Partner London
"Whilst we have not yet heard of any insurers cancelling or limiting insurances because of the conflict in the Middle East, it might still happen."
In the wake of recent military action in the Middle East, we have been asked by financiers and lessors of aircraft as to whether this will have any impact on aircraft insurances. The short answer is that, whilst we have not yet heard of any insurers cancelling or limiting insurances because of the conflict in the Middle East, it might still happen. Following Russia’s invasion of Ukraine, it took several days before cancellation/review notices were issued by insurers to the insureds under aircraft insurance policies.
Aircraft insurance cancellation/review notices
Most aircraft insurance policies allow insurers to give the insured notice of review of the premium payable under it and/or the geographical limits applicable to it. Upon expiry of the notice period (in the case of the widely used LSW555D, seven days following midnight GMT on the date of issue of such notice), if the insured does not accept the new terms, the policy, as it relates to the insurer that issued the notice, is cancelled at that point. LSW 555D also provides for an automatic review of the premium and/or policy conditions and/or geographical limits in the event of the hostile detention of atomic or nuclear weapons, regardless of whether an insured aircraft is directly affected (although losses arising from such events are excluded in any event). Cancellation takes effect seven days after the detonation if the review is not accepted by the insured.
Normal practice is for review notices to be issued without any consultation with the insured – and lessor/finance parties (in the context of an airline’s policy, rather than any lessor contingent and repossessed policy where the lessor is the insured) will typically be notified of the same directly pursuant to the letter of undertaking that is usually issued by the relevant broker in accordance with the requirements of the lease/finance documents. In the case of the situation in the Middle East, given the size and importance of the aviation market in the region and the players likely to be impacted by any cancellation of cover, there is perhaps an interesting commercial question of whether discussions with insureds would be appropriate prior to issue of any notice.
Following recent court decisions regarding lessor insurance claims concerning aircraft in Russia, it appears that the ‘grip of the peril’ doctrine, discussed below, is not prevented from operating, or ousted, by the issue of a review notice for a specified jurisdiction. As a result, the issue of such notices may be of limited effect for insurers of aircraft located in and unable to leave a jurisdiction to which a notice relates.
‘Grip of the peril’ doctrine
"Once an insured peril begins, damage to the insured asset that flows from that peril is covered under the relevant insurance policy, even if the damage occurs after the expiry of the cover."
The ‘grip of the peril’ doctrine is likely to be an important factor in the present situation. Put simply, once an insured peril begins, damage to the insured asset that flows from that peril is covered under the relevant insurance policy, even if the damage occurs after the expiry of the cover.
Self-evidently, this is a fact-dependent exercise and there will be situations which are likely to be clearer cut than others. An example being where an aircraft has been stranded at an airport because of the closure of airspace and/or the airport due to military action prior to any cancellation of cover/review of geographical limits taking effect and remains stranded, and a loss occurs after the cancellation/review takes effect. Other situations present challenges for insureds: for example, if an aircraft is flown out of a jurisdiction following issue of a review notice to implement a geographical limit in that jurisdiction, but while cover is still in place (so that if it had remained there, the grip of the peril doctrine may have operated to cover any loss that occurred after the limit took effect), it would not be covered by insurance upon re-entry to the same jurisdiction while the limit was still in place.
Recommended actions
Recommended actions for insureds and any parties noted as Contract Parties for the purposes of such insurances, include the following:
- insureds should review their war risk policy wording in each type of policy that is potentially responsive (e.g. the airline policy or, as applicable, any contingent and repossessed policy) to check the scope of cover provided and any cancellation/review provisions, bearing in mind that the precise provisions may vary between policy types;
- noted Contract Parties in respect of an aircraft (including lessors and financiers of aircraft insured pursuant to airline policies) should review the relevant insurance certificates and broker’s letters of undertaking to ensure that they are effective and that the insurances provide for LSW555D (or equivalent) and note the correct contact information for the Contract Parties specified to be notified; and more generally
- any review noticed received or made available should be analysed carefully in the light of the policy provisions to check if it is permissible and/or effective.
