Marine insurance is one of the earliest forms of insurance type in the history. Its importance continues because of the massive sea trade traffic. Almost 80% of the world trade travels by sea. The fact that ships are carrying goods more than people affects both the policies and approach for vessels and other insurable subjects. Policies are more focused on goods and offer solutions for them, while crews become a secondary part of the insurances. From the first day through present time, seaways have their distinctive dangers and problems. Maybe the most important issue is the piracy. This old way of robbery is still popular in these days, especially, at African offshore Gulf of Aden. By examining the recent cases from Somalia, what can we say about the relation between marine insurance and risk of piracy?
Nowadays pirates do not care about the value of the goods or crew. What they aim is to gain a high ransom from ship owners without getting into getting trouble. By this way, they do not take any risks in terms of selling the seized goods in the market and therefore the variety of goods does not affect whether it is saleable or not, because what the pirates care is cash ransom money and not the goods itself. Nowadays pirate attacks are mainly seen at three spots which are – South East Asia, West Africa-Gulf of Guinea and the most famous one, the Gulf of Aden-Somalia. Especially, the Gulf of Aden is a critical point where one third of international oil trade and almost 20.000 vessels pass by from Somalia offshore. Therefore, it is an attractive place for pirates.
First of all, marine insurance is a contractual relationship where insurer and ship owner agree on the risks that will be covered. However, its coverage could include not just vessels but cargo, terminals, any transport that property is transposed, obtained or held between two destinations. Marine insurance is always thought that covers the goods during the shipping but in fact it is actually called cargo insurance which is a sub-branch of marine insurance. Marine insurance also covers ships, freight and other interests.
Another acknowledged definition of marine insurance can be found in the Marine Insurance Act (MIA) 1906. A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure. Marine Insurance Act 1906 is called as ‘marine insurance’ however it covers more than just the marine adventure. Section 2 of the act expressly remarks that the act also covers inland risks. Therefore, marine insurance covers onshore and offshore at the same time including hull and any casualty and liability of it.
Today, piracy is considered as an international crime. However, modern definition of piracy causes problems in terms of international law and also insurance policies. Underwriters change their policy and premiums according to international demand, sometimes wars and political changes around world. They make specific policies for specific routes. They separated war and strike risks and divided piratical acts.
On 19th August 2008, the “Bunga Melati Dua”, a Tuvalu flag chemical tanker vessel was on a voyage from Malaysia to Rotterdam carrying a cargo of bio- diesel when it was hijacked by pirates off the horn of Africa. The ship was taken, along with its crew and cargo to Somali waters. About a month after the seizure, the pirates began negotiations with the ship owners for a ransom to release the captured ship, the crew and the cargo.
The cargo owners (Masefield AG) had arranged an insurance covering, inter alia, loss arising from piracy and theft. On 18th September, 2008, they tendered a notice of abandonment to the cargo insurers (Amlin Corporate Member Ltd), the aim of which was to treat the cargo as an actual total loss with cargo owners relinquishing all rights to the cargo. The cargo owners maintained that the cargo had become an actual total loss (ATL) under section 57 (1) Marine Insurance Act 1906, arguing they were irretrievably deprived of the cargo.
Section 57 (1) of the Act provides:
“Where the subject-matter is destroyed, or so damaged as to cease to be a thing of the kind insured, or when the assured is irretrievably deprived thereof, there is an actual total loss”
As an alternative they argued that the cargo had become a constructive total loss (CTL) under section 60(1) of the Act because, inter alia, a total loss appeared to be unavoidable.
Section 60 (1) of the Act states provides:
“Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.”
On this basis, the cargo owners claimed in excess of US$ 7 million from their cargo insurers. The cargo insurers refused to accept the notice of abandonment, maintaining the cargo was likely to be released when the hijacking was resolved and thus no total loss had or would occur.
The vessel and its crew and cargo were released on 29th September, 2008, following the payment of a ransom of $2 million by the vessel’s owners. The primary issue for determination was, whether when notice of abandonment was served, the claimant had been irretrievably deprived of the cargo and thus it had been actually totally lost; regardless of the fact that it was restored at a later date following payment of a ransom by the shipowners.
The cargo owner argued that at the time the notice of abandonment was given, cargo was an actual total loss (ATL) due to capture by the pirates or alternatively it was a constructive total loss (CTL). On this basis, they sought to recover the difference between the insured value of the cargo and its resale value. These arguments were rejected in the English Commercial Court in 2010, and the cargo owner appealed.
Before the English High Court, it was common ground that the theft of the cargo and seizure by pirates were insured risks. The primary issue though was whether the claimant had been irretrievably deprived of the cargo at the time when the notice of abandonment had been served. The claimants supported their case by reference to ‘Dean v Hornby’ (1854), concerning the capture by pirates who, by the nature of having seized property, exercised dominion over a ship or cargo and, thus, that the property seized is an actual total loss even though it is later recovered.
In the case of the “Bunga Melati Dua”, ransom negotiations were still ongoing. The claimants did not dispute that there was a possibility, perhaps even a likelihood, that the ship and cargo would be released following payment of a ransom. However, whilst accepting that a ransom payment would not be illegal, cargo owners argued that the court should not take the ransom negotiations into consideration because payments to hijackers would encourage further acts of piracy and be contrary to public policy (in English law).
Admiralty Judge Mr. Justice David Steel made considerable reference to the general situation of piracy in Somalia both in relation to “Bunga Melati Dua” as well as other vessel seizures, taking into consideration past cases as well as market intelligence and the defendants’ expert evidence. Steel J. reported that the trend showed that the property was likely to be released, probably within short order, after a ransom payment. In fact the “Bunga Melati Dua”, her crew and cargo were released less than 6 weeks after the initial seizure of the vessel (and only 11 days after the claimants had submitted their notice of abandonment).
