Court ruling provides insurance guidance for piracy-related losses

If you’re ever an SA victim of piracy (like the frequent Somalian version), a piracy case just heard in England will interest you. Said Andrew Robinson, director of lawyers Deneys Reitz and president of the Maritime Law Association (MLA): “The recent decision in the Masefield v Amlin case has provided some useful guidance to SA insurers and cargo interests whose goods are exposed to the perils of piracy. “Whilst the decision largely centred on issues of actual and constructive total loss of cargo under the English Marine Insurance Act 1906,” he added, “the decision remains relevant to South African importers and exporters. It’s certainly very applicable to the SA scene, with Deneys Reitz having advised a local insurance underwriter about whether it would be lawful to secure a claim by a ship owner against a cargo owner for a contribution to general average expenses where a significant portion of the general average expenses included a ransom payment to have the ship, cargo and crew released from pirates. This followed a ship with SA-destined cargo aboard being hijacked by pirates late last year off the east coast of Africa. After a long wait, the ship, cargo and crew were eventually released against the payment of a ransom. The issues that needed to be considered were not at all dissimilar to those faced by the cargo interests and underwriters in the Masefield case. On August 19, 2008, on a voyage from Malaysia to Rotterdam, the “Bunga Melati Dua”, together with her crew and cargo, was seized by Somali pirates. It remained in the hands of the pirates until October, when a ransom was paid and the ship released to continue its voyage. Two parcels of bio-diesel carried on the vessel were insured by Amlin under an open cover contract that included the Institute Cargo Clauses “A” that covered covered loss by both piracy and theft. By the time the cargo arrived in Rotterdam, the cargo owners still thought they had a case for a loss of the cargo, and sought recovery of about US$7-million under the policy – that being the net loss after allowance for the proceeds of disposal of the cargo at Rotterdam. It was all a fine balancing act, with the judge having to decide whether the claimants had the right to assume that, in this interim period, they had been irretrievably deprived of their cargo – that is, that the recovery of it was impossible. Said Robinson: “The court was obliged to consider whether the cargo owner had a claim either for an actual total loss (“ATL”) or for a constructive total loss (“CTL”). “Also, for the purpose of determining whether the cargo could properly be considered to be irretrievable, the claimant argued that the payment of ransom to pirates was contrary to public policy (though not illegal) and therefore could not be taken into account in considering the prospects of the recovery of the cargo.” After some considerable argument and counterargument, the judge decided against there being a case of ATL. Part of his reasoning was that: “Given the history of previous cases of capture by Somali pirates, there was ample evidence that, in reality, there was a reasonable hope and perhaps even a likelihood that the ship and cargo would be recovered by payment of a ransom.” Similar reasoning was behind the judge finding against CTL. “Having reached these conclusions,” Robinson told FTW, “it was clear that the only way in which the cargo interest could now succeed was to establish that the payment of ransom was contrary to public policy. “If this were the case then, it was argued, the potential for the release of the vessel and cargo by this means could not be taken into account when considering whether a vessel and her cargo were in practice irretrievable.” And that, he added, was where the local question of whether the ransom is part of the general average came up. “The judge,” Robinson said, “noted that, in practice there is little option but to pay a ransom where that is the only effective means (in the absence of any diplomatic or military intervention) to remove vessel, crews and property from harm.” He also noted that the payment of ransom was not illegal under English law and where the “balance of convenience” was not clear cut the court should resist any temptation to intervene where there is no clear and urgent reason to categorise an activity as contrary to public policy. This rejection of the argument that ransom payments are contrary to public policy is particularly interesting, according to Robinson. “It led the judge to reflect upon both the legality of such payments and whether they can be recoverable as a sue and labour expense, and he decided that payment of a ransom was, indeed, one of these costs,” he added. “The point also has relevance for ship and cargo owners in relation to general average.” Robinson pointed out that, in his view, the payment of ransom was also not illegal under SA law. “It follows that South African underwriters and uninsured cargo interests may well find that they are obliged to secure general average claims and pay a contribution to general average, where the expenses include the payment of a ransom.