First appellate court ruling in global Russia aviation cases affirms finding that retention of aircraft is not “physical loss or damage”

In a landmark decision, a Florida appellate court affirmed a lower court ruling that continued possession of commercial aircraft by Russian lessees following imposition of sanctions is not “physical loss or damage” under an all-risk policy as a matter of law. The ruling by Florida’s Fourth District Court of Appeal in Zephyrus Aviation Capital, LLC, et al. v Berkshire Hathaway International Ins. Ltd. is the first appellate court ruling anywhere in the world on the multibillion-dollar international claims complex surrounding commercial aircraft remaining in Russia following the invasion of Ukraine. 4D2023-1815, 2024 WL 2855753 (Fla. 4th DCA June 6, 2024).

The much-watched appeal affirms last year’s order by a Florida trial court dismissing claims against the all-risk market with prejudice in what was, itself, the first substantive ruling on coverage in the global claims complex. Zephyrus Aviation Capital, LLC, et al vs. Berkshire Hathaway International Insurance Limited, et al, Case No. CACE-23002230 (17th Jud. Cir., June 30, 2023). The ruling may be considered a major win for all-risk aviation insurer exposures and signals that well-settled legal standards for “physical loss” are equally applicable to alleged losses of commercial aircraft in Russia.

The order on appeal granted a motion to dismiss with prejudice filed by Tokio Marine Kiln as all-risk market lead and ten following market insurers. The motion argued that the all-risk policy’s requirement of “physical loss or damage” could not be satisfied in the absence of tangible alteration of the property, either by change to the property’s physical form or by being physically carried off in a change of possession. The all-risk defendants further argued that the complaint alleged neither type of tangible alteration but acknowledged that at all relevant times – before and after the outbreak of hostilities – the aircraft remained in use and in the physical possession of the same lessee. Following briefing and oral argument, Judge Jack Tuter, Chief Judge of Florida’s 17th Circuit Court in and for Broward County, granted the all-risk market’s motion with prejudice.

Zephyrus appealed the dismissal and argued that the Russian lessee’s continued possession of the insured’s aircraft following imposition of sanctions and lease termination was effectively a “theft.” It further argued that despite the policy’s requirement of “physical loss or damage,” an all-risk insured is not required to show physical change to property when “theft” is alleged. In turn, the all-risk market argued that well-settled law required some actual change in physical condition to establish “physical loss,” and that the issue of “theft” was only relevant to that requirement if the “theft” involved a change in physical condition such as change in structure or change in physical possession – neither of which were alleged.

At oral argument, the panel pressed both sides on case law which found “physical loss” where an aircraft was alleged to have been stolen from airfields and hangers. Counsel for Zephyrus argued that the cases set forth a separate path to establishing physical loss under Florida law by alleging a theft. All-risk counsel argued that the label of “theft” was immaterial to those rulings and that it was the facts of the cases – physical taking of property from one country to another and changes of physical possession – that satisfied the requirement of change in physical condition to establish physical loss. All-risk counsel further emphasized that the cases were consistent with the trial court’s ruling and did not set forth a separate “theft” exception to the requirement of tangible alteration because they involved physical changes to the property.

While much of the appeal focused on Zephyrus’ “theft” argument, the core issue in the ruling affirmed was the legal standard necessary to establish or allege “physical loss.” Florida, like most states, applies a well-settled principle that there can be no “physical loss” without actual alteration of property. As the all-risk market emphasized, the facts of the case may have been unique, but the appellate court was not called upon to address an issue of first impression because the applicable legal standard – “physical loss or damage” – was simple and firmly established in law.

The District Court of Appeal accepted that proposition, affirming the trial court order of dismissal with prejudice in a per curiam affirmance without opinion just one week after hearing oral argument. A video of the oral argument is available on the 4th DCA website.

Implications for insurers

The Zephyrus ruling and affirmance on appeal is significant to insurers facing Russia aviation claims and beyond for several reasons. First, it represents the first and only appellate ruling anywhere in the world on the general fact pattern common to the claims complex – continued, unconsented to possession of aircraft by Russian lessees – and it affirms the finding that such allegations do not satisfy all-risk policies’ requirement of “physical loss or damage.”

Second, the affirmance of the trial court’s dismissal of the case with prejudice at the pleadings stage strongly suggests courts may be receptive to pleadings-based motions or early motions for summary judgment in order to streamline the issues and claims in all insurance cases. Importantly, the ruling affirmed in Zephyrus pointed to the complaint’s affirmative allegations in ultimately dismissing with prejudice. The order specifically emphasized that “the aircraft continues to operate in Russia” (emphasis in original). Whether on motions to dismiss or early summary judgment motions, defendants looking to follow the model in Zephyrus are encouraged to focus on establishing a lack of change in condition or possession of the subject aircraft.

Third, and perhaps most importantly, both the order affirmed and the core issue on appeal turned on well-settled legal standards for establishing “physical loss” and not newly developed law. Although Russia’s invasion of Ukraine and the scale of resulting international sanctions is unprecedented, neither the appellate court nor trial court was required to make new law because voluminous existing case law firmly defines what is required to establish “physical loss.”

Both the winning motion to dismiss and defense of appeal was handled by DLA Piper, with Trumon Phillips of the firm’s Miami office handling oral argument of both. DLA Piper is representing or advising clients in nearly every Russian aviation case filed around the world and is monitoring efforts to repeat their success in Zephyrus, plaintiffs’ strategies for avoiding the ruling, and the development of the law across all relevant jurisdictions. Should you have any questions about these issues, please reach out to either of the authors to discuss:

Aidan M. McCormack
Chair, Insurance – Americas, and Global Co-Chair, Insurance Sector

J. Trumon Phillips
Of Counsel