How To Navigate London's Aviation Insurance Claims Process
Maintaining appropriate insurance is critical for the entire aviation industry. Many US-based airlines, aircraft owners/financiers, and aircraft lease servicers devote significant resources at the front end, setting up their insurance programs, maintaining schedules of insured assets, and making annual trips to London for meetings with the major players in the Lloyd’s aviation market. But it is equally important that companies plan for the possibility of major claims under their policies. Companies do not always anticipate some of the unique challenges that US-based insureds face when making a claim under their aviation policies.
London market forms often require arbitration of coverage disputes in London. Even when the policy does not require it, policyholders may unwittingly agree to London arbitration anyway. It is rarely to the insured’s advantage. London arbitration procedures are not necessarily any more streamlined than the litigation procedures we are accustomed to in the United States. As a result, it can be just as slow and expensive as litigation. Indeed, due to high attorney rates in London and the possible need to retain both barristers and solicitors, it can often be more expensive. Moreover, given the long and storied history of Lloyd’s, and the centrality of the insurance industry to the London business community, London arbitrators sometimes demonstrate a bias in favor of insurers. Finally, there is no absolute right to an appeal from a London arbitration decision; it is within the UK court’s discretion.
For these reasons, insureds should avoid a London arbitration clause in their policies, if they are able to negotiate. And after a coverage dispute arises, don’t voluntarily agree to arbitration if the policy gives you the freedom to litigate in the United States.
Lloyd’s Aviation Claims-Handling Practices
It is standard London market practice for the insured’s broker to handle notice of losses or claims to the insurer. But these broker communications are often in-person, with little or no written record that conversations took place. To create a written record, the best practice is to be proactive and do it yourself. If you wish to report a claim or loss, communicate that to the broker in writing. Make sure s/he is able to produce a written record that communication to the insurers took place (e.g., “scratches” on documents reflecting that the insurer’s representative has seen the communications from you to the broker). If the insurer refuses to put any formal responses in writing, make sure your broker is sending you contemporaneous emails or other written reports documenting what the insurer’s response has been. In cases where the claim or loss is being reported to a contingent aviation insurer, insist on a tolling agreement or some other documentation acknowledging that the claim has been timely reported, but all parties are awaiting the outcome of the claim under the principal policy before proceeding under the contingent coverage.
In the event of a hull loss, depending on the current market value of the aircraft, it may not make sense to pursue costly mitigation measures. However, you may later confront an argument from the insurer that you failed to “sue and labor” to protect the aircraft. To protect your claim, the best practice is to keep the insurers (including any contingent insurers) well informed. The insurer will have to pay these expenses as part of your “sue and labor” claim, so they may voluntarily agree that you need not take certain steps that do not make economic sense.
Aviation hull policies will usually pay an “agreed value” upon a “total loss” of an aircraft. However, the policies often contain no definition of the term “total loss,” a concept that originated in centuries-old marine policies. The policy might also state that a “constructive total loss” occurs when the cost of repair “be estimated at” 75% of the aircraft’s agreed value – without specifying whose estimate is the relevant one (i.e., the insured’s or the insurers’). Absent any such specifying language, the insured can take the position that a constructive total loss occurs when the insured estimates that the cost of repair will exceed 75% of the aircraft’s agreed value.
Similarly, when estimating cost of repair insurers may contend that they are entitled to a “credit,” because the aircraft was part-way through the set amount of flight hours following which a C-Check would have been required in any event. But if the policy does not clearly state that “cost of repair” must be adjusted based on where the aircraft was in its maintenance cycle at the time of loss, then there is no reason to read such a requirement into the policy. Moreover, by deducting the costs of a C-Check, the insurer is effectively claiming that some of the loss is due to “wear and tear” – an excluded cause of loss under an aviation hull policy. But under the “efficient proximate cause” rule that has been adopted in numerous jurisdictions, the “wear and tear” exclusion will apply only if “wear and tear” was the moving or principal cause of the loss. And of course, the insurer always bears the burden to prove the applicability of any policy exclusion. Thus, unless the insurer can establish that “wear and tear” was the efficient proximate cause of the loss (in which case there is no coverage at all), the insurer is not entitled to any kind of “credit” for a risk which was not the moving cause of the damage.
As a practical matter, many insureds will be unable to avoid arbitrating their claims in London. Keep in mind that venue does not necessarily dictate choice of law. If the policy was written for a US-based insured, it should be construed under US law. The arbitration agreement should stipulate that questions of insurance policy interpretation will be governed by US law; the parties should be permitted to cite US case law and statutes, and introduce expert testimony regarding the proper application of that law. For the same reason, it is probably to the policyholder’s advantage to choose US-based arbitrators, even if that option is somewhat more expensive than selecting an arbitrator based in London.
Finally, at the outset of any major claim, it highly advisable that the policyholder retain insurance coverage counsel. The history and nature of the Lloyd’s market and aviation policy language place US-based insureds at a disadvantage. As the above loss valuation examples demonstrate, the policy language is often vague, and draws on obscure marine insurance concepts which don’t quite fit the modern aviation industry. It may not be practical to negotiate with the insurers at the front end to get this language changed. But with good coverage counsel you can level the playing field when you have a claim, to ensure that you fully understand the policy language and to leverage modern American rules of insurance policy interpretation.
Dennis Cusack and Erica Villanueva are insurance coverage partners in Farella Braun + Martel’s San Francisco office.