[2025] EWHC 1430 (Comm)

What remained were certain issues as to whether the Defendants had a right to be subrogated to certain amounts which the Claimants had received. These were called by the WR Insurers, in their submissions, ‘recoveries’, but it was not accepted by the Claimants that all were properly so described.

The essential legal principles are clear. The following is taken from MacGillivray on Insurance Law (15^th ed.), [22-001] - [22-005]:

Subrogation is the name given to the right of an insurer who has paid a loss to be put in the place of the insured so that he can take advantage of any means available to the insured to extinguish or diminish the loss for which the insurer has indemnified the insured. [22-001]

The doctrine confers two distinct rights on the insurer after payment of a loss. [22-002]

The first is to receive the benefit of all rights and remedies of the insured against third parties which, if satisfied, will extinguish or diminish the ultimate loss sustained. (Ibid.)

The second right vested in the insurer by the doctrine of subrogation is to claim from the insured any benefit conferred on the insured by third parties with the aim of compensating the insured for the loss in respect of which the insurer has indemnified him. The right is usually exercised by an insurer claiming from the insured a sum equivalent to any sum of damages paid to the insured by a third party legally liable for the loss. The right is wider in scope than that, however, and the insurer is entitled to moneys paid to the insured ex gratia to diminish the loss unless intended by the donor to benefit the insured to the exclusion of the insurers. [22-005]

As explained by Brett LJ in Castellain v Preston (1883) 11 QBD 380 at 388:

… as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished.

Cotton LJ, in the same case, at 395 said:

… if there is a money or other benefit received which ought to be taken into account in diminishing the loss or in ascertaining what the real loss is against which the contract of indemnity is given, the indemnifier ought to be allowed to take advantage of it in order to calculate what the real loss is, even though the benefit is not a contract or right of suit which arises or has its birth from the accident insured against.

An insurer may be subrogated to a receipt by an assured following a loss, even though that receipt is under a contract or arrangement which preceded the loss and which is payable independently of the occurrence of the loss. That was the case in Castellain v Preston itself, where the insurer was subrogated to the purchase money paid by the buyer in respect of the purchase of the house, which had been damaged by fire after the exchange of contracts but before completion.

It was also not in dispute that where an assured recovers money from a third party which reduces the loss against which the insurance gives an indemnity but where the assured has losses in excess of the policy limit, the recoveries are to be applied ‘top-down’ to the loss in excess of the limit first, and only when the assured is compensated for the loss above the limit do insurers begin to take the credit below the limit: Napier and Ettrick (Lord) v Kershaw [1993] 1 All ER 385; Royal & Sun Alliance Insurance PLC v Textainer Group Holdings Ltd [2024] EWCA Civ 547.

What was in issue was the application of those principles to three categories of ‘recovery’. It is necessary to consider the points which arise in relation to each Claimant separately.

I will take AerCap first. AerCap contended that, if the loss was held to have been caused by a WR Peril, as I have held it to be, the points raised by WR Insurers were not of any significance. This was because AerCap’s losses, net of settlement amounts received, was US$2.051 billion, whereas the aggregate limit on its War Risks cover was US$1.2 billion, and the points at issue did not, it contended, exceed the difference. Nevertheless, WR Insurers made submissions that AerCap had to give credit for (a) amounts of ‘maintenance reserves’; (b) security deposits; (c) amounts received under maintenance letters of credit; and (d) amounts for which credit was given in the Russian Insurance Settlements. I will consider each in turn.

‘Maintenance reserves’ are periodic payments made by lessees pursuant to the lease of an aircraft in addition to their rent payments. They are sometimes referred to as ‘supplemental rent’. They are paid partly based on usage of the aircraft or engine, and partly on a purely periodic basis. Once paid maintenance reserves are the property of the lessor, which can do with it what it wishes. However, during the term of the leases, where maintenance reserves are being paid, and provided no Event of Default is continuing, AerCap must reimburse the lessee for the costs of qualifying maintenance work, by way of ‘maintenance contributions’. It is not a requirement of the leases that AerCap use the actual maintenance reserve payments it has received to make the maintenance contributions.

At the end of the lease period, with the exception I will come to, the lessee has no entitlement to the return of any maintenance reserves if it has paid more in maintenance reserves to AerCap than AerCap has reimbursed it by way of maintenance contributions. The exception is that, in certain leases, it was specified that, where there has been a total loss of the aircraft, and there is no unremedied payment default or Event of Default, the lessee should receive 50% of the amount by which the aggregate maintenance reserves paid during the lease exceed the aggregate amount of maintenance contributions paid by AerCap.

