Prepare for take-off: the Russian Aviation Insurance mega-trial is underway
Insight
The first week of October saw the beginning of the much-anticipated Russian-aviation-insurance-mega-trial before the High Court. The case is notable in both form and substance: not only will the outcome have huge ramifications across the insurance sector, but it is among the largest and most complex cases ever to come before the High Court. A host of big name insurers (including AIG and Lloyds of London) are facing the wrath of a collection of aircraft lessors who collectively own over 400 planes which have been stuck in Russia since the invasion of Ukraine. The lessors, including AerCap, the world’s largest commercial aircraft leasing company, are seeking a total of over $3 billion in claims to cover them for the loss of planes leased to Russian airlines.
One of the key issues in dispute concerns how matters unfolded in Russia in the early part of 2022, particularly when and how lessors became unable to recover aircraft from airline operators in Russia. Was it all down to Kremlin instructions, or were commercial considerations the driving factor? If lessors do benefit from insurance cover, these factual questions will be key in deciding whether the loss (if established) falls under general “all risks” cover, or specific “war risk” cover. The question is particularly important because the war risk policies are capped, whereas the all risk policies have no payout limit.
The stranded planes have spawned a litany of litigation in the English, Irish and US courts. The funds at stake are huge: in this claim before the High Court, lessors are seeking a combined total sum of over $3 billion. In Ireland, home-base to a large number of the world’s airlines, the claims are valued at around $2.8 billion. In total, the value of aircraft stuck in Russia following the invasion of Ukraine has been estimated to total $10 billion. The insurance industry itself is still bearing the weight of numerous business interruption claims which arose following the coronavirus pandemic, and a billion-dollar loss here would be a heavy blow. Insurers will argue that there has been no physical loss of the planes yet – they are, after all, still operational, albeit held in inhospitable territory with, it is argued, little to no hope of recovery any time soon. In addition, they will claim that Western sanctions on Russia prevent them from providing any cover at all for the aircraft and, in some cases, that leasing agreements were ended by consent prior to the peril arising. They will also ask the lessor companies to demonstrate that "all reasonable steps" have been taken to recover the stranded aircraft.
Some settlements have been reached, with AerCap recovering over a billion dollars last year as a result of settlements with certain Russian airlines. The Irish trial has been underway since June, with trials scheduled in California and Florida next year. AerCap still has over 100 aircraft outstanding which are the subject of these proceedings: it remains to be seen whether further settlements will unfold as either the English or Irish trials progress.
Needless to say, the repercussions of such a mega-trial will be watched by the airline, legal, and insurance industries alike. For insurers in particular, an unsuccessful outcome and a resulting large payout is likely to ensure that clauses drafted to cover war risks and exclusions will need to be re-examined in a world increasingly impacted by global conflict.
The trial continues and is expected to last until Christmas.
Many thanks to trainee Eloisa Clegg for their help in writing this article.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2024