Grounded By Geopolitics: A Gulf in Aviation Insurance Coverage?

This article is by Chloe Derrick, Partner, (left) and Claudia Seeger, Associate, at Stewarts Law.

With no immediate end to the Iran conflict in sight, discussion continues around the extent to which insurance policies cover physical assets and other potential losses in the Gulf region. Even for businesses with comprehensive insurance programmes, a myriad of different exclusions, wordings and policies across the market can create a chaotic coverage picture. Given the scale of potential losses, operators in the aviation and related sectors across the Gulf states will already be suffering losses (or stress-testing loss scenarios) and considering to what extent damaged assets or business interruption losses may be covered under their existing policies.

War Risks

War and political risk coverages remain in sharp focus, as we continue to witness global conflicts at historic levels. In the recent Russian aviation mega-litigation, the High Court found partially in favour of insureds, determining that seizure-related losses arising from the Russia/Ukraine war were indemnifiable under a lessor’s War Risks cover, but not under its All-Risks cover. That judgment is now subject to appeal, and the Court of Appeal has been asked to consider a number of grounds, including whether the lessors sufficiently established loss by deprivation of possession. The appeal will be of general importance for policyholders with War Risks coverage, where there may be a dispute over whether there has been a “total loss” of an asset.

To date, reports of civilian aircraft being damaged as a result of the Iran conflict have been limited to around 20 Iranian passenger aircraft damaged in US-Israeli strikes. The sheer concentration of aircraft and airlines located in Gulf states, however, continues to give rise to a potential risk of damage to assets outside the immediate war zone or other business interruption. This may perhaps be from long-range missiles, drones or a country’s own defensive action.

Any potentially impacted policyholder in those regions should closely consider the impact of any war exclusion clauses across their insurance programmes. While All-Risks policies typically exclude war, the buying power of large, global corporations such as airlines means that, in many cases, there may be bespoke policies that require close review.

Policyholders should also be risk testing any gaps in their war perils coverage, where attacks on airports and infrastructure across the Middle East are increasing in frequency, outside of the direct conflict zone. Businesses should consider, for example, the scope of coverage for potential physical loss or damage to equipment while in storage or transit, or to aviation assets that are grounded or out of active operation.

Are you in the ‘grip of war’?

War Risks policies usually include a war cancellation clause, which provides that cover against War Risks may be cancelled by underwriters on seven days’ notice.

Policyholders should note, however, that receiving a cancellation notice or a review notice (which seeks to amend the scope of coverage to exclude certain countries) does not automatically mean that all coverage extinguishes. A long-standing marine-based causation doctrine named the ‘grip of the peril’ prevents insurers from escaping liability by cancelling coverage as soon as a war peril arises.

If the loss crystallises after the policy has been cancelled, the loss is still covered provided that: (a) the covered asset falls into the ‘grip’ of an insured peril during the period of the risk, and prior to the cancellation or alteration of coverage coming into effect; and (b) the said peril matures into a loss by way of a sequence of events following in the ordinary course from the insured peril.

War Risks insurers may therefore remain liable for an aviation (or other) asset affected by a war peril, even after a notice of cancellation has been issued, so long as the insured can establish that the peril ‘grips’ the property while the insurer is on risk (and not just that the property is exposed to the peril). We can see circumstances where disputes may arise over whether the asset was ‘gripped’ prior to cancellation, and if so, whether it remains ‘in the grip’ at the date of loss, or is subject to a later, intervening peril, which by that point is no longer indemnified. Such considerations may arise if a ceasefire fails or if there is only a temporary pause in the conflict.

Business Interruption

Even where no physical loss has occurred, operators in the aviation and related sectors have already been suffering financial losses and will need to consider to what extent any business interruption (BI) losses may be covered under existing policies. In practice, coverage may be minimal. Standard BI wordings often require physical loss or damage, so cancellations, airspace closures and re-routing may fall outside cover. Much will turn on the wording (and any bespoke non-damage extensions). Again, policyholders should stress-test their BI programmes.

Cyber Risks

Earlier this year, Iranian-linked hackers claimed responsibility for a prominent cyber-attack on US company Stryker, and the US’s cyber and intelligence agencies have warned of further cyber threats by Iran-affiliated threat actors. Even policyholders with broad cyber cover may find themselves exposed, since state-backed and war-related attacks are, in most cases, already excluded to a greater or lesser degree. Exactly how a policyholder is to establish whether an attack is state-backed or not remains to be seen, with various mechanisms proposed but not yet tested. Unfortunately, the geopolitical situation tells us that losses will very likely arise, and the existing exclusions and wordings will, at some point in the future, no doubt be tested by the courts.

Airline Collapses

Typical insurance policies are unlikely to respond directly to airline insolvencies, where the underlying driver is financial distress stemming from conflict-related fuel price volatility.

It is possible, however, that trade credit policies could see an increase in claims due to an airline’s inability to meet its financial obligations following insolvency.

Equally, insolvencies may trigger coverage under directors’ and officers’ (D&O) policies held by airlines if allegations of mismanagement surface in relation to the handling of the fuel crisis or other issues.

New products have been launched recently that seek to address potential gaps in coverage for certain aviation war perils and cyber-war threats. The development of product lines underlines a fast-moving risk market, with insurance solutions evolving in response to geopolitical change. In relation to complex aviation programmes, policyholders should continually assess and identify potential gaps in coverage and consider how these might be addressed.