This article was first published in Insurance Day on Friday 11 February 2011.
The Court of Appeal has reiterated that it will always be a question of fact whether an actual total loss can be said to exist in any given case.
In February 2010, the UK High Court ruled that capture by pirates does not automatically give rise to a total loss claim under a property policy. This decision was recently confirmed by the Court of Appeal (Masefield AG and Amlin Corporate Member Ltd (2011)).
The "Bunga Melati Dua" was captured by Somali pirates on
19 August 2008 while carrying a cargo of biodiesel owned by
Masefield and insured by Amlin. On 18 September 2008, Masefield
gave notice of abandonment of the cargo to Amlin. The vessel, her
crew and cargo were released 11 days later on payment of a
ransom.
Immediate actual loss
Masefield argued that capture by pirates created an immediate actual total loss (ATL) of the cargo, regardless of the prospects of recovering the cargo. Masefield did not pursue the argument, advanced in the High Court, that the capture gave rise to a constructive total loss (CTL) of the cargo.
The Marine Insurance Act 1906 provides at section 57(1) that there
will be an ATL where the insured is "irretrievably
deprived" of the subject-matter insured. Restating the test
set by the High Court that an assured is not irretrievably deprived
of property unless it is physically or legally impossible to
recover it, the Court of Appeal held that it would ultimately be a
question of fact whether a piratical seizure could give rise to an
immediate ATL. Where there was not only a chance, but a strong
likelihood, that payment of a ransom of a comparatively small sum,
relative to the value of the vessel and her cargo, would secure the
recovery of both, there was no ATL. This case was a typical
"wait and see" situation.
Prospect of recovery by ransom
Masefield accepted that payment of a ransom is neither illegal nor contrary to public policy. However, they contended that the prospects of recovery by payment of a ransom was not a relevant factor to take into consideration when applying the test of irretrievable deprivation. Masefield argued that the duty to sue and labour did not require an insured to make a ransom payment. Therefore, they argued that a piratical seizure that can be brought to an end only by the payment of a ransom must be regarded as though it provided no prospects of recovery at all, and therefore must give rise to an ATL.
"No identified public policy"
Lord Justice Rix rejected this argument. He made reference to the report of the House of Lords European Committee published on 14 April 2010 "Combating Somali Piracy: the EU's Naval Operation Atalanta" and concluded that there was "no universally recognised principle of morality, no clearly identified public policy, no substantially incontestable public interest" that could lead the courts at present to conclude that the payment of ransoms in Gulf of Aden pirate hijackings was contrary to public policy such that they were required to intervene. While the payment of ransoms could be said to perpetuate the piracy problem, the priority was the safe return of vessels and crew, which could be achieved by the payment of a ransom.
Insurers must "wait and see"
Insurers may therefore rest easy that capture of insured property by Somali pirates is unlikely automatically to give rise to a total loss claim so long as the current practice of releasing vessels in return for a ransom continues. However, the Court has reiterated that it will always be a question of fact whether an ATL can be said to exist in any given case. In the majority of cases, insurers must "wait and see" how each piratical seizure develops and consider on the facts of each claim whether an ATL or CTL can be said to have arisen.
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.
