Morningstar expects that the final resolution of aircraft leasing claims derived from the confiscation of aircraft will require resolution through complex arbitration and legal procedures. This is not unexpected for the most complicated loss events. For instance, the claims that followed after the 9/11 terrorist attacks took almost 16 years to settle.”
He continued: “This is further compounded by the commingling in exposures from the reinsurers participating in the primary insurance policies contracted by Russian airlines, with that of insurers and reinsurers providing coverage to the lessors’ contingent policies.”
The agency highlighted that in the event that claims are considered valid, total losses for the aviation insurance industry should remain manageable despite what would become the largest single aviation loss in history.
The report concluded that, similar to previous major loss events in insurance history, the aviation insurance market will go through a period of deep transformation, particularly in the war risks segment, that will require a reassessment of concentration limits for repossession and nationalisation of aircraft.
