The Russia/Ukraine conflict has led to a monumental disconnection of Russia from the global economy, with dire consequences for many industries—including the aircraft leasing industry. Western governments’ ever-evolving sanctions regime inspired retaliatory decrees by the Russian Federation, which collectively caused significant financial losses for companies doing business with Russian entities. As we previously reported, Western companies hire an estimated $10 billion Russian airlines face a total loss of their property. Western governments have ordered lessors to take back planes, but a Russian Federation decision requires Russian airlines to not return (or “export”) such aircraft to their Western owners.
Against this background, the road to recovery from insurance for the resulting loss of hired equipment appears to be rocky. But a secondary market may emerge to help monetize insurance assets.
Challenges in recovering insured losses
Western companies may have rights to coverage from Russian insurers or Western reinsurers for losses of leased aircraft. Russian airlines must purchase hull and liability insurance, in which the Western lessors are named as additional insureds, from domestic Russian insurers. Generally, these policies are also reinsured by Western reinsurers, including those in the London market. Optimally – and often – the reinsurance contracts contain “cut-through” provisions that allow the insured to bypass the Russian general and liability policy and claim directly against the reinsurer.
However, as a practical matter, Western companies have had little success in securing this coverage. Claiming against direct Russian hull and liability policies is virtually impossible in current geopolitical circumstances. But recent experience has also shown that claiming against reinsurers can be problematic for several reasons. Reinsurers taking a “wait-and-see” approach to the unfolding story surrounding Russia’s invasion — perhaps holding out for the eventual recovery of the plane — could limit their cooperation, erecting barriers to companies trying to perfect their coverage claims. Meanwhile, these claims span legal gray areas that can make the issue of coverage controversial in many cases. Although one landlord has already brought a case against reinsurers in London, the effectiveness of that approach remains to be seen.
The availability of appeal on secondary markets
Despite some obstacles to traditional insurance recovery, secondary markets have shown interest in purchasing the encumbered landlords’ rights to recover insurance proceeds. Financial institutions, particularly those experienced with litigation finance, see opportunities to invest in contentious or difficult claims as a way to free up landlords’ trapped capital in exchange for a share in the outcome. Such transactions may be enforceable in current circumstances, depending on their structure and the applicable law.
Most insurance policies, including aviation insurance policies, contain a clause that prohibits the insured from assigning his policy to a third party without the consent of the insurer. Under the law of most US jurisdictions, the general rule is that an insured cannot assign an insurance policy contrary to such an anti-transfer clause, but the insured may transfer his right to repair policy continues under a policy for a loss already suffered without securing the insurer’s consent. Thus, if the insured has already suffered a loss of equipment within the coverage of the policy, he can assign his right to recover insurance proceeds for the loss to a third party. This is because once the loss is suffered, the insured no longer assigns a policy as such, but simply an accrued right to recover proceeds, just like assigning an endorsed check.
It is important that this rule is not universal and may be subject to variations that could trip up an unwary insured. Courts applying New York law, for example, generally accept the “incurred loss” exception to an anti-assignment clause, but they may invalidate such an assignment when the value of the loss is not already fixed at the time of the assignment and is not definitive, such as when the loss includes a business interruption component that is still ongoing.
Furthermore, for policies of reinsurance issued in the London market or elsewhere outside the United States, it will be important to understand how applicable law treats agreements purporting to assign rights to insurance proceeds. Some jurisdictions are not as receptive as the US to such assignments, while others allow broader assignments. Under British law, for example, assignments can take place in a “pot-pourri” of different forms, “with motley terminology.” An insured may be entitled to it repair under a policy or even assign the policy self.
But each form of assignment under UK law has different considerations for reinsurance policyholders, making it essential for insurance cover counsel to review the transaction. Assignments of a claim are typically only honored where the loss has expired, or where rights to the insured property are also transferred. Certain formalities may also be required, e.g. the assignment must be in writing under the hand of the assignor and express written notice must be given to the insurer. The expertise of coverage counsel can ensure that the assignment has its intended effect.
Negotiating an assignment of rights could provide a path to recovery of losses from equipment leased to Russian airlines. Landlords pursuing such a path should engage qualified insurance coverage advisors to help structure such transactions to account for the pitfalls that can derail such a transaction.