Aircraft Non-Repossession Insurance

Manufacturers of aircraft have been eager to meet the growing demand for passenger and cargo airlift capacity and have encouraged (and, in some cases, assisted) lessors and lenders to expand their horizons to make finance available in developing countries and for weaker and start-up airlines. In many of these circumstances, the aircraft operators cannot provide stand-alone credit ratings strong enough to attract financing. As a consequence, most such transactions are based upon the value of the aircraft and the ability of lessors or lenders to repossess it if the payments are interrupted. These asset-based facilities require assurance that, in an event of default, the aircraft will be returned promptly with its maintenance records in shape for the issuance of a new Certificate of Airworthiness by the relevant aviation authority, which is a basic requirement for re-leasing or resale to a new operator.

The risk that return of the aircraft to the lessor or to the lender/mortgagor is not possible or that the legal system in the host country is not effective in ensuring the return of the aircraft in a reasonable time frame may well be a fatal deterrent to the proposed and otherwise attractive transaction. In some countries, the host government may itself intervene to prevent the return of the aircraft or simply fail to act, and such failure makes return of the aircraft impossible.

The PRI industry has a product to cover these risks. Aircraft Non-Repossession Insurance has proven to be a significant and profitable niche market. In the last several years, approximately 75 to 100 policies providing coverage in excess of $1 billion have been in force. Premiums range from 0.10% p.a. to in excess of 3% p.a. Information about claims is sketchy and informal; however, the claims history seems to be a good story from the underwriters’ perspective, with the possible exception of recent problems in Brazil related to the timely return of Varig aircraft following extended insolvency proceedings. There have been other recent failures to repossess aircraft such as Philippine Airlines and Air Nauru, but these were not covered by insurance.

Major brokers include Willis, which has the largest share of the market, along with Marsh, Chubb and HSBC. Most policies are manuscripted to some extent, but the basic terms generally include the following:

• Description of the Aircraft – Including detailed maintenance records
• Agreed Value
• Designation of the Transaction Documents – Lease, loan/mortgage, etc.
• Covered Perils – Action or inaction of the host country government (including its judiciary) which amounts to expropriation, deprivation of use or failure to allow repossession or deregistration from the host country’s aviation registry in accordance with the relevant transaction agreements. Generally, these coverages also include inability to remit the proceeds of a sale of the aircraft in hard currencies. Policies also cover third party blockades or quarantines and U.N. sanctions which prevent export of the aircraft.
• Waiting Period – 180 to 360 days
• Core Exclusions – Loss arising from war/political violence; damage during the waiting period; failure of the insured to comply with local law.
• Warranties/Covenants – Due and valid execution of binding and enforceable transaction documents; compliance with local law; cooperation with the underwriter in matters affecting the claim; etc.
• Subrogation
• Confidentiality

In a number of countries, the demand for aircraft vastly exceeds the pace of modernization of the local legal systems and the development of a commercial culture compatible with international norms. The risks of non-repossession for transactions in these countries can be covered or substantially mitigated by Aircraft Non-Repossession cover, and it is therefore likely that the demand for this special PRI product will continue to grow.

Cape Town Convention

The Cape Town Convention on International Interests in Mobile Equipment (the “Cape Town Convention”) and its accompanying “Protocol on Matters Specific to Aircraft Equipment” (the “Aircraft Protocol”), now both in force, are the product of years of work under the auspices of several international bodies. The purpose of the Cape Town Convention is to make the creation and enforcement of security interests in mobile equipment, particularly aircraft, more transparent and effective on a global basis. The basic innovations include an open global electronic registry for perfecting international interests in aircraft, coupled with the signatory’s option of elections and declarations in the Aircraft Protocol to bring about uniform standards and practices for the enforcement of security interests in local courts.

In some countries that might otherwise require PRI, the host government’s adoption and ratification of the Cape Town Convention may provide enough comfort about the prospect of reliable enforcement of repossession rights that PRI might even be unnecessary or, in any event, available at a lower premium. As of this moment, however, it is unclear whether the Cape Town Convention will attract broad-based adoption around the globe. ■