The Russia/Ukraine conflict has led to a monumental decoupling of Russia from the global economy, with dire consequences for many industries—including the aircraft leasing industry. Western governments’ still-evolving sanctions regime has inspired retaliatory decrees by the Russian Federation, which collectively have engendered significant financial losses for companies doing business with Russian entities. As we previously reported, Western companies leasing an estimated $10 billion worth of aircraft to Russian airlines are facing a total loss of their property. Western governments have ordered lessors to repossess aircraft, but a Russian Federation decree mandates that Russian airlines not return (or “export”) such aircraft to their Western owners.
Against this background, the path towards recovering insurance for the resulting loss of leased equipment is proving to be rocky. But a secondary market may be emerging to help monetize insurance assets.
Challenges to 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, prominently including those in the London Market. Optimally—and often—the reinsurance contracts contain “cut-through” provisions that allow the insureds to bypass the Russian hull and liability policy and claim directly against the reinsurer.
As a practical matter, however, Western companies have had little success 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 may be problematic for several reasons. Reinsurers taking a “wait-and-see” approach to the unfolding narrative surrounding Russia’s invasion—perhaps holding out for the eventual recovery of the aircraft—may limit their cooperation to erect barriers for companies trying to perfect their coverage claims. Meanwhile, these claims straddle legal gray areas that may make the question of coverage contentious in many cases. Although one lessor has already filed suit against reinsurers in London, the efficacy of that approach remains to be seen.
The Availability of Recourse to Secondary Markets
Despite some hurdles to traditional insurance recovery, secondary markets have shown interest in purchasing the aggrieved lessors’ rights to recover insurance proceeds. Financial institutions, particularly those experienced with litigation finance, see opportunities to invest in contentious or difficult claims as a means to free up lessors’ trapped capital in exchange for a stake in the outcome. Such transactions may be feasible in present circumstances, depending on their structure and the law that is applied.
Most insurance policies, including policies of aviation insurance, contain a clause barring the insured from assigning its policy to a third party without the consent of the insurer. Under the law of most U.S. jurisdictions, the general rule is that an insured cannot assign an insurance policy in violation of such an anti-assignment clause, but the insured can assign its right to recover policy proceeds under a policy for a loss that already has been incurred without securing the insurer’s consent. Thus, if the insured already has suffered a loss of equipment within the coverage of the policy, it can assign to a third party its right to recover insurance proceeds for the loss. This is because once the loss is incurred, the insured is no longer assigning a policy as such, but merely an accrued right to recover proceeds, much like assigning an endorsed check.
Importantly, this rule is not universal and may be subject to variations that can 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 void such an assignment when the value of the loss is not already fixed and definite at the time of the assignment, such as when the loss includes a business interruption component that is still in progress.
Moreover, 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 U.S. to such assignments, while others allow for broader assignments. Under UK law, for instance, assignments may occur in a “pot-pourri” of different forms, “with variegated terminology.” There, an insured may assign its right to recover under a policy or even assign the policy itself.
But each form of assignment under UK law poses different considerations for reinsurance policyholders, making it essential for insurance coverage counsel to review the transaction. Assignments of a claim are typically only honored where the loss has matured, or where rights to the insured property are also assigned. Certain formalities may also be required, e.g., the assignment needs to be in writing under the hand of the assignor and express notice in writing 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 may provide a pathway to recovery from losses of equipment leased to Russian airlines. Lessors pursuing such a path should engage qualified insurance coverage counsel to help structure such transactions to account for the pitfalls that can derail such a transaction.