When Western sanctions were imposed on Russia, that voided the aircraft leases on planes operated by Russian airlines. More than half the Boeing and Airbus planes in Russia had to be returned. Airworthiness Certificates were cancelled. The Russian government, though, ordered that the planes not be returned in violation of the country’s Cape Town Treaty obligations. And the planes were re-registered in Russia.
Russian airlines haven’t had normal access to parts. Some have been obtained in contravention of sanctions, on a black market, while some aircraft have bene raided for parts to keep the remains of a smaller fleet operating.
Even if sanctions were to end, the planes will have lost substantial value in world market because their maintenance records cannot possibly be kept up to world standards. What parts have been replaced, what sort of replacement parts were used, and how were those parts obtained?
For the leasing companies, you might think ‘they’ll just file an insurance claim’. And you’d be right! But that’s not the end of the story. In March I wrote that “the question of insurance coverage is something that’s going to be litigated.” That litigation is happening (FT).
Carlyle Group is suing 35 insurers and reinsurers, including AIG, Axis and Chubb and Lloyd’s of London underwriters, for $700 million over 16 Boeing and 7 Airbus planes spread across numerous Russian carriers. Their single largest exposure is with 5 planes operated by UTAir. Carlyle’s insurance claims haven’t been denied. They just haven’t gotten an answer in over 7 months, let alone a check.
It’s a big claim. No one wants to pay. Insurers also would love to see sanctions lifted, and Russian airlines either re-lease the planes or otherwise make good to the lessors – or at least have the planes returned. That would mitigate losses. Once they pay, they’ll be in a position of having to collect later, if there’s any collections to happen. So in the meantime they no doubt will press every ambiguity. For instance,
- Have the aircraft really been lost? Are they in fact unrecoverable? At what point does an airline’s failure to return aircraft after its lease becomes void become a covered event? (The planes are not, for instance, lost when they continue to fly.)
- And is the standard policy that lessors have over their aircraft the correct coverage to file under, or should it be covered by war risk insurance? In other words, which insurance pays?
My sense is that the lawsuit is leverage, because of the potential for punitive damages against the insurers. Now they’ll have a reason to settle rather than delay.
That’s like saying your auto insurer won’t pay because the thief is driving the car somewhere.
Anyone who wants to read a factual book about how the Russian government and oligarchs will steal, lie and cheat to win at all costs should read “Red Notice” by William Browder. It is a true story of similar circumstance that didn’t involve stealing aircraft but stealing companies, selling assets, failing to pay taxes, etc. and then arresting the rightful owners. It is scary and the lessors of these aircraft might be in for a really bad ride should they pursue the rightful return of their property.
As an insurance broker, I can tell you that this kind of insurance and reinsurance agreements are extremely complex, and sometimes situations like these can’t be predicted by insurers, therefore leading to litigation as to which clause exactly should apply similar to what we had at the evergiven situation, a deal will likely be struck at some point here as well. Not at all similar to an Auto insurance where the risks are predictable and Layee out in the terms
I worked for many years in aviation insurance and there are war risk and confiscation coverages that cover specifically this scenario. If the lessor has, they are on solid ground.
Russia has been for many months a criminal nation. This story about the return of leased planes is just another example. Its people whether they like Putin or not will be tarred with the brush. It will be off the world’s tourist attractions for many years even if they end their unlawful and immoral war launched against Ukraine and peace is restored. Their guilt for war crimes and crimes against humanity can fill volumes. Makes the Nuremberg trials and its pronouncements look like a joke. Their tourism industry is dead, beyond repair, as will be their air fleet in short order when parts completely disappear. They should be banned from the UN and all other organizations that espouse the rule of law and common decency.
While the Russian government’s conduct has indeed been criminal let’s not go overboard with the Nuremberg and all.
Those post WW2 trials for Nazi leaders set the standard for crimes against humanity for future generations. Laws against starting an aggressive war. That became the pillars of the UN rules governing how sovereign nations dealt with each other. Russia worse than Nazi Germany back then. Nukes.