UK: Piracy Whose Risk Is It Anyway?

London Insurers Should Rethink Piracy Policies
Last Updated: 12 March 2009
Article by Jonathan Bruce

THE problem of piracy has recently hit new heights in Somalia with the hijacking of Faina and Sirius Star. With the latter, we are talking of insured values of up $100m for the cargo and up to $150m for the hull, at a time when insurers are already under pressure. This is and always has been a problem for London, given that, ultimately, a large proportion of the assets at risk are likely to be insured or reinsured in London.

Since Hicks v Palington in 1590, it has been assumed that ransom payments are a subject for general average contribution. That seems fair, although the contributing parties should perhaps logically include P&I insurers, which will have a strong interest in releasing the crew and in preventing any major pollution incidents, and sue and labour expenses could well be covered in the relevant P&I rules/cover in any event. The clubs' worst case scenario might

include a deliberate pollution incident by 'suicide' pirates just off the beautiful beaches of the Seychelles, for example. Alternatively, it is not difficult to foresee the taking of a cruiseship where the lives of more than 1,000 people could be at risk. So far the legal liability of P&I interests to contribute to ransom payments by way of general average has not been tested in the English Courts, but such a dispute cannot be far off, particularly where, for example,

the insurer is not from the international group and the liability is potentially huge. So much for P&I, but there are plenty of other insurers that might be liable in a piracy, including cargo insurers, loss of hire insurers, and, for the vessel, hull or war risks insurers.

It is clear that the ICC(A) cargo clauses cover piracy, and that the (B) and (C) clauses do not (unless additional cover is purchased). The position there is very clear. The same, however, cannot be said in relation to coverage of ransom in respect of the vessel itself, even though ITCH 1983 or 1995 expressly covers 'piracy'.

Assuming that these attacks are covered as 'piracy', then ransom payments (arguably along with all the other expenses involved in dropping off the ransom and recovering the vessel) should be recoverable as a sue and labour expense (to avoid a total loss caused by piracy).

The issue is whether on certain facts this will be excluded from the hull insurance but instead falls on war risks. The issue might be fairly irrelevant in cases such as Sirius Star where it is understood that the hull and war risks underwriters are the same.

However, it is easy to imagine future cases where high-value vessels such as this have the hull and war risks placed with separate underwriters. Further, it is common for there to be no deductible for war risks (compared with a hefty deductible for hull), and likewise there might be separate warranties, such as a warranty not to sail within, say, 250 miles of the Somalian coast, which may only be incorporated in one or other cover.

The ITCH clauses clearly cover 'piracy', but exclude loss or expense "caused by... any terrorist or any person acting from a political motive" (the 'Strikes' exclusion). Likewise they exclude loss or expense "caused by any weapon of war and caused by any person acting maliciously or from a political motive" (the 'Malicious Acts' exclusion).

It is also stated in ITCH that these exclusions "shall be paramount and shall override anything contained in this insurance inconsistent therewith". There is then an express buy back for these exclusions in the institute war and strikes clauses. The purpose of the drafters is clearly that piracy falls on the hull rather than the war risks underwriters, but it could be that this is not the case on certain facts. The Joint Hull and War Committees' 2005 wordings, which are rarely used, place piracy risks squarely on the war risks cover, so the concern relates to the traditionally used 1983 and 1995 wordings, where it could be argued that the position is less clear.

What exactly is piracy? The classic definition of a pirate is in Republic of Bolivia v Indemnity Mutual Mar Ass Co Ltd (1909), which is "a man who is plundering indiscriminately for his own ends, and not a man who is simply operating against the property of a particular state for a public end, the end of establishing a government, although that act may be illegal and even

criminal, and although he may not be acting on behalf of a society which is politically organised."

It should be borne in mind, however, that this was an old case, on the f.c&s. (free of capture and seizure) clauses, and modern day pirates are different, especially in the context of Somalia.

It seems that no one has produced any evidence that the acts of piracy that have taken place to date out of Somalia have been carried out for political purposes, but there is a fine line between these latest acts and acts of terrorism, which as above fall clearly on the war risks cover. At the very least, the problem might arise where the motives are a mixture of financial and political. With the sums at stake, one assumes that it is only a matter of time before evidence of political motives surfaces, no matter how dangerous it is to obtain that evidence.

In circumstances where warlords are raising huge sums of money, in a country where there has been no organised government for many years, it is not difficult to imagine ransom monies being channeled into weaponry purchased with the specific aim of gaining political control in

Somal ia, for example. Evidence of that would be very likely to trigger the 'Strikes' (or terrorism) exclusion in ITCH 83 or 95, passing the whole problem onto war risks.

Further, other difficulties could arise such as the ransom payment being illegal under English law under the Proceeds of Crime Act if, at the time the ransom was paid, the paying parties had reasonable belief that the organisation being paid was a terrorist one.

It is also conceivable that a hull insurer could seek to rely on the malicious acts exclusion, which would also put this risk, unwittingly perhaps, onto war risks. It is not difficult to articulate the behaviour of the Somalian warlords who are behind these attacks as malicious in the extreme, and clearly they are using weapons that can be described as weapons of war. This

point also seems to have been untested in the English Courts.

Against this backdrop of uncertainty, where delays and wranglings with insurers can literally mean the difference between life and death, it is not difficult to see why a proliferation of bespoke kidnap and ransom covers are suddenly being offered to shipowners, although many will have thought they already had this cover through their hull insurance.

Buying a specialised additional cover is one solution for the shipowner, but the likely long-term solution for the London market and its customers is to end the debate by making all forms of piracy, politically motivated or otherwise, a clear subject of the war risks cover, thus joining forces with the approach taken by most of the wordings drafted by London's competing markets. Until then, the ticking time bombs out there might not only be those in the hands of Somalian pirates.

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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