Insurers are facing a yearslong legal battle with aircraft leasing firms over a potential $15 billion claims bill from jets stranded in Russia because of the Ukraine war.

AerCap Holdings NV, the world's biggest aircraft leasing firm, filed a $3.5 billion claim in late March after the Russian government passed a law enabling leased jets in the country to be registered locally, widely seen as a first step toward seizing the planes.

S&P Global Ratings said in a March 31 report that aviation losses from the Russia-Ukraine war could range from $6 billion to $15 billion across three different scenarios.

Sources of conflict

What lessors are able to collect from insurers will depend greatly on the coverage that is deemed applicable. Lessors are covered under policies taken out by airlines and also their own contingent all-risks and war cover if airlines' policies do not respond. War cover typically has a seven-day cancellation provision, which could give rise to disputes about whether the cover was canceled before it was triggered.

An aviation insurance source said that one question is whether the signing of Russia's reregistration law or the seizure of the aircraft would act as the loss trigger.

"There are quite a few areas that are up for debate, hence the reason it could take a few years before the final bill is settled," Ali Karakuyu, director and lead analyst of insurance at S&P Global Ratings, said in an interview.

War cover contains aggregate limits, designed to cap payouts if a large number of aircraft are affected at the same time. But lessors will look beyond their contingent war cover when making claims.

"War policies are not the only policies at risk in this event," Benjamin Serra, senior vice president at rating agency Moody's, said via email. "Aircraft lessors benefit from different types of coverage, which, subject to interpretation, could trigger insurers' payments outside of aviation war aggregate limits."

S&P Global Ratings' $6 billion aviation loss scenario, its base case, takes into account the 78 out of 515 foreign-owned aircraft leased to Russian airlines that were either outside Russia before the invasion or have been recovered since, according to aviation consultancy Cirium. It also assumes some coverage has been canceled and that some court decisions do not include the highest levels of sums insured and coverage.

Ratings' $15 billion scenario, which exceeds the $12 billion insured value it estimates for the 515 aircraft, assumes the vast majority of policies are not cancelable and the vast majority of court cases allow lessors to collect the highest possible sums insured — for example, if the insured event is classified as theft instead of an act of war.

AerCap's $3.5 billion claim exceeds the $2.5 billion value of its assets stranded in Russia, which include 113 planes and 11 engines, following the recovery of 22 planes and three engines.

Other lessors are sanguine about their insurance responding. Steven Udvar-Házy, executive chairperson of Air Lease Corp., said at a March 16 conference that its insurers had once "fully paid out" for two Boeing 737s in Thailand that Air Lease Corp. had difficulty recovering, and that the insurance proceeds exceeded the book value of the two aircraft.

Fluid situation

Sanctions triggered by the Russia-Ukraine war have forced aircraft lessors to cancel their deals with Russian airlines, and they have since struggled to reclaim their aircraft. The big players in the Russian market are giving little away about their strategy in the impending insurance battle. AerCap did not respond to a request for further details on its insurance claim. Air Lease Corp., Avolon Holdings Ltd. and Carlyle Aviation Partners Ltd. did not respond to questions about their plans to file insurance claims. Avolon said in a first-quarter update on April 7 that 10 of its owned aircraft were in Russia as of March 31, representing less than 1% of its portfolio value.

BOC Aviation Ltd. had 17 owned aircraft and one managed aircraft on lease to Russian airlines, the company said in an April 7 update. The net book value of the 17 owned aircraft was $589 million, or 2.5% of total assets as of March 31, net of cash collateral. A BOC Aviation spokesperson said via email the company had "extensive" contingent coverage for its planes inside and outside Russia in addition to the primary cover arranged by the airline, but they declined to give further information at this stage because of "the fluidity of the situation." BOC Aviation CEO Robert Martin told an aviation conference April 7 that the company would continue to try to recover aircraft from Russia, but "whatever doesn't get resolved will end up in an insurance claim," Reuters reported.

SMBC Aviation Capital Ltd. has 34 aircraft in Russia with airlines Aeroflot, S7 Airlines OJSC, Ural Airlines JSC, Nordwind and JSC NordStar Airlines. An SMBC Aviation Capital spokesperson said via email that the company "continues to carefully monitor developments in Ukraine and is engaged with all relevant authorities." The company continues to adhere to sanctions and has terminated leases with all Russian airlines, the spokesperson added.