News / 09-03-2022 / London

It is a difficult fact of life that crises such as the present one in Ukraine cause not only human losses and suffering of the most grievous kind, but also extreme challenges for commercial entities and sectors, and their insurers. Recent events have demonstrated yet again how crucial insurance is to all commercial operations, none more so than the Aviation, Aerospace and Space sectors. It is a sign of the current challenging geopolitical landscape that we expect certain market clauses will come under scrutiny again after many years without disputes.

Most will now be aware of the EU Regulation 2022/328 which, as from 26 February 2022, introduced further restrictive measures, including an export ban for EU based entities and EU nationals on goods and technology for use in the Aviation and Space industries in Russia and a prohibition on the provision of insurance and reinsurance, directly or indirectly, in relation to those goods and technology. 

In the UK, the Russia (Sanctions) (EU Exit) Regulations 2019 came fully into force on 31 December 2020 and were intended to ensure that sanctions relating to Russia continued to operate effectively post Brexit.

The UK Treasury has recently announced that it will follow suit with further sanctions similar to EU Regulation 2002/328. The UK Government has not yet provided details of the impending legislation, but it will likely ban access to the UK insurance market for Russian entities, directly or indirectly, in the Aviation and Space sectors. The UK insurance market will therefore shortly be in a similar position as EU insurers. At present, pending the UK legislation, EU and non-EU security on the same slip may not face the same questions. 

Under the AVN 111 Sanctions and Embargo Clause, once providing cover to an insured becomes unlawful by reason of embargo or sanction, cover ceases. This immediately brings us back to our old friend AVN67B (the Airline Finance/Lease Contract Endorsement) and the questions that arise under it, including as to whether lessors, financiers, or other interests, have a separate policy or need the cover under the underlying policy to still be in place (which may have ceased in the present circumstances in respect of EU insurers as a result of EU Regulation 2022/328 and shortly for UK insurers too) to bring a claim under it. It would be surprising if this point were not scrutinised over forthcoming months.

The FT recently indicated that EU Regulation 2022/328 would affect USD 5 Bn worth of aircraft in Russia, with almost all major lessors affected. Some put the figure higher. Russian lessees are generally insured locally, with liabilities then reinsured into London and other markets. 

In addition leases of aircraft to Russian entities, or for use in Russia, must be terminated by 28 March 2022. Lease returns are usually planned many months in advance; obtaining the successful return of those aircraft in a fraction of this time scale would mean overcoming the challenge of closed airspaces, limitations on use of SWIFT transactions and ever tighter sanctions.  The Russian Ministry of Transport has already prepared a draft government decree proposing measures to mitigate the effects of international sanctions on its civil aviation sector and this legislation may affect proposed lease returns.

This current crisis raises not only pressing questions for operators but also for lessors and other financiers who face the potential of large holes appearing in their balance sheets, the metal stuck in Russia and receipt of lease payments looking highly uncertain, especially if they were due to flow through a sanctioned bank. 

Insurers will be anticipating that lessors and other interests may turn to their contingent hull and/or possessed policies (which, broadly, provide cover where the lessee's policy does not respond and a lease is terminated or repossessed, respectively), especially once leases get terminated, as a means of filling some of these holes.

Depending on how events develop, we can expect to see challenges in respect of the scope of cover under hull and contingent hull policies and possibly war risk too, if rumours of potential requisition gain ground and requisition or detention occurs. There are likely to be significant challenges in respect of establishing whether and when such a loss has occurred, and how it will be proved, given the fact that the evidence will likely be in Russia.

It is also noteworthy that press reports (FT; 7 March) are already focusing on the risks of cannibalisation with Airbus, Boeing, Safran, Rolls-Royce and GE all suspending or pausing support services and/or parts, such that aircraft may end up being cannibalised in order to provide spare inventory for others. This is likely to give rise to claims for 'constructive total loss', itself a fertile ground for argument and evidentiary challenges, not least as to timing within a given policy period. 

Many other issues already exist, more will emerge, some may even retreat as events unfold; the only thing that is certain is that the picture that all need to grapple with will be under constant review. 

If we can assist you with issues as they arise, do please contact Gillie Belsham or Anna Anatolitou, or your usual Ince contact. 

Gillie Belsham is a senior Aviation insurance and commercial disputes focused lawyer, Global Head of the Aviation practice at Ince, who has served the Aviation and Aerospace sector and the Aviation insurance market for many years including with some of its very biggest claims.

Anna Anatolitou is an Aviation Partner with significant experience both in-house and in private practice, advising the aviation insurance market and the air transport industry for over 20 years.

Both Gillie and Anna are ranked as leading individuals in legal directories including The Legal 500 and Chambers and Partners.