By Patricia Russo, Head of Aviation.
Since the beginning of the war between Russia and Ukraine, various sanctions have been imposed on Russian civil aviation, including the requirement for leasing companies to remove their aircraft from Russian soil by the end of March 2022. With this demand, the Russian government approved a law allowing leased aircraft in the country to be registered locally, and as a result, a significant number of them were not returned to their owners.
Typically, airlines do not own their aircraft; they lease these assets from specialized companies. When sanctions were imposed on Russia, these leasing companies canceled their leasing contracts with the intention of reclaiming the aircraft, which did not happen. There are reports of more than 400 leased aircraft that still remain in the country to date.
In the lease agreements between lessors and airlines, there are minimum insurance requirements to be met. Airlines and operators are obligated to take out insurance policies covering losses and damages directly caused to the aircraft and third parties, as well as protection against war risks (Hull All Risks, Liability, Hull War). In turn, lessors also obtain these coverages to ensure the protection of their assets in case the operator’s insurance does not cover the damages that may occur.
The general conditions of the policies describe Hull War coverage as intended to cover the loss or damage to the aircraft directly caused by confiscation, nationalization, seizure, subjection, detention, appropriation, requisition, by right or use, or by order of the government (civil, military, or de facto) and/or public or local authority, of a country within the coverage of the policy. Despite its name, the Hull War policy does not cover damages caused by a declared (or unofficially declared) war that may occur between a series of listed countries, with Russia being one of them.
After the non-return of the aircraft, extensive discussions began among operators, lessors, and insurers, likely to extend for many years with ongoing legal disputes, generating high costs in legal fees, considering some points that still remain uncertain and can have various interpretations:
> Russian airlines that had leasing contracts canceled still have possession of the aircraft, so it can be argued that they have not incurred losses. Therefore, their policies should not be triggered?
> To initiate a claim, certain parameters must exist, and some insurers argue that these were not necessarily met. An example would be the occurrence date. What would be the considered date? Some say it is the date of Russia’s invasion of Ukraine, others argue it is the date the government signed the decree allowing the registration of the aircraft in the country. Some even say it would be the date the airlines refused to return the aircraft. The date is extremely important in this case, as it can determine whether the potential claim would still be covered under the policy in force at that time or if the insurance cancellation due to imposed sanctions was already in effect.
> Despite the non-return of the aircraft and threats made by the Russian Government, no aircraft can be considered truly lost. Therefore, in this case, the War policy may not be triggered.
> Unlike the All Risks Hull policy, War Hull policies have a cap, which are aggregate limits intended to limit the amount of payment in the event of a large number of aircraft being linked to the same loss at the same time. This would significantly reduce indemnity amounts if applied. However, the situation becomes more complex as some lessors argue that it is not a Confiscation claim covered under the War policy but rather a Theft claim, which falls under the All Risks policy, increasing the indemnity amount as there is no cap.
> Another uncertainty is how Western sanctions imposed will be interpreted by the courts compared to the language of the existing sanctions in the War Hull policies.
While this situation is unresolved, the insurance market has taken some measures and made some changes to try to protect itself and compensate, albeit minimally, for the loss it is expected to suffer. Historically, War Hull policies have never had high premiums, as they were seen as policies with low exposure to risk, and therefore, the overall premium for this line is extremely low compared to estimated indemnity values.
Some changes made by insurers include a significant increase in rates. The policy that was once considered a small part of the cost within an airline’s insurance program can no longer be viewed that way. In addition to the rate increase, insurers have excluded or restricted some conditions, such as the confiscation coverage, from their policies. These measures have been taken so that markets can maintain their capacities and continue underwriting this line of business.
We believe that this is only the beginning of the changes that will occur, as the global Reinsurance market takes a long time to absorb these losses, which are not yet reflected in all balance sheets.
Despite all the uncertainty, renewals of All Risks Hull policies are not expected to see a significant price increase at this time. However, War Hull and Liability policies in case of War have faced more difficulty in negotiations and may bring significant premium increases for airlines in their renewals, along with certain coverage restrictions.
In the past year, we have seen some markets withdraw completely from underwriting War risk, but others view this situation as an opportunity to enter this line of business and may start bringing new options for upcoming renewals.
At Latin Re, we are closely monitoring the developments of this situation, in contact with partners around the world, so we can align our clients’ expectations during the renewals of their policies and, as always, provide the best solution to them.
