Insurance: Aviation - prohibition on provision of insurance and reinsurance services

The UK government has now published further sanctions prohibiting UK insurers from providing aviation insurance to anyone connected with Russia or for use in Russia. The sanctions took effect as of 8 March 2022 and block Russia’s aerospace and aviation sectors from accessing insurance through the UK market.

The legislation introduces:

• new powers to detain Russian aircraft and remove aircraft belonging to designated individuals and entities from the UK register;
• a ban on the export of aviation and space-related goods and technology, including technical assistance; and
• a further ban on UK persons providing insurance and re-insurance services in relation to these goods and technology.

Whilst the Bank of England acknowledges that the measures will severely limit access to the global insurance and reinsurance market, it maintains that the sanctions against Russia are “manageable” for Britain’s insurers and wider financial sector.

Prohibition on provision of insurance and reinsurance services

The legislation introduces specific sanctions in relation to insurance and reinsurance services relating to aviation and space goods and aviation and space technology.

Regulation 29A makes it clear that firms cannot directly or indirectly provide insurance or reinsurance services relating to aviation and space goods or aviation and space technology to (i) persons connected with Russia; or (ii) for use in Russia.

This means that, even if the person to whom a firm is providing the relevant insurance or reinsurance service is not in or “connected with Russia” (as defined in Regulation 21 of the legislation), the prohibition may still apply if the goods or technology to which the service relates are for use in Russia.

A General Trade Licence has been granted for the continuing provision of certain existing insurance and reinsurance until 28 March 2022 where, in the case of insurance a) there is no reinsurance; or b) the reinsurance is not sanctioned, or, in the case of reinsurance the insurance is not sanctioned. Care should be taken, as the scope of this general licence is not as broad as the prohibition; it only applies to insurance for activities within the scope of the pre-existing trade sanctions in Regulation 28, not the new trade sanctions in Regulation 29A which are in some respects broader.

The UK sanctions follow those published by the EU on 25 February 2022. Paragraph 2 of Article 3c of Regulation 2022/328 states that it shall be prohibited to provide insurance and reinsurance, directly or indirectly, in relation to goods and technology listed in Annex XI (Aircraft, spacecraft, and parts thereof) to any person, entity or body in Russia or for use in Russia. The EU Regulation is directly effective in EU member states and applies to third country branches and EU incorporated insurers.

Sanctions and Embargo Clause

Aviation policies usually include a version of the AVN 111 Sanctions and Embargo standard clause which states (extract) that “If, by virtue of any law or regulation which is applicable to an Insurer at the inception of this Policy or becomes applicable at any time thereafter, providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction, that Insurer shall provide no coverage and have no liability whatsoever nor provide any defence to the Insured or make any payment of defence costs or provide any form of security on behalf of the Insured, to the extent that it would be in breach of such law or regulation. 

In circumstances where it is lawful for an Insurer to provide coverage under the Policy, but the payment of a valid and otherwise collectable claim may breach an embargo or sanction, then the Insurer will take all reasonable measures to obtain the necessary authorisation to make such payment

.”

The affected policies are therefore not automatically cancelled or terminated, but the coverage provided by EU or UK insurers has ceased to be effective to the extent it would infringe the relevant sanctions. As insurers are severally liable for their percentage share under an aviation policy, in order to assess the percentage held by insurers it has become crucial to review the subscribing insurers to determine if they are EU or UK persons. Under AVN 111, a restricted insurer may give 30 days’ notice of cancellation of its participation in the policy.

Market standard wording for war risk coverages contains a seven-day notice clause allowing (re)insurers to give notice to amend or cancel the cover in the event of a radical and adverse change in conditions or circumstances. We understand that many (re)insurers have sought to do this in recent days (specifically giving notice of geographical restrictions), but that some policies in the market have been negotiated to remove this right. Given pressure of time, these notices are likely to have been issued in general terms without review of the specific policy terms, which should be checked to ensure notices are valid both in terms of their substantive wording and by whom (with what authority) and to whom they have been given.

Contingent/possessed policies (i.e. policies which cover lessors to the extent the lessee is uninsured or a lease has terminated) may now also be on risk to the extent that any EU or UK insurers’ coverage has ceased to be effective. Such policies should be reviewed urgently to determine policy insuring clauses, conditions and exclusions, as well as amendment and cancellation rights.