This article was first published on 14 October 2022
In October 2022 we wrote the article below about the proceedings issued in London by AerCap against its insurers for its aircraft that remain in Russia. Similar proceedings have been issued by aircraft lessors in courts around the world, with significant claims filed in courts in Ireland, the US and England. In addition to the AerCap proceedings, the claims in the English courts include DAE's claim issued shortly after it wrote off $538 million for its 19 aircraft that remain in Russia and claims issued by Falcon 2019-1 Aircraft 3 Ltd and Zephyrus Capital Aviation Partners 1D Ltd.
In a similar way to the management of COVID-19 business interruption insurance claims, the Commercial Court has assigned one judge, Mr Justice Butcher, to these cases. The Court wishes to understand how many cases arising from the same fact pattern may be issued and the issues involved. A CMC has been listed for March 2023 in one of the cases and the Court has asked for all those that wish to participate to make themselves known to the Court by 16 December 2022 with a view to exploring whether there are case management steps the court should take to manage the claims.
Aviation insurance: AerCap v insurers
In May 2022 we wrote about the potential coverage issues facing aircraft lessors whose aircraft remain in Russia. That article can be found here.
Many of the issues identified in that article are set out in proceedings issued by AerCap against its Hull All Risks Insurers (led by AIG) and its War Risks insurers (led by Lloyds) for the loss of 141 aircraft and 29 engines leased to Russian airlines. This article sets out some of the arguments relied upon by insurers in support of their denial of coverage.
The policy
Whilst we have not seen the policy, it is clear from the pleadings that the policy provides contingent cover which responds in the event claims do not fall for cover under the "principal insurances". Those principal insurances are likely to be policies issued to the various lessees containing the AVN 67 endorsement (which adds the lessors as additional insureds) and/or reinsurances containing an enforceable cut through in favour of the lessors.
The All Risks cover is provided under Section 1 and the War Risks cover is under Section 3. Both sections have a separate market of insurers who are separately represented in the proceedings.
The policy contains the standard Sanctions and Embargo Clause AVN 111.
The claim
AerCap is claiming just under US$3.5 billion under the Hull All Risks cover for the wrongful deprivation of physical possession of the aircraft by the lessees. In circumstances where the recovery of those aircraft is uncertain/ unlikely, AerCap states that amounts to "irretrievable deprivation" of the aircraft.
As an alternative claim, AerCap is claiming US$1.2 billion (the aggregate limit under the policy) under the War Risks cover.
Insurers' defences
Both the All Risks and War Risks insurers are stating they are not on risk for any claims payable under the principal insurances with the relevant clause stating that insurers are not liable "whether or not payment has been made". Given that the principal insurances may well be issued by Russian insurers, AerCap may face the argument that even though payment cannot be obtained (due to sanctions) it is still "payable" under the principal insurances and therefore the contingent cover is not triggered.
In addition, insurers are relying on a clause that states the cover is only for aircraft which are the subject of a lease agreement. Insurers are arguing that, because Aercap issued notices of termination to the lessees (which they were required to do under the sanctions regime), the loss occurred after the aircraft ceased to be the subject of a lease agreement and are therefore outside the cover provided.
In terms of the more substantive arguments. The All Risks insurers state that the deprivation has not become sufficiently permanent as to amount to an irretrievable deprivation of possession of the aircraft which amounts to a total loss under the insurance. The All Risks insurers state that the deprivation has not become sufficiently permanent as to amount to an irretrievable deprivation of possession. That is on the basis that: (i) the aircraft may yet be recovered, for example, if there is a change in Russian government policy; (ii) when the aircraft were re-registered to the Russian Registry they were done so in the lessors/ owners names; and, (iii) some Lessees have stated they are willing to return the aircraft if they are able to get permission to fly the aircraft out of Russia. The last point leads into a further point that the All Risks insurers are taking which is that they are putting AerCap to strict proof that they have taken all reasonable steps to seek to recover the aircraft.
In addition to the above points, the All Risks insurers are relying on the AVN 48B exclusion for War, Hi-Jacking and Other Perils. That is on the basis that the loss is excluded because it was caused by: (i) acts done for political purposes including acts of the lessees and/or acts by the President/ government/ public authorities of Russia; and/or, (ii) the confiscation and/or seizure and/or restraint and/or detention and/or appropriation by or under order of the Russian government. Those perils are excluded under the All Risks section but written back into the cover provided by the War Risks section.
The War Risk insurers are defending (in addition to the principal insurance and Lease Agreement arguments) on the basis that Aercap have not identified any peril within the scope of the War Risk cover that has caused the loss.
Sanctions
Both sets of insurers are relying on the Sanctions and Embargo Clause AVN 111 in the policy. The All Risks insurers are alleging that any payment by them is prevented under this endorsement and the general law. The War Risks insurers are stating that, as a result of the sanctions regime, they have no liability for losses arising after 26 February 2022.
Conclusion
These proceedings will be closely watched by lessors who have aircraft in Russia which they cannot retrieve. It is unsurprising, given the sums involved and the complexity of the situation facing lessors, that litigation has already commenced and we anticipate there is more to come.