Aviation

Written by Naomi Vary

Key developments in 2024

In this this inaugural aviation chapter of the Annual Insurance Review, it would be impossible not to focus on the continuing upheaval wrought by the Russian invasion of Ukraine.  The aviation industry, which had largely weathered the disruption of the Covid pandemic, has been faced with new challenges since February 2022.   Closure of European airspace to Russian aircraft, and of Russian airspace to aircraft from "unfriendly" countries, has forced route networks to adapt.   Western sanctions which prohibited the supply of aircraft to Russian airlines have derailed longstanding relationships between Western aircraft lessors and their Russian customers.  Prohibitions on the provision of insurance have similarly impacted aviation business models.

For aviation insurers, the conflict has led to multi-billion dollar litigation before the courts in England, Ireland and the United States.   This chapter is not the place to debate the merits of this ongoing litigation but, to put points neutrally, the aircraft lessors, having requested return of their aircraft from Russia, brought insurance claims under various insurance programmes when those aircraft were not returned.    These programmes include the "All Risks" and "War Risks" sections of the lessors' Contingent & Possessed policies, and the corresponding sections of the insurance and reinsurance policies issued to the Russian airlines themselves; this latter category involving around 90 separate actions before the English court, with trial expected to start in October 2026.  

Trials on the Contingent & Possessed policies are underway in England and Ireland, with judgment expected (subject to a recent pause in the English trial) in the first half of 2025.  Perhaps most fundamentally for the market, the judgment(s) will give certainty on the operation of the Contingent & Possessed policies; despite the fact that these are a standard part of the insurance package for any aviation lessor, the scope of the coverage provided by those policies is a point of significant dispute in the actions and has not been the subject of any previous judicial finding.  In addition to this central issue, the litigation brings into focus the dividing line between the "All Risks" cover – which provides cover for All Risks of physical loss or damage unless excluded – and the named perils in the "War Risks" insurance, which are excluded from the All Risks insurance and covered by a separate policy, generally with a different market.  The litigation is being fought as fiercely – and perhaps more so – between the All Risks and War Risks insurers as between the lessors and the insurance market, which is sorely testing the relationships in this historically amicable market. 

What to expect in 2025

Given the high profile of the litigation, it is easy to forget that these claims are unusual.  The bulk of exposure on aviation policies concerns much more familiar matters relating to hull and liability covers.  To highlight a few:

On the All-Risks side, industry reports note that one effect of Covid has been the loss of skilled personnel from the industry, and the interruption of training for essential pilots and crew.  Smaller airlines may be tempted to use pilots or co-pilots with fewer flying hours, either overall or on type, in order to keep aircraft in the air.  By doing so they may fall foul of insurance requirements in their policies, whether express or under an Open Pilot Warranty, leading to lack of cover in the event of an incident.   

On the All Risks and on the liability side, the impacts of extreme weather can create havoc for an airline.  2024 has seen a number of reported incidents of extreme "clear air" turbulence, estimated by industry reports to cost the USA aviation industry around USD200million per year in a combination of airframe damage, additional maintenance requirements and liability claims for injured passengers and crew.  Unlike more traditional extreme weather, clear air turbulence can be hard to forecast, and given its likely links to climate change the events of 2024 are unlikely to be isolated incidents.

Turning to the War Risks policies, the febrile political situation across the globe causes clear risks for air travel, either from conventional weapons or more subtle cyber warfare.  Aircraft on the ground in war zones are highly likely to suffer damage if the aircraft cannot be extracted, and the common seven-day cancellation provisions for war risks insurance in the event of a conflict can leave airlines unprotected.  Finally, it is to be hoped that despite the increasing rhetoric on all sides, the Five Powers war exclusion will not be brought into play over the war in Ukraine.

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