UK: US SDN Laws Put Insurers in a Bind

Last Updated: 16 September 2010
Article by Chris Zavos and Jennifer Salmon

A review of the implications for the London marine insurance market of President Obama's Executive Order on the prohibition of ransom payments.

On 12 April, US president, Barack Obama, prohibited payments to specially designated nationals (SDNs) engaged in acts directly or indirectly threatening the peace, security or stability of Somalia. His order identified piracy and armed robbery at sea as such acts.

While the scope of the order is not certain, pirates as a class are not designated SDNs. However, it may be impossible to determine whether the ultimate beneficiary of a ransom payment may be an SDN. Thus, the order prohibits the payment of ransoms to Somali pirates in certain circumstances.

Clearly, President Obama cannot directly legislate for the London Market (or non-US insurers outside the US) and the order applies only to US individuals, US entities and assets within the US.

The order does not automatically change the English law position, confirmed recently in Masefield AG v Amlin (2010), that ransoms are neither illegal nor contrary to public policy. (See "Capture by Pirates is not enough to make a claim for total loss"). In addition, for UK interests, the approval of the Serious Organised Crime Agency can be sought under the Proceeds of Crime Act 2002. The UK Government could impose similar legislation to the order, having previously followed the US in relation to Islamic Republic of Iran Shipping Lines (whether the UK will also follow the US in relation to the draft Iran Refined Petroleum Sanctions Act remains unclear).

In the absence of UK prohibition, the implications of the order under English law policies can be illustrated by two examples.

Consider first a US owner who pays a ransom in breach of the order. Would the illegality of the payment in the US give English insurers a defence to a claim for indemnification? Questions may arise under s.41 of the Marine Insurance Act 1906, the implied warranty of legality. However, the warranty most probably applies only to lawfulness under English law. Further, as the insured peril precedes the illegality, s.41 may not provide an insurer with a defence.

Taking a second scenario, consider a US insurer who insures a vessel that is hijacked. The assured may not be subject to the order and may have lawfully paid a ransom. Can a US insurer refuse to pay an assured's claim on the basis it would face penalties in the US? The Marine Insurance Act does not provide such a defence. If general public policy arguments cannot come to the rescue, there is authority to suggest, if an act required by a contract becomes illegal in the foreign country in which the contract is to be performed, the English courts will excuse the performing party from their contractual obligation.

The scope of this authority, and whether an English court would consider that the insurance contract was to be "performed" in the US or here, is uncertain. The insurance market is in a difficult position. The legality of ransom payments under US law is unclear and the consequences of getting it wrong are potentially severe (fines and/or imprisonment).

Curiously, a US owner may be unable to make a ransom payment (with or without the support of its insurers), with the result the vessel is totally lost. The order itself would not, of course, prevent the payment of a total loss claim to the owner in those circumstances.

US advice indicates the only way to be certain of not falling foul of the order is to apply to the US Office of Foreign Asset Control for specific clearance to pay or reimburse a ransom. It is hoped the order's application will be clarified, not just for the benefit of the insurance market but also for the 300 seafarers held by pirates at present.

This article was first published in Insurance Day on Friday 30 April 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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