Gard News 192, November 2008/January 2009
01 NOV 2008
|Piracy – A major challenge|
Physical and financial protection against piracy is essential, especially in view of the recent increase in frequency and violence of attacks.
A challenge throughout the centuries
Piracy has long been a risk to seaborne trade. More than 2,000 years ago the Roman leader Cicero denoted pirates as “enemies of all mankind”. However, recent incidents, especially off the coast of Somalia, have reminded the shipping industry and the public in general about the violence and cruelty with which piracy attacks are conducted, the dangers faced by those on board, as well as the significant losses that may occur both in terms of human life and property. The increased frequency of attacks is of great concern and clearly suggests that the prospects of extorting significant sums of money motivate pirates to increase their activity. It is a sad fact that their “successes” also make them better equipped for future raids.
A protection challenge
The international shipping community has long called for stronger intervention and protection by coalition forces navy vessels off the coast of Somalia, but this has proven to be difficult. However, the situation may improve with the recent establishment by the United Nations of a Maritime Security Patrol Area (MSPA)1 in the Gulf of Aden under the command of the Combined Task Force 150 (CTF).2 The situation in Somalia is rather unique as its Transitional Federal Government has consented to foreign naval vessels exercising jurisdiction within its territorial waters for a temporary period of six months until December 2008.3 This allows foreign naval vessels to exercise military force to apprehend and take control of ships and other craft used by pirates, as well as to arrest and subsequently prosecute the pirates.
A handling challenge
It is in the interest of the shipowner to ensure the return of the ship and cargo as quickly and efficiently as possible so as to minimise loss, damage or delay, but at the same time avoiding having to pay exorbitant ransoms, which inevitably motivate pirates to continue or even increase their activities. All in all it is down to professional crisis management, which in most cases may require the assistance of consultants who are professional negotiators with special knowledge and training for this kind of situation. This is because the tasks at hand may involve direct negotiation contact with very dangerous people in risky environments and/or the physical delivery to these people of ransom payments. It is simply not something that the regular staff in a shipping or insurance company are trained or equipped to do.
Members and clients are generally advised to have in place adequate contingency plans that cover precautionary measures against piracy attacks, as well as prudent reactions should such attacks nevertheless occur. Gard can provide contact details of special consultants who may help to establish a contingency plan for piracy attacks. Gard’s loss prevention department monitors piracy-prone areas and advises members and clients through loss prevention circulars.5
An insurance challenge
It may be difficult to determine in practice what is an act of piracy, as opposed to an act of war, an act of terrorism, or an act arising from “insurrection” or “civil strife” or a “hostile act by or against a belligerent power” – all of which are terms often found in marine insurance policies. Fairly subtle distinctions may determine whether losses, liabilities, costs and expenses arising from the act shall be considered a war risk and hence fall on the war risk insurance(s) or, if not a war risk, shall fall on the marine risk insurance(s) placed by the owner. To make this even more complicated, different war risk insurance conditions treat the risk of piracy in different ways. Some consider piracy to be a war risk, whilst others consider it to be a marine risk.
If pirates have hijacked a ship with cargo on board, both the ship and cargo will in principle be at risk of loss or damage. The owners may declare GA and seek to apportion the sacrifices and expenditure that may arise to free the ship and cargo from the peril. Examples of such sacrifice or expenditure are ransom payments and the cost of professional negotiators to facilitate return of the ship and cargo. It has been debated whether the shipowner is entitled to recover from cargo and other interests, as GA sacrifice or expenditure, a ransom paid to ensure the return of the hijacked ship and cargo.6 The right of the shipowner to declare GA as well as the principles for GA apportionment usually arise from the contract of carriage, which typically incorporates one of the versions of the York-Antwerp Rules. Therefore, shipowners may ensure greater certainty in the application of GA principles to a ship hijacking situation through careful contract drafting. In any event, the shipowner should seek to clarify his rights with regard to GA as soon as possible if a piracy event occurs.
Piracy is regarded as a war risk by the Norwegian Marine Insurance Plan, 2006 (NMIP),7 which does not make any distinction between an act of piracy and an act of terrorism or any other malicious act for the purpose of cover. Losses, liabilities, costs and expenses arising from piracy are therefore covered by NMIP as a war risk. This also applies to the ship’s proportion of GA, as well as loss of hire.8
Under English and German conditions piracy is not considered a war risk, but a marine risk, while terrorism is a war risk. Consequently, the characterisation of the event becomes important, and that, as noted above, can be a difficult task in practice. Characterisation as an act of terrorism will usually require proof that the perpetrator acted with political intent or from a political motive (which was the case in the bombing of the LIMBURG off the coast of Yemen in 2002). However, a grey area exists for instance where the hijacking has the purpose to extort money to finance weapons for a subsequent campaign to gain control over a certain land and sea territory. Would this still be piracy in the conventional sense (a marine risk) or would the activity be seen as having crossed a line to become terrorism (a war risk)?
The death or injury of crew, passengers and/or any other persons carried on board the ship caused by or in connection with piracy is a covered P&I risk as per Rules 27, 28 and 29 of the Gard Rules for Ships (Rules 18 and 19 of the Gard Rules for Mobile Offshore Units). The same goes for liability for loss of or damage to property belonging to such persons (personal effects). The exclusion in Rule 58 of the Gard Rules for Ships (Rule 41 of the Gard Rules for Mobile Offshore Units) of liabilities, losses, costs and expenses arising from war risks does not apply to piracy.9
As noted, it may be difficult to determine in practice what is an act of piracy, as opposed to terrorism, that is, what is a marine risk as opposed to a war risk. If the war risk insurance for the entered ship covers liability in respect of crew that arises from piracy under its war P&I section, then the standard P&I cover will probably be subsidiary to the war risk insurance.10
Whether ransom payments are recoverable by insurance depends firstly on whether it is possible to link the ransom payment to an insured interest and secondly to which extent – under the terms of the relevant insurance – the ransom payment can be considered as a measure to minimise an insured loss that would have been incurred but for such payment.11
It follows that ransom payments upon acts of piracy might be recoverable under the P&I cover only to the extent they are not recoverable from any other insurance and only if it can be demonstrated that the payments have been made for the purpose of averting or minimising a recoverable liability that would have been incurred but for the payments. Ransom payments following acts of terrorism or any other named war risks are not recoverable under the P&I cover, since the underlying (war) risk is outside the scope of P&I insurance.