How do the principles of subrogation apply to such amounts? I put on one side for a moment amounts falling into the exceptional category referred to in the last paragraph. In relation to the others, in my view, insurers are not subrogated to such amounts. There is no right or remedy which could be exercised or which was acquired upon or after the occurrence of the loss by which that loss could be diminished. What has happened is that the assured has, prior to the loss, received payments, which it has been entitled to treat as its own, and to which the lessee has no claim. Payments which an assured has received before and independently of any loss, and which have become its own property might, in some types of insurance claim, be relevant to assessing what loss the assured sustains at the time of the occurrence of the peril and can claim for under the policy. I do not consider that to be the case here, not least because this is property insurance and there is an agreed value fixed in the policy. But, I would suggest, there would not, at least ordinarily, be any question of the insurer being subrogated to payments of that sort.

True it is that, by the loss, the lessor will have been saved the amount which it would have had to have paid by way of future maintenance contributions, but that is not, in my view, a right or remedy to which the insurer can be subrogated. Moreover, the agreed value fixed in the policy will itself have been affected by the estimated future costs of keeping the aircraft in serviceable condition: other things being equal, higher maintenance costs will generally lead to lower market and thus lower agreed values. For insurers to get the benefit of a lower agreed value and also a further credit representing saved maintenance expenses would be likely to give rise to a double credit, or allowance, in respect of future maintenance costs.

What of the exceptional category I have referred to above, in which the leases provided that the lessee should receive, in the event of a total loss, and if there is no unremedied payment default or Event of Default, 50% of the amount by which the maintenance reserves paid exceeded the amount of maintenance contributions? This was the subject of only very limited argument. However, I consider that this category is different. As I understand it, in this category of case, as a result of the circumstances giving rise to the loss of the aircraft, which themselves gave rise to Events of Default, AerCap will have received the benefit of being able to retain 50% of the balance of the maintenance reserves, which in other circumstances it would have had to pay to the lessee. That does appear to me to be a matter where the doctrine of subrogation can, in principle, apply.

The second category of ‘recovery’ in question is security deposits. These are sums which the lessees were required to pay to AerCap as security in respect of their obligations under the leases. If an Event of Default occurred and was not remedied, the security deposit could be applied by AerCap towards the payment or discharge of any obligation of the lessee under the lease. There is no dispute between the parties that security deposits, once retained by AerCap, are capable of constituting payments which might offset the loss in respect of which indemnity is sought: i.e., there is no dispute that they are payments to which insurers might be subrogated.

The issue is as to whether AerCap was entitled to set those sums off against other losses. But it is also not in dispute that AerCap is entitled to apply sums held by way of security deposits against unfulfilled obligations of the lessees under the leases. Thus, it is not in dispute that AerCap was entitled to do so in relation to arrears of rent as at the date of termination of leasing. Equally, in relation to cases where AerCap has applied security deposits against future rent in relation to aircraft where there was no settlement with lessees/Russian insurers, the Defendants do not contend that AerCap should give credit for those amounts, although they say that that should have an impact on whether AerCap should be awarded interest on the value of those aircraft. I am not going to deal with issues of entitlement to interest at this stage.

WR Insurers do say, however, that AerCap was not entitled to apply security deposits against future rent amounts in relation to those aircraft in respect of which there were RISs. The basis for that argument is that, under the RISs, the leases were terminated, and accordingly the lessees no longer owed obligations in relation to future rents; and thus by the time that AerCap purported to apply security deposits against such future rents, those future rents were not due.

I considered that the answer given by Mr Howard KC to this was correct. While the RISs put an end to the obligations of the lessee vis a vis the lessor, they did not mean that AerCap had not suffered the loss of future rent. The RISs in fact state that they are not intended to be construed as a release of any claims that AerCap may have under insurances or reinsurances. Accordingly, I consider that there were uninsured losses which AerCap has suffered to which it was entitled to apply the relevant amounts of the security deposits.

The third category is as to maintenance letters of credit. In some cases, AerCap agreed, as an alternative to the lessee making monthly maintenance payments, that the lessee could provide a letter of credit to secure its maintenance obligations. Shortly before the service of written closing submissions, AerCap accepted that amounts it had received under maintenance letters of credit were in principle amounts which might be offset against the loss in respect of which indemnity was sought, in the same way as security deposits. This acceptance was on the basis that the sums could be drawn down under the letters of credit on the occurrence of an Event of Default. But, AerCap contended that it had set off those amounts against accrued but unpaid rent, and future rent, and that the result of this exercise was that in the case of all except two aircraft (MSN 35420 and MSN 28245), no credit to the Defendants was required. The points arising here are the same as those in relation to security deposits, and my conclusions are the same.

The fourth category is amounts for which credit was given in settlements with Russian lessees/insurers. WR Insurers point to credits which were given by AerCap in those settlements for various matters, namely security deposits. These overlap with but are not identical to the three categories of ‘recovery’ to which I have already referred. WR Insurers contend that AerCap should not be permitted to take an inconsistent position in relation to credits as between its insurance settlements and its present claim. The amounts credited were part of the consideration which AerCap received under the RISs, and have already been allocated by AerCap, in the RISs, to the value of the aircraft.

