Piracy and insurance
An update on the insurance challenges created by the continuing threat of pirate attacks.
An age-old problem
Wherever there has been motive and opportunity, piracy has existed. Today is no different. The fact that Somalia is currently regarded as a failed state has created both motive and opportunity for the pirate kings of the region to carry out a series of attacks and hijackings which have, to date, resulted in the payment of ransoms of many millions of dollars. Quite how much is difficult to say. Accurate records do not exist and virtually all shipowners who have paid a ransom are unwilling to specify the amount paid.
What is meant by “piracy”?
Elements to take particular note of are “committed for private ends”, “on the high seas” and “outside the jurisdiction of any state”.
The phrase “committed for private ends” is important. It requires the motive(s) of the attackers to be determined – as far as it can be. Are they acting for purely “private ends” – usually financial gain – or are they acting from a wider, political, motive? Such attackers are generally not forthcoming as to their motive(s) and those subjected to an attack rarely have the opportunity to ask. However, the behaviour of the attackers, and sometimes their public statements, allows some conclusions to be drawn as to their motives. Thus the Somali pirates have stated publically they have no political motives and are simply “in it for the money”. Additionally, their attacks have taken place “outside the jurisdiction of any state”. In contrast, several of the “pirates” operating around the Nigerian coastline and up river, notably the Movement for the Emancipation of the Niger Delta (MEND) appear to have overtly political aims (as well as criminal ones) and their attacks have, generally, taken place in territorial waters and within the jurisdiction of the Nigerian government.
Why does this matter to insurers?
In broad terms, liabilities, losses, costs or expenses arising from a true “piracy” attack/hijack are not excluded from P&I cover under Gard’s Rule 58 (War Risk),2 whereas P&I cover would not be available in respect of liabilities, etc., arising from a “terrorist” attack/hijack.3 In the latter situation, it would be the war risk insurers who would be in the front line insofar as such risks and liabilities are concerned.
Due to the inherent difficulty of ascertaining whether an act constitutes an act of terrorism as opposed to an act of piracy, Gard may in its absolute discretion make that ascertainment. The rules of all the International Group P&I Clubs are essentially similar in this respect.
Which insurance applies?
Thus, at the outset, it is vital for a shipowner whose ship has been hijacked to try to identify the motive behind the attack. This is of course easier said than done and the safe course for an owner is to ensure all his insurers are notified at the same time and that there is discussion and, ideally, agreement as to which of them, if any, will be responsible for what risks and liabilities.
“Similar weapons of war”
What are “other similar weapons of war”? Because this phrase has not been exhaustively and precisely defined, either in the Pooling Agreement or in the Rules of individual clubs, it is necessarily open to some interpretation. Can it be said that a “normal firearm” is a “similar weapon of war”? Even the term “normal firearm” leaves scope for interpretation: “normal” in what sense? The AK-47 firearm is commonly used by pirates and is a firearm originally developed to be used in war and war-like situations. Similarly, pirates are often equipped with rocket-propelled grenades (RPGs), which are arguably covered by the term “rockets”.
The FAQ document issued recently by the International Group of P&I Clubs provides the following clarification:
“What does ‘similar weapons of war’ mean? There is no definition in the Pooling Agreement or in club rules but the wording used ‘or other similar weapons of war’ indicates that such other weapons should be of a similar nature to those previously identified. The specifically identified weapons of war are mines, torpedoes, bombs, rockets, shells and explosives and show an intention that something more than guns/rifles/conventional ammunition would be needed to trigger the operation of the exclusion.”
From this, the conclusion is that cover is not available for liabilities, losses, costs or expenses caused by the use of such “similar” weapons and that recovery should then be sought under the war risk policies for the vessel. However, it seems clear that an AK-47 would not be classed as a “similar weapon of war” and, therefore, that its use would not affect the P&I cover. As with all such matters, in the event of uncertainty, Gard will consider each case on its own merits, once the facts become clear.
A ransom payment is specifically covered under a Kidnap and Ransom insurance policy, but it is believed that relatively few owners have such a policy. If not, the question is more often asked whether and if so, to what extent, P&I cover may be available for a ransom payment. Here, the answer is that there is no specific cover for a ransom payment and since P&I cover is essentially a “named risks” cover, the presumption is that no such cover is available. P&I is also a third party liability cover and a ransom payment is unlikely to be regarded as something paid to settle a third party liability that would be recoverable under the P&I policy.
In the context of piracy off Somalia and in the Gulf of Aden, it seems to have been generally accepted by the insurance markets that, based on their stated motive of “pure” financial gain, the hijackers are “pirates”, rather than “terrorists” and that a ransom paid to pirates, as distinct from a ransom paid to terrorists, can be treated as a voluntary sacrifice on the part of the shipowner, made for the good of the common venture and as such, is capable of being apportioned in general average (GA) in accordance with the values of the affected property. In such circumstances, hull and machinery insurers and the owners, or more likely the insurers, of any cargo on board and bunkers and any freight at risk would contribute towards the ransom amount in the same proportion as for any other GA sacrifice or expenditure. There is support for such a position under English law which dates back to 1590.
The above distinction between pirates and terrorists is important, because, under English law, the payment of ransom to a party seeking pure financial gain is not illegal, although a payment to anyone or any group supporting, endorsing or funding any terrorist aim or group is illegal. Similar issues of possible illegality in relation to ransom payments may arise under other legal systems. A shipowner should check the position under the legal system under which he operates before deciding whether to pay a ransom and before declaring GA and seeking a contribution from his hull and machinery insurers.
Other issues for insurers
Unarmed or armed guards?
Contracts with security companies
Examples of such clauses are those dealing with liabilities to third parties and those imposing a time limit within which claims must be made by the (shipowner) client against the (security) company. Many such contracts will also contain a clause specifying the amount of insurance carried by the security company. This should be checked to ensure the figure is sufficient.
Handling ransom negotiations with the pirates
Post-release care of hijacked crew
Following charterers’ orders
Piracy risk cover for charterers
To some extent, the efforts of the various naval forces now patrolling the Gulf of Aden appear to have reduced the number of successful hijacks, at least in the short term, although adverse weather conditions in the Gulf of Aden are also thought to have contributed. No doubt training and preparation on the part of shipowners and their crews have also played a part, although some reports of attacks/hijacks suggests that some vessels are not as prepared to deal with such an attack as they should be. On a more long term basis, whether the number of attacks has reduced is a matter for conjecture, since not all such incidents are reported. It must also be doubted whether, having had such success in the last year, the various pirate gangs are likely to give up what for them has been a very profitable activity. Efforts are being made to establish a legally binding procedure whereby captured pirates can be put on trial and, it is assumed, thereby prevented from resuming their former trade. Ultimately, however, and as has been noted by many commentators, it is only when the underlying problem – the fact that Somalia is a failed state, with no functioning governement – has been addressed and rectified that we may see a reduction in and hopefully an end to such attacks.
Gard News is published quarterly by Gard AS, Arendal, Norway.
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