In relation to the ransom, Mr Justice Steel noted that ransom payments were not illegal under English law. So far as being contrary to public policy argument, he referred to ‘Fender v St John Mildmay’ (1938) quoting Lord Atkin: “the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable and does not depend upon the idiosyncratic inferences of a few judicial minds”.
The court was “wholly unpersuaded” that payment of ransom was contrary to public policy. Although ransom payments made further hijackings more likely, there were few other alternatives and if the payment of ransom was contrary to public policy, the well-established ‘Kidnap and Ransom’ policies sold in the London insurance market would, in effect, be unenforceable.
As a consequence, the claimants failed in their claim for actual and constructive total loss.
To succeed, a claimant needs to show they were “irretrievably deprived” of the cargo. In deciding against cargo claimants, Steel J. concluded the cargo owners were not irretrievably deprived of the cargo because there was reasonable hope that the cargo could be recovered. Further, although the cargo owners lost possession, they retained title to their property and the fact that negotiations started so soon after the seizure of the vessel and cargo, supported the proposition that the cargo was neither irretrievably lost nor that a total loss was inevitable.
Furthermore, ‘Dean v Hornby’ case was not applicable. Although viewed in isolation, that decision might be seen to support the claimants’ argument. The post-seizure events in that case were protracted and complicated, and the ship was never restored to her owners, nor did they have the opportunity of regaining possession (as was the case for the “Bunga Melati Dua”).
The judge commented as follows: “The short answer, in my judgment, is that an assured is not irretrievably deprived of property if it is legally and physically possible to recover it (and even if such recovery can only be achieved by disproportionate effort and expense).”
On appeal, the claimant continued its argument that
- capture by pirates created an immediate ATL, whatever the prospects of recovery might be, and
- the law would not or could not take into account the payment of a ransom as a relevant and legitimate reason for calculating the possibility of recovery of the cargo.
Lord Justice Rix, giving judgment for the Court of Appeal, disagreed, holding that:
“… piratical seizure in the circumstances of this case, 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 recovery of both, was not an actual total loss”.
It was further held that it was not an irretrievable deprivation of property, but rather a wait and see situation. Despite the cl
’ which laid down fundamental guidance as to the circumstances in which public policy could be invoked by a court.
In citing the guidance established by the Court in Fender, the Court of Appeal reiterated that, when determining public policy:
‘… the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable and does not depend upon the idiosyncratic inferences of a few judicial minds’.
Rix LJ also noted that Parliament had intervened by way of repeal of the Ransom Act 1782, which in any event only outlawed the payment of a ransom in respect of British ships taken by the King’s enemies. Notwithstanding legislative intervention, the Court of Appeal noted, as had Steel J, and by way of reference to the decision in Royal Boskalis Westminster NV v Mountain, that the payment of a ransom can be recovered as a sue and labor expense pursuant to section 78(4) of the MIA. It logically followed that the payment of a ransom could not be against public policy.
The Claimant also submitted that it could not or should not be under a duty of sue and labor to make a ransom payment meaning that capture, which could only be resolved by way of a ransom payment, fulfilled the test of an ATL. This argument was dismissed by the Court. The Court’s decision as to whether seizure by pirates amounted to an actual total loss was based on a factual analysis of the likelihood that the vessel and her cargo would be recovered.
The Court observed that the motive of pirates in seizing vessels is generally to obtain the ransom payment, upon receipt of which a vessel, its crew and cargo are released. In light of this, in similar circumstances, it appears unlikely that seizure by pirates could ever amount to an actual total loss. However, the position may differ if the ransom demand is a much greater proportion of the value of the ship and cargo, or if there is any other reason to believe that a ransom will not be paid or, if paid, would not secure the release of the vessel.
It is also interesting to note that an analogy was drawn by the claimant between the payment of a ransom and the payment of a bribe, in the context of its argument that the payment of a ransom is an “illegitimate and unreasonable means of recovery”. Although the Court did not consider this to be a sound analogy, the potential comparison could give rise to a question of whether, once the Bribery Act 2010 (the “Act”) comes into force, ransom payments are illegal under this Act.
The Court was not directly concerned with the application of the Act. However, the Court observed that there is no legislation expressly precluding the payment of a ransom and to do so is, therefore, not illegal, although “bribery or constructive bribery may well be”. It commented that the payment of a ransom in these circumstances is prima facie not a bribe, “done for the purpose of obtaining an improper advantage”. This draws a direct comparison with the Act, which defines as an offence a situation where financial advantage is offered or given to induce or reward the improper performance of a function or activity, or where the acceptance of the advantage itself constitutes improper performance.
Thus, the “Bunga Melati Dua” is an example of a marine insurance contract that did not clearly define when losses due to piracy could be claimed. Following this decision, it is important for contracts of insurance to deal with all eventualities in the event of pirate attack in order to avoid any uncertainty in their interpretation. In the absence of express agreement, where the recovery of a ship’s cargo remains a possibility, no claims for the total loss of the cargo can be made against the cargo insurer. It is up to the parties in insurance contracts to clearly define the point at which a claim for the full insured value of the cargo will be possible. In a case of refusing the ransom may jeopardize the crew’s lives that such a risk cannot be taken. Although these payments would seem as an incentive for pirates, yet the solution is not refusing the payment and jeopardize the lives and goods.
With the scourge of piracy expanding deeper into the Indian Ocean, the Court of Appeal’s confirmation that a ransom paid to a pirate is a timely decision and leaves in place one of the few options an owner has to secure the release of his vessel, cargo, and most importantly, his crew, in a safe and timely manner. To this extent the Court’s decision can only be welcomed in these morally opaque times.
