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Premium protection? Recourse for lessors if a Thai lessee fails to maintain insurance17 August 2020

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The dramatic decline in demand for air travel has forced airlines to radically restructure their operations to achieve significant and substantial cost savings in all aspects of an airline’s operations. With fleets grounded and the prospect of limited operations in the near to medium term, suspending or cancelling aircraft insurance may appear to be an attractive and expedient way to achieve costs savings. This article will consider the impact of doing so on the duties and obligations of lessees and the rights of lessors if a lessee fails to maintain the necessary insurance.

"With fleets grounded, suspending or cancelling aircraft insurance may appear to be an attractive and expedient way to achieve costs savings."

Why is aviation insurance important?

Aircraft operators are required to hold and maintain certain types of insurance and at minimum levels of policy cover. Many countries and territories impose minimum insurance requirements and the minimum policy cover is typically linked to the maximum take off weight (MTOW) of an aircraft. For example, EC 785/2004 imposes minimum policy coverage for aircraft flying into, out of or through the airspace of an EU member. These requirements do not only apply to aircraft registered in an EU member. This is to ensure that there is insurance cover for claims by third parties, including passengers and for damage caused by aircraft. As a result, insurance cover is an essential and universal requirement regardless of the registration of the aircraft.

The Regulation on Liability Insurance of Carriers Engaging in Carriage by Air (2019) issued under the Thai International Carriage by Air Act (2015) (“the ICBA”) requires airlines operating in Thailand to have the following liability insurance, including the minimum policy coverage as of 23 June 2020:

  • passenger death and injury: SDRs 128,821;
  • passenger delay: SDRs 5,346;
  • damage or delay to baggage: SDRs 1,131 per passenger; and
  • damage or delay to cargo: SDRs 22/kg.

Thai lessees are typically required to effect and maintain the following insurance:

  • hull all risks for loss or damage whilst flying and on the ground in respect of the aircraft;
  • hull war and allied perils;
  • all risks (including war and allied risk) property insurance on engines and parts not installed on the aircraft; and
  • comprehensive aircraft third party, property damage, passenger, baggage, cargo and mail and airline general third-party legal liability.

"The CAAT has the power to order airlines to provide proof of third-party insurance and typically does so when airlines first request permission to operate flights to Thailand."

Consequences of lessees’ failure to maintain insurance

The Civil Aviation Authority of Thailand (“CAAT”) has the power under section 6 of the ICBA to order airlines to provide proof of third-party insurance and in practice typically does so when airlines first request permission to operate flights to Thailand. The CAAT can refuse permission for the entry or departure of an aircraft which fails to provide the required proof of insurance (further details in our August 2019 article here). An operator which fails to maintain current and valid insurance would be in breach of this regulation and the CAAT may decline permission to operate flights if it uncovers a breach of this regulation. In addition to the direct consequences of a breach, the operator would face the financial consequences of being unable to operate flights and could have committed an event of default (“EOD”) under the lease because the aircraft may no longer be considered airworthy.

The requirements for insurance set out above are usually clear and express terms of a lease and create a contractual obligation on the lessee to comply. The consequences of such a breach and the rights of the parties should be directly and clearly addressed in the terms of the lease.

If a lessee fails to maintain the insurance required by the lease, the lessor will typically have the right under the lease to:

  • pay the premiums or take any other step to maintain the insurance;
  • require the lessee to ground the aircraft; and/or
  • declare this an EOD, enabling the lessor to terminate the lease and/or repossess the aircraft, including deregistration and export.

Lessors should carefully consider how to respond to a failure to maintain current and valid insurance. Each breach should be documented and recorded in accordance with the provisions of the lease and lessors should carefully consider any waiver of their rights in relation to a breach, particularly given the statutory and contractual requirements to maintain valid and current insurance.

It is important to ensure that the lease includes a clause entitling the lessor to terminate for any breach of the lease, although it may be preferable to include, as a specific and express EOD, the failure to maintain valid insurance. In addition, Thai law requires that the lessor provide the lessee with a reasonable period to rectify the breach or perform its obligations before the right of termination can be validly exercised. Appropriate legal advice should be sought on whether a failure to continue to maintain valid insurance can be rectified and, if not, whether a notice period is required.

"Restructuring and rehabilitation does not absolve an airline of its obligation to maintain valid and current insurance."

Deregistration

In December 2019, the CAAT revised its rules for aircraft registration and deregistration by issuing Regulation 23 to replace Regulation 11 (our analysis of Regulation 11 can be accessed here). The intention of Regulations 11 and 23 is to provide a process by which a lessor can deregister and export an aircraft without the consent and cooperation of the lessee. Before Regulations 11 and 23 were implemented, deregistration without the consent of the lessee was complicated and uncertain. Where the failure to maintain the necessary aviation liability insurance constitutes an EOD and where this entitles the lessor to terminate the lease, provided the lessor terminates the lease in accordance with its terms, the lessor can rely on Regulations 11 and 23 to have the CAAT deregister the aircraft and authorise its departure from Thailand. Lessors should ensure that they fully comply with the requirements and procedures of the lease for its termination.

The current environment may not make termination of leases or repossession attractive options to lessors, but lessors should ensure that their rights are protected and that their exposure to claims, for which there is no valid insurance, is excluded or limited. In better economic conditions, the threat and risk of lease termination and deregistration may serve to ensure that lessees comply with their obligations in relation to insurance.

Restructuring/rehabilitation

Restructuring and rehabilitation under the Thai Bankruptcy Act (1940) provides an airline with protection from its creditors as they can only take enforcement action with the leave of the court. However, this does not absolve an airline of its obligation to maintain valid and current insurance, regardless of whether this is a contractual obligation under the lease or a requirement of the ICBA. This is particularly where the airline continues flight operations during the rehabilitation.

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