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25 July 20236 minute read

First substantive ruling in global Russia aviation cases finds retention of aircraft is not “physical loss or damage”: Implications for insurers

In a major win for all-risk aviation insurer exposures, a Florida state court held in Zephyrus Aviation Capital, LLC, et al vs. Berkshire Hathaway International Insurance Limited, et al, that plaintiffs alleging their leased commercial aircraft are stranded in Russia following the outbreak of hostilities have not incurred “physical loss or damage” as a matter of law. Case No. CACE-23002230 (17th Jud. Cir., June 30, 2023).

This is the first substantive ruling by any court in the world on coverage issues in the multibillion-dollar international claims complex surrounding commercial aircraft that remain in Russia following the invasion of Ukraine. Both the substance and procedural posture of the ruling give it the potential to alter the landscape of many of the 30-plus Russian aviation insurance lawsuits pending around the world.

The ruling granted a motion to dismiss filed by Tokio Marine Kiln as all-risk market lead and ten following market insurers. The motion argued that the all-risk policy’s requirement of “physical loss or damage” could not be satisfied in the absence of tangible alteration of the property, either by change to the property’s physical form or by being physically carried off in a change of possession. The all-risk defendants further argued that the complaint alleged neither type of tangible alteration but acknowledged that at all relevant times – before and after the outbreak of hostilities – the aircraft remained in use and in the physical possession of the same lessee. Following briefing and oral argument, Judge Jack Tuter – Chief Judge of Florida’s 17th Circuit Court in and for Broward County – granted the all-risk market’s motion with prejudice.

Like dozens of Russia aviation coverage cases, Zephyrus centers on commercial aircraft owned by plaintiffs and leased to Russian airlines. The plaintiffs alleged that following the invasion of Ukraine, they issued a notice of lease termination and default and insisted the Russian airline send the aircraft to a third country for recovery. In a fact pattern repeated across the claims complex, the lessee allegedly failed to return the aircraft as demanded, citing new Russian legal restrictions on the export and lease of aircraft. Following the lessee’s failure to return the aircraft, the plaintiffs sought coverage for the aircraft’s agreed value under both all-risk and war-risk policies.

In their briefing, both parties cited to case law finding “physical loss” in cases of theft, with the plaintiffs analogizing such case law and the defendants distinguishing it. In their brief, the plaintiffs argued that theft is always a covered peril in an all-risk policy. The all-risk defendants argued that binding cases finding “physical loss” in the case of theft uniformly involved some physical change of the property, either in the form of damage or a physical taking and change of possession.

At oral argument, the court pressed both side on the issue of “theft.” Plaintiffs’ counsel again argued that all-risk policies generally cover theft and that the complaint stated a claim for coverage because it alleged a theft. Counsel for the all-risk market argued that the policy did not use the language of “theft” as a triggering event and therefore the complaint’s characterization of the stranded aircraft as having been “stolen” did not circumvent the policy’s requirement of “physical loss or damage” and that term’s requirement of tangible alteration. The court appeared to take the defendants’ side, noting in its order that although “Plaintiffs claim the lessee stole the aircraft when they refused to return it . . . Florida law holds ‘physical loss’ requires some physical change to the insured property,” which it held the complaint failed to allege.

The parties also clashed over the applicability of recent COVID-19 insurance cases interpreting the phrase “physical loss or damage,” with the court again adopting the insurers’ position in its order. The plaintiffs sought to distinguish COVID-19 case law by pointing to differences in those cases’ resulting loss – loss of business income – as well as their absence of alleged physical deprivation of insured property. The defendants countered that COVID-19 case law held that changes in law that restrict use of and access to insured property are not “physical loss or damage,” and that those cases are particularly relevant where plaintiffs allege they are being deprived of the use and possession of aircraft on account of new Russian legal restrictions.

The court held the “bulk of authority supports the Defendants position” and went on to cite both COVID-19 case law and pre-COVID-19 case law for the proposition that “physical loss” requires “some physical change to the insured property.” The order went on to dismiss the complaint’s all-risk counts with prejudice against the moving all-risk defendants, leaving the war-risk counts to be litigated.

Implications for insurers

The Zephyrus ruling is significant to insurers facing Russia aviation claims and beyond for several reasons. First, it represents the first and only court ruling anywhere in the world analyzing whether the general fact pattern common to the claims complex – continued, unconsented to possession of aircraft by Russian lessees – satisfies all-risk policies’ requirement of “physical loss or damage.”

Second, the court’s dismissal of the case with prejudice at the pleadings stage suggests courts may be receptive to pleadings-based motions or early motions for summary judgment in order to streamline the issues and claims in all insurance cases. Importantly, the ruling in Zephyrus pointed to the complaint’s affirmative allegations in ultimately dismissing with prejudice. Specifically, the order emphasized that “the aircraft continues to operate in Russia” (emphasis in original). Whether on motions to dismiss or early summary judgment motions, defendants looking to follow the model in Zephyrus will need to focus on the establishing a lack of change in condition or possession of the subject aircraft.

Third, the court’s reliance on COVID-19 case law to interpret the phrase “physical loss or damage” and hold that it is not satisfied by changes in law may make the argument more susceptible to repetition across a range of jurisdictions, given the volume of favorable COVID-19 case law around the country.

While Zephyrus is not binding on courts outside the jurisdiction, the ruling may prompt other defendants to file similar pleadings-based motions or early motions for summary judgment and may make courts more likely to grant them.

The winning motion in Zephyrus was briefed and argued by DLA Piper on behalf of Tokio Marine Kiln as all-risk market lead and its following market clients. DLA Piper is representing or advising clients in nearly every Russian aviation case filed around the world and is monitoring efforts to repeat their success in Zephyrus, plaintiffs’ strategies for avoiding the ruling, and the development of the law across all relevant jurisdictions. Should you have any questions about these issues, please reach out to either of the authors to discuss:

Aidan M. McCormack
Chair, Insurance – Americas, and Global Co-Chair, Insurance Sector

J. Trumon Phillips
Of Counsel