Investment bank Berenberg said in a briefing note that the insurance industry is in "uncharted territory" over whether they will be on the hook for major claims.
Approximately 600 Western-owned aircraft, leased to Russian operators, are grounded at airports in the country after Moscow was sanctioned by Britain, the European Union and the U.S. over its invasion of Ukraine last month.
Experts say that insurers could face claims stretching to billions of dollars if the Russian government confiscates the aircraft.
"Insurers, airlines and lessors could be heading into a decade-long legal battle over liability should these jets be written off," Berenberg said. "In a worst-case scenario from an insurance point of view, we believe that this could ultimately result in a $10 billion loss, of which a big proportion would be borne by the London market."
But the investment bank warned that the estimates were based on a "very low-probability, high-severity event."
Law360 contacted three aviation insurance lawyers on Wednesday, but all declined to comment on the record as they were directly involved in the dispute.
"It's still very early, and the issues are very complex, but there is likely to be litigation going on for several years," a City lawyer, who did not want to be named, said.
Russian President Vladimir Putin signed off a new law on Monday that would allow Russian aircraft operators to retain foreign-owned planes for use in the domestic market, where the lessors have canceled contracts because of the sanctions. Berenberg said the development "raises the risk of the jets being potentially unrecoverable."
British sanctions introduced last week give aircraft leasing companies until March 28 to extricate themselves from contracts with Russia lessors and recover their jets.
But the short deadline, coupled with a fly-zone ban for many Russia operators, has complicated matters for companies.
Singaporean aircraft lease company BOC Aviation said in a financial update last week that it had 18 craft with a value of $935 million stranded in Russia, equivalent to almost 5% of its fleet.
"Sanctions will require that we recover our aircraft from Russian airlines, and as a consequence we have been actively discussing logistics and planning with our customers," David Walton, chief operating officer at BOC, told investors on Thursday.
"The EU and U.K. sanctions set, effectively, a deadline of March 28 for termination of aircraft leases, which is frankly an unrealistic timetable for a fleet of approximately 500 aircraft leased into Russia by operating lessors," he added.
If the aircraft prove to be impossible to recover, the question becomes whether the losses for those written off would be passed to insurers.
Although many insurers issued seven-day cancelation notices to aircraft companies at the start of the war, liability will probably turn on when the "trigger" for claims is pulled. Berenberg said that leasing companies could argue that Feb. 24 — the first day of the Russian invasion — was the date of loss, at which point cover may have still been active.
The issue is further complicated by the wording of EU sanctions, published on Feb. 25, which prohibit the provision of insurance or reinsurance "directly or indirectly" to companies operating in the Russian aviation industry, or for aircraft intended to be used in the country's market.
Most aviation insurance policies also contain a clause that waives liability for insurers if they breach sanctions or an embargo when they pay out on claims.
--Editing by Joe Millis.
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