I considered that AerCap was correct to say that the credits given in the RISs do not determine that the relevant recoveries cannot be attributed, for the purposes of the claim on insurers, against unpaid hire. The evidence is that the amounts which were paid under the settlements were the maximum amounts which the Russian airlines and insurers, who were in a very strong position in the negotiations, were willing to pay. The way in which those amounts were said to be structured does not, in my view, bind AerCap in relation to the separate question of the credits which it must give to insurers in relation to its claim under the policies.

In the case of DAE/Falcon, three categories of ‘recovery’ are in issue: (a) maintenance reserves; (b) security deposits; and (c) maintenance letters of credit. There is also an issue as to the commitment fee paid to DAE with respect to MSN 66625.

In relation to maintenance reserves, DAE submitted that some were not recoveries because they had been received by it as its unencumbered property. This applied to what were called the ‘S7 maintenance reserves’. That, as I understood it, raised the same issue of principle as raised by AerCap in relation to maintenance reserves, and which I have answered above in AerCap’s favour.

That point apart, DAE/Falcon accepted that the amounts of maintenance reserves and security deposits, and which had been paid under maintenance letters of credit were, in principle, sums which were capable of reducing the indemnity payable under the policies. What DAE/Falcon submitted was that they had suffered other losses, in the form of unpaid future rent, to which those recoveries could be, and had been, allocated. WR Insurers submitted that, at least in respect of maintenance reserves, they could not be allocated to unpaid rent, but could only be applied to maintenance obligations. That, however, was not borne out by the example lease to which I was directed, namely that in respect of MSN 32639, where there were provisions that the lessee would not be entitled to recover maintenance reserves if there was a default continuing under the agreement; and, in the case of a total loss, for the lessee to pay the ‘agreed value’, which was set at a sum considerably greater than the agreed value of the aircraft under the insurance, and for the lessee not to be entitled to the repayment of any maintenance reserves until the ‘Total Loss Amount’, which includes the ‘agreed value’, should have been paid. Accordingly, even under the contractual scheme, DAE would have been entitled to apply maintenance reserves against the lessee’s responsibility for a sum much larger than the amount of unpaid rents. In any event, it appeared to me that DAE would have been entitled to set off the amount of those maintenance reserves against any amount due from the lessee under the lease.

I concluded that there was no material difference between maintenance reserves on the one hand and security deposits, which WR Insurers accepted could be applied against unpaid future rents, on the other.

WR Insurers raised a similar point about maintenance reserves in the case of DAE’s RIS in relation to Aeroflot aircraft as they had raised in relation to AerCap’s RISs. I do not accept it in relation to DAE’s RIS, for the same reasons.

There are four DAE Aircraft in relation to which, even after setting the maintenance reserves against unpaid rents, there remains a surplus amount. DAE argued that that was not necessarily to be credited to WR Insurers, because the calculations did not take account of interest payable in respect of sums due under the leases. To the extent that this matters, this issue will have to be resolved at a later date.

As to the commitment fee paid in respect of MSN 66625, it was not established that this was a relevant recovery. This was a sum which was paid over to DAE, outright, in equal tranches upon signing and delivery under the lease of this aircraft. It was not a right or remedy which could be exercised, nor a benefit received, after the loss which could diminish the insured loss.

In relation to Merx, questions again arise in relation to the treatment of maintenance reserves, security deposits and maintenance letters of credit. Merx takes the same stance as to credit for maintenance reserves as does AerCap. For the reasons I have given in relation to AerCap’s arguments, I conclude that Merx does not have to give credit in respect of the maintenance reserves it received. As to security deposits, Merx takes the position that it need not apply the security deposits to any loss at all; but that if necessary it would set them off against unpaid rent. I doubt that it is correct that Merx need not give credit for the security deposits, once retained, if they are not applied to other losses, and that is not the stance of AerCap or DAE. The point as to whether Merx needs to apply the deposits to any loss was barely argued by either side. WR Insurers contended, moreover, that if security deposits were allocated to unpaid rents, then that might need to be reflected in any award of interest in relation to any amount WR Insurers have to pay in respect of the value of the Aircraft. Both these points should be resolved, if they still arise and cannot be agreed, at a later stage.

As to Genesis, the issues relate to a sum paid under a maintenance letter of credit, and in relation to a security deposit. In relation to the security deposit amount (US$855,000), there was, by the end of the trial, no issue that credit did not need to be given for it, but it might be relevant in relation to the award/calculation of interest. As to the sum of US$1,060,746, drawn under a maintenance letter of credit, I doubted that the position should, as a matter of principle, be different from that applying to the other Claimants. In any event, as I understood it, Genesis contended that it could apply the amount involved against uninsured losses, which greatly exceed it: see paragraph 90(1) of Genesis’s Closing Submissions. On that basis, the only issue would be as to whether there is any effect on interest which might be awarded to Genesis. I will not finally decide the questions of whether the sum received under the maintenance letter of credit should, in principle, be credited to underwriters, or as to whether, if it is not to be credited because it can be attributed to uninsured losses, that has an effect on interest. Those will require to be resolved, if they still arise and are not agreed, subsequently.