UK court judgment highlights febrile geopolitical climate for aviation

By Helen Biggin, partner, Vedder Price

The UK’s High Court recently handed down a judgment regarding six multi-billion dollar insurance claims arising out of the failure by Russian airlines to return leased aircraft to Western lessors following the Russian invasion of Ukraine in February 2022. The judgment had been highly anticipated in the aviation industry, given both the number of aircraft concerned and the unprecedented value of the claims.

The pivotal point at stake was whether claims made by the lessors under their ‘all risk’ and ‘war risk’ policies covering hundreds of aircraft on lease from foreign operators to Russian airlines at the time of the invasion. The judge, Mr Justice Butcher, held that the lessors’ claims fell under the ‘government perils’ section of the policies, and the value of the aircraft would therefore be paid out.

He also identified that all of the aircraft were considered ‘lost’ when, on 10 March 2022, the Russian Government passed Government Resolution 311 (GR 311) banning the return of leased aircraft to foreign lessors. The findings of the court have significant ramifications for the aviation industry going forward, and will be closely scrutinised, especially given current geopolitical headwinds. The judge’s assessment of the ‘proximate cause’ of the loss, the interpretation of the insurance policy and the scope of the ‘grip of peril’ will likely set important precedents.

Proximate cause of loss

As noted above, the judge held that the definitive loss of the aircraft occurred on 10 March 2022, with GR 311 the cause. The judge made clear this was because GR 311 was enforced when it was obvious the war in Ukraine would continue for the foreseeable future. GR 311 was also implemented in direct response to the imposition of international sanctions on Russia and as such, GR 311 was highly likely to remain in force and it could not be expected that the Russian airlines would subsequently disregard or sidestep the terms of GR 311.

This has obvious consequences for the aviation industry. In the face of ongoing geopolitical uncertainty, airlines, insurers and lessors will remain at the mercy of global events and may continue to find themselves at risk as assets are ‘lost’.

Helen Biggin is a partner at Vedder Price law firm in the UK.

Interpretation

When considering the lessors’ insurance claims, the court was required to consider carefully the scope of the lessors’ ‘possession’ and how it was to be interpreted, namely whether they had taken sufficient steps to recover possession of their assets. If their possessed cover, that is to say the cover they relied on when materially in possession of the assets, did not apply, then the question was whether their contingent cover would take over in those circumstances.

The judge held that the lessors could claim under their contingent cover, as they had demonstrated they were unable to recover the aircraft, but had taken reasonable steps to try to do so. The court also considered whether the lessors could claim under their possessed cover, ultimately holding they could not, because the aircraft had to be in the “course of repossession” and it was clear that both consensual and hostile repossession of the aircraft in Russia was not possible.

This will be a crucial point of consideration in the context of repossession situations, as it suggests that though repossession attempts may clearly be futile from the outset, some efforts still need to be made to exhibit the frustrated reality of the situation.

In this context, the judgment also considered attempts made by each lessor to recover its aircraft, which are instructive for future scenarios. Many took steps including issuing termination notices, exploring diplomatic options, using commercial leverage to attempt to get agreement from the Russian airlines to return aircraft and attempting to arrest any aircraft flown out of Russia.

Although not expressly stated by the judge, the impression given in the judgment is that some of the steps taken – especially individuals travelling to Russia – actually went beyond what was required. In any case, lessors will need to take heed as to what constitutes sufficient effort to regain possession and ensure that, should a similar matter arise, repossession efforts meet the threshold laid out by the judge.

‘Grip of peril’ doctrine

Most of the policies allowed insurers to issue notices of review which alter the geographical coverage of their policies or terminate them entirely and which become effective seven days after they are served. Following the invasion and the imposition of sanctions, a number of insurers issued notices to terminate policies or exclude Russia from their coverage.

The timing of some of these notices meant that the seven-day notice period expired before 10 March 2022, when the aircraft were ‘lost’. The lessors argued that the aircraft were in the ‘grip of peril’ prior to the end of the notice period and argued therefore that their claims were still covered by the relevant policy.  

Following a detailed examination of statements made at the time by various Russian officials and government institutions, the judge agreed there was cover under the relevant insurance policy and provided important clarification as to when the doctrine could be relied upon.

With ongoing and increasing geopolitical tension, this decision is a crucial one with important findings affecting the aviation and insurance industries. These are likely to be of relevance across all manner of aircraft disputes following Russia’s invasion of Ukraine, and in any hypothetical future geopolitical events affecting aircraft leasing. In particular, the recognition of geopolitical circumstances equating to practical cause of ‘loss’, and the extent of the ‘grip of peril’ doctrine will alter how the industry looks to respond to these circumstances and approach their insurance coverage.