By Scott Vincent

June 16 - (The Insurer) - Aviation insurers are expected to tighten definitions around political and sovereign risks in the aftermath of last week’s High Court judgment, which ruled in favour of lessors in the Russian aircraft test case, Morningstar DBRS said in a note on Monday.

• Insurers may tighten definitions around political and sovereign risks

• Potential withdrawal of contingent war risk coverage for leased aircraft

• Ruling may influence global courts, giving aircraft lessors leverage in ongoing disputes

Some insurers may also now withdraw from offering contingent war risk coverage for leased aircraft or limit geographic exposure, the note said, highlighting that this could in turn lead to capacity constraints and increased pricing in aviation insurance and reinsurance.

Last Wednesday’s judgment from Justice Butcher ruled that lessors were entitled to recover under war risk rather than all-risks policies.

Although this was an English court decision, Morningstar DBRS said the ruling will likely influence courts and tribunals globally, especially in jurisdictions applying common law principles.

Aircraft lessors operating in other jurisdictions may gain leverage in ongoing disputes, the note said.

With several insurers having delayed finalisation of reserves for stranded aircraft claims, there is now also the potential for an increase to technical provisions for the loss.

Morningstar DBRS said entities with high exposure but insufficient reserving buffers, particularly some Lloyd's syndicates, could experience pressure on solvency ratios.

The analysis firm said there was also potential for reinsurance or retro recoveries to be disputed, particularly where terms differ from the underlying policies.

“The case highlights the importance of clarity in policy language. Insurers that adopted aggressive denial postures or failed to engage in good-faith negotiations may face reputational damage. As a result, future underwriting relationships with aviation lessors and financiers could be impaired,” the note added.

Fidelis Insurance Holdings said it would review all options, including a potential appeal, after the High Court judgment was made public last Wednesday.

Marcos Alvarez, managing director, global financial institution ratings at Morningstar DBRS, said: "A successful appeal could narrow or reverse parts of the liability findings, especially around the interpretation of policy exclusions in proximate cause.

“However, absent a strong overturn on appeal, the ruling's broader legal and financial implications will persist," he added.

Morningstar DBRS said most affected insurers will likely announce updated loss guidance and reserving decisions over the coming quarters.

MEGA-TRIALS

Last week's judgment related to five actions that had been brought together as a "mega-trial" related to almost 150 jets along with some engines which market sources say were initially valued at around $4.7 billion, although settlements prior to the ruling have reduced that value to nearer $3.0 billion.

Lessors including AerCap and Dubai Aerospace Enterprise (DAE) Merx Aviation, KDAC Aviation Finance and Falcon sought compensation under "contingent and possessed" policies that can provide cover under a broad, all-risks clause for loss or damage to aircraft or under a more specific war-risks clause. (Re)insurers named in the actions included Lloyd's of London, AIG, Chubb and Swiss Re.

These lessors bought C&P insurance to protect their fleets in circumstances where for some reason the underlying airline (re)insurance fails to respond (contingent), and when anything unfortunate happens during the repossession process (possessed).

The cases filed in London all similarly argued that aircraft leased into Russia are covered by policies against war or theft, but insurers sought to argue that the planes are undamaged and could yet be returned.

The English hearing is the second in the series of worldwide “mega-trials” on C&P claims. The first started in Dublin on 11 June last year. Many others in various US jurisdictions, including Florida, Connecticut, New York, California and Minnesota, are set to begin in 2025.

A second English trial regarding operator policy claims under Russian law is also due to be heard next year. More than 500 aircraft worth an estimated $10bn have been stranded since the invasion, according to figures from S&P.