San Diego, Calif. (March 12, 2024) - In Zephyrus Aviation Capital, LLC, et al vs. Berkshire Hathaway International Insurance Limited, et al., Case No. CACE-23002230 (17th Jud. Cir. FL, June 30, 2023), the plaintiffs, aviation leasing, servicing, and management companies, brought suit seeking coverage for the alleged loss of use and possession of the aircraft resulting from the Ukraine crisis. The plaintiffs alleged six causes of action, including (I) declaratory judgment under the war policy's deprivation clause; (II) breach of contract under the war policy's deprivation clause; (III) declaratory judgment under the all-risks policies; (IV) breach of contract under the all-risks policies; (V) declaratory judgment under the war policy; and (VI) breach of contract under the war policy.
The court ultimately agreed with the defendants that the language in question under the all-risk policies did not contemplate the complete "physical loss" of aircraft due to a wartime conflict. The court granted the defendants' motion to dismiss two causes of action (III and IV) ,with prejudice, reasoning that "Plaintiffs do not allege a tangible change to their property." Id. at 3.
The plaintiffs brought suit under hull and war risk policies for aircraft stranded in Russia. The defendants filed a motion to dismiss two causes of action in the complaint, which sought coverage under the Hull policy. The relevant portion of policy language subject to the motion to dismiss covers "against all risks of physical loss or damage." Importantly, the aircraft are still being operated in Russia by the Russian airline that leased the plaintiffs' aircraft.
The defendants argued that the plaintiffs did not allege that the aircraft experienced any physical damage triggering a loss. The defendants took the position that the insurance policy only insures against "physical loss or damage" to the aircraft or its engines. The defendants further argued that the plaintiffs merely "alleged a change in the legal and geopolitical constructs, which define the airplane's legal use but not its physical properties." Id. at 1.
In other words, the defendants argued that, under Florida law, changes in law that restrict the use of property do not amount to "physical loss or damage." The defendants argued that this is true even when the change in law has caused the insured to lose access to the insured property. Therefore, under the defendants' theory, there had been no physical loss or damage to insured property such that causes of action III and IV should be dismissed.
The plaintiffs maintained that they suffered a physical loss because they were permanently deprived of the aircraft, even though there was no physical damage. They claimed they issued a notice of lease termination and default, and insisted the Russian airline send the aircraft to a third country for recovery, which the lessee ignored citing Russian legal restrictions on export of the leased aircraft.
It is hard to extrapolate much from this case because it is not binding on overseas jurisdictions and the contract terms vary between policies. One policy may require physical damage or loss to recover while others may be drafted in such a way that coverage is triggered by a mere lack of dominion and control, or theft. If carriers have similar language in their all-risk policies, then we may see an increase in the filing of dispositive motions like motions to dismiss and summary judgment motions. However, it is important to note that the claims on the war policy were not dismissed and are moving forward. Also, the court's ruling is based on Florida law holding that "physical loss" requires some physical change to the insured property. Other jurisdictions may hold that "physical loss" is a mere loss of dominion and control.
Importantly, the court noted that the all-risk policies at issue did not contemplate losses resulting from wartime conflict. However, courts in the future could be less lenient on carriers given that they are now on notice of these potential claims. In other words, in the future, courts could be more inclined to hold that both parties to the contract were aware of the potential for aircraft seizures in Russia and, if they did nothing to change the language of the exemption or coverage to reasonably put the insured on notice, that it intended to exclude coverage for these types of claims, then this could be held against them.
Lewis Brisbois continues to monitor the development of insurance cases and will be carefully monitoring the outcome of the case in London's High Court that involves several lessors and is set to proceed to trial later this year.
Lewis Brisbois' attorneys have a deep understanding of the coverage issues and insurance laws being impacted by the conflict and are advising clients on managing their legal and business risk as events develop. For more information, contact the author or editors of this alert. Visit our Ukraine Conflict Response Practice page for additional alerts in this area.
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