Aircraft Leasing Insurance Change: New Exclusions for Russia, Belarus, Ukraine, Crimea
In November 2022, in relation to leased aircraft, a change was reported in aviation insurance market terms where insurers imposed a new sub-limit for confiscation-type risks within the aggregate limit applicable to Hull War cover. (See Holland & Knight's previous blog, "Aircraft Leasing Insurance Change: Sub-Limited Hull War Confiscation Risk," Nov. 3, 2022.)
A further insurance change has arisen that imposes blanket exclusions related to Russia, Belarus, Ukraine and Crimea, and impacts aircraft lessors as additional insureds.
Refer to the following example wording extracted from an insurance certificate recently provided to the lessor under a lease agreement.
Geographical Limits Change
In the example wording, Geographical Limits for both the War cover and, significantly, the Non-War (All Risks) cover (property and liability) is limited as follows:
Worldwide excluding Russia, Ukraine, Crimea and Belarus. However, coverage pursuant to this Policy is granted:
(a) For the overflight of any excluded country where the flight is within an internationally recognized air corridor and is performed in accordance with I.C.A.O. recommendations or
(b) in circumstances where an insured has landed in an excluded country as a direct consequence and exclusively as a result of force majeure.
But Worldwide in respect of Products.
The Geographical Limits under an airline policy specifies the territory in which the loss of or damage to equipment must occur so as to be covered. Any loss that occurs in an excluded territory is not covered.
Recall that exclusions must be differentiated from policy terms and conditions: breach of a policy term or condition by the airline should not prejudice cover granted to the 'innocent' lessor under AVN67, whereas if an exclusion applies, no cover is granted.
Leading brokers in the London market share that:
- This change is being imposed by insurers on airline and lessor contingent policies.
- It is significant that Geographical Limits now exclude certain territories from All Risks cover as well as War Risks cover on a blanket basis.
- Historically, the policies of major airlines would specify "Worldwide"; whereas smaller or regional airlines might have been subject to the Kiln Geographic Areas Exclusion Clause (LSW617) that excludes certain territories (where the airline would never fly) and writes-back cover for over-flight and force majeure
- Insurers in the London market are seeking to exclude all aviation insurance exposure to Russia or Belarus in addition to excluding Ukraine and Crimea. Insurers cite sanctions issues in addition to a commercial objective to exit this exposure.
- For an airline that does not wish to (or cannot lawfully) operate to or from Russia or Belarus, the above Geographical Limit change may be agreed between the airline and insurers, thereby granting cover for overflight only in accordance with International Civil Aviation Organization (ICAO) recommendations and landings due to force majeure.
- For an airline that does wish to (and can lawfully) operate to or from Russia or Belarus, then following negotiation, the airline and insurers may agree to provide cover for an additional premium on terms agreed on a case-by-case basis. Such airlines would not include United Kingdom (U.K.), U.S. or European Union (EU) airlines due to sanctions issues; but could include certain Middle Eastern and Asian airlines.
Hull War Cover Change
In the example wording, the Hull War cover is further limited as follows (refer to the final sentence in bold text):
HULL (including spares) WAR AND ALLIED RISKS covering loss or damage in accordance with LSW 555D for an agreed value as set out above. Cover includes confiscations and other perils detailed in Section 1(e) of LSW 555D by the government of registration, subject to a sublimit of USD 400,000,000 in the annual aggregate. Coverage is subject to an overall annual aggregate policy limit of USD 1,300,000,000. Coverage under Section 1(a) of LSW 555D in respect of spares is restricted to air and sea transits in accordance with the applicable transit clause(s). No cover for hull and spare parts losses is provided in respect of losses that occur in the territories of Ukraine, Russia or Belarus where such losses directly arise from armed hostilities between Russia and Ukraine
Recall that the Hull War insurers will be a different group of insurers to the All Risks insurers and as such may impose new terms specific to the Hull War cover. The final sentence above is an example of such a new term.
Reading this new term in the light of the new Geographical Limits: any Hull War cover granted for overflight of or force majeure landings in Ukraine, Russia or Belarus actually would not respond to a loss that occurs directly from armed hostilities between Russian and Ukraine. It is unclear why Crimea is not referenced. On these terms, the result would be that an airline that wishes to and can lawfully over-fly Russia and/or Belarus – or for that matter Ukraine – would have no cover for a loss occurring during over-flight or upon an emergency landing in these territories if it arises from such armed hostilities. Such a 'gap' in the Hull War insurance cover did not exist previously.
Leading brokers in the London market share that Hull War terms are being agreed on a case-by-case basis by the insurers and airline involved and as such may differ between airlines.
Leased Aircraft Considerations
When this issue arises in relation to leased aircraft, the lessor should give consideration to the following:
- Leading brokers in the London market share that at the current time there is no established market practice or wording in relation to these issues. Each airline needs to be considered on a case-by-case basis.
- The lessor should be satisfied that the changes reflect the maximum extent of cover that is commercially available and the airline's likely operations.
- The lessor should consider if the terms of the lease agreement are sufficient to address the changing situation.
- The lessor may want to review if the cover under its own contingent/possessed policy has been subject to similar changes.
If you have any questions, please contact the author or another member of Holland & Knight's Asset Finance Group.