Last week, the High Court of Justice in London ruled in favour of aircraft lessors for the 2021 and 2022 underwriting years, a key development in the ongoing Russia-Ukraine aviation litigation, and one which analysts at Morningstar DBRS warn has potential credit implications for insurers and reinsurers.

We reported last week that the UK High Court ruled in favour of aircraft lessors under war risk insurance policies for aircraft and engines stranded in Russia since early 2022.

Of course, the judgement is limited to selected test cases, but as noted by analysts, it establishes a precedent that could expose insurance and reinsurance companies to several billion dollars in cumulative liabilities driven by the ruling’s emphasis on a broad interpretation of “seizure” and “confiscation” that could lead to further claims being validated.

Analysts at Morningstar DBRS explain that this judgement is also positive for the six involved lessors with still active claims under their war risk contingent insurance policies, as it sets a precedent that may provide confidence in the potential future outcome of their cases, despite some being filed in other jurisdictions.

The defendants have been granted leave to appeal; however, the initial judgement will strongly impact the insurance market regarding the broad interpretation of war risk clauses and the insurability of politically driven asset seizures.

Commenting on the ruling’s credit implications for insurers and reinsurers, analysts highlight seven areas that could impact aviation carriers.

The first is reserves. “Many insurers had delayed finalising reserves for stranded aircraft claims, awaiting judicial clarity. This judgement now compels war risk and all risks insurers to reassess and likely increase technical provisions. Entities with high exposure but insufficient reserving buffers—particularly some Lloyd’s syndicates—could experience pressure on solvency ratios,” say analysts.

As well as heightened reserve pressure, analysts note the potential for adverse reserve development, explaining: “The judgement’s emphasis on a broad interpretation of ‘seizure’ and ‘confiscation’ may lead to further claims being validated. For insurers that have underestimated potential exposures or assumed successful denial strategies, the risk of reserve inadequacy could be significant.”

The judgement will affect the reinsurance layers, as these significant gross losses will push insurers to seek to cede claims to reinsurance layers. However, reinsurance recovery may be delayed or contested, particularly where terms differ from the underlying policies or where reinsurers challenge aggregation or coverage triggers. Retrocessionaires may also re-examine their exposures, potentially leading to disputes.

Analysts explained that the case highlights the importance of clarity in policy language; insurers that have adopted aggressive denial postures or failed to engage in good faith negotiations may face reputational damage, which affects future underwriting relationships with aviation lessors and financiers.

The judgement should serve as a caution to insurers who will have to tighten definitions and exclusions around political and sovereign risks. Morningstar DBRS expects more limited contingent coverage or higher premiums for war-related endorsements.

Finally, some insurers may withdraw from offering contingent war risk coverage for leased aircraft or limit geographic exposure, citing capacity constraints and increased pricing in aviation re/insurance.

Although this is an English court decision, 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.

Since the year-end 2024 balance sheet leverage is already the lowest level in the last five years, partially due to reduced funding requirements given new aircraft delivery issues at the original equipment manufacturers (OEMs), analysts at Morningstar DBRS expect that many of the larger lessors will use the proceeds from the judgements to return capital to shareholders and owners rather than for the repayment of debt.

For those lessors without order books with the OEMs, the proceeds from potential future insurance-related judgements and/or settlements can be used to acquire aircraft in the secondary market to support incremental growth.

Analysts at Morningstar DBRS concluded, “With the Court’s ruling favouring the lessors, the legal and financial implications of the Russia-related aircraft insurance saga have been reshaped by confirming a broad interpretation of war risk perils and affirming the enforceability of lessor policies against insurers.

“While the final impact depends on appeal outcomes and future recoveries, the current judgement reinforces potential downside risks for aviation insurers. It also highlights the need for stronger reserving, legal clarity, and risk governance.”