Common Policyholder Pitfalls When Navigating London Aviation Insurance Claims

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 Arbitration

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 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.

Mitigation Obligations

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.

Practical Realities

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.  The policy language is often vague, and draws on obscure marine insurance concepts which don’t quite fit the modern aviation industry. 

For example, aviation policies often pay an “agreed value” upon a “total loss,” but contain no definition of the term “total loss,” a concept that originated in centuries-old marine policies.  They might simply state that a “constructive total loss” occurs when the cost of repair “be estimated at 75% of its agreed value” – without specifying whose estimate is the relevant one (i.e., the insured’s or the insurers’). 

It may not be practical 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.