The London aviation insurance market could be in for a chaotic 2024, Steven Marks of Podhurst Orseck predicts, as reinsurers scramble to cover damages for aircraft crashes that are ballooning far more than planned.
December 15, 2023 at 06:41 PM
A financial crisis is incoming for the aviation industry in the new year due to insurers’ responses to lawsuits filed after multiple air crashes in the last two years, misjudging how much money is needed to pay damages, an expert warns.
Steven Marks, partner at Podhurst Orseck in Miami, told Law.com that an industrywide panic is likely on its way in 2024, prompted by reinsurers who provide coverage for air carriers failing to move their cases out of the United States and causing damages leveled against them to climb to astronomical levels.
Marks predicts the fallout from these payments, along with coinciding political tensions resulting from the Russia-Ukraine conflict, will bring harsh financial consequences to the entire industry despite air travel increasing.
“Aviation travel is back and robust,” he told Law.com. “Air travel is going to continue to increase; passenger claims for luggage, air turbulence, things like that are not going to drive any market changes from an insurance standpoint, so those are never meaningful, [but] to have two major crashes that Boeing had with that many passengers, compounded with Ukrainian-Russian confiscation, compounded with a billion-dollar judgment, is really the perfect storm.”
Marks has been a leader in aviation-based lawsuits for 38 years, litigating some of the biggest crash cases in the industry, including recently against Boeing for the 737 MAX aircrafts that crashed in Indonesia and Ethiopia in October 2018 and March 2019, respectively.
In the early 2000s, Marks secured a judgment for the SilkAir Flight 185 that crashed into the Musi River near Palembang, Sumatra, Indonesia, in December 1997, killing all 97 passengers and seven crew members on board. He acted as co–lead trial counsel for the California state court plaintiffs in front of a Los Angeles jury in 2001.
Hidden within the SilkAir case, however, is a problematic element that Marks says is resurfacing in the current Boeing 737 MAX cases, and this time threatens to cause widespread panic in the industry. SilkAir’s insurer had reserved only $3 million to pay damages, and the ultimate $150 million judgment “shook up the marketplace.”
“That was small potatoes compared to the perfect storm that’s about to hit these insurers in 2024,” Marks said.
According to Marks, air carriers are covered mostly by reinsurers who assume most of the liability from the primary insurers, who only assume typically 2% to 4% of the risk for air accidents. These companies, Global Aerospace, Chubb, AIG, Tokio Marine and others, reserve funds that result in a hit on their balance sheets.
After the SilkAir case’s monumental final payout, the insurance market nearly went bankrupt before rules and regulations were updated to provide more oversight. However, with the current Boeing 737 MAX cases, reinsurers like Global Aerospace, the largest in the market, are again funding very little in reserves to pay accumulating damages.
“The reserves that were put on the original Boeing air case were wholly inadequate … [n]ow they’re staring down at hundreds of damage-only trials in an egregious case,” Marks said. “They thought the loss would only be [$200,000 or $300,000], they’re looking at 20 or 30 million, or more in some cases.”
Marks was appointed by a federal judge to be one of three lead attorneys in the Boeing 737 MAX cases, in which Lion Air Flight 610 and Ethiopian Airlines Flight 302 crashed and killed 189 and 157 people, respectively.
Reinsurers first tried to move the cases out of the United States, where Florida’s first-party bad faith law allows plaintiffs to treble damages by four times if proven that an insurer deliberately attempted to deny coverage.
“They thought they could win a forum non conveniens motion … and move the case to Indonesia.”
“They thought, ‘this is an Ethiopian crash, this isn’t going to last in the United States.’ They were wrong. The political atmosphere was such that they couldn’t file a motion for forum non conveniens,” he said. “These two crashes, that were unprecedented in scope and liability, are going to stay in the U.S. and they are reserved inadequately for both of them.”
Now, he says, reinsurers are forced to increase their reserves to pay claims because they don’t have the funds, after judges “forced them into admissions of liability.” The resulting impact is a potential market-wide crisis as insurers scramble to simultaneously pay damages they didn’t plan for.
“There is going to be an insurance crisis,” Marks said. “It’s going to have huge financial consequences.”
Also complicating matters is Russia’s invasion of Ukraine in February 2022, which resulted in the confiscation of aircrafts. Companies like Irish aircraft leasing operator Carlyle Aviation Partners, who Marks is currently representing, are trying to recover planes leased to Russian airlines still stuck in the country since the conflict erupted.
Marks has claims filed by Carlyle in the U.K. High Court against Chaucer Corporate Capital and AIG Insurance for withholding insurance claims. More than 400 aircrafts amounting to nearly $10 billion were reportedly seized by Russia when President Vladimir Putin signed a law enabling local carriers to move them to the Russian register.
“We’ve never had in the history of aviation or insurance anything this large where there was clearly a conspiracy among every insurer to not to pay a single Russian claim,” Marks said.
Carlyle’s initial claims on the day of Russia’s invasion amounted to $700 million, but when multiplied by four after proving the reinsurers deliberately refused to pay the claims, which ballooned to $3.2 billion.
Another example is the case against Tokio Marine, the reinsurer covering LaMia for their 2016 crash of an Avro RJ85, which killed 71 of 77 people on board, including all but three players on the Brazilian soccer team Chapecoense on their way to Medellin, Columbia. Tokio Marine reserved just $25 million in reinsurance coverage placed by primary insurer Bisa.
Marks says Tokio Marine refused to provide a defense because they thought there was no jurisdiction, failed to reserve enough funds, and are now caught in an almost $1 billion judgment ordered against them.
“You now have a $975 million claim where there is not a reserve,” he said. “We collect that and win a coverage case; it’s only going to compound an already complicated liquidity issue for the entire London market.”
Although Marks says he’s seen just about everything in the aviation litigation space, being involved in several other aircraft accidents over 30 years including ValueJet, Colgan Air, Concorde and Malaysian 370, the coming year could present troubles very few are prepared for.
“We’ve been looking for some watchdog or some member of Parliament to dig into this like they did in the early 2000s, because there is a looming crisis, and it will trickle down and affect everyone.”
“It’s $2 billion max cases, it’s Russian confiscation, and a failure to have defended the Lamia soccer players that, combined, I don’t think everyone in the industry could write the check.”