In a recent case the court has held that payment of a ransom was not contrary to public policy and would be taken into account when assessing whether a cargo owner had been deprived of an insured cargo and suffered a loss.

Following the hi-jacking of a vessel (the Bunga Melati Dua) carrying cargoes of bio-diesel, Somali pirates demanded a ransom which was agreed and paid by or on behalf of the ship-owner. As a result the vessel, cargo and crew were released. The cargo owner, Masefield, claimed an indemnity under its cargo policy, which covered loss by both piracy and theft, for the actual or constructive loss of the cargoes. Under the obligatory cargo policy, declarations totalling over US$13.3m had been made in relation to the cargo. On disposal of the cargo, after recovery, it was valued at just US$7m. Masefield argued that payment of the ransom (US$4m) should not be taken into account when determining whether it had been irretrievably deprived of the cargo, because such a payment was contrary to English public policy.

The court held that Masefield had not been irretrievably deprived of the cargo. The claim for a total loss, whether actual or constructive, had not been made out. The test for deciding whether an insured has been "irretrievably denied" is an objective one and has to be determined on the facts. If it is legally and physically possible to recover a cargo then an insured has not been irretrievably deprived. This is the case even if recovery of the cargo can only be achieved by disproportionate effort and expense. In this case:

  • The contemporaneous correspondence and the information in the public domain showed that all interested persons (including Masefield) were fully aware that the cargoes were likely to be recovered.
  • This was entirely consistent with the unchallenged expert evidence.
  • Other vessels seized by Somali pirates had been promptly released following negotiations over a relatively short period.
  • In fact the vessel and cargo were safely recovered only 11 days later after payment of the ransom.

The fact that the pirates were holding the ship to ransom did not alter this analysis. There was no "clear and urgent reason" to categorise the payment of the ransom as contrary to public policy:

  • The payment of a ransom is not illegal as a matter of English law.
  • Circumstances have arisen in the past where legislative action has intervened to make such payments illegal; the courts should refrain from entering into the same field.
  • If the crews of the vessel are to be taken out of harm's way, the only option is to pay the ransom. Diplomatic or military intervention cannot usually be relied upon and failure to pay may put in jeopardy other crews.

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Background

On 19th August 2008, the vessel Bunga Melati Dua, a chemical/palm oil tanker, was seized by Somali pirates in the Gulf of Aiden and taken to Somali waters. Masefield was the owner of two parcels of bio-diesel which had been shipped onboard the vessel. Amlin was the insurer of the cargo under an open cover policy which covered loss by both piracy and theft.

The initial ransom demand was US$4.7m. The Bunga Melati Dua was the sixth ship to be hijacked in 2008. In fact in the 12 month period from November 2007- November 2008, some 30 vessels were seized and then released on payment of ransoms in excess of $60m. Negotiations commenced between the ship-owners and the pirates regarding the release of the vessel, cargo and crew. During this time, on 18th September 2008, Masefield served a Notice of Abandonment on Amlin. This was declined but the parties entered into an agreement that proceedings should be deemed to have commenced on this date. About 10 days later, the owners paid a ransom of US$4m to the pirates, and the vessel, cargo and crew were released.

It was Masefield's case that on capture of the vessel, the cargo became an actual total loss under the Marine Insurance Act 1906, in that the assured had been "irretrievably deprived" of the cargo. Alternatively there was a constructive total loss in that the vessel and cargo had been reasonably abandoned on account of its actual total loss appearing to be unavoidable. Further, the possibility of an effective ransom payment should be ignored for these purposes.

During the capture, one of the crew of the vessel had been killed. Thereafter there was no attempt to recover the vessel by military intervention nor any diplomatic attempts.

Held

It was common ground that both theft of cargo and the capture of seizure of the cargo by pirates were insured risks under the policy.

The primary issue was whether, when notice of abandonment was served on 18th September 2008, Masefield had been irretrievably deprived of the cargo and thus it had been actually totally lost, albeit restored at a later date following the payment of the ransom.

The Masefield relied on the decision in Dean v Hornby (1854) 3 El & Bl.180 that it said supported the proposition that, in the case of capture by pirates who intend to exercise dominion over a ship or cargo, there is straightaway an actual total loss even though the property is later recovered.

The Judge stated that much was known about the modus operandi of Somali pirates. It was evident that they would demand a ransom, which was likely to be paid, and then would release the vessel, cargo and crew upon payment. This likely result was also backed up by expert evidence during the hearing.

Indeed, the "striking feature" of this case was that the cargo was safely recovered following the payment of a ransom - less than 6 weeks after the vessel was seized and 11 days after Masefield had served a notice of abandonment on Amlin.

Comment

This decision clarifies the law of marine insurance, piracy and total losses and the treatment of ransom payments as a matter of English law.

  • When looking at actual total loss, under the Marine Insurance Act, the test of "irretrievably deprived" is an objective one and has to be assessed on the facts. If there is any way to recover property – even if it is through disproportionate effort or expense, there is no irretrievable deprivation.
  • Further, the payment of a ransom to pirates is not contrary to English public policy. Such a payment is not illegal but may on occasion be seen as the only option.

Further reading: Masefield AG v Amlin Corporate Member Ltd [2010] EWHC 280 (Comm)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/03/